CGT Event C1
What is CGT event C1?
CGT event C1 involves a situation where a taxpayer owns a CGT which becomes lost or destroyed.
The rules governing CGT event C1 are contained in section 104-20 of the Income Tax Assessment Act 1997 (Cth) (‘ITAA’).
At what time does CGT event C1 occur?
CGT event B1 occurs when the taxpayer first receives compensation (e.g. an insurance payout) for the loss or destruction.
If the taxpayer does not receive compensation, then the CGT event occurs when the loss is discovered, or the destruction occurs.
How to calculate the capital gain or the capital loss?
A taxpayer makes a capital gain if the capital proceeds from the loss or destruction are more than the asset’s cost base.
A taxpayer makes a capital loss if the capital proceeds are less than the asset’s reduced cost base.
In terms of calculating capital proceeds – monetary compensation and/or the market value of a replacement asset will be included. Note, the market value substitution rule does not apply e.g. if nil proceeds are received.
Who makes the capital gain or the capital loss?
The taxpayer who owns the CGT asset that becomes lost or destroyed.
Exceptions
A capital gain or capital loss will be disregarded if the relevant CGT asset was acquired before 20 September 1985 (i.e. pre-CGT).
In addition, CGT event C1 will not apply where another CGT event happens which has more specific application (e.g. CGT event C2). CGT event C1 would also not apply where the asset in question is held on revenue account as a revenue asset or as an item of trading stock.
CGT discounts and concessions
Any capital gain which results from CGT event C1 can be discounted under the general CGT discount (Division 115 ITAA) and the small business CGT concessions (Division 152 ITAA) where the taxpayer meets the various criteria of eligibility under those divisions.
The main residence exemption (Subdivision 118-B ITAA) may also be available to disregard (partially or entirely) a gain which occurs under CGT event C1, unless the event involves the forfeiture of a deposit.
Meaning of ‘lost’ or ‘destroyed’?
In TD 1999/79, the ATO considers the meaning of the phrase ‘lost or destroyed’ (words not defined in the tax legislation) and if those terms apply where there is a voluntary loss or destruction.
The view is that the term ‘lost’ does not include voluntary actions (e.g. a taxpayer voluntarily forfeiting a deposit simply because they would prefer not to proceed with a transaction). It may also extend to situations where an asset is confiscated (depending on the facts and circumstances). In contrast, the term ‘destroyed’ encompasses both involuntary and voluntary actions (for example, the taxpayer deliberately demolishing a building on land owned for the purposes of redeveloping, or where the whole of a building is destroyed by fire or flood).
The ATO also points out that ‘lost’ or ‘destroyed’ mean wholly lost or destroyed and does not extend to a situation where an asset is simply damaged. Notwithstanding, event C1 may happen in respect of discrete and identifiable part of a CGT asset (which is a CGT asset in its own right) is wholly lost or destroyed even if the broader CGT asset is not.
Interaction with other tax law provisions
If an asset becomes ‘lost’ or ‘destroyed’, the replacement asset roll-over in Subdivision 124-B ITAA may also be available for the taxpayer to disregard a capital gain which arises – provided they satisfy the various conditions of eligibility. The capital gain typically arises where the taxpayer receives an insurance payout or a replacement asset for loss/destruction etc. and the proceeds (or market value of the replacement asset) exceed the asset’s cost base. Remember that the roll-over does not disregard capital gains indefinitely, it simply defers the recognition of those gains.
As alluded earlier, CGT event C1 has some similarities to CGT event C2. It is important to separate these two events because of the different rules that apply when calculating gains and losses. For instance, the cost base market value substitution rule (section 112-20 ITAA) is relevant to event C2 but not event C1 and that may have a significant impact on calculated gains/losses.
Other matters and examples
In ID 2010/116 and ID 2010/124, the ATO considers that a CGT asset (such a shares) may become ‘lost’ where they are sold without proper consent of the owner. For example, where a stockbroker sells the owner’s shares to a third party without consent. That said, there are private rulings (non-binding, of course) where the ATO has rejected a taxpayer’s arguments about there being no consent. If the sale is considered consensual, the loss will be voluntary meaning the asset will not be ‘lost’ and event C1 not applicable.
In TD 1999/79, the ATO suggests that CGT event C1 can apply to intangible assets which become lost or destroyed and that CGT event C1 may apply (in respect of goodwill) when a business permanently ceases.
In ID 2002/633, the ATO noted that CGT event C1 may not result in any capital gain or loss where:
- a taxpayer demolished a building on land they owned; and
- where no capital proceeds were received; and
- where the building was not deemed to be separate CGT asset.
This is because of the combined effect of:
- the market value substitution rule for capital proceeds not applying (section 116-25 ITAA); and
- the operation of the cost base apportionment rules (section 112-30 ITAA) which could result in no amount being apportioned to the cost base/reduced cost base of the building.
There are a number of private rulings that contemplate that event C1 might be applicable where a CGT asset is stolen through hacking or a scam arrangement (on the view the asset has been ‘lost’).
CGT event C1 may also occur where a person loses a deposit, depending on the circumstances.
Again, it is important to consider if event C2 is the more applicable event in the circumstances.
CGT Event C2
CGT event C2 happens where the taxpayer’s ownership of an intangible CGT asset ends because the asset:
- Is redeemed or cancelled;
- Is released, discharged or satisfied;
- Expires;
- Is abandoned, surrendered or forfeited;
- If the asset is an option is exercised
- If the asset is a convertible interest is converted.
The rules relating to this event are contained primarily in section 104-25 of the ITAA 1997.
When does CGT C2 event happen?
The CGT event occurs when the relevant contract is entered into or, if no contract, when the intangible asset ends.
How to calculate the capital gain under CGT event C2
The taxpayer will make a capital gain if the capital proceeds from the intangible asset ending exceed the asset cost base. There is a capital loss if capital proceeds are less than the asset’s reduced cost base.
Note that a capital gain or capital loss is disregarded if the CGT asset was acquired pre CGT (i.e. prior to 20 September 1985).
Instances where CGT event C2 does not occur
CGT event C2 does not appear to extend to the ending of a beneficiary’s interest in a discretionary trust.
Instances where the capital gain under CGT event C2 may be disregarded
The capital gain or loss under CGT event C2 may be disregarded in certain circumstances. This includes where:
- A capital gain or loss happens to a company because shares in a 100% subsidiary are cancelled on liquidation of a subsidiary. The gain may be reduced if the roll over in Subdivision-126-B applies.
- A capital gain or loss made by a demerging entity as a result of a demerger. There are cost base adjustments that can be made if C2 happens as a result of a demerger.
As is the case in respect of event D1 (and the CGT regime generally), it is important to remember that the CGT regime will effectively only apply if an amount subject to a CGT event is not included in taxpayer’s assessable income or exempt income per the anti overlap rule in section 118-20 of the ITAA 1997 (extracted above). Therefore, any section of the tax law that deals with an amount included in the capital gain calculation e.g. section 6-5 of the ITAA 1997 or another specific provision (except section 40-880) will take priority. Any amount not dealt with under another provision will remain relevant to the calculation of a capital gain.
Instances where CGT event C2 may occur
Common examples of instances where CGT event C2 occurs include:
- A shareholder forgiving the outstanding balance of a loan owed to them by a company. This is because a loan receivable is an asset of the lender for CGT purposes and the ownership of the asset ends upon forgiveness. Generally, the cost base of the asset is the amount of the loan and the capital proceeds is the consideration received for disposal of the debt. If there is no consideration received, the market value of the debt at the time of the CGT event (generally when the forgiveness became formal) may be relevant per the operation of the market value substitution rule.
- In respect of a the discharge of an unpaid present entitlement (UPE). The relevant beneficiary possesses a right to, at any time, call on payment of a present entitlement that remains unpaid. Therefore, the UPE is an enforceable right that can constitute a CGT asset. The satisfaction or discharge of the UPE triggers CGT event C2 as the ownership of the CGT asset comes to an end. The cost base is the total consideration to acquire the UPE (generally, nil). If nil, the market value of the right will generally apply. The capital proceeds is the total money received or receivable. If none, the market value of the UPE apply per the operation of the market value substitution rules. This will generally be the face value of UPE at the time of the CGT event.
- Damages received in a legal matter. These receipts trigger CGT event C2 by discharging the legal rights of the taxpayer to sue. The legal right to sue is considered to be a CGT asset owned by party which possesses the right.
- In respect of the cancellation of shares in the liquidation process of a company.
- The expiry of a put option. However, note that CGT event C3 will generally apply with precedence.
