CGT event C2
What is CGT event C2?
CGT Event C2 is where a 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.
CGT Event C2 happens when the relevant contract is entered into or, if no contract, when the intangible asset ends.
How to calculate CGT Event C2 capital gain or loss
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.
This article is general information only and does not provide advice to address your personal circumstances. To make an informed decision you should contact an appropriately qualified professional.