What is CGT Event H2?

CGT Event H2 involves a situation where an act, transaction or event occurs in relation to a CGT asset owned by a taxpayer and that act, transaction or event does not result in an adjustment being made to the asset’s cost base or reduced cost base.

The rules dealing with CGT Event H2 are contained in section 104-155 of the Income Tax Assessment Act 1997 (Cth) (ITAA).

CGT Event H2 occurs at the time the act, transaction or event occurs.

How to calculate CGT Event H2 capital gain or capital loss

The taxpayer makes a capital gain if the capital proceeds exceed the incidental costs the taxpayer incurs related to the event.

The taxpayer makes a capital loss if the capital proceeds are less than incidental costs.

The incidental costs referred to here can include the value of property given but not amounts received as a recoupment that is not included in the taxpayers assessable income.

The scope of incidental costs (generally speaking) is set out in section 110-35 ITAA and includes 10 potential categories of expenses. This includes things such as transfer costs, stamp duty, sale-related advertising costs, sale-related marketing costs, search fees, and borrowing expenses such as loan application fees and mortgage discharge fees.

Exceptions

CGT Event H2 is strictly an event of last resort and can only apply where no other CGT Event happens. This is an exception to the general rule about the priority of CGT Events – that rule provides that where more than one CGT Event happens, the most specific event should be recognised.

It will also not happen if:

• the act, transaction or event is the taxpayer borrowing money or obtaining credit; or
• a company issues or allots equity interests or non-equity shares in it; or
• the trustee of a unit trust issues units in it; or
• a company grants an option to acquire equity interest, non-equity shares or debentures in it; or
• a company grants an option to itself to dispose of shares in it; or
• the trustee of a unit trust grants an option to acquire units or debentures in it; or
• a company or a trust that is a member of a demerger group issues new ownership interests under a demerger.

You might notice the key theme amongst the majority of the above-bulleted exceptions is that the issue of shares / units or the grant of options must be in the company / trust itself and not a third party entity.

Instances where CGT Event H2 might occur

Section 104-155 ITAA provides the following example:

You own land on which you intended to construct a manufacturing facility. A business promotion organisation pays you $50,000 as an inducement to start construction early. No contractual rights or obligations are created by the arrangements. The payment is made because of an event (the inducement to start construction early) in relation to your land.

In ID 2006/222, the ATO expressed the view that CGT Event H2 applied where an insurer resolved to provide an insurance premium rebate payment to a policy holder. Based on the facts in this interpretative decision, the resolution to provide the rebate affected the rights of the policy holder and constituted an act/event in relation to a CGT asset. The relevant CGT asset was the bundle of rights held by the policy holder under the insurance policy. CGT Event H2 was considered applicable as no other CGT Event applied and the rebate payment did not result in any adjustment to the taxpayers cost base.

TR 97/3 contemplates situations where compensation is received by landowners from public authorities under a statute which imposes limitations on the use of land. For instance, a payment made to the owner of land to compensate them for being legally required to preserve native vegetation or which limits rights to clear the land. In these situations, the view is that CGT Event H2 might be triggered by such payments where the land is acquired after the statutory limitation is imposed. Generally, another CGT Event would apply if the land was acquired before the statutory limitation was imposed in relation to the land.

As set out in TR 96/24, an amount described by parties to a sale of a business agreement as consideration for goodwill may actually – when properly characterised – represent something else such as a capital receipt which triggers CGT Event H2.

As set out in TR 94/30, CGT Event H2 may be triggered for payments related to the variation of share rights where that variation does cause another CGT Event. It is not relevant to consider whether that variation has a beneficial or adverse impact on those rights.

As set out in TR 94/29, CGT Event H2 may be triggered under a contract for the sale of land in situations where instalment monies related to acquisition are legally retained by a vendor following a breach of the contract. Note that instalment monies are not the same as deposit monies.

In IT 2631 the ATO contemplates that CGT Event H2 might apply to catch incentive payments made to a taxpayer who enters into a lease to commence an entirely new business.

CGT Event H2 may also apply where a trust asset is subject to a separate charter of rights and obligations (i.e. a trust re-settlement), but only where another CGT Event does not apply.

CGT discounts and concessions

Any capital gain which arises from CGT Event H2 is not permitted to be discounted under the general CGT discount (Division 115 ITAA).

The small business CGT concessions (Division 152 ITAA) are theoretically available to reduce or eliminate a capital gain where the taxpayer meets the various criteria of eligibility. That said, given the nature of event H2, it is unlikely those concessions would be applicable. The main residence exemption (Subdivision 118-B ITAA) is not available to disregard a capital gain which arises under event H2.