CGT Event K6

What is CGT Event K6?

Typically, capital gains tax is not applicable when a CGT event happens to a CGT asset acquired prior to introduction of the CGT regime on 20 September 1985. CGT Event K6 stands in exception and is capable of capturing capital gains in respect of pre-CGT shares in a company or pre-CGT interests in a trust, but only where the company or trust has sufficient post-CGT property.

Specifically, CGT Event K6 is applicable where all of the following happen:

• the taxpayer acquired shares in a company or an interest in a trust before 20 September 1985; and
• one of these CGT events happens in relation to the shares or interest: A1, C2, E1, E2, E3, E5, E6, E7, E8, J1 or K3
• there is no roll-over for the CGT event which occurs; and
• just before the relevant CGT event happens, one or both of the following equal at least 75% of the net value of the company or trust:
  • the market value of property of the company or trust (except trading stock) acquired after the CGT regime commenced; or
  • the market value of interests the company or trust owned through interposed companies or trusts in property (except trading stock) acquired after the CGT regime commenced.

The net value of the company or trust is the amount by which the total market value of assets in the entity exceeds its total liabilities. In this context, an asset refers to property and other economic resources that can be turned to account. A liability refers to a legally enforceable debt which is due for payment or a presently existing obligation to pay a certain sum or an ascertainable sum. It must be non-contingent.

To provide a basic example, let’s assume a shareholder acquired shares in a company before 20 September 1985. The shareholder sells their shares on 1 January 2025. Just before this time, the relevant company had post-CGT property (excluding trading stock) valued at $1,000,000. The company also had assets valued at $2,000,000 and liabilities of $800,000. Thus, the net value of the company was $1,200,000. The market value of post-CGT property ($1,000,000) is 83.33% of net value of company ($1,200,000). Therefore, event K6 will apply (assuming the other conditions are also satisfied).

The net value calculation is subject to adjustment where certain actions are taken to ensure the 75% threshold is not exceeded. In particular, where liabilities are discharged or released, or where CGT assets are acquired for the purpose of avoiding event K6. In these scenarios, it is necessary to disregard the impact of the discharge, release or acquisition.

The rules dealing with event K6 are primarily contained in section 104-230 of the Income Tax Assessment Act 1997 (ITAA). The ATO expresses its views on CGT Event K6 in TR 2004/18DC. This ruling was recently updated in December 2024 (draft updates only with consultation on finalisation in-progress at the time of writing).

Remember that event K6 impacts upon the shareholder or interest holder, not the company or trust which is tried under the 75% test.

When does CGT Event K6 occur?

CGT Event K6 happens when the relevant CGT event happens (A1, C2, E1, E2, E3, E5, E6, E7, E8, J1 or K3).

How to calculate CGT Event K6 capital gain

The taxpayer will make a capital gain equal to the part of the capital proceeds from the share or interest that is reasonably attributable to the amount by which the market value of the relevant property is more than the sum of the cost bases of that property.

The legislation does not provide a specific formula or methodology to be used. However, the method used (whatever it is) obviously needs to be reasonable in the circumstances. In TR 2004/18DC, the ATO provides guidance on acceptable methodologies. It floats a two-step methodology that could be employed to calculate the capital gain under single tier structures. Step 1 involves determining how much of the capital proceeds actually relates to the post-CGT property according to the following formula: capital proceeds x market value of post-CGT property / market value of all property. Step 2 involves determining how much of the step 1 amount relates to the amount by which the market value of the post-CGT property exceeds the cost bases of that property according to the following formula: step 1 amount x market value excess / market value of post-CGT property.

TR 2004/18DC also contemplates a number of other matters such as:

• what is meant by property, including what is meant by property acquired on or after 20 September 1985 (keeping in mind that property is not confined to CGT assets);
• application of the 75% test; and
• calculation of the capital gain, including in the context of multi-tier structures.
• Interactions with other provisions of the ITAA.

It is not possible to make a capital loss under event K6.

Exceptions

There are a number of potential exceptions from CGT Event K6, including:

• for a taxpayer who has shares in a company – some shares were listed for quotation in the official list of a stock exchange in Australia or a foreign country at the time of the other event and at all times in the period of 5 years before the time that event; or
• for a taxpayer who has interests in a unit trust – some units were similarly listed or were ordinarily available to the public for subscription or purchase during the same period referred above.
• If the share/interest was acquired post-CGT, the taxpayer could have chosen a roll-over for that CGT event under the scrip for scrip roll-over contained in Subdivision 124-M ITAA. Any partial roll-over amount would also be disregarded.

CGT discounts and concessions

The general CGT discount (Division 115 ITAA) and the small business CGT concessions (Division 152 ITAA) may be available to discount or eliminate a capital gain under CGT Event K6, provided the taxpayer meets the various conditions of eligibility.