Issue
Does CGT event K6 in section 104-230 of the Income Tax Assessment Act 1997 (ITAA 1997) happen where the taxpayer sells pre-CGT shares in a private company and the value of the post-CGT assets of the company is less than 75% of the net value of the company?
Decision
No, CGT event K6 does not happen when the taxpayer sells pre CGT shares and the net value of the post-CGT assets of the company does not exceed 75% of the net value of the company.
Facts
Prior to 20 September 1985 the taxpayer acquired half of the issued ordinary shares in a private company; which was created in order to develop and sell certain blocks of land. At the time of sale the assets of the company are cash (acquired post CGT) and a block of land (which is trading stock). The company does not own any other asset or have any liabilities. The cash represents approximately 61% of the net value of the assets of the private company.
One of the other shareholders has offered to buy the shares held by the taxpayer for approximately 50% of the net value of the private company.
Reasons for Decision
CGT event A1 happens if you dispose of a CGT asset (section 104-10 of the ITAA 1997). A CGT asset is any kind of property or a legal or equitable right that is not property (section 108-5 of the ITAA 1997). You dispose of a CGT asset if a change of ownership occurs from you to another entity.
A capital gain or capital loss from CGT event A1 is disregarded if the relevant asset was acquired before 20 September 1985 (paragraph 104-10(5)(a) of the ITAA 1997).
The shares in the private company are CGT assets, and their disposal will give rise to CGT event A1. However, as the taxpayer acquired the shares before 20 September 1985, the capital gain or capital loss on their disposal will be disregarded for the purposes of CGT event A1.
CGT event K6 happens where CGT event A1, C2, E1, E2, E3, E5, E6, E7, E8, J1 or K3 happens to pre-CGT shares or trust interests, and there is no roll-over for the other CGT event (subsection 104-230(1) of the ITAA 1997).
CGT event K6 only happens if, just before the other CGT event happened, the market value of post-CGT property (other than trading stock) of the company or the market value of interests the company owned through interposed companies in post-CGT property is at least 75% of the net value of the company (subsection 104-230(2) of the ITAA 1997).
CGT event K6 happens just before the other CGT event happens (subsection 104-230(5) of the ITAA 1997).
For the purposes of CGT event K6, cash acquired by the company after 19 September 1985 is considered to be part of the market value of post-CGT property (CGT Determination Number 24).
The 'net value' of the company means the amount by which the sum of the market values of the assets of the entity exceeds the sum of its liabilities (section 995-1 of the ITAA 1997).
In working out the net value of the company, you disregard the discharge or release of any liabilities, or the market value of any CGT assets acquired if the discharge or release or acquisition was done for a purpose of ensuring that the 75% of net value test would not trigger CGT event K6 (subsection 104-230(8) of the ITAA 1997).
The only post-CGT property of the company is cash, and this makes up approximately 61% of the net value of the company. The block of land owned by the company (including the development expenses associated with it) is trading stock and is not included in calculating the post-CGT property of the company (paragraph 104-230(2)(a) of the ITAA 1997).
Therefore, CGT event K6 will not happen when the taxpayer sells the shares as the market value of the post-CGT property of the company does not exceed 75% of the net value of the company.