CGT Event K6: The Sleeper Tax Trap Unveiled in the ATO’s Latest Ruling

Background

Where a shareholder has acquired shares in a private company or units in a unit trust, that were acquired prior to 20 September 1985, such interests are generally considered a ‘pre-CGT’ asset when disposed.

However, where the market value of post CGT assets held by a company or a trust represent at least 75% of the net value of that company or trust, at the time of the disposal of the interest, that disposal of the so-called ‘pre-CGT’ interest by a shareholder or unit holder, may be subject to CGT.

This is the effect of the ‘K6 CGT event’.

The Ruling

On 22 December 2024 the Commissioner of Taxation issued an updated version of TR 2004/18 to address issues with regards to the following:

• what is meant by property, including what is meant by property acquired on or after 20 September 1985;
• application of the 75% test;
• calculation of the capital gain; and
• interactions with other provisions of the ITAA 1997.

In particular, the Ruling notes that:

(a) ‘Property’ is interpreted as its ordinary legal meaning. As such, for example, two CGT assets for the purposes of the legislative provisions (example land and buildings) will be treated as one asset in accordance with the common law provisions.

(b) In respect of the 75% ‘test’, the test is satisfied if only one of the following is satisfied:

• The market value of the assets acquired post 20 September 1985 equals or exceeds 75% of the net value of the company or trust in which the entity holds the interest; or
• The market value of interests acquired post 20 September 1985 by a company or trust and held through an interposed company or trust equal or exceed 75% of the net value of the holding company or trust.

(c) The calculation of the capital gain is made in accordance with a ‘2-step’ approach. This should ensure a reasonable attribution of the capital gain of the post CGT assets.  This calculation is as follows:

• Step 1: determine how much of the capital proceeds actually relates to the post-CGT property; and
• Step 2: determine 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.

The calculation of the attributable capital gain will be subject to the facts and circumstances of each disposal.

In respect of single tiered ownership structure an example of the ‘2 – step’ calculation of a CGT gain could be as follows.

Example

Min Co is a privately owned mining exploration company. Its sole shareholder, John, acquired all of his shares pre-CGT. Just before John disposed of all of his shares for $810,000, Min Co held the following property all of which was post-CGT acquired except for the Mining tenement – QLD. Min Co also had liabilities of $40,000.

Step 1

Step 1 amount = Capital proceeds × (Market value of post-CGT property ÷ Market value of all property)

= $810,000 × $610,000 ÷ $850,000

= $581,294

Step 2

Step 1 amount × (Market value excess ÷ Market value of post-CGT property)

= $581,294 × $95,000* ÷ $610,000

= $90,529

John therefore has a capital gain of $90,529 in relation to the disposal of the interests.

*$95,000 is equal to the following:

The Ruling acknowledges that with respect to a multi- tiered ownership structure, a ‘modified’ 2 step approach may be required to account for a reasonable attribution of a capital gain to a taxpayer with respect to post CGT assets.

Interactions with other provisions

There are broad interactions with other respective provisions of the income tax legislation.  For example, a gain made as a result of the application of CGT event K6 will still remain subject to the CGT discount where applicable taxpayers have derived the gain (individuals, trustees and superannuation funds).

The CGT small business concessions contained in Division 152 will also apply. In a multi-tiered ownership structure, the relief offered by the CGT small business concessions will be limited to the shares held in the company, not to the property of the company or property of a lower tiered company as capital gains are not made on such property at that time.

Next steps

Taxpayers who are planning to realise the wealth built up in their business by selling it, taking advantage of the small business CGT concessions and using the tax concessional environment of their self-managed superannuation fund (SMSF) to maximise their savings for retirement need to be familiar with the rules for both the CGT concessions and limits to superannuation contributions.

To help navigate the many onerous compliance challenges posed by the interaction of the Small Business CGT concessions and Superannuation laws, explore TaxBanter’s March 2025 Special Topic.

Link to the March 2025 Special TaxBanter Special Topic (yet to be finalised – insert link here)