It is worth surveying how three CGT anti-avoidance provisions, can affect how the gain on shares or units, can be affected by the nature of underlying assets, held by the company or trust (in the K6 event provision: s104-230 and the discount capital gains provision: s115-45). Similarly the pre-CGT nature of a company or trust’s assets, can be lost, if there’s a change in continuity of majority ultimate ownership, since the introduction of CGT (on 20.9.1985, under Division 149). All of these provisions are in Income Tax Assessment Act 1997 (Cth) (ITAA 1997). CGT is an integral part of the Australian tax system, impacting individuals, businesses, and investors, and it is important not to overlook some of the integrity rules that can produce unexpected tax outcomes, if taxpayers and their advisers are not aware of their operation.

Gain on Pre-CGT interests in companies and trusts ‘pregnant’ with ‘post-CGT’ assets – taxable under s104-230 (CGT event K6)

Ordinarily, when a CGT event happens to a pre-CGT asset, the capital gain or loss is disregarded. However, you can make a taxable capital gain, under CGT event K6, if certain CGT events (A1, C2, E1, E2, E3, E5, E6, E7, E8, J1 or K3) happens in relation to the shares in a company or an interest in a trust acquired before 20 September 1985 (note that, in Taxation Ruling TR 2004/18, the Commissioner has ruled on what he thinks the K6 provision, in s104-230, operates). The ‘trigger’ the K6 event happening, is similar, but different to the amount of the taxable capital gain, if it does operate. The provision operates on both interests in both companies and trusts (but, for simplicity’s sake, I will mention just ‘companies’ and shares’.

. The ‘trigger’ for this is that, just before the time the relevant CGT event happened, to the shares:

  • (in the case of ‘directly held property) the market value of property (other than trading stock) of the company, that was acquired on or after 20 September 1985 (post-CGT property) is at least 75% of the net value of the entity, just before the CGT event happened; or
  • (n the case of indirectly held property) the market value of interests the company owned through interposed companies or trusts, in post-CGT property (other than trading stock), is at least 75% of the net value of the entity.

The amount of a K6 capital gain, is equal to that part of the capital proceeds from the shares that is ‘reasonably attributable to the amount by which the market value of the property [held directly and indirectly – see above] of the company, is more than the sum of the cost bases of that property.

There can be no ‘capital loss’ generated by a K6 event.

Things to note about this, include the following.

  • The gain taxed, if K6 is triggered, applies to both directly and indirectly held post-CGT property.
  • In the case of ‘directly held’ property, there is a ‘mis-match’ between the gross value of the post-CGT property, and the ‘net’ value of the company (if it has any liabilities).
  • For ‘indirectly held assets, the 75% is calculated as ‘market value of interests’ the company has, in post-CGT property.
    • This means that a shareholding of less than 100% (say 25%) will bring to account, only 25% of the post-CGT property, in the subsidiary.
    • It also means that the ‘gross’ v’s ‘net’ value mis-match doesn’t exist (because the market value, of the interest, will be net of debt/liabilities in that subsidiary).
  • There are separate 75/% ‘triggers’ for each of direct and indirectly held post-CGT property.
    • This means that the percentage under each of the tests cannot be ‘aggregated’ (eg. a 50% direct holding can’t be added to a 25% indirect holding, to get to a 75% K6 trigger).
    • It also means, that if both triggers apply, there’ll be double tax (but the Commissioner says he won’t ‘double tax’ under this provision – which is an extra-statutory concession).
  • It is only post-CGT ‘property’ (not ‘CGT assets’) that enliven the K6 trigger tests, and then found the calculation of the taxable K6 gain. This is, of course, a pointed difference between ‘CGT asset’ and ‘property’ in that s108-5 defines ‘CGT asset’ as ‘property’ and other ‘legal and equitable rights that are not property’. Also, some assets, like motor vehicles are ‘disregarded’ as CGT assets, but are plainly ‘property’.
    • The Commissioner rules that ‘property’ has its ordinary meaning, as something one can ‘own’ (which usually means that ownership can be transferred – eg. land, goods & shares).
    • Rights that are not ‘property’ (but may have value) include things like personal rights, mining, quarrying or prospecting information and ‘future income tax benefits’ (recognised as ‘assets’ for accounting purposes).
    • ‘Goodwill’ is usually regarded as something that can be ‘owned’. If so, it is generally regarded as ‘acquired’ when the business began (possibly pre-CGT). What might colloquially be regarded as ‘goodwill’ might actually be comprised of various other rights – some of which might still be property (eg. copyright in software, or trademarks). This won’t change the aggregate value of ‘property’ but it might change the amount which is ‘pre’ and the amount which is ‘post’ CGT – for both market values and ‘cost bases’. Good will might be comprised by other rights, that are not property – eg. non-copyright client information, names of suppliers, operational knowledge about things like how much stock to order, at each relevant date. The High Court has deliberated on what is, and what is not, ‘Goodwill’ – by majority holding that it is not as wide as the value of the business, sold as as a going concern, compared with the sum of the value of all separately identified assets. This could be an important ingredient in value, which is not included in either the ‘trigger’ or the K6 ‘gain’ amount.
  • The K6 gain, is only so much of the CGT proceeds (eg. on the sale of the shares), as is ‘reasonably attributable’ to an unrealised capital gain, on the post-CGT property – which the company holds directly and indirectly. The law is not prescriptive about how this is calculated and the Commissioner acknowledges there could be more than one basis of ‘attribution’ that is ‘reasonable’ – though he does give guidance (in TR 2004/18) about what he thinks will be the most likely basis for a ‘reasonable’ attribution.

Section 115-45 — no CGT discount where capital gain made from equity in an entity with newly acquired assets 

Finally, shares or interests in trusts (eg. Units) can be held for 12 months, but lose their ‘discount’ status, if too many of the underlying assets (in the company or trust) are new (held for less than 12 months, by the company/trust). This is under section 115-45, which sets how this discount can be lost, and to what extent.

There are three cumulative triggers, before a capital gain on shares/units lose their ‘discount’ status – under s115-45.

  1. First, the taxpayer (and associates) must have been beneficially entitled to shares/units giving them at least 10% of the shares/units, by either ‘value’ or ‘voting’ rights – measured ‘just before’ the relevant CGT event happened to the shares/units.
  1. Second, more than 50% of the cost bases, of the underlying assets, held by the company or trust, must be new (ie. held by the company/trust for less than 12 months). This, too, must be measured ‘just before’ the CGT event happened to the share/units.
  1. Third, more than 50% of the ‘notional net capital gain’, on the underlying assets (held by the company or trust) must be be ‘new’ (ie. held by the company/trust for less than 12 months). The capital gains are ‘notional’, in that the disposal is deemed and the capital proceeds are deemed to be the assets’ ‘market values’. It is a ‘net’ capital gain, in the sense that modified version of the s102-5 method of calculating ‘net capital gains’ applies (see s115-45(5)-(7) for details). Again these calculations have to be done ‘just before’ the CGT event happens to all those underlying assets.

It’s worth making some comparisions with the previous CGT event K6 provision (which is the other, where too many of some sort of underlying assets, affects the way the shares/units are taxed.

  • First, the whole ‘discount’ is lost (not just a proportion that matches the proportion of new assets).
  • Second, there is no attempt to dig down into assets only indirectly held, by the company or trust.

Division 149 — pre-CGT assets held in a company or unit trust become post-CGT assets 

In contrast, a CGT asset, ceases to be ‘pre-CGT, when Division 149 applies. This happens when the ‘ultimate owners’, who held ‘majority underlying interests’ (MUI) (see subsection 149-15(1)) in the CGT asset, cease to be the same, as held those majority interests, just before the 20 September 1985 date, when CGT first applied (and it has to be the earliest time, when that there ceased to be continuity of persons who held those ‘majority interests’). An MUI in a CGT asset is more than 50% of the beneficial interests, that an ultimate owner has (whether directly or indirectly) in the asset or in any ordinary income that may be derived from the asset.

No taxing point arises at the time of the change in the underlying majority interest holders, but the underlying assets, cease to be pre-CGT, in the hands of the relevant entity, and it’s cost base then includes its ‘market value’ at the time it ceases to be pre-CGT (of course, further amounts can be subsequently included’ in its cost base, as allowed by the law).

Subsequently occurring CGT events, might then trigger a capital gain (or loss).


In summary, the way shares/units are taxed, can be affected by the amount of pre-CGT assets, or new assets held by the relevant company or trust – losing, respectively, a portion of their ‘pre-CGT’ status, under the K6 provision (s104-23) or their ‘discount’ status, under a ‘discount capital gain’ anti-avoidance provision (s115-45). Conversely, the pre-CGT status of assets held by a company or trust, can be affected by losing continuity majority ultimate ownership, from the 1985 date on which CGT was introduced (under Div 149).



This article is based on and idea originating in an article, published by The Tax Institute, in TaxVine (v6, on 1.3.2024).

[FJM 21.3.24]