Capital Gains Tax and the 12 Month Rule

Capital Gains Tax and the 12 Month Rule

Capital Gains Tax (CGT).To qualify for the CGT discount, a CGT asset must have been acquired by the taxpayer at least 12 months before the CGT event.

Certain CGT events, such as those that alter an asset to such an extent that they are deemed to create a new asset (e.g. major renovations), cannot qualify for the CGT discount because the asset is now deemed to not have been acquired at least 12 months before the CGT event.

In some cases, a taxpayer that acquires an asset within 12 months of the CGT event will be eligible for the CGT discount for any capital gain that arises. This will occur where certain assets are acquired under the same asset or replacement asset rollover provisions or under the rules applying to deceased persons. In these cases, the taxpayer will be treated  for CGT purposes as having acquired the asset for at least 12 months if the collective period of ownership is at least 12 months.

Assets owned by a taxpayer before becoming an Australian resident are treated as having been acquired at the date they became an Australian resident, so the 12 month rule will commence from the date from the date of residency. This rule does not apply to assets that are taxable Australian property before the person becomes a resident.

The 12 month rule is subject to two other provisions that can negate the CGT discount:

• The CGT discount will not apply to a capital gain if the CGT event that occurred later than 12 months after acquisition was the result of an agreement entered into within that 12 month period.
• The CGT discount is not available for capital gains arising from certain CGT events happening to equity interests in a company or trust if all of the following three conditions are satisfied:

      a) the taxpayer and /or associates owned at least 10% of the equity in the entity before the CGT event
      b) more than half of the cost bases of CGT assets owned by the underlying company or trust were acquired within the 12 month period before the sale of the equity interests, and
      c) a notional net capital gain made on assets held by the company or trust just before the CGT event, and acquired less than 12 months before, is greater than 50% of the notional net capital gain on all assets held by the company or trust at that time.

If any one of the three conditions above is not met, the capital gain is a discount capital gain.

However, the CGT discount can apply to such capital gains from CGT events happening to:

•   shares in a company with at least 300 members, or
•   interests in a fixed trust with at least 300 beneficiaries
•   unless the concentrated ownership rules apply.
•   Concentrated ownership occurs if:
•   one or up to 20 individuals own (directly or indirectly) shares with fixed entitlements to at least 75% of the income or capital, or at least 75% of the voting rights in the company, or
•   ne or up to 20 individuals own (directly or indirectly) interests in the trust with fixed entitlements to at least 75% of the income or capital, or at least 75% of the voting rights in the trust (if any).

For the purposes of the concentration of the ownership test, one individual together with associates, and any nominees of the individual or their associates will be counted as one individual.

It should be noted that special rules apply to capital gains made by trusts and listed investment companies.