INTRODUCTION Overview... [13 010] Nature of CGT events... [13 020] What if more than one event applies?... [13 030]

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CGT EVENTS 13 INTRODUCTION Overview... [13 010] Nature of CGT events... [13 020] What if more than one event applies?... [13 030] ASSET DISPOSAL OR TERMINATION CGT event A1 disposal of CGT asset... [13 050] CGT event B1 use and enjoyment before title passes... [13 060] CGT event C1 loss or destruction... [13 070] CGT event C2 ending of intangible asset... [13 080] CGT event C3 end of option to acquire shares, units or debentures... [13 090] RIGHT CREATION CGT event D1 creating contractual or other rights... [13 150] CGT event D2 grant, renewal or extension of option... [13 160] CGT event D3 grant of right to mining income... [13 170] CGT event D4 grant of conservation covenant... [13 180] TRUSTS CGT event E1 creating trust over asset... [13 200] CGT event E2 transfer of asset to trust... [13 210] CGT event E3 converting trust to unit trust... [13 220] CGT event E4 capital payment from trust... [13 230] CGT event E5 beneficiary becomes absolutely entitled... [13 240] CGT event E6 disposal to beneficiary to end income right... [13 250] CGT event E7 disposal to beneficiary to end capital interest... [13 260] CGT event E8 disposal of capital interest by beneficiary... [13 270] CGT event E9 creating trust over future property... [13 280] LEASES CGT event F1 grant, renewal or extension of lease... [13 300] CGT event F2 grant, renewal or extension of long-term lease... [13 310] CGT event F3 lease change lessor s expenditure... [13 320] CGT event F4 lease change lessee receives payment... [13 330] CGT event F5 lease change lessor receives payment... [13 340] SHARES CGT event G1 capital payment to shareholder... [13 400] CGT event G3 liquidator or administrator declares shares or financial instruments worthless... [13 410] SPECIAL CAPITAL RECEIPTS CGT event H1 forfeited deposit... [13 450] CGT event H2 receipt for event relating to CGT asset... [13 460] CESSATION OF RESIDENCE CGT events I1 and I2 ceasing to be resident... [13 500] REVERSAL OF ROLL-OVERS CGT event J1 company not in wholly owned group after roll-over... [13 550] CGT event J2 small business roll-over change in replacement asset... [13 560] CGT event J4 reversal of trust to company roll-over... [13 570] CGT event J5 small business roll-over no replacement asset... [13 580] CGT event J6 small business roll-over insufficient expenditure... [13 590] OTHER EVENTS CGT event K1 registered emission units: carbon pricing scheme... [13 640] CGT event K2 bankrupt pays debt... [13 650] CGT event K3 asset bequeathed to tax-advantaged entity... [13 660]

[13 010] CGT EVENTS CGT event K4 asset becomes trading stock... [13 670] CGT event K5 special collectable losses... [13 680] CGT event K6 pre-cgt shares or trust interest... [13 690] CGT event K7 balancing adjustment events for depreciating assets... [13 700] CGT event K8 taxing events under direct value shifting rules... [13 710] CGT event K9 carried interests of venture capital managers... [13 720] CGT event K10 certain short-term forex realisation gains... [13 730] CGT event K11 certain short-term forex realisation losses... [13 740] CGT event K12 partners in foreign hybrids... [13 750] CONSOLIDATION EVENTS Background... [13 800] CGT event L1 loss of pre-cgt status of membership interests in entity becoming subsidiary member... [13 810] CGT event L2 negative amount remaining after step 3A of the ACA on joining... [13 820] CGT event L3 tax cost setting amount exceeds joining ACA amount... [13 830] CGT event L4 no reset cost base assets and excess of ACA on joining... [13 840] CGT event L5 negative amount remaining after step 4 of the ACA for a leaving entity... [13 850] CGT event L6 errors in calculating the ACA... [13 860] CGT event L7 variation in liability repealed... [13 870] CGT event L8 excess of allocable cost amount... [13 880] INTRODUCTION [13 010] Overview This chapter examines the CGT events which are fundamental to the operation of the CGT provisions as a capital gain or capital loss can only arise when a CGT event occurs. The chapter examines the requirements and consequences of each CGT event, which are categorised into the following topical groups: asset disposal or termination...[13 050]-[13 090] right creation...[13 150]-[13 180] trusts...[13 200]-[13 280] leases...[13 300]-[13 340] shares...[13 400]-[13 410] special capital receipts...[13 450]-[13 460] cessation of residence...[13 500] reversal of roll-overs...[13 550]-[13 590] other events...[13 640]-[13 750] consolidation events...[13 800]-[13 880] There is another category of CGT events changing residence but those events are considered in Chapter 18. This chapter also considers preliminary matters relating to the nature of CGT events and how they are applied if more than one is relevant: see [13 030]. [13 020] Nature of CGT events Each CGT event deals with the following issues: how the event occurs; any exceptions to the event; when the event is taken to occur; whether a capital gain or capital loss arises and 518 2013 THOMSON REUTERS

CGT EVENTS [13 050] how it is calculated; and any effect the event has on the cost base of the relevant CGT asset. See Chapter 16 for roll-overs that may be available for capital gains arising under CGT events. Note that Div 109 deals with any corresponding acquisition of an asset by the other party to a CGT event. It is relevant for determining, among other things, whether an asset has been held for more than 12 months for the purpose of qualifying for the CGT discount. For example, in Healey v FCT [2012] FCA 269, the Federal Court held that a trust had acquired shares pursuant to the acquisition rules that apply to CGT event E2 (transfer of an asset to a trust) on the date of transfer of the shares, and not pursuant to the acquisition rules that apply to CGT event A1 (disposal of asset) on the date of making the contract of disposal. As a consequence, the shares were not held for more than 12 months for the purposes of the CGT discount (see [14 400]). This decision was upheld by the Full Federal Court on appeal: see Healey v FCT [2012] FCAFC 194 (the taxpayer is seeking special leave to appeal to the High Court). [13 030] What if more than one event applies? It is possible that more than one CGT event could apply to the same transaction. This will be relevant if, for example, the method of calculating a capital gain or loss is different under the different events. In these circumstances, the most specific event to the taxpayer s situation is taken to apply (subject to exceptions for CGT events J2, J3, K5 and K12): s 102-25(1). Note that CGT events D1 and H2 only apply in a residual capacity if no other CGT event applies and that if they do apply, CGT event D1 takes priority over CGT event H2: s 102-25(3). An example is Healey v FCT [2012] FCAFC 194, where the Full Federal Court upheld a decision that CGT event E2 (transfer of an asset to a trust) was more specific than CGT event A1 (disposal of asset) for the purpose of determining when a trust acquired shares under the relevant acquisition rules in Div 109 (see also [13 020]). On the other hand, in the case of the disposal of land under a standard contract of sale to a trust which is not connected with the taxpayer, CGT event A1 is the more specific event rather than CGT event E2: see ATO ID 2003/559. ASSET DISPOSAL OR TERMINATION [13 050] CGT event A1 disposal of CGT asset CGT event A1 happens if a taxpayer disposes of a CGT asset: s 104-10(1). Disposal Disposal occurs if there is a change of ownership from the taxpayer to another entity, whether or not the change of ownership occurs because of the happening of a specific act or event or by operation of law: s 104-10(2). However, a change in the legal ownership of an asset without a change in its beneficial ownership will not constitute a disposal. This means that CGT event A1 does not apply, for example, if a taxpayer transfers legal ownership but retains the beneficial ownership of a CGT asset, or if a trustee who held the legal ownership is changed: s 104-10(2)(a) and (b). Similarly, CGT event A1 will not apply to the mere subdivision or splitting of property as there is no change in the beneficial ownership of the property: s 112-25(2) and CGT Determination 7. The most obvious CGT event A1 is the sale of an asset. However, CGT event A1 will also apply: to the gifting of a CGT asset; the sale of a CGT asset without the owner s consent (see ATO ID 2010/116) but not the theft of a CGT asset as there is no change in beneficial ownership; 2013 THOMSON REUTERS 519

[13 050] CGT EVENTS to the compulsory acquisition of a CGT asset (subject to roll-over relief: see [16 100]); to the transfer of ownership of the asset to the State by operation of law (see ATO ID 2009/129 where land was vested in a statutory trustee, and see ATO ID 2002/67, where land was forfeited to the State under a court order); and if a trustee ceases to hold an asset on trust and commences to hold it in their own capacity (see ATO ID 2010/72). In relation to group companies, CGT event A1 will also happen to the head entity of a consolidated group if a subsidiary member disposes of an asset (Determination TD 2004/39), if a membership interest in a subsidiary is sold outside the group (Determination TD 2004/40) or if a subsidiary member of a group contracts to sell a CGT asset and the contract settles after the entity leaves the group (Determination TD 2008/29). Note that Forex realisation event 1 happens when an entity disposes of foreign currency or a right to it: see [32 260]. For the application of CGT event A1 to immediate transfer farm-out arrangements, see Draft Ruling MT 2011/D1. Earnout arrangements Under proposals announced in the 2010-11 Federal Budget, all payments received under a qualifying earnout arrangement will be treated as relating to the underlying business assets that were bought and sold (ie a look-through treatment, as opposed to the separate asset treatment for an earnout right as outlined in Draft Ruling TR 2007/D10). This means that CGT event A1 will apply in respect of all payments. The proposed measures will apply from the date of assent of the amending legislation, with transitional provisions available from 17 October 2007, the date of release of Draft Ruling TR 2007/D10 (Assistant Treasurer s media release No 98, 12 May 2010). The Tax Office s administrative treatment of earnout arrangements pending the introduction of the legislation is available on its website. Generally taxpayers will have the choice to apply the proposed look-through treatment for earnout arrangements entered into between 12 May 2010 and the date of assent of the amending legislation (inclusive). In addition, the buyer in a standard earnout arrangement will have the choice to apply the proposed look-through treatment for earnout arrangements entered into on or after 17 October 2007. Further, if amendments to assessments are necessary when the legislation is introduced, the Tax Office will not apply shortfall penalties and will remit any interest accrued up to the date the amending law is enacted. Immediate transfer farm-out arrangements Ruling MT 2012/1 deals with the CGT and other tax consequences of immediate transfer farm-out arrangements. Under such an arrangement, the farmee acquires an interest in a mining tenement, and also acquires a right to reassign the interest in the mining tenement to the farmor if, for example, exploration reveals insufficient quantities of minerals. The ruling states that, in these circumstances, CGT event A1 happens to the farmor for the interest in the mining tenement that is transferred by the farmor to the farmee. However, the exemption in s 118-24(1) (see [15 080]) will apply to disregard any capital gain or loss on the transfer of the interest in the mining tenement if the decline in value of the interest in the mining tenement is (or would be) worked out under the UCA provisions in Div 40 (discussed in Chapter 10). In addition, on the basis that no cost is attributable to this right, and it is merely incidental to the acquisition of the interest in the mining tenement, the ruling states there are no additional CGT consequences for the farmee. See also Ruling MT 2012/2 (deferred transfer farm-out arrangements). Apart from a change in the legal ownership of an asset without a beneficial change in the ownership (see s 104-10(2)), a gain or loss arising from CGT event A1 will also be disregarded for assets acquired before 20 September 1985 (except where CGT event K6 520 2013 THOMSON REUTERS

CGT EVENTS [13 050] applies to pre-cgt shares or trust interests (see [13 690])). A gain or loss from a lease will also be disregarded if the lease was granted before, and not renewed or extended after, 19 September 1985: s 104-10(5). Another exception applies to the transfer of assets to provide or redeem a security (see also [12 340]). But note that the exception for assets vesting in a trustee in bankruptcy or a liquidator as a result of insolvency have been removed as a result of the amendments made by the Tax Laws Amendment (2013 Measures No 1) Act 2013: see [12 320]. See [15 160] for an exception for capital gains and losses arising in respect of the disposal of rights under the financial claims scheme. The event is taken to occur when any contract for the disposal is entered into or, if there is no contract, when the change of ownership occurs: s 104-10(3). If there is no contract, at common law a change of ownership occurs when the transferor has done everything necessary to effect a change of ownership: see Corin v Patton (1990) 169 CLR 540. If a contract is entered into in circumstances that involve a delay between entering into the contract and settlement, such as commonly occurs in the case of real estate sales, CGT event A1 is nevertheless taken to occur upon entering into the contract, provided the contract proceeds to settlement, as otherwise there is no change in ownership (and CGT event A1 will not occur). For the CGT consequences of the forfeiture of a deposit, see [13 450]. Note that although s 170(10AA) ITAA 1936 allows the Commissioner to amend an assessment at any time to give effect to s 104-10(3), this power may only be exercised if a new fact arises after the original assessment is made which makes it necessary to give effect to the original taxing event: Metlife Insurance Ltd v FCT (2008) 70 ATR 364. Guidelines on the timing of CGT events arising under contracts of disposal are provided in FCT v Sara Lee Household & Body Care (Australia) Pty Ltd (2000) 44 ATR 370 and McDonald v FCT (2001) 46 ATR 426. For example, if 2 or more contracts are involved, a judgment is required as to which of the contracts is the source of the obligation to effect the disposal. See also AAT Case [2013] AATA 76, where the AAT found that a heads of agreement arrangement was a binding contract and not simply an agreement to agree which was conditional upon the subsequent execution of the formal contract of sale. Note also that rights acquired under an assumption of liability agreement are considered to be disposed of at the time the rights are progressively extinguished by the other party making the required payments under the agreement and not at the time the agreement was entered into: Orica Ltd v FCT (2001) 46 ATR 218. Compulsory acquisitions, whether under Australian or foreign law, are taken to occur at the earliest of (s 104-10(6)): receipt of compensation from the acquiring entity; the acquiring entity becoming the asset s owner; the acquiring entity entering the asset under the compulsory power; or the acquiring entity taking possession under the compulsory power. However, note that roll-over relief may be available for some compulsory acquisitions: see [16 100]. In relation to goodwill acquired under a contract, if the goodwill coalesces with the existing goodwill of the taxpayer s business and forms a part of that business already conducted, the goodwill is considered to have been acquired when the original goodwill was acquired including if it was pre-cgt goodwill: Ruling TR 1999/16 and ATO ID 2010/208. Corresponding acquisition of asset The person who acquires the asset is taken to have acquired it when any contract for the disposal is entered into or, if there is no contract, acquisition occurs when the disposing entity ceases to be the asset s owner: s 109-5(2). However, under a compulsory acquisition, 2013 THOMSON REUTERS 521

[13 060] CGT EVENTS acquisition is taken to have occurred at the earliest of the 4 times mentioned above: s 109-5(2). Note also that there will be no acquisition if the exceptions in s 104-10(7) apply, ie where there is a disposal merely to provide or redeem a security or the vesting of assets in a trustee or liquidator on insolvency: s 109-15. A capital gain arises if the capital proceeds from the disposal are more than the asset s cost base: s 104-10(4). A capital loss arises if the capital proceeds from the disposal are less than the asset s reduced cost base: s 104-10(4). Capital proceeds are discussed at [14 250]-[14 320]. Cost base and reduced cost base are discussed at [14 020]-[14 200]. [13 060] CGT event B1 use and enjoyment before title passes CGT event B1 applies if the use and enjoyment of a CGT asset occurs before title to the asset changes hands. The event happens if a taxpayer enters into an agreement with another entity under which the right to use and enjoy an asset owned by the taxpayer passes to the other entity, provided title to the asset will or may pass to the other entity at or before the end of the agreement: s 104-15(1). Determination TD 1999/78 provides guidance on the meaning of end of an agreement. (See also Div 240 for the inclusion of amounts under hire purchase agreements in assessable income: see [33 090].) The general exception causing a gain or loss to be disregarded for assets acquired before 20 September 1985 applies. An exception also applies if title in the asset does not actually end up passing to the other entity when the agreement ends: s 104-15(4). Note that if title does not pass but an amount has been paid under the agreement for the use and enjoyment of the asset, it is likely that the amount would be income according to ordinary concepts (similar to rent or a royalty, depending on the nature of the asset and the terms of the agreement) and/or assessable under other CGT events (eg CGT event H2: see [13 460]). The event is taken to occur when the other entity first obtains use and enjoyment of the asset: s 104-15(2). Corresponding acquisition of asset The person who eventually acquires the asset when title passes is taken to have acquired it when the person first obtained the use and enjoyment of it: s 109-5(2). There is no acquisition if title does not actually end up passing when the agreement ends. A capital gain arises if the capital proceeds from the agreement are more than the asset s cost base: s 104-15(3). A capital loss arises if the capital proceeds from the agreement are less than the asset s reduced cost base: s 104-15(3). Capital proceeds are discussed at [14 250]-[14 320]. Cost base and reduced cost base are discussed at [14 020]-[14 200]. [13 070] CGT event C1 loss or destruction CGT event C1 happens if a CGT asset (or part of a CGT asset) is lost or destroyed: s 104-20(1). Determination TD 1999/79 provides guidance on the meaning of loss or destruction. CGT event C1 also applies if a CGT asset is sold without the owner s consent to a bona fide purchaser: ATO ID 2010/124. The general exception causing a gain or loss to be disregarded for assets acquired before 20 September 1985 applies: s 104-20(4). Note that no capital gain or loss arises on the destruction of a dwelling if no capital proceeds are received: ATO ID 2002/633. Note also 522 2013 THOMSON REUTERS

CGT EVENTS [13 080] that CGT event C1 does not apply if a CGT asset (or part of it) has been merely damaged as opposed to destroyed: see Determination TD 1999/79. Instead, if compensation is received, cost base reductions in accordance with the Commissioner s policy in Ruling TR 95/35 may apply: see [14 080]. Importantly, the event is taken to occur when any compensation for the loss or destruction is first received. If no compensation is received, the event occurs when the loss is discovered or the destruction occurred: s 104-20(2). Due to its nature, there is no corresponding acquisition of an asset in respect of this event. A capital gain arises if the capital proceeds from the loss or destruction are more than the asset s cost base (s 104-20(3)) or that part of the asset s cost base in the case of a partly destroyed asset: see [14 170]. A capital loss arises if the capital proceeds from the loss or destruction are less than the asset s reduced cost base: s 104-20(3). Capital proceeds are discussed at [14 250]-[14 320]. Cost base and reduced cost base are discussed at [14 020]-[14 200]. Note that roll-over relief under Subdiv 124-B is available for a capital gain made under CGT event C1 on the loss or destruction of an asset: see [16 100]. [13 080] CGT event C2 ending of intangible asset CGT event C2 happens if a taxpayer s ownership of an intangible CGT asset ends by the asset being redeemed, cancelled, released, discharged, satisfied, abandoned, surrendered or forfeited or by the asset expiring: s 104-25(1). See Determination TD 1999/76 for guidance on the meaning of expiry. Examples of where CGT event C2 can apply include: the waiver of a debt; the cancellation or redemption of shares under corporations law; the expiry of the lease on its extension or renewal (s 104-25(4)); the surrender of rights by a lessor pursuant to a lease surrender payment (Ruling TR 2005/6); renunciation by a beneficiary of their interest in a discretionary trust (Determination TD 2001/26); closing out the position under a financial contract for differences (Ruling TR 2005/15); extinguishing a debt when a company is deregistered (Determination TD 2000/7); the satisfaction of an investor s rights under a Deferred Purchase Agreement warrant by the delivery of the delivery assets (Determination TD 2008/22); the ending of a mining tenement right acquired by a farmee (Ruling MT 2012/2); the discharge of a bankrupt borrower from bankruptcy where all provable debts are released (ATO ID 2003/215); and the discharge of contractual rights when a contract is abandoned (ATO ID 2003/828). In Integrated Insurance Planning v FCT (2004) 54 ATR 722, the Federal Court held that CGT event C2 applied to the waiver of a loan received by an insurance agent on the basis that the agent s right to have the debt waived was a CGT asset that was extinguished by the waiver. The general exception causing a gain or loss to be disregarded for assets acquired before 20 September 1985 applies. If the asset is a lease, the lease must have been granted before and not renewed or extended after 19 September 1985: s 104-25(5). also apply to: the ending of a right in relation to a marriage breakdown settlement (see [15 150]); the exercise of rights to acquire shares or units (see [17 380]); the conversion of a convertible note (or interest) into shares or units (see [17 410] and [17 420]); and the exercise of an option (see [17 220]). See [15 160] for an exception for capital gains and losses arising in relation to the ending of rights under the financial claims scheme. 2013 THOMSON REUTERS 523

[13 080] CGT EVENTS The event is taken to occur when any contract that results in the asset ending was entered into or, if there is no contract, when the asset ends (see, for example, Re Carberry and FCT [2011] AATA 303, where cancellation of water licences occurred at the time they were replaced): s 104-25(2). Due to its nature, there is no corresponding acquisition of an asset in respect of this event. A capital gain arises if the capital proceeds from the ending are more than the asset s cost base: s 104-25(3). A capital loss arises if the capital proceeds from the ending are less than the asset s reduced cost base: s 104-25(3). Capital proceeds are discussed at [14 250]-[14 320]. Cost base and reduced cost base are discussed at [14 020]-[14 200]. Note that the market value substitution rule for capital proceeds will not apply in a range of cases (eg if CGT event C2 occurs in relation to a share in a widely held company or a unit in a widely held unit trust): see [14 260]. Company dissolution and cancellation of shares CGT event C2 applies to the cancellation of shares under the Corporations Act 2001 following the dissolution of a company: see Determination TD 2001/27. In this case, the capital proceeds comprise any final and interim liquidation distributions paid to shareholders, provided the company is dissolved within 18 months of the payments. Otherwise, CGT event G1 (about capital payments) would apply to the distributions: see [13 400]. For these purposes, the capital proceeds would include any dividend component of the liquidation distribution. However, the anti-overlap provisions in s 118-20 (see [15 250]) operate to reduce any double taxation arising from the taxation of the dividend under s 47(1) ITAA 1936: see Determination TD 2001/27. EXAMPLE [13 080.10] A shareholder owns 100 post-cgt shares in a company. Upon the liquidation of the company, the shares are cancelled (ie disposed of). $ $ Cost base at the time of cancellation 10,000 Liquidator s final distribution: Amount not deemed to be a dividend 11,000 Amount deemed by s 47 to be a dividend 7,000 18,000 Capital proceeds on disposal 18,000 Notional capital gain 8,000 Reduced by the deemed dividend 7,000 Assessable capital gain 1,000 Note the capital gain of $1,000 may be eligible for the small business concessions: see [15 540]. If a liquidator s distribution is assessable to a shareholder as a franked dividend, s 118-20 does not operate to reduce the capital gain by the amount of the franking credit and, instead, the capital gain is reduced only by the amount of the s 47(1) dividend: s 118-20(1B)(b). Note also that the availability of a franking rebate in respect of a liquidator s distribution is subject to the restrictions relating to dividends paid out of disqualifying capital accounts. If a company is wound up and shares are cancelled, CGT event C2 occurs on the date of the relevant court orders or, in the case of voluntary winding up, 3 months after the return of the final meeting is lodged (or the date specified in the court order): Determination TD 524 2013 THOMSON REUTERS

CGT EVENTS [13 150] 2000/7. However, CGT event G3 may apply at an earlier time if a liquidator or administrator issues a written declaration in respect of worthless shares or financial instruments: see [13 410]. Reduction of capital gain or loss certain companies Companies that make a capital loss from forgiveness of a commercial debt can agree to forgo the loss in certain circumstances: see [20 660]. Companies that make capital gains or losses from share cancellations on liquidation of 100% owned subsidiaries may have the relevant amounts reduced if certain roll-overs have occurred: see [16 270]. [13 090] CGT event C3 end of option to acquire shares, units or debentures CGT event C3 happens to a company or unit trust on the ending of an option to acquire shares in a company, units in a unit trust or debentures in either, if the option was granted by the company or trust. The event happens if the option ends by way of it not being exercised by the time required or by it being cancelled, released or abandoned: s 104-30(1). Note that a CGT event does not occur on the granting of such an option: see also [13 160]. The CGT consequences of exercising an option are considered at [17 200]-[17 230]. Importantly, CGT event C3 applies to the company or unit trust (see CGT event C2 at [13 080] for the implications for the option holder). An exception causing a gain or loss to be disregarded applies for options granted before 20 September 1985: s 104-30(5). The event is taken to occur when the option ends: s 104-30(2). Due to its nature, there is no corresponding acquisition of an asset in respect of this event. A capital gain arises to the company or unit trust if the capital proceeds from the grant of the option are more than the expenditure incurred in granting it: s 104-30(3). A capital loss arises to the company or unit trust if the capital proceeds from the grant of the option are less than the expenditure incurred in granting it: s 104-30(3). Capital proceeds are discussed at [14 250]-[14 320]. Note that the expenditure incurred in granting the option can include giving property: see [12 400]. However, any recoupment of expenditure that is not included in assessable income must be excluded: s 104-30(4). RIGHT CREATION [13 150] CGT event D1 creating contractual or other rights CGT event D1 happens if a taxpayer creates a contractual right or other legal or equitable right in another entity: s 104-35(1). For example, it would occur if a taxpayer enters into a restrictive covenant agreement not to compete with a person or an entity as the taxpayer has created the right to enforce the agreement in the hands of the other party. CGT event D1 would also apply, for example, to rights created under an agreement to: enter into an exclusive trade-tie agreement with another person; play sport only with a particular club; not to appear in a film made by another company; grant management rights over property; 2013 THOMSON REUTERS 525

[13 150] CGT EVENTS endorse the use of particular goods and services; vary a contract not amounting to a disposal of the whole or part of the rights under the contract; and create a right to reside in a property for life: Ruling TR 2006/14. It should be noted that some of these matters could result in the taxpayer deriving ordinary income or also fall within other CGT events. This will mean that the more specific event takes precedence unless there is no other CGT event (except CGT event H2) that could apply: see [13 030]. For example, CGT events F4 or F5 would apply to an agreement to vary a term of a lease. The Tax Office also considers that CGT event D1 happens if a taxpayer receives money or property for withdrawing an objection against a proposed land development, provided the receipt is not for permanent damage to, or reduction in value of, the land: Determination TD 1999/80. Note that the Commonwealth, States and Territories are entities for the purposes of CGT event D1 (Determination TD 1999/77), although a court is not (Determination TD 1999/81). CGT event D1 does not apply to the creation of the following rights (s 104-35(5)): rights created through borrowing money or obtaining credit; rights created that require the taxpayer to do something that will itself constitute a CGT event for the taxpayer (eg agreeing to dispose of an asset); rights created by the issue or allotment of shares in a company, including non-equity shares issued on or after 1 July 2001; rights created by the issue of units in a unit trust; rights created by the granting of an option to acquire shares (including non-equity shares issued on or after 1 July 2001), units or debentures in the entity granting the option; and the right created in the seller of a business under an earnout arrangement (see Draft Ruling TR 2007/D10 and [13 050]). Note that the grant of an option is covered by CGT event D2 (see [13 160]). The event is taken to occur when the taxpayer enters into the contract or creates the other legal or equitable right: s 104-35(2). See also Determination TD 1999/82. Corresponding acquisition of asset The person or entity who obtains the contractual or other right that has been created is taken to have acquired it when the contract is entered into or the other right is created: s 109-5(2). See also Healey v FCT [2012] FCAFC 194, which is discussed at [13 020]. A capital gain arises if the capital proceeds from creating the right are more than the incidental costs that the taxpayer incurred that relate to the event: s 104-35(3). A capital loss arises if the capital proceeds from creating the right are less than the incidental costs that the taxpayer incurred that relate to the event: s 104-35(3). Note that a capital gain arising under CGT event D1 is not eligible for the CGT discount (see [14 400]): s 115-25(3). Capital proceeds are discussed at [14 250]-[14 320]. Incidental costs that relate to an event are discussed at [14 040] and would include the legal costs of creating the right. The 526 2013 THOMSON REUTERS *Extract from The Australian Tax Handbook Tax Return Edition 2012. For more information, please visit www.thomsonreuters.com.au/essentials