Capital Gains Tax

Fundamentals
Suggested Solutions

ATL003 CTA2A Advanced

SP1 2019
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Suggested solutions

The solutions provided in these study materials are suggested solutions only. The solutions to
the activities have been prepared to teach candidates how to resolve those activities within a
given set of circumstances. Candidates may encounter different practical scenarios at work
which will need to create a different solution or there may be other ways to arrive at a compliant
solution. The Subject Convenor, lecturer or tutor are those support contacts who will discuss any
alternative solution
CAPITAL GAINS TAX FUNDAMENTALS SP1 2019 SUGGESTED SOLUTIONS 4

Capital Gains Tax Fundamentals

Case Studies Suggested Solutions

Case Study 1 Suggested solution

Property 1 – Cost base:
1st element: $250,000
2nd element: $5,000
$14,000
$7,500
$13,000
$289,500
The interest costs will not form part of the cost base, as the interest was deductible since
this CGT asset was used to produce assessable rental income.

It should be ensured that the concepts of the elements of cost base are reviewed.

Capital proceeds: $400,000

Capital gain = $400,000 – $289,500 = $110,500 × 50% = $55,250

Property 2 – Cost base:

1st element: $225,000
2nd element: $5,000
$13,000
$243,000
Capital proceeds: $350,000

Market value substitution will apply as the sale was not non-arm’s dealing and the market value
of the property exceeded the capital proceeds.

Therefore, the capital proceeds are $450,000.

Capital gain = $450,000 – $243,000 = $207,000 × 50% = $103,500

Mr T’s brother will have a market value substitution on his cost base. By virtue of s 112-20(1),
the first element of the cost base will be restated to $450,000. Other elements of the cost base
will then be added to this.

Case Study 2 suggested solution:

CGT event E4 occurred to Jay during this tax year. While the non-assessable amount is less than
the cost base, a capital gain does not arise, rather the cost base of the units is reduced (s
104-70(6)). Further, in the present case, non-assessable amounts relating to the general 50%
discount are not included in the calculation. So only the $1,000 tax deferred amount will be
considered.

As noted, no capital gain will arise in the present case; however, Jay’s new cost base will be
$19,000.
CAPITAL GAINS TAX FUNDAMENTALS SP1 2019 SUGGESTED SOLUTIONS 2

Case Study 3 suggested solution:

The share buy-back will result in a CGT event C2 on the cancellation of Robert’s shares. For
CGT purposes the full $45,000 would ordinarily be the consideration for the cancellation of the
shares so Robert will have a prima facie gain of $20,000 ($45,000 – $25,000).

However, as this is an off-market share buy-back, s 159GZZZQ(4) of ITAA 1936 provides that
the consideration received on disposal would be reduced by the assessable dividend component
of the buyback price. Accordingly, the capital gain would be $12,000, being $37,000 less
$25,000. As an Australian resident individual Robert would be entitled to discount the gain to
$6,000.

Case Study 4 suggested solution

Explain the difference between CGT event K6 and Div 149

CGT event K6 (see s 104-230) arises where the underlying property of a trust or company is
post-CGT (specifically where the market value of post CGT property (excluding trading stock) is
more than 75% of the net value of the entity).

Division 149 impacts the assets of an entity. Where there has been a change of more than 50%
of the beneficial interests in a pre-CGT asset, it impacts the assets of the entity as opposed to the
shareholders themselves (at least directly! – indirectly it impacts the shareholders via the
treatment of future distributions particularly on liquidation – i.e. the distribution of a pre-CGT
capital profits reserve versus post-CGT profits).

What is the impact of each of these provisions?

CGT event K6 will result in a capital gain, including a gain on pre-CGT shares, that is reasonably
attributable to the extent that the market value of post-CGT property (excluding trading stock)
exceeds the cost base of that property. You should read further by accessing TR 2004/18.

Division 149 results in the ceasing of an asset as being pre-CGT.

At what times do you see these provisions being an issue?

CGT event K6 is generally a problem where a pre-CGT shareholder disposes of shares in a

company where the company has had significant growth by acquisition post-CGT.

Division 149 will generally be a problem where a pre-CGT company is changing hands.

Note: there are savings provisions where pre-CGT companies are bequeathed to other persons –
i.e. the beneficiary stands in the shoes of the deceased as if they owned the shares from the time
of purchase, or if marriage or relationship breakdown rollover relief (under Subdivision 126-A)
applies to the CGT event (refer to S149-30).
CAPITAL GAINS TAX FUNDAMENTALS SP1 2019 SUGGESTED SOLUTIONS 4

Unseen scenario suggested solution

Although Joe’s business and assets are pre-CGT, he should choose to utilise the Subdivision
122-A rollover to roll the goodwill and assets into ABC. As a consequence, the shares Joe
receives will be taken to be pre-CGT and ABC will be taken to have acquired the assets pre-CGT.
The subsequent disposal of shares to Sofia will be a pre-CGT gain and disregarded, however,
Sofia has acquired shares on 1 January 2010 with a cost base of $400,000. It has not been stated
whether the shares were acquired at market value, so this would have to be verified. If they were
not acquired at market value, the market value substitution rule would apply.

There is no impact under Division 149 when Joe disposes of 40% of his shares, which are treated
as pre-CGT shares.

The interposition of Holdco above XYZ should be a Div 615 rollover. All cost base attributes
should be rolled over. Mr and Mrs Jones will therefore have no gain or loss.

The acquisition by Holdco of ABC is a partial 124-M rollover. For Joe – no rollover is available –
all gains are pre-CGT and disregarded. He is taken to acquire the Holdco shares at market value
on 31 December 2018. Market value would be 60% of $1m being $600,000.

As there has been a majority change in ownership when Holdco acquires the shares in ABC on
31 December 2018, ABC would have it recognise the market value of its pre-CGT assets (i.e.
land and building and goodwill) on that date as the cost base of those assets upon any future
disposal of them.

For Sofia, she receives $400,000 shares and $400,000 cash. Her current cost base is $400,000.
As the eligible/ineligible proceeds are 50/50 in proportion, her cost base needs to be
apportioned. As such, based on the 124-M rollover her shares in Holdco will have a cost base of
$200,000. However, Sofia will also have made a gain of $200,000 on the ineligible cash
proceeds taxable in 2018-19 ($400,000 – $200,000). Note, she should be able to discount this
by 50% (Div 115) and possibly small business concessions (where eligible) although insufficient
data provided.

Note 1: The Holdco shares are worth $1m as at 31 December 2018, because the ABC shares are
valued at $2m, with $1m being provided in cash and $1m being provided in Holdco shares. Joe
gets 60% and Sofia gets 40%. The number of shares is not relevant.

Note 2: CGT event K6 does not happen when Joe sells 40% of his shares to Sofia, because all
assets of ABC are deemed to be pre-CGT assets – see s 122-70(3) ITAA97. Accordingly, the
condition in s 104-230(2) that the market value of property acquired on or after 20 September
1985 is at least 75% of the net value of the company is not satisfied.

Activity suggested solutions

Activity 1 Suggested solution

1.

The CGT consequences depend on whether the lessee or the lessor is the owner of the
improvements (refer to TD 98/23).
CAPITAL GAINS TAX FUNDAMENTALS SP1 2019 SUGGESTED SOLUTIONS 4

Improvements owned by lessee

If the lessee owns the improvements (see TD 46), the cost base of the improvements includes
the amount of capital expenditure incurred in making the improvements. On a CGT event
happening to the improvements, the amount of any capital proceeds received will determine
whether a capital gain or loss is made. If the improvements remain affixed to the land on the
expiry or termination of the lease, CGT event A1 (disposal of a CGT asset – s 104-10 of the
Income Tax Assessment Act 1997) happens to the improvements. The improvements are disposed
of by the lessee to the lessor.

If the parties are not dealing with each other at arm’s length or no capital proceeds are received,
ss 116-30 and 112-20 apply and the lessee is taken to have received, and the lessor to have paid,
the market value of the improvements.

Improvements owned by lessor

If the lessee does not own (and has never owned) the improvements, but the capital expenditure
is incurred by the lessee to increase the value of the lease and is reflected in the state or nature of
the lease at the time of a CGT event happening to it, s 110-25(5) allows for the expenditure
incurred to be included in the cost base of the lease to the lessee (also refer to s 112-80). If any
part of the lessee’s expenditure is recouped, and the amount of the recoupment received is not
included in the lessee’s assessable income. This amount does not form part of the cost base of
the lease.

On expiry or termination of the lease, CGT event C2 in s 104-25 – about cancellations,

surrenders and similar endings of intangible assets – happens to the lease and the amount of
capital proceeds, if any, will determine whether a capital gain or loss is made by the lessee (see,
in particular, s 116-75).

2.

Consider whether the expenditure is deductible or capital. Assistance can be found in TR 97/23.

Expenditure incurred on an initial repair after property is acquired, if the expenditure is incurred
in remedying defects, damage or deterioration in existence at the date of acquisition, is capital
expenditure and is not, therefore, deductible under s 25-10.

The CGT consequences of initial repairs are discussed in TD 98/19. Initial repair expenditure
incurred on a CGT asset after its acquisition is included in the fourth element of the relevant cost
base of the asset (about capital expenditure to increase an asset’s value) under s 110-25(5) (cost
base) or s 110-55(2) (reduced cost base) of ITAA97. The ATO considers that initial repair
expenditure does not satisfy any other cost base, or reduced cost base, element in ss 110-25 and
110-55.

3.

Even though James does not pay the money to Bill, the person who disposed of the asset, James
pays it ‘in respect of acquiring’ the asset and he can include it in the first element of the asset’s
cost base. Note that the $100,000 will be considered as capital proceeds Bill receives in respect
of a CGT event happening. Refer to TD 2003/1.
CAPITAL GAINS TAX FUNDAMENTALS SP1 2019 SUGGESTED SOLUTIONS 4

4.

The question revolves around whether money paid for the purposes of the first element of the
cost base in s 110-25(2) of ITAA97 and the reduced cost base under s 110-55 include the
amount of a liability extinguished under the doctrine of set-off. If an amount is owed in respect
of the acquisition of a CGT asset, the set-off of all or part of that liability constitutes money paid
in respect of the acquisition of the asset for the purposes of the first element of the cost base in
s 110-25(2) and the reduced cost base under s 110-55. Refer to TD 2005/52.

5.

Third party costs for re-zoning the property are included under the fourth element of the cost
base as they are incurred for the purpose of increasing the value of the land. Note that no value
can be attributed to the taxpayer’s own labour costs. Refer to TD 60.

6.

If a taxpayer accepts an unconditional takeover offer from a ‘bidder’ company for their share in a
‘target’ company, and the capital proceeds for their ‘target’ company share is a share in the
‘bidder’ company, they are taken to have acquired the ‘bidder’ company share for the market
value of their ‘target’ company share as at the time they enter into the contract to acquire the
‘bidder’ company share, that is, when they accept the offer. Refer to TD 2002/4.

If at the time Aaron accepts the offer the market value of an XYZ Ltd share is $4.40 the first
element of the cost base and reduced cost base of each ABC Ltd share is:

2 × $4.40 = $8.80
If the market value of an XYZ Ltd share was $4.60 at the time Aaron accepted the offer, the first
element of the cost base and reduced cost base for each ABC Ltd share would be $9.20.

Online Activity 2 Suggested solution

1.

Capital proceeds: 200 ABC shares × $1.25 plus $150 = $400

2.

CGT event A1 happens as a result of the sale of the Web shares. In the first instance John’s
capital proceeds from this event include the amount of the lump sum cash payment, being $5m.,
but not any value attributable to the earnout.

John does not acquire any new assets as a result of the earnout rights, as relevant legislation
adopts a look through approach rather than bringing to account the earnout rights as separate
assets.

Subsequently, when John receives payments pursuant to the earnout arrangement. These cash
payments of $150,000, $130,000 and $120,000 give rise for the need to amend his prior year
taxation return by amending the capital proceeds attributable to the original CGT event A1
further capital proceeds for each period the additional amounts are received.
CAPITAL GAINS TAX FUNDAMENTALS SP1 2019 SUGGESTED SOLUTIONS 6

Activity 3 Suggested solution

Pursuant to CGT Event D2, Brown will have a CGT consequence on the receipt of capital
proceeds attributable to the granting of the option:

Section 104-40(1) CGT event D2 happens if you grant an option to an entity, or renew or
extend an option you had granted.

Note: some options are not covered: see subsections (6) and (7).

Section 104-40(2) The time of the event is when you grant, renew or extend the option.

Section 104-40(3) You make a capital gain if the *capital proceeds from the grant, renewal or
extension of the option are more than the expenditure you incurred to grant, renew or extend it.
You make a capital loss if those capital proceeds are less.

Based on the foregoing, the amount received ($10,000 less the costs of $500) is assessable –
$9,500. The gain is not subject to the CGT discount (section 115-25(3)).

If the option is not exercised there are no further CGT consequences.

If the option is exercised, and to avoid the potential consequences of doubling up on CGT event
A1, the capital proceeds for the sale of the business is the gross amount receivable for the
disposal. Were it not for s 104-40(5), the option fee would not be taken into account when
calculating the CGT gain on the asset sale. Accordingly, s 104-40(5) requires the taxpayer to
amend the earlier tax return to disregard the CGT consequences of the option fee received in the
year in which the option fee was assessed i.e. for the tax year in which CGT event D2 occurred.

The Commissioner is authorised to amend assessments at any time to give effect to s 104-40(5)
(ITAA36 s 170(10AA), item 50).

Activity 4 Suggested solution

1.

See TD 1999/78.

Perry

This type of loose family arrangement does not fall within CGT event B1 because there is no
agreement under which title will or may pass and because there is no specific point of time or
particular occurrence when the arrangement will end.

Bill

This situation is not covered by CGT event B1 because the agreement is not one under which
title will or may pass at the end of the agreement.

Jim

There was an agreement under which Ken had a right to the use and enjoyment of the boat and
under that agreement title of the boat would or might pass to Ken when the hire purchase
agreement ends – which could be after three years or within that period – CGT event B1 occurs
when Ken first obtained the use and enjoyment of the boat and not when Jim actually transferred
CAPITAL GAINS TAX FUNDAMENTALS SP1 2019 SUGGESTED SOLUTIONS 4

the boat to him. Had the three years passed without Ken buying the boat, any capital gain or
capital loss Jim made from the CGT event would be disregarded.

2.

No. Subdivision 130–A of ITAA97 deals specifically with the treatment of bonus shares. This
Subdivision applies rather than s 104 -135 - refer to TD 2000/2.

3.

The shares, when held by Gunther, are not taxable Australian property. Section 128-15 of
ITAA97 applies to the shares in the hands of the resident beneficiary.

The date of acquisition and cost base of the shares for the resident beneficiary are calculated in
accordance with s 128-15 of ITAA97 so that:
 the shares are deemed to have been acquired by the beneficiary on the date of Gunther’s
death (21 March 1999) under s 128-15(2); and
 for an acquisition cost equal to the market value of the shares as determined at the date of
Gunther’s death, i.e. $16,000 under item 4 of the table in s 128-15(4).

4.

Assume that the facts in Part (3) are unchanged, except that Gunther acquired the shares on 21
January 1990 for $5,000. Again, the shares held by Gunther are not taxable Australian property.

The date of acquisition and cost base of the shares for the resident beneficiary are calculated in
accordance with s 128-15 of ITAA97 so that:
 the shares are deemed to have been acquired by the resident beneficiary on the date of
Gunther’s death (21 March 1999): see s 128-15(2); and
 the cost base of the shares is the market value of the shares on the date of Gunther’s death
($16,000): see item 3A in the table in s 128-15(4).

5.

This question considers the application of CGT event K6 in s 104-230 of ITAA97.

CGT event K6 can result in capital gains (but not capital losses) if certain CGT events happen to
pre-CGT shares in a private company or pre-CGT interests in a private trust where the market
value of its post-CGT property is at least 75% of its net value (the 75% test).

The land and building are separate CGT assets under Subdiv 108-D. However, the land and
building are a single item of property acquired prior to 20 September 1985 for CGT event K6
purposes.

Refer paragraphs 61 and 62 of TR 2004/18.

6.

For a capital gain to be made on the disposal of pre-CGT shares, CGT event K6 must apply.

For CGT event K6 to apply, the market value of the post-CGT property must be at least 75% of
the net value of the company (the latter being the amount by which the sum of the market values
of the assets exceed the sum of its liabilities – see s 995-1(1) ITAA97).
CAPITAL GAINS TAX FUNDAMENTALS SP1 2019 SUGGESTED SOLUTIONS 8

The market value of the post-CGT assets is $610,000 ($850,000 – $240,000).

The net value of the company is $810,000 ($850,000 – $40,000).

$610,000 is 75.3% of $810,000. Therefore, CGT event K6 applies.

As Min Co is a single tier structure, John may calculate his capital gain under the 2-step
approach.

Step 1 – capital proceeds relating to the post-CGT property

John has assumed that the post-CGT property and the pre-CGT property are reflected in the
capital proceeds on a proportional market value basis. As John is unaware of what property the
liabilities relate to, John has assumed that the liabilities relate to the post-CGT property and the
pre-CGT property on a proportional market value basis. As a result, the capital proceeds relating
to the post-CGT property could be determined as:

Step 1 – Amount = (Capital proceeds × Market value of post-CGT property) divided by Market
value of all property

Step 1 amount = $810,000 × $610,000/$850,000 = $581,294

Step 2 – allocating the step 1 amount to the market value excess

Step 2 involves allocating the capital proceeds relating to the post-CGT property between the
cost base of that property and the market value excess of that property on a reasonable basis.
This can be done by firstly determining the proportion of gain on the post-CGT property to its
market value, then applying that same proportion to the amount of proceeds attributable to the
post-CGT property.

As a result, the amount of the CGT event K6 capital gain is determined under Step 2 as:

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

Step 2 amount = $581,294 × $95,000*/$610,000 = $90,529

The ATO will accept as reasonable the capital gain of $90,529 because, having regard to the
facts, it is not thought to be manifestly and materially unreasonable.

* Note that the $95,000 is calculated as the gain on the Mining Tenement SA ($135,000) less
the losses on the depreciating assets ($10,000) and the Land and Buildings ($30,000) – see the
explanation in the next paragraph.

In calculating the market value excess, both the depreciating assets and the land and buildings
are taken into account even though their market value is less than their cost base. This is because
the post-CGT property taken into account in calculating the capital gain is not limited to the
property which would yield a capital gain relative to its market value just before the time of CGT
event K6.

Refer to Example 5 in TR 2004/18 and, in particular, paras 131 to 136. As to the allocation of
the Step 1 amount to the market value excess, see paras 125-126 of TR 2004/18.
CAPITAL GAINS TAX FUNDAMENTALS SP1 2019 SUGGESTED SOLUTIONS 4

Activity 5 Suggested solution

1.

Cost base of 300 shares = $120,000 (office building) + 10,000 (market value of office furniture)
+ 35,000 (market value plant and equipment) + 20,000 (market value of trading stock) – 20,000
(loan amount) = $165,000.
Capital proceeds $200,000
Cost base 200 × 165,000 ($110,000)
300
Capital gain $90,000
50% discount* ($45,000)
Net capital gain $45,000

*See s 115-34(3) ITAA97 in relation to the time of acquisition of assets by the company. See
s 115-34(2) in relation to the time of acquisition of the shares by Mick.

Note that because the market value of the precluded assets has been taken into account in
determining the cost base of the shares, Div 122 has, to this extent, applied to them.

However, depreciable property obtains a roll-over under item 1 of the table in s 40-340 ITAA97.
The company inherits the depreciation profile of the transferor – see s 40-345. There is no
equivalent for trading stock, which suggests that the Div 122 roll-over is of no utility and the
usual consequences on the disposal of trading stock outside the ordinary course of business
apply. Capital gains on trading stock are, in any event, disregarded under s 118-25 ITAA97.

This explains why the market value of the precluded assets is taken into account under Div 122.
Either the gain on trading stock will have been brought to account in the hands of the transferor
under the trading stock provisions or, in relation to depreciable property that has been rolled
over, the company will be liable for any tax consequences on the subsequent disposal of the
depreciable property.

2.

The Subdiv 122-A consequences for the company is that the office building is deemed to have
been acquired for the transferor’s cost base ($120,000).

122-70(2) If you acquired the asset on or after 20 September 1985:

(a) the first element of the asset’s “cost base” (in the hands of the
company) is the asset’s cost base when you disposed of it; and …

Accordingly, on the company’s disposal of the asset, the company will generate a capital gain of
$130,000 (i.e. $250,000 less $120,000).

3.

Item 6 of the Code of Professional Conduct deals with confidentiality (and disclosure of
information). In order to send relevant information to Malcolm to enable Malcolm to prepare the
outstanding BASs, John’s Tax Services should disclose its arrangement with Malcolm in its letter
CAPITAL GAINS TAX FUNDAMENTALS SP1 2019 SUGGESTED SOLUTIONS 10

of engagement with Mick. John’s Tax Services obtains Mick’s explicit permission by way of a
signed client engagement letter to disclose the information to Malcolm.

Activity 6 Suggested solution

The insurance proceeds received by Molly exceed the cost of the new factory by $850,000
(= $1,000,000 – $150,000). This is more than the capital gain made, i.e. the capital gain
would have only been $700,000 ($1,000,000 – $300,000).

The capital gain of $700,000 is not reduced and therefore must be included in Molly’s
assessable income. The 50% CGT discount would apply to reduce the capital gain to
$350,000. The cost base of the new factory is $150,000.
The insurance proceeds received by Molly ($1,000,000) are less than the cost of the new
factory $1,200,000. In that case, the capital gain will be disregarded and the cost base of the
new factory will be reduced by the amount of the capital gain ignored, i.e. the cost base of
the new factory would be $500,000 ($1,200,000 – $700,000).

When a replacement asset is received as compensation, the consequences are broadly:

 the replacement asset will be treated as a pre-CGT asset if the original asset has that status
 if the original asset is a post-CGT asset, the replacement asset will inherit the original asset’s
cost base and reduced cost base
 any capital gain that arises on the original asset is ignored.

Activity 7 Suggested solution

The capital proceeds for the transfer of the Sherlock shares to the Peter Family Trust will be
determined pursuant to section 116-30 – that is the market value of the Sherlock shares
($700,000).

As a consequence of the Division 615 rollover, the taxation implications for Peter in relation to
the Sherlock shares is provided by s 615-40. The consequences set out in Subdiv 124-A also
apply to a roll-over under this Division as if that roll-over were a roll-over covered by Div 124
(about replacement-asset roll-overs).

Note that those consequences generally involve disregarding a capital gain (or capital loss) the
taxpayer makes from the disposal, redemption or cancellation of their shares or units in the
original entity. They would also involve working out the first element of the cost base of each of
their new shares in the interposed entity by reference to the cost bases of their shares or units in
the original entity.

Pursuant to Subdiv 124-A, the cost base of the Sherlock shares is determined by section
124-10(3):

124-10(3) If you acquired the original asset on or after 20 September 1985,

the first element of each new asset’s cost base is:

The original asset’s cost base

(worked out when your ownership of it ended)
Number of new assets
CAPITAL GAINS TAX FUNDAMENTALS SP1 2019 SUGGESTED SOLUTIONS 4

Accordingly, in this instance Peter’s cost base for the Sherlock shares will be $200,000 (refer to
the facts provided).

Further the Div 615 rollover is referred to as a “replacement asset” rollover – see s 112-115. The
significance of this description is particularly relevant for the purposes of Div 115.

Pursuant to s115-30, the acquisition date of the Sherlock shares is referenced back to Peter’s
acquisition date of the Watson shares. Accordingly, notwithstanding the fact that Peter disposed
of the Sherlock shares within the six-month period of the rollover transaction, Peter will be deemed to
have acquired the shares more than 12 months and therefore the general CGT Discount will be
available to reduce the capital gain by 50%.

The assessable capital gain will be:

($700,000 – $200,000) × 50% = $250,000

Online Activity 8 Suggested solution

Total cost base:

$5.00 × 400 shares = $2,000, spread over the 400 shares in Symbol and 24 shares in Bub.

5% × $2,000 = $100

$100 ÷ 24 shares = $4.17 cost base per Bub share

Cost base of each Symbol share:

($2,000 – $100) ÷ 400 shares = $4.75 per share

Capital proceeds $200

Cost base ($100)

Capital gain $100

Activity 9 Suggested solution

1.

For Brown, Division 128 provides that the deceased taxpayer does not have any taxation
consequences on their death, per s 128-10:

When you die, a capital gain or capital loss from a CGT event that results for
a CGT asset you owned just before dying is disregarded.

However, where the taxpayer bequeaths an asset to a non-profit entity, CGT event K3 will occur
per s 104-215(1):

“CGT event K3 happens if you die and a CGT asset you owned just before
dying passes to a beneficiary in your estate who (when the asset passes):
(a) is an exempt entity; or …”
CAPITAL GAINS TAX FUNDAMENTALS SP1 2019 SUGGESTED SOLUTIONS 12

In accordance with the provisions of CGT event K3, the deceased will be assessable on the
difference between the market value of the asset and its cost base per s 104-215(4):

“A capital gain is made if the market value of the asset on the day you died is
more than the asset’s cost base. A capital loss is made if that market value is
less than the asset’s reduced cost base.”

Brown’s son will acquire the asset received as a consequence of Brown’s death in accordance
with s 128-15:

“Time and deemed cost base of acquisition:

128-15(2) The legal personal representative, or beneficiary, is taken to have
acquired the asset on the day you died.

129-15(4) This table sets out the modifications to the cost base and reduced
cost base of the CGT asset in the hands of the legal personal
representative or beneficiary.

Item 1: asset acquired by deceased post September 1985 – the

cost base of the asset on the day you died

Item 4: asset acquired before 20 September 1985 - the * market

value of the asset on the day you died”

For the trustee testamentary trust, the CGT consequences will be the same as for Brown’s son.

2.

On the transfer of the shares to the grandchildren pursuant to the terms of the trust created by
the testator’s will, there will be no CGT implications if the shares transferred are the same shares
held by the deceased on their death (s 128-20).

The grandchildren will be deemed to have acquired the shares on the date of Brown’s death for a
deemed cost the same as the deceased’s cost base at the time of his death (s 128-15).

Note that the ATO has said that it will not depart from its longstanding practice of treating the
trustee of a testamentary trust in the same way as a legal personal representative (Practice
Statement PS LA 2003/12)