CGT

Question

Our land in NSW was bought by a holding company registered in the A.C.T. for a syndicate of 3 shareholders -two shares each) prior to Sept 1985.The land was in two titles (one 10 acres and the other 60 acres) and a house was built by an individual shareholder on each title (also prior to 1985) and lived in by two of the shareholders as primary place of residence.
In 2003 one of the shareholders died and passed her shares in the company(one each) to the other shareholders by way of will. Her house and the whole of the land (ie both titles) were valued for probate purposes at the date of her death. Her house has been rented since her death. The other shareholders house was not included in this valuation as it was considered primary place of residence of that shareholder.
What are the capital gains ramifications of: (1) a sale of the shares in the company of one of the present parties to the other or (2) the sale or transfer of one or other of the blocks/titles?

Answer

The property is still considered a pre 1985 property as it continues to be owned by the company. The only thing that has changed hands is the shares. I hope I have followed your explanation of events correctly. Lets say A was the one that died and B &C inherited A’s 2 shares. This means that B &C now each own 3 shares 2 pre CGT and 1 post CGT.
The assets held by the company are still considered to be pre CGT because less than 50% of the underlying ownership has not changed hands. In fact none of the underlying ownership is considered to have changed because you inherited A’s shares rather than purchased them.
Now if you were to sell the shares the situation would be straight forward. No CGT on the 2 you each held from before 1985. The one you each inherited would be subject to CGT on the difference between the market value of the shares (relevant to the value of the underlying asset) when you inherited them and the selling price reduced by any costs. You may also be able to increase the costs base ie market value at DOD by any expenses you have incurred directly in maintaining the assets of the company.

The reality is people do not buy shares in private companies they simply buy the assets off the company. That is fine, as stated earlier the company owns the whole property pre CGT so it pays no tax on the gain. Now, the trouble starts, if the company simply pays you the sale proceeds it would be considered a dividend, fully taxable as normal income. The next stage requires special planning and much care and is certainly going to save you a lot more in tax than even the fees of paying the best in the industry to get this right. You need to liquidate the company so that the money comes out as a payment of capital to shareholders rather than a dividend. That way most of it will be CGT free with only 1/3rd of the selling price subject to CGT and then as stated above you reduce this by the market value at DOD and other associated expenses.
Note there has recently been amendments made to Section 47 to allow distributions like this to be made when a company is wound up but not by a liquidator, to be deemed made by a liquidator ie be a return on the shares not a dividend. Nevertheless, there is a lot of money at stake and the amendments are untested so it is probably better to use a liquidator.
Section 40-880 1997 ITAA will allow you to write off the cost of liquidation over 5 years in your personal income tax returns.

Whatever you do, don’t buy any more property is this company because companies do not qualify for the 50% CGT discount nor can houses held inside a company qualify for the main residence exemption. Further, putting post CGT assets into the company will erode its pre CGT concessions, refer CGT event K6.

So in direct answer to your questions,
Transferring the shares to another party – If you are considering doing this to a related party consider that it would be far better to transfer the shares through a will so the pre 1985 status of the property inside the company is maintained. But if you transfer them otherwise it will need to be done at market value and a CGT event will be triggered on the transfer of the inherited share though this will only be the difference between the market value in 2003 plus any cost base increases such as selling costs and the market value at the date of transfer.

The company selling one of the blocks – The company would pay no tax because of it being a pre 1985 asset but the problem then is getting the cash out of the company. You can’t liquidate the company because it still owns the other title which would lose its pre 1985 status if you moved it out of the company so you could liquidate. So you will be stuck with not being able to take the cash out of the company any other way than a dividend which would be taxed as normal income