Thanks for your reply of 15th December Julia.
Things are a bit clearer now, although still disappointing
that there is a significant double taxation. (The Company CGT plus the personal CGT).
I can confirm that the father does comply with the PPoR exemption requirements you outlined.
And I should have given you some $ amounts to work with. Your guess of the purchase price is correct
but the property is now worth about $1.4 mil total, making the gain since purchase about $900,000.
A couple of follow up questions though.
1. Since the Company bought the property pre Sept 1999, isn’t it able to index the cost base by CPI (108/67.5 = 160%)? Same with my shares in the Company (although I would have to choose between indexing and discounting).
2. I want to be fair to my father (and ultimately his other heirs, my brother and sister) but shouldn’t the value of the shares I buy from my father be reduced by this impending CGT liability? Using your figures I should pay him $60,000 less. Right?
3. If, after buying my Father’s shares, I do some significant renovations to add value before sale, who should pay? me or the Company? If it’s the Company where does it get the money? (issue more shares to me, or borrow from me or a bank?)
1) You are quite right the company can use the indexation method but it can is only entitled to index for inflation up to 30th September 1999, https://www.ato.gov.au/law/view/document?Mode=type&TOC=%2207%3APLR%3ATaxation%3AINCOME%20TAX%20ASSESSMENT%20ACT%201997%3ACHAPTER%203%20-%20SPECIALIST%20LIABILITY%20RULES%3APART%203-1%20-%20CAPITAL%20GAINS%20AND%20LOSSES%26c%20GENERAL%20TOPICS%3ADivision%20114%20-%20Indexation%20of%20cost%20base%3A%23001174%23SECTION%20114-1%20Indexing%20elements%20of%20cost%20base%3B%22 Here is the Index rates https://www.ato.gov.au/Rates/Consumer-price-index/
For this reason the discount method is better for you to use personally.
2) You could speak to the professional valuer to value the shares, in my experience they do not take into account the potential future CGT liability of the company but if you can persuade them to then that will help. The ATO also provides a valuation service, they maybe worth talking to. Your problem is the liability does not exist at the time of the valuation.
3) The company could borrow from a bank but it would probably be more difficult than you borrowing personally if you have other security. You then either have to lend the company the money or buy more shares in the company. The amount spent will increase the cost base so the company will not pay tax on the return of that amount in the selling price and can use it to buy back your shares or repay your loan. I think it would be much simpler if you just lent the money to the company than go through a share buy back process. I am still keen for you to keep your options open not to liquidate the company and maybe one day finding a way to use the franking credits. But as I said last time you need your accountant to consider all the possibilities there as they know your personal circumstances.