Understanding CGT Event D1
Did you know?
Your home can be taxable even if you don’t rent it out! Even if you bought your home Pre Capital-Gains Tax [CGT] (1985)!
Understanding CGT Event D1
When it comes to capital gains tax (CGT), there are various events that can trigger a tax liability. One such event is CGT event D1, which occurs when a taxpayer grants an easement, profit à prendre, or license over an asset.
But what exactly does this mean for you?
What is CGT Event D1?
CGT event D1 happens when you create a contractual right or other legal or equitable right in another entity. This event is distinct from CGT event A1, which deals with the disposal of an asset.
When CGT event D1 occurs, the cost base of the asset cannot be considered in calculating any capital gain or loss.
Additionally, any capital gain from the grant is not a discount capital gain and cannot be disregarded even if the asset was acquired before 20 September 1985 or if it relates to a main residence
Example: Granting an Easement
Let’s look at an example to understand this better:
Lisa bought a property on 1 January 1985. On 1 December 2017, she granted an easement over the property to her neighbour for a storm water pipe and received $40,000 for doing so. Lisa incurred $1,000 in legal expenses related to the grant of the easement.
As a result, Lisa will make a capital gain of $39,000 (capital proceeds of $40,000 less incidental costs of $1,000).
This capital gain is not a discount capital gain and cannot be disregarded, even though the property was acquired before 20 September 1985 or if it was her main residence
Why is This Important?
Understanding CGT event D1 is crucial for taxpayers who might be involved in granting rights over their assets. It ensures that you are aware of the tax implications and can plan accordingly. Whether it’s an easement, profit à prendre, or license, knowing how these grants are treated for CGT purposes can help you make informed financial decisions.
Source: ATO TD2018/15 : Income tax: capital gains: does CGT event D1 happen if a taxpayer grants an easement, profit à prendre or license over an asset?