Capital gains tax update 2004-05 income year

This information is compiled by the Losses and Capital Gains Tax Centre of Expertise to make you aware of capital gains tax (CGT) developments during the 2004-05 income year. This update is current as at 30 June 2005. If you require details of CGT developments during the 2003-04 income year, refer to the Capital gains tax update 2003-04.

Legislative changes

Changes to the capital gains tax (CGT) provisions of the Income Tax Assessment Act 1997 (ITAA 1997) are outlined below.

Tax Laws Amendment (2005 Measures No. 2) Act 2005 received Royal Assent on 29 June 2005. Schedule 2 amends the Income Tax Assessment Act 1997 to provide an automatic CGT rollover for CGT events that happen to CGT assets of registrable superannuation entities that, during the period from 1 July 2004 to 30 June 2006 (inclusive), merge to comply with licensing requirements under superannuation safety reforms.

The rollover ensures that a capital gain or capital loss that would otherwise be recognised from an asset transfer is disregarded and that recognition of any capital gain or loss is deferred until a later disposal of the asset by one or more successor registrable superannuation entity trustees.

Tax Law Amendment (2005 Measures No 3) Act 2005, which received Royal Assent on 26 June 2005, makes the following CGT related amendments.

• Removal of CGT threshold for certain testamentary gifts: Schedule 1 amends section 118-60 of the ITAA 1997 which provides a CGT exemption for certain testamentary gifts of property to deductible gift recipients. A capital gain or loss made from a testamentary gift of property can be disregarded for CGT purposes regardless of the value of the property. This amendment effectively removes the requirement that testamentary gifts be valued at greater than $5,000 in order to receive the CGT exemption.

The amendment will apply in the 2005-06 income year and to each later income year.

• Foreign branch income and capital gains from international shipping and airline operation: Schedule 2 corrects an unintended effect of the application of the New International Tax Arrangements (Participation Exemption and Other Measures) Act 2004 which expanded the foreign branch income exemption as from 1 July 2004. The unintended effect meant that foreign branch income and capital gains from the operation of ships or aircraft in international traffic escape taxation.

The amendment ensures that section 23AH of the ITAA 1936 does not apply to the income and capital gains derived by an Australian resident company from the operation of ships or aircraft in international traffic through a foreign branch. Accordingly, the resident company will continue to include in its assessable income, foreign branch income and capital gains from this type of operation.

The amendment applies retrospectively for income years starting on or after 1 July 2004.

New International Tax Arrangements (Foreign-owned Branches and Other Measures) Act 2005, which received Royal Assent on 26 June 2005, implements additional measures resulting from the Review of International Taxation.

Schedule 4 makes the following CGT amendments relating to employee shares or rights that do not have the necessary connection with Australia.

• Cost base clarification: the first element of the cost base and reduced cost base of a qualifying employee share or right (that is, one that satisfies the conditions in section 139CD of the ITAA 1936) and for which the cessation time (as defined in section 139CA of the ITAA 1936) has not happened when an inbound resident becomes a resident will be its market value at the cessation time (Subdivision 130-D). In all other cases the first element of the cost base and reduced cost base of the share or right will be its market value at the residence change time (Subdivision 136-B of the ITAA 1997).
• Application of CGT event I1: a capital gain or loss from a qualifying employee share or right will be disregarded if the share or right is not covered by an election under section 139E of the ITAA 1936 and the cessation time for the share or right has not yet occurred. The link between CGT event I1 and Subdivision 130-D of the ITAA 1997 has also been clarified.

These amendments generally apply to CGT events occurring on or after 26 June 2005.

Tax Laws Amendment (2004 Measures No. 6) Act 2005, which received Royal Assent on 21 March 2005, makes the following CGT related amendments.

• Amendment to CGT event G3: Schedule 8 extends the scope of CGT event G3 to allow an administrator (in addition to a liquidator) of a company to declare shares and other equity interests in a company to be worthless for CGT purposes. The declaration permits taxpayers who hold those shares or other equity interests to choose to make a capital loss. These amendments apply to declarations made after 21 March 2005.
• Amendment to CGT event L7: Part 9 of Schedule 1 provides that a head company will not be required to determine a capital gain or capital loss (under CGT event L7) arising from changes in the value of a deferred tax liability in respect of liabilities brought into a group by an entity that joined during the transitional period 1 July 2002 to 30 June 2004. The amendments take effect from 1 July 2002.
• Transfer of life insurance business: Schedule 12 provides that when a life insurance company transfers some or all of its life insurance business to another life insurance company and the originating company and the recipient company are part of the same wholly owned group, then CGT rollover relief will be available when the life insurance business is transferred provided this transfer occurs before the end of the consolidation transitional period. The amendment applies to transfers of life insurance business that take place on or after 1 July 2000.

New International Tax Arrangements (Managed Funds and Other Measures) Act 2005 received Royal Assent on 21 March 2005. Schedule 1 makes the following CGT related amendments.

• A capital gain or loss made by a foreign resident from a CGT event happening to an interest in a fixed trust will be disregarded if at least 90% of the underlying assets of the trust do not have the necessary connection with Australia. The amendment applies to capital gains or capital losses made on or after 21 March 2005.
• A capital gain taken to be made by a foreign resident beneficiary of a fixed trust under section 115-215 of the Income Tax Assessment Act 1997 will be disregarded if the gain relates to a trust asset without the necessary connection with Australia. The amendment applies to capital gains made on or after 21 March 2005.
• CGT event E4 will not apply to distributions of foreign source income from the trustee of a trust to a beneficiary that is a foreign resident. The amendment applies to payments made on or after 21 March 2005.

Tax Laws Amendment (2004 Measures No. 7) Act 2005 received Royal Assent on 1 April 2005. It makes the following CGT related amendments.

• Rollover of income taxing point for shareholders in employee share schemes – Schedule 3 amends the employee share scheme provisions to allow taxpayers who have deferred the income tax liability on a discount received on shares or rights acquired under an employee share scheme to rollover any taxing point that would otherwise occur because of a corporate restructure. The amendments apply to shares and rights acquired on or after 1 July 2004 as a result of corporate restructures. Related amendments are made to Subdivision 130-D of the ITAA 1997 to ensure synchronisation between the new employee share scheme rollover and the CGT rules.
• Technical corrections and amendments - Schedule 10 corrects and amends taxation law errors such as duplications of definitions, missing asterisks from defined terms, incorrect numbering and referencing and outdated guide material. There are a number of minor changes made to the CGT provisions throughout the ITAA 1997. Generally, these changes apply from 1 April 2005, however there are some exceptions.

Last Modified: Wednesday, 25 October 2006