Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)Chapter 4 Minor CGT changes
Outline of Chapter
4.1 Certain amendments in Schedule 4 to this Bill will make corrections to the capital gains tax (CGT) provisions in the Income Tax Assessment Act 1997 (ITAA 1997) and the Income Tax (Transitional Provisions) Act 1997 (ITTP Act). Items 1 to 5 will make a correction to the Income Tax Assessment Act 1936 (ITAA 1936).
Background to the legislation
4.2 The CGT provisions in the ITAA 1936 were rewritten as part of the Tax Law Improvement Project (TLIP) and inserted into the ITAA 1997 by Tax Law Improvement Act (No. 1) 1998 . The ITAA 1997 provisions apply to the 1998-1999 and later income years. Since the CGT rewrite was inserted into the ITAA 1997, unintended consequences to the CGT provisions have been identified which arose in the CGT rewrite process. Amendments are required to the ITAA 1997 and the ITTP Act. An unintended consequence also requires amendments to the ITAA 1936.
4.3 The amendments reinstate the position of the ITAA 1936 or make other minor amendments such as rectifying incorrect cross-references. Some of the amendments will reinstate a tax benefit to taxpayers which was inadvertently removed by the CGT rewrite. Conversely, other amendments will remove a tax benefit which inappropriately resulted from the process. None of the corrections change the policy reflected in the ITAA 1936.
4.4 These amendments are the third instalment of CGT rewrite refinements. The first instalment was in Taxation Laws Amendment Act (No. 4) 1999 and the second instalment is now before the Parliament in Taxation Laws Amendment Bill (No. 11) 1999.
4.5 With the exception of the amendments proposed by items 2, 6 and 30 all of the amendments will apply to assessments for the 1998-1999 income year and later income years [Schedule 4, item 65]. This date of effect reflects recommendation 5 of Joint Committee of Public Accounts and Audit (JCPAA) Report 356 (An Advisory Report on the Tax Law Improvement Bill (No. 2) 1997) which reads:
In correcting unintended consequences introduced by the Tax Law Improvement Bill (No. 2) 1997, the correction should be made retrospective to the commencement of the 1998-99 year of income, irrespective of whether the error had adversely affected the taxpayer or the revenue. This principle should remain in force for the first two years of the operation of the provisions of the Tax Law Improvement Act (No. 2) 1997 .
4.6 The TLIP CGT amendments already made by the Taxation Laws Amendment Act (No. 4) 1999 have already applied (and those proposed to be made by the Taxation Laws Amendment Bill (No. 11) 1999 are proposed to apply) from the beginning of the 1998-1999 income year consistent with recommendation 5 of JCPAA Report 356.
4.7 The amendment proposed by item 2 (which relates to Part IVA of the ITAA 1936 and which favours taxpayers) will apply to schemes entered into after 3.00 pm, by legal time in the Australian capital Territory on 29 April 1997. This was the proposed application date for an amendment that earlier was not successfully made in consequence of the TLIP rewrite process.
4.8 Item 6 (relating to non-operative Guide material in Division 100 of the ITAA 1997 and which does not disadvantage taxpayers) does not have an application provision. Having an application provision would cause unneeded complexity by requiring 2 versions of the provision: the first until the commencement of Division 152 of the ITAA 1997 and the second afterwards.
4.9 The amendment proposed by item 30 (relating to the correction of a typographical error and which does not disadvantage taxpayers) will apply to things done on or after 1 July 1998, the date from which the correction needs to apply.
4.10 Items 46 and 50 (relating to the repealed and replaced CGT small business concessions in Subdivision 118-F and Division 123 of the ITAA 1997) have a special commencement provision to ensure that they can apply from the beginning of the 1998-1999 income year as intended. More detail on this point is included in the explanation for those items.
Detailed explanation of new law
| What the provision does | What the amendment will do |
|---|---|
| Part IVA - general anti-avoidance provisions. | Ensure that intended consequential amendments to Part IVA include references to the rewritten CGT provisions are made.
Capital losses made in an income year before the 1998-1999 income year have the meaning given by Part IIIA of the ITAA 1936. [Schedule 4, items 1 to 5] |
| What the provision does | What the amendment will do |
|---|---|
| 100-30(2) - Provides a guide to the types of CGT exemptions. |
(1) Ensure that the correct number of exemptions categories is listed (4 not 5). (2) Remove the reference to the category of exempt receipts as it is no longer relevant. (3) Rename the category of exempt transactions as exempt or loss denying transactions to make it consistent with the heading of section 118-37. (4) Amend the note so that it does not suggest that all CGT exemptions are in Division 118. [Schedule 4, item 6] |
| 103-5 - Provides that a payment, cost or expenditure can include the market value of property given (based on its market value) to the extent that a provision in the CGT law says that it does. | Remove a possible ambiguity in the wording to ensure that section 103-5 applies as intended to the extent that a provision in the CGT law says that it applies (rather than to the extent that property is given).
[Schedule 4, item 7] |
| 104-10(5)(b) - Describes the exceptions to CGT event A1 (disposal of a CGT asset). | Ensure that the exception providing that a capital gain or loss for a CGT lease granted, renewed or extended before 20 September 1985 applies only to the lessor. At present, the provision is capable of technically being construed as applying also to assignees of a lessee's interest under a lease. The equivalent provision in the ITAA 1936 applied only to lessors. The amendment ensures the provision applies in the same way as the ITAA 1936.
[Schedule 4, item 8] |
| 104-25(5)(b) - Describes the exceptions to CGT event C2 (cancellation, surrender and similar endings). | Make an equivalent change for CGT event C2 to that explained for item 8.
[Schedule 4, item 9] |
| 104-60(5)(b) - Describes when CGT event E2 (transferring a CGT asset to a trust) does not happen. | Correctly reflect the ITAA 1936 by ensuring the exception to CGT event E2 in paragraph 104-60(5)(b) reflects the exception in subparagraph 160M(3)(a)(ii) of the ITAA 1936.
The exception applies where there is a transfer of an asset to a trustee to hold on terms of an existing trust where the only change that occurs is a change of trustee. This reflects a continuation of the approach taken in the ITAA 1936. [Schedule 4, item 10] |
| 104-70(2) - CGT event E4 (capital payment for trust interest). | Ensure that non-assessable amounts are reduced by amounts repaid, consistent with the repaid rule for capital proceeds in section 116-50.
[Schedule 4, items 11 to 12] |
| 104-70(5) - Describes the effect of a capital gain made from CGT event E4 on the cost base and reduced cost base of an interest or unit in a trust. | Include a signpost to an additional transitional provision proposed by item 60.
[Schedule 4, item 13] |
| 104-135(1A) and (1B) - CGT event G1 (capital payment for shares). | Ensure that non-dividend amounts are reduced by amounts repaid, consistent with the repaid rule for capital proceeds in section 116-50. [Schedule 4, item 14] |
| 104-135(3) - Describes the effect of a capital gain made from CGT event G1 on the cost base and reduced cost base of a company share. | Include a signpost to an additional transitional provision proposed by item 61.
[Schedule 4, items 15 and 16] |
| 104-150(1A) and (1B) - CGT event H1 (deposit forfeiture). | Ensure that deposit amounts are reduced by amounts repaid, consistent with the repaid rule for capital proceeds in section 116-50.
[Schedule 4, item 17] |
| 104-J - Heading for the Subdivision. | More accurately reflect the content of the Subdivision.
[Schedule 4, item 18] |
| 104-175(7) - Provides for an exception to CGT event J1 (company ceasing to be group member after roll-over). | Reinstate the ITAA 1936 position by removing an arguable position that the subsection inappropriately prevents Division 149 and any other similar ungrandfathering provisions from applying.
[Schedule 4, item 19] |
| 104-185(1)(a) - Describes when CGT event J2 (change of status of replacement asset) happens. | Clarify that CGT event J2 happens if the asset ceases to be an active asset
of the taxpayer
.
[Schedule 4, item 20] |
| 104-185(1) - Describes when CGT event J2 (change of status of replacement asset) happens. |
(1) Renumber the existing note as note 1. (2) Include a signpost to an additional transitional provision proposed by item 62. [Schedule 4, item 22] |
| 104-190(1) - Describes when CGT event J3 (change of circumstances where a share or interest is a replacement asset) happens. | Include a signpost to an additional transitional provision proposed by item 62.
[Schedule 4, item 23] |
| 104-205(3) - Describes the effect of a capital gain made from CGT event K1 on the cost base and reduced cost base of an item of intellectual property. |
(1) Renumber the existing note as note 1. (2) Include a signpost to an additional transitional provision proposed by item 63. [Schedule 4, items 24 and 25] |
| 108-50 - Provides for separate CGT asset treatment (e.g. for major capital improvements to pre-CGT assets). | Provide a signpost to alert the reader to the fact that sections 124-595 (Crown lease roll-over) and 124-725 (prospecting or mining entitlement roll-over) can also provide for separate CGT asset treatment. At present, a reader could wrongly assume that Subdivision 108-D deals comprehensively with separate asset treatment.
[Schedule 4, item 26] |
| Division 109 - Provides acquisition rules for CGT assets. | Clarify that Division 109 is not limited to the timing of acquisition of a CGT asset, by stating clearly that Division 109 provides for both
how
and
when
an asset is acquired.
See also item 58. [Schedule 4, items 27 to 29] |
| 109-55 (table item 9) - Describes the acquisition rules for bonus equities. | Correct a typographical error by deleting the word not.
[Schedule 4, item 30] |
| Subdivision 110-A (section 110-40 onwards) - Provides rules for what does not form part of cost base. | Ensure that for assets acquired at or after 7.30 pm, 13 May 1997, deductible expenditure is (for the first, fourth and fifth elements of cost base) initially included in the asset's cost base and is excluded when the CGT event happens. This treatment gives the taxpayer the benefit of any indexation component on that expenditure.
[Schedule 4, items 31 to 36] |
| 112-97 - Lists CGT cost base modifications outside of the CGT provisions. |
(1) Correct table items 10 and 11 which incorrectly state that sections 159GZZZBC and 159GZZZBD (CGT assets used in gold mining) modify the total cost base or reduced cost base when in fact they modify only the first element (acquisition consideration). (2) Include a missing reference to section 159GZZZZE (infrastructure borrowings) of the ITAA 1936. [Schedule 4, item 39] |
| 112-115 - Lists replacement-asset roll-overs. | Ensure that table item 1 correctly reflects the roll-over provisions in sections 122-40 to 122-65 by referring to the disposal or creation of assets by an individual
or trustee
to a wholly-owned company.
[Schedule 4, item 40] |
| 116-75 - Provides that the capital proceeds from the expiry, surrender or forfeiture of a lease includes a payment by the lessor to the lessee (because of the lease ending) for the lessee's capital expenditure in improving the leased property. | Correctly reflect the ITAA 1936 by omitting specific references to CGT event C2. These references incorrectly suggest that section 116-75 can apply only in relation to CGT event C2 when it can also apply in some cases in relation to CGT event A1 (disposals): see Taxation Ruling TR 1999/18.
This amendment will ensure that section 116-75 applies consistently with its predecessor in the ITAA 1936 (subsection 160ZV(1)). [Schedule 4, item 41] |
| 118-10 - Describes when capital gains and capital losses made from collectables and personal use assets are disregarded. | Ensure that the provisions can interact with the cost base market value substitution rule in section 112-20.
[Schedule 4, items 42 and 43] |
| 118-A - Describes the general exemptions to CGT. | Reflect the ITAA 1936 by providing that a capital loss made by an exempt entity is disregarded.
[Schedule 4, item 44] |
| 118-210(5)(a) - Identifies the CGT events for which the main residence exemption applies to a trustee for a dwelling acquired under a will. | Reflect the ITAA 1936 by providing that CGT event E5 (beneficiary becoming entitled to a trust asset) is an event that attracts the trustee main residence exemption.
[Schedule 4, item 45] |
| Subdivision 118-F and the small business roll-over (Division 123) - Previously provided for the CGT retirement exemption. | Ensure that the CGT small business concessions could apply, as intended, to capital gains arising from creating rights.
These amendments favour taxpayers and restore the position in the ITAA 1936. The previous small business concessions in the ITAA 1997 had already applied to most CGT events involving creating rights inherently linked to carrying on a business. This is because the concessions applied to capital gains from CGT events that happened in relation to a CGT asset. For example, CGT events D2 (granting an option), D3 (granting a right to income from mining) and F1 (granting a lease) involve underlying assets which satisfy the nexus requirement that the CGT event happens in relation to the CGT asset. CGT event D1 (creating contractual or other rights) also typically involves an underlying asset. For creating rights under a restrictive covenant, business goodwill is the relevant underlying asset. CGT event D1, however, can apply where it the CGT event does not happen in relation to an underlying asset. This amendment, therefore, provides special rules for CGT event D1 to overcome this difficulty. Subdivision 118-F and Division 123 have been repealed with effect from 21 September 1999 and have been replaced by Division 152 (small business relief). These amendments are necessary to cover the period from the beginning of the 1998-1999 income year to when Division 152 first applied. Special commencement provisions have been included to complement the application provision and to ensure that the amendment is effective, given that it relates to repealed provisions. It is also proposed to make an equivalent amendment for Division 152. [Schedule 4, item 46] |
| 112-A (Heading) - Describes the CGT consequences of transferring ownership of an asset to a wholly-owned company. | More accurately reflect the content of Subdivision 122-A by including a reference to trustees, consistent with section 122-15 providing that the roll-over applies to individuals and
trustees
.
[Schedule 4, item 47] |
| 122-25(5) - Describes a test which must be met to allow a Subdivision 122-A roll-over. | Reflect the ITAA 1936 by providing that the income of a company must not be exempt. At present, the requirement incorrectly applies only if the company is exempt under Division 50 (the main, but not the only, provisions conferring exemptions).
[Schedule 4, item 48] |
| 122-135(5) - Describes a test which must be met to allow a Subdivision 122-B roll-over (disposal or creation of assets by partners to a wholly-owned company). | Reflect the ITAA 1936 by providing that the income of a company must not be exempt. At present, the requirement incorrectly applies only if the company is exempt under Division 50 (the main, but not the only, provisions conferring exemptions).
[Schedule 4, item 49] |
| Former Division 123 - Previously provided for the CGT small business rollover. | See explanation for the amendment proposed by item 46.
[Schedule 4, item 50] |
| 124-140(1) - Describes when there is a roll-over of a capital gain made on a statutory licence. | Correctly summarise the roll-over consequences in 'Note 1' where 2 or more licences may be converted into a single licence.
[Schedule 4, item 51] |
| 126-50(4) - Describes a test which must be met for a roll-over to be allowed. | Reflect the ITAA 1936 by providing that the income of a company must not be exempt. At present, the requirement incorrectly applies only if the company is exempt under Division 50 (the main, but not the only, provisions conferring exemptions).
[Schedule 4, item 52] |
| 126-60(3) (Note) - Signposts Divisions that identify the rules for when a capital gain or loss made from a CGT asset acquired before 20 September 1985 is disregarded. | Correctly reflect that Division 149 (when an asset stops being a pre-CGT asset on changes in underlying ownership) is not the only set of provisions that removes the exemption for pre-CGT assets.
[Schedule 4, item 53] |
| 130-20(2) - Describes the first element of bonus equities' cost base. | Correct a typographical error by changing the second
note 3
to
note 4
.
[Schedule 4, item 54] |
| 130-83(3) - Determines the date of acquisition of employee shares. | Correctly reflect the ITAA 1936. At present this provision incorrectly results in a fresh acquisition of the asset.
[Schedule 4, item 55] |
| 134-1 - Describes the effect of the exercise of an option on the option's cost base and reduced cost base. | Provide a signpost to Subdivision 130-D and section 112-15 for options acquired under an employee share scheme.
[Schedule 4, item 56] |
| 140-15(2) - Describes the circumstances in which a share value shift happens. | State more directly that the reference to 'entity' is to an entity that is a controller (for CGT purposes) of the company.
[Schedule 4, item 57] |
| 995-1(1) - Defines the term 'acquire'. |
(1) Reflect the ITAA 1936 by clarifying that the term 'acquire' applies in relation to CGT assets only in their capacity as CGT assets. (2) Clarify that the acquisition rules in Division 109 are not limited to the timing of acquisition of a CGT asset, but also extend to how an asset is acquired. (3) Clarify that the definition extends to other acquisition rules signposted by Subdivision 109-B. See also items 27 to 29. [Schedule 4, item 58] |
| 995-1(1) - Defines the term 'dispose of'. | Reflect the ITAA 1936 by clarifying that the term 'dispose of' applies to CGT assets only in their capacity as CGT assets.
[Schedule 4, item 59] |
| What the provision does | What the amendment will do |
|---|---|
| 104-70(3) - Describes the effect of a capital gain made from CGT event E4 (capital payment for trust interest) on the cost base and reduced cost base of an interest or unit in a trust. | Ensure that if a capital gain arose before the 1998-1999 income year under section 160ZM of the ITAA 1936, the cost base and reduced cost base are reduced to nil in the same way that they are reduced to nil if a capital gain arises under CGT event E4.
[Schedule 4, item 60] |
| 104-135 - Describes the effect of a capital gain made from CGT event G1 (capital payment for shares) on the cost base and reduced cost base of a company share. | Ensure that if a capital gain arose before the 1998-1999 income year under section 160ZL of the ITAA 1936, the cost base and reduced cost base are reduced to nil in the same way that they are reduced to nil if a capital gain arises under CGT event G1.
[Schedule 4, item 61] |
| 104-185 and 104-190 (CGT events J2 and J3) - Describes when a capital gain rolled over under the ITAA 1936 can become assessable under the ITAA 1997. | Accurately link the ITAA 1936 to the ITAA 1997 to enable CGT events J2 and J3 (change of status or circumstances for a replacement asset under the small business roll-over) to apply when the small business roll-over was allowed under the ITAA 1936. It will also enable these CGT events to apply when a small business roll-over was allowed under the former Division 123 of the ITAA 1997.
[Schedule 4, item 62] |
| 104-205 - Describes the effect of a capital gain made from CGT event K1 (partial realisation of intellectual property right) on the cost base and reduced cost base of an item of intellectual property. | Ensure that if a capital gain arose before the 1998-1999 income year under section 160ZZD of the ITAA 1936, the cost base and reduced cost base are reduced to nil in the same way that they are reduced to nil if a capital gain arises under CGT event K1.
[Schedule 4, item 63] |
| 118-10(2) - Describes when a capital gain or loss made from an interest in collectables is disregarded. | Correctly reflect the transitional provision needed to support the amendments proposed by item 42.
[Schedule 4, item 64] |