House of Representatives

Taxation Laws Amendment Bill (No. 2) 1992

Taxation Laws Amendment Act (No. 2) 1992

Explanatory Memorandum

(Circulated by the authority of the Treasurer, the Hon John Dawkins, M.P.)

Chapter 3 Capital Gains Tax Amendments

Clauses: 23,24,25,26,27,28,29,30,31,33,34,35,36,37,38,39,40,41,42,43,44,47,48,50,51,67,69,70,71,72 and 73

Overview

Make minor technical amendments to the Capital Gains Tax provisions.

Capital Gains Tax - Amendments

This Bill will amend the Income Tax Assessment Act 1936 to make the following minor technical amendments to the capital gains tax provisions:

·
Correct some minor deficiencies in the principal residence exemption provisions;
·
Only allow companies to claim or to transfer current year capital losses following ownership changes on satisfaction of a same-business test;
·
Overcome technical problems which could unfairly prevent some taxpayers from obtaining CGT rollover relief following the destruction of an asset;
·
Modify the anti-avoidance rules which prevent value-shifting advantages arising on the transfer of assets between companies under common ownership, by extending the effective discretions which can reduce otherwise harsh applications of the provisions;
·
Clarify the application of transitional provisions contained in section 160ZZS;
·
Provide that the consideration for disposal of an asset that expires is not deemed to be an amount greater than the actual consideration;
·
Allow CGT rollover relief following the death of a taxpayer for asset transfers that occur pursuant to deeds of family arrangement;
·
Provide that CGT is payable where non-taxable Australian assets owned by a deceased Australian resident are inherited by a non-resident beneficiary;
·
Provide that payments made to a lessee for the variation of a post-19 September 1985 lease in excess of the lessee's indexed cost base are taxed as a capital gain;
·
Ensure that the CGT exemption for motor vehicles extends to interests held in motor vehicles;
·
Overcome double tax problems for employee share trusts;
·
Ensure that the provisions which provide an (effective) rollover on the conversion of a convertible note into a share or a unit, apply only for CGT purposes;
·
Extend the rollover relief currently available on the breakdown of a marriage to the breakdown of a de facto marriage;
·
Prevent the use of rollover provisions available for share splits and consolidations as a means of avoiding the bonus share rules; and
·
Prevent the rollover of an asset which is trading stock in the hands of the transferee and therefore outside the scope of the CGT provisions of the law.

A detailed explanation of each of the amendments is contained in the Appendix to this Chapter.

Principal Residence Exemption

Summary of proposed amendments

Relevant period

The Bill will amend the definition of "relevant period" contained in subsection 160ZZQ(1) of the principal residence exemption (PRE) provisions to make it clear that the "relevant period" commences at the time when the taxpayer acquires a legal interest in the land on which a dwelling is situated.

Renovation or repair

The Bill also proposes amendments to the CGT PRE provisions which will allow a taxpayer to retain the benefit of the PRE during a period in which a dwelling is unoccupied due to renovations or repairs.

Part A - Relevant Period

Background to the legislation

Some or all capital gains realised on the disposal of a taxpayer's sole or principal residence are exempt from CGT by section 160ZZQ. The availability of this exemption is determined by reference to the part of the "relevant period" (as defined) in which the dwelling was occupied by the taxpayer as a sole or principal residence.

For this purpose, the "relevant period" is the period after 19 September 1985 during which the dwelling was owned by the taxpayer. The Commissioner of Taxation has accepted in the past that the "relevant period" is the period of legal ownership of the dwelling; that is, the period between the settlement of the contracts for purchase and sale. This covers situations where a purchaser of a dwelling is not entitled to occupy the dwelling prior to acquiring legal ownership on settlement of the purchase contract. If the relevant period included a period prior to legal ownership, a taxpayer would lose that part of the exemption relating to the period between the execution and settlement of the contract for purchase during which he or she was unable to satisfy the PRE occupancy requirement.

Explanation to the proposed amendments

New subsection 160ZZQ(1AA) clarifies the definition of "relevant period". For the purpose of the PRE the "relevant period" will be the period of legal ownership of the dwelling, ie. the period between settlement of the contracts for purchase and sale.

This amendment will clarify the operation of the section and confirm the approach which has been previously adopted by the Commissioner of Taxation.

Commencement date

New subsection 160ZZQ(1AA) will apply to disposals made after 19 September 1985.

Clauses involved in the proposed amendments

Paragraph 44(1)(a) : Inserts new subsection 160ZZQ(1AA).

Subclause 67(3) : Provides that the amendment will apply to disposals made after 19 September 1985.

Part B - Renovation or Repair

Background to the legislation

The CGT exemption for a taxpayer's sole or principal residence is generally only available where a dwelling is occupied by a taxpayer and is not used for income producing purposes.

By subsection 160ZZQ(5) this exemption has been extended to include a period (up to 4 years) prior to the actual occupation of the dwelling by the taxpayer during which a new dwelling is being constructed. Similarly, a taxpayer may demolish an existing dwelling and construct a replacement dwelling while retaining the PRE during the period that the dwelling (or the land) is unoccupied.

However, the existing PRE provisions do not provide an exemption in the situation where a taxpayer only partially demolishes an existing dwelling, or undertakes renovations or repairs to an existing dwelling, and during this time the taxpayer is unable to occupy the dwelling.

Explanation of the proposed amendments

The proposed amendment to subsection 160ZZQ(5) will extend the CGT exemption for a taxpayer's sole or principal residence to include a period during which the taxpayer does not occupy an existing dwelling but carries out renovations or repairs to it.

The extended period of exemption will only be available where the dwelling is subsequently occupied by the taxpayer for a period of at least 3 months following the completion of the renovations or repairs. The exemption will also be available if the taxpayer dies prior to completion of the renovations or repairs, or prior to the completion of the 3 month occupancy period.

As with the existing concessions contained in subsection 160ZZQ(5), it will be necessary for the taxpayer to lodge an election with the Commissioner of Taxation, in the year of income in which the dwelling first became his or her sole or principal residence, to the effect that the principal residence exemption is to apply to that dwelling. Furthermore, in order for the dwelling to qualify for exemption, no other dwelling can be taken to be a taxpayer's principal residence. Where a taxpayer has elected for subsection 160ZZQ(5) to apply to a particular dwelling, any other dwelling owned by the taxpayer will be subject to the general capital gains and losses provisions.

Consequential Amendment

An amendment proposed by new subparagraph 160ZZQ(5AA)(a)(ia) will ensure that if a dwelling is vacated for the purpose of carrying out repairs or renovations, the period between the time when the dwelling ceased to be occupied by the taxpayer (or another person) and the time when the taxpayer re-occupied the dwelling (up to a maximum of 4 years) may be included in the period that the dwelling was the taxpayer's principal residence for CGT purposes.

Where the taxpayer acquires the legal interest in the land on which a dwelling is situated but the dwelling is never occupied by the taxpayer or another person, by subparagraph 160ZZQ(5AA)(a)(ii), the period from the time that the taxpayer acquired the interest in the land until the completion of the repairs or renovations (up to a maximum of 4 years) will be included in the period that the dwelling was the taxpayer's sole or principal residence.

In addition, new paragraph 160ZZQ(5AA)(c) specifies the time when repairs or renovations to a dwelling are taken to have commenced: if a contract was entered into for the repairs or renovations, they will be taken to have commenced at the time of making the contract; or if there was no contract (for example, if the taxpayers carried out the repairs or renovations themselves), the commencement time will be the time when the work actually began. This new provision clarifies the time when repairs or renovations are taken to have commenced for the purposes of applying new sub-subparagraph 160ZZQ(5)(b)(iv)(B), ie. in working out whether the repairs or renovations commenced prior to the death of a taxpayer.

Commencement date

These amendments will apply to disposals after 19 September 1985.

Clauses involved in the proposed amendments

Paragraphs 44(1)(b) - (h) : Extends the principal residence exemption to cover periods where a dwelling is being renovated or repaired.

Subclause 67(3) : Provides the amendments apply to disposals after 19 September 1985.

Capital Losses of Companies

Summary of the proposed amendments

Broadly, the amendment will ensure that a capital loss incurred by a company in a year of income in which there is a change in the majority underlying ownership of the company is only allowable if, at all times during the year that the loss is incurred, the company carries on the same business as it carried on immediately before the change in underlying ownership occurred.

The provisions of the tax law which enable transfers of net capital losses between member companies of a 100% commonly-owned company group will also be amended to only allow companies to transfer a net capital loss following a change in majority underlying ownership if, throughout the year in which the change occurs, the company transferring the loss carries on the same business as it carried on immediately before the change occurred.

Background to the legislation

Under the ordinary income provisions of the tax law a company is not allowed a deduction against its assessable income for a current year income loss or for a carried forward (prior year) income loss, unless the company satisfies either a "continuity of ownership test" (ie continuity of 50% or more of the underlying beneficial ownership of the company) or a "continuity of business test". Similarly, the transfer of income losses between member companies of a 100% commonly-owned company group is also dependent on the satisfaction of one of these two tests.

This principle of denying company losses unless the company satisfies either the continuity of ownership or the continuity of business test should also apply for current year capital losses, carried forward (prior year) capital losses or intra-group transfers of capital losses. Under the existing CGT provisions, carried forward (prior year) capital losses are only allowable, under subsection 160ZC(5), if the company satisfies one of these tests. However, due to a deficiency in the CGT legislation, capital losses may be allowable, under paragraph 160Z(9)(b), and intra-group transfers of capital losses may be allowable, under subsection 160ZP(9), even if neither of these tests is satisfied. The reason for this is that the mechanism in paragraph 160Z(9)(b) and subsection 160ZP(9) for determining whether a loss is allowable or transferable is not appropriate.

Under paragraph 160Z(9)(b) a capital loss is not allowable in the year it is incurred if the current year income loss provisions (dealing with losses on revenue account) apply to the company in that year. The current year income loss provisions, comprising sections 50A to 50N of the Act, are designed to prevent assessable income derived by a company in one part of a year of income under the ownership of one set of shareholders from being offset by a deduction for a revenue loss incurred by a company during another part of the income year when the company is (or was) owned by a different set of shareholders. The provisions apply to preclude a current year income loss incurred in one part of an income year from being taken into account in calculating the company's taxable income for the year unless the company satisfies the continuity of ownership test or the continuity of business test.

Although a capital loss is disallowed if the current year income loss provisions apply to reduce an income loss incurred by the company, if the company does not incur an income loss then the provisions of sections 50A to 50N never apply. In this situation, even though the company may not have satisfied the continuity of ownership or the continuity of business test, because the current year income loss provisions do not apply, the capital loss cannot be disallowed.

The same difficulty is experienced with the transfer of net capital losses between member companies of a 100% commonly-owned company group under section 160ZP; ie. the transfer of capital losses is also dependent on whether the current year income loss provisions apply to the company in the year the net capital loss is incurred. If there is no current year income loss, then the transfer of net capital losses cannot be denied.

To overcome this problem, an amendment will be made to paragraph 160Z(9)(b) and subsection 160ZP(9) of the CGT legislation to ensure that current year capital losses are only allowable, and net capital losses are only transferable, where the company incurring or transferring the loss satisfies either the continuity of ownership or the continuity of business test.

Explanation of the proposed amendments

The Bill will amend existing paragraph 160Z(9)(b) to deem a capital loss not to have been incurred by a company during a year of income where:

·
section 50H of Subdivision B of Division 2A of Part III applies to deem a disqualifying event to have occurred in relation to the company in relation to the year of income; and
·
the company does not pass the continuity of business test in relation to that year of income.

Broadly, section 50H deems a disqualifying event to have occurred in the following situations:

·
a change in the beneficial ownership of shares carrying the right to exercise 50% or more of the voting power in the company;
·
a change in the beneficial ownership of shares carrying the right to receive 50% or more of any dividend that might be paid by the company;
·
a change in the beneficial ownership of shares carrying the right to receive 50% or more of any capital distribution that might be made by the company;
·
the acquisition of the control of the voting power of the company where one purpose of that acquisition is to receive or obtain a fiscal benefit or advantage;
·
the management or conduct of the affairs or business operations of the company without proper regard to the rights, etc.,of natural persons who control or are capable of controlling the voting power;
·
the company has a loss available at a particular time during a year of income and the company subsequently derives income which would not have been derived but for the loss, ie. income is in some way channelled into the company to obtain the benefit of a tax deduction for losses incurred in the earlier part of the same year; or vice versa, ie. the company has a profit at a particular time and then subsequently incurs a loss in order to reduce the tax that would otherwise have been payable.

Where a disqualifying event has occurred, a capital loss will be disallowed unless the company passes the continuity of business test set out in new subsection 160Z(9A) in relation to the year of income. Subsection 160Z(9A) provides that a company will be taken to have passed the continuity of business test in relation to a year of income if throughout that year:

·
the company carries on the same business as it carried on immediately before the disqualifying event occurred; and
·
the company does not derive income from a business, or a transaction, of a kind that it had not carried on, or entered into, immediately before the disqualifying event occurred.

Essentially, the amendment to paragraph 160Z(9)(b) means that a capital loss incurred in a year of income by a company will only be allowable following a change in ownership if, at all times during that year, the company carries on the same business it carried on immediately before the change in ownership occurred.

The Bill will make the same amendment to section 160ZP [Clause 29] . That is, if section 50H of the current year loss provisions applies to deem a disqualifying event to have occurred in relation to a company in relation to a year of income, the net capital loss incurred by the company in respect of that year is able to be transferred under section 160ZP if the company passes the continuity of business test referred to above.

Commencement date

These amendments apply generally to assessments for the 1991/92 and subsequent years of income. However, in the case of companies which, due to a substituted accounting period, have balanced prior to 3 April 1992, the amendments will apply to assessments for the 1992/93 and subsequent years of income.

Clauses involved in the proposed amendments

Subclause 27(1) : Inserts new paragraph 160Z(9)(b) and subsection 160Z(9A) dealing with the disallowance of current year capital losses of companies.

Clause 29 : Inserts new subsection 160ZP(9) and subsection 160ZP(9A) dealing with circumstances where a company cannot transfer a net capital loss to another group company.

Subclause 67(2) : Provides that the amendments apply in relation to the 1991/92 and subsequent years of income for companies balancing after 2 April 1992.

Involuntary Disposals

Summary of the proposed amendments

The Bill proposes an amendment to section 160ZZK which will give the Commissioner of Taxation a discretion to extend the period during which a taxpayer may obtain a CGT rollover for an asset acquired in place of an asset which was lost, destroyed or compulsorily acquired by a government or a government authority.

Background to the legislation

Under section 160ZZK, CGT rollover relief is available for an asset acquired by a taxpayer in place of an (original) asset which was lost or destroyed (for example by a fire or natural disaster) or disposed of as a result of it being compulsorily acquired by a government or government authority. Rollover relief provides for the deferral of the tax that would otherwise have been payable on the disposal of the original asset or, in the case where the original asset was acquired prior to 20 September 1985, allows pre-CGT status for the replacement asset.

To qualify for the rollover the taxpayer must receive compensation or insurance monies as a consequence of the loss, destruction or compulsory acquisition of the original asset and these funds must be used to acquire a replacement asset within a period of 12 months prior to the disposal of the original asset and one year after the end of the year of income in which the disposal of the original asset occurred.

In the situation where a taxpayer receives a compensation award or money under a policy of insurance to compensate for the loss of the asset, subsection 160U(9) deems the date of disposal of the asset for CGT purposes to be the date that the compensation or insurance money was received. In some circumstances it is possible for a taxpayer to have acquired a replacement asset more than 12 months prior to receipt of the compensation payment or insurance money.

Section 160ZZK allows the Commissioner of Taxation a discretion to extend the period in which a replacement asset must be acquired, beyond 12 months after the end of the year of income in which the disposal of the original asset occurred. However, there appears to be no similar discretion allowing the Commissioner to extend the period for more than 12 months prior to the loss of the original asset.

Explanation of the proposed amendments

Paragraph 160ZZK(1)(b) will be amended to specifically allow the Commissioner of Taxation a discretion to extend the period in which a taxpayer must acquire a replacement asset beyond the 12 months prior to the date that the disposal of the original asset is deemed to have occurred for CGT purposes.

Commencement date

The amendment to section 160ZZK applies to involuntary disposals of assets after 19 September 1985.

Clauses involved in the proposed amendments

Subclause 36(1) : Extends the circumstances in which the Commissioner of Taxation may exercise his or her discretion.

Subclause 67(3) : Provides that the amendment applies to disposals of assets after 19 September 1985.

Value Shifting - Division 19A

Summary of proposed amendments

The proposed amendment will:

·
extend the discretions which apply to reduce the otherwise harsh application of section 160ZZRE (ie. the section of Division 19A which determines the cost base adjustments to be made to particular shares or loans where there is a transfer of assets between companies under common ownership); and
·
clarify the meaning of the terms "consideration" and "subsidiary" as used in Division 19A.

Background to the legislation

Cost Base Adjustments to Shares and Loans

Division 19A is designed to prevent unintended CGT advantages that may result from the transfer of assets acquired after 19 September 1985 between companies under common ownership. The Division operates where an asset is transferred between companies under common ownership for consideration less than its indexed cost base or, if less, its market value. In such cases, Division 19A enables adjustments to be made to the cost bases of shares and loans held in the respective companies to reflect the resultant shift in values, and to prevent CGT timing advantages from arising.

The main operative provisions of the Divisions are contained in sections 160ZZRE to 160ZZRH. These sections enable cost base reductions and increases to be made to reflect the effective shifts in value that may occur. For the most part, the adjustments are to be made by an amount that is "reasonable". The exception to this is section 160ZZRE, which applies in relation to shares and loans held directly in the transferor, and which contains formulae for calculating the amount of cost base reductions to be made. However, situations can occur where the operation of that section can be adverse to taxpayers, especially where a mix of pre and post CGT shares or pre CGT shares and post CGT loans are owned in the company, because cost base adjustments are made first to the post CGT shares or post CGT loans. This may be harsh where, as a result of an asset's transfer, the value of both pre and post CGT shares or pre CGT shares and post CGT loans is reduced.

This point can be illustrated by example. Assume Company A is the sole shareholder in Company B. To simplify the example, assume A owns 200 $1 shares in B, each of which cost $1 and is still worth $1. However, assume that 100 of the shares were acquired before 20 September 1985 (and are CGT exempt) and the other 100 shares were acquired on or after that date. Also assume that B owns two assets, each of which cost and is still worth $100, with one being a pre CGT asset and the other a post CGT asset. Finally, assume that B transfers its post CGT asset to Company X, another subsidiary of A, for no consideration.

Under subsection 160ZZRE(3), in this scenario the indexed cost base of the post CGT shares held by A would be reduced by $100 to nil; this is because under the formula contained in paragraph (3)(b), only the cost base of post CGT shares is reduced. This is clearly an inequitable result, as B still owns an asset worth $100, so that the 50% interest owned by A represented by the post CGT shares would still be worth $50.

The same problem can arise where the taxpayer holds pre CGT shares and post CGT loans. Again the cost base adjustments are made only to the post CGT loans (under subsection 160ZZRE(4)). However, where as a result of an asset's transfer there is a fall in value of the pre CGT shares and the post CGT loans, making cost base adjustments under the existing formula in subsection 160ZZRE(4) produces an unfair result. Moreover, the problem would be worse if, for example, the post CGT loans were secured and as a result of an asset's transfer only the pre CGT shares fell in value; in this case the application of the formula produces an even harsher outcome.

Another situation in which the cost base adjustments made by the formula in section 160ZZRE would be unfair are where a taxpayer holds interests in a company which comprise shares of different classes, (for example, post CGT ordinary shares and post CGT preference shares) and, as a result of the transfer of an asset out of the company, the value of the taxpayer's shares is reduced, but not proportionally. For example, the ordinary shares may fall in value while the value of the preference shares is not significantly reduced. In this situation even though all the shares are post CGT shares, making the proportional cost base adjustment to both the ordinary and preference shares under the section 160ZZRE formula is inappropriate.

Similarly, a problem may arise where a taxpayer holds loans in a company which comprise 2 or more loans with differing security (for example, a post CGT secured loan and a post CGT unsecured loan), or one of the loans is a pre CGT loan, and as a result of the transfer of an asset out of the company, the taxpayer's post CGT loans are not proportionally reduced in value (ie. the unsecured loan may fall in value while the value of the secured loan remains the same), or the fall in value is also spread over the pre CGT loan. The cost base adjustments which are made to the post CGT loans only under the section 160ZZRE formula will again produce unreasonable results.

To develop a formula for cost base reductions to deal with all these different cases specifically would be extremely difficult and complicated. It was for this reason that the other operative provisions of Division 19A were drafted on a "reasonableness" basis. However, the existing structure of section 160ZZRE which specifies a formula for making adjustments is still useful: it provides certainty in the way the section is to operate in the most common situations and it also provides a type of statutory example of the way in which Division 19A cost base adjustments generally are to be made. However, in view of the unfair results that can occur because of the strictness of the section 160ZZRE formula, it is necessary to modify the section's operation to take account of the situation outlined above where, clearly, it would be unreasonable to make the full cost base adjustment pursuant to the existing section 160ZZRE formula.

Meaning of "Subsidiary" and "Consideration"

There are two further minor difficulties with Division 19A which are to be redressed by an amendment.

Firstly, there has been some concern and uncertainty about the meaning of the term "consideration" as used in Division 19A, in particular having regard to the general CGT definition of "consideration" on the disposal of an asset. If the consideration actually paid is less than the asset's market value and the disposal is not an arm's length transaction, the market value of the asset is deemed to be the disposal consideration (subsection 160ZD(2)). It has been argued that Division 19A has no practical application, because it only applies to non-arm's length asset transfers which in turn are generally treated as being for consideration equal to the asset's market value. If this were the case it would always be impossible to cross the threshold for the Division's application - that consideration less than the lesser of indexed cost base or market value be paid on the transfer.

The Government does not accept that this view is correct. The explanatory memorandum to Division 19A makes it clear that the Division's operation is determined by reference to the actual consideration paid, and not some other notional amount. Nevertheless, to remove any uncertainty on this point the Government has decided to amend Division 19A by specifically providing that its potential application is determined by reference to the actual consideration paid on an asset's transfer.

Another area of uncertainty in relation to the application of the Division is that it contains no definition of the term "subsidiary". This is potentially significant, because the Division does not apply to asset transfers to subsidiaries. Again this is unlikely to cause practical problems; at general law a company is treated as a subsidiary of another if it is more than 50% owned by that other company. Because Division 19A only applies to companies under 100% common ownership, there is no difficulty in determining whether one company is a subsidiary of another. However, to remove any uncertainty, an amendment will be made to incorporate the general tax law definition of "subsidiary", which is a company effectively owned 100% by another.

Explanation of the proposed amendments

Cost Base Adjustment to Shares and Loans

The Bill will amend section 160ZZRE to include new subsection 160ZZRE(6) which will modify the application of subsections 160ZZRE(3) and (4) in circumstances where, at the time of disposal of an asset (called the "first asset" in section 160ZZRE) by a company, the taxpayer holds:

·
shares or loans in the company that were acquired after 19 September 1985 and shares in the company that were acquired before 20 September 1985; or
·
shares of 2 or more classes in the company where one or more shares was acquired after 19 September 1985; or
·
2 or more loans in the company where one of the loans was acquired after 19 September 1985;

and, in these circumstances, it would be unreasonable to make the proportional cost base adjustment to the post CGT shares or loans that is required by 160ZZRE(3) and (4) because:

·
the fall in value of the shares or the loans in the company is spread (in whole or in part) over the pre CGT shares rather than spread entirely over the post CGT shares or the post CGT loans; and/or
·
the fall in value of the post CGT shares is not spread evenly over all of the post CGT shares of the company, eg. shares of particular classes are reduced in value more than shares of another class; and/or
·
the fall in value of the post CGT loans is not proportional, eg. the value of an unsecured loan falls significantly while the value of a secured loan is not reduced at all; and/or the fall in value of the loans is spread (in whole or in part) over pre CGT loans rather than spread entirely over the post CGT loans.

In these situations if the cost base adjustment made by the formula in subsections 160ZZRE(3) or (4) does not reflect the true reduction in value of the post CGT shares or loans (either because it is too high or too low for a particular asset) then subsections 160ZZRE(3) and (4) will not apply and the cost base adjustments will be made under subsection 160ZZRE(6) having regard to:

·
the extent to which the market value of the post CGT shares or the post CGT loans held by the taxpayer in the company were reduced as a result of the disposal of the first asset (mentioned in subsection 160ZZRD(1)) by the company; and
·
the circumstances in which the post CGT shares or the post CGT loans were acquired by the taxpayer.

Definition of "Subsidiary" and "Consideration"

The other difficulties with the Division which are mentioned in the background to the amendments are overcome by two further amendments to section 160ZZRA. The first amendment defines the term "subsidiary" (referred to in paragraph 160ZZRD(1)(c)) for the purposes of Division 19A. The definition is the same as the definition in subsection 160ZZO(4), ie:

A company is a subsidiary of another company (the holding company) at a time if all the shares in the subsidiary company are beneficially owned by:

a)
the holding company;
b)
a company that is, or two or more companies each of which is, a subsidiary of the holding company; or
c)
the holding and a company that is, or two or more companies each of which is, a subsidiary of the holding company;

and no person was in a position at the time to affect the rights of the holding company (or of a subsidiary of the holding company) in relation to the subsidiary company.

The second amendment defines the term "consideration" in relation to the disposal of the first asset mentioned in subsection 160ZZRD(2) to mean the actual consideration given in respect of the asset, ie the consideration is worked out as if subsection 160ZD(2) (deemed market value rules) in Part IIIA did not apply. The effect of this is that the consideration referred to in Division 19A is the actual consideration given on the disposal of the asset rather than the market value of the asset.

Commencement date

All these amendments to Division 19A will apply in relation to disposals of assets after the date of introduction of the amendments. This means that shares or loans held in the transferor at the time of introduction which are subsequently disposed of after that date, will be subject to the new modified cost base adjustments of subsection 160ZZRE(6).

Transitional provisions contained in Clause 72 will ensure that the amendments made to section 160ZZRA to include a definition of "subsidiary" and to clarify the term "consideration" will be disregarded in determining the meaning of these expressions when used in relation to a disposal up to and including the date of introduction of the amendments. Essentially, the fact that the amendments were made is not to be taken as an indication that the terms did not have that meaning from the time Division 19A was introduced.

Clauses involved in the proposed amendments

Clause 47 : Inserts definition of "consideration and "subsidiary" in section 160ZZRA.

Clause 48 : Inserts new subsection 160ZZRE(6) dealing with shares and loans in a transferor company.

Subclause 67(5) : Provides that the amendments apply to disposals of assets after 2 April 1992.

Clause 72 : Transitional provision dealing with the meaning of "consideration" and "subsidiary".

Section 160ZZS

Summary of the proposed amendments

Deemed date of acquisition and consideration given for acquisition of an asset

The Bill proposes an amendment to section 160ZZS which will set out the deemed date of acquisition of an asset and the deemed consideration given for the asset when existing subsection 160ZZS(1) applies to deemed an asset to have been acquired after 19 September 1985.

Application to the Crown, foreign Governments and non-profit organisations

An amendment is also proposed to deem the Crown, a foreign government and non-profit organisations to be natural persons for the purpose of section 160ZZS.

Part A - Deemed Date of Acquisition and Consideration given for Acquisition of an Asset

Background to the legislation

The CGT provisions operate to tax gains made on the disposal of assets acquired on or after 20 September 1985. A transitional provision contained in section 160ZZS ensures that, if no change occurs after 19 September 1985 in the direct ownership of an asset but after that date there is a change in the majority underlying beneficial interests held by natural persons in the asset, then the pre-CGT status of the asset is not maintained. In these circumstances, by subsection 160ZZS(1), the asset is deemed to have been acquired after 19 September 1985 and is therefore subject to the CGT provisions on its disposal.

Where section 160ZZS has deemed an asset to have been acquired on or after 20 September 1985 due to a change in the majority underlying interests held in the asset, it does not specify the deemed date of acquisition of the asset or the deemed consideration for its acquisition..

Explanation of the proposed amendments

Proposed subsection 160ZZS(1A) will clarify the operation of section 160ZZS by specifying that where there has been a change in the majority underlying interest in an asset, the deemed date of acquisition of the asset will be the first date after 19 September 1985 that the change in majority underlying interests occurred.

For example, if a 40% change in the underlying interests held by natural persons in an asset occurred on 31 December 1991 and then a further 10% occurs on 1 July 1992, the deemed date of acquisition will be 1 July 1992, notwithstanding that the largest part of the change in underlying interests occurred on 31 December 1991.

For the purpose of determining the cost base of the asset for CGT purposes, the deemed consideration given for the asset will be its market value at the deemed date of acquisition.

Commencement date

New subsection 160ZZS(1A) will apply to disposals made after 19 September 1985.

Clauses involved in the proposed amendments

Paragraph 50(a) : Inserts new subsection 160ZZS(1A).

Subclause 67(3) : Provides that the amendment applies to disposals made after 19 September 1985.

Part B - Application to the Crown, Foreign Governments and Non-Profit Organisations

Section 160ZZS operates by reference to the underlying interests in an asset which are held by natural persons. Interests in assets may be held by the Crown, foreign governments or non-profit organisations with constitutions which do not allow natural persons to hold an interest in capital or income from any property owned by the organisation. An argument has been raised that interests held by such bodies are not interests held by natural persons and so cannot be taken into account, under section 160ZZS, in determining whether there has been a continuity in majority underlying interests held in an asset since 19 September 1985. The amendment made by subsection 160ZZS(2A) will ensure that interests held by these bodies are treated as interests held by natural persons and therefore can be taken into account for the purposes of section 160ZZS.

Explanation of the proposed amendments

New subsection 160ZZS(2A) will deem bodies politic (eg. the Crown or a foreign government) and companies which are prohibited by their constitutions from making distributions (whether money, property or otherwise) to their members to be natural persons for the purposes of the application of section 160ZZS.

This will have the effect that when such entities dispose of underlying interests in assets, the result will be the same as if all of the interests in the asset had been held by natural persons.

Transitional Provision

New subsection 160ZZS(2A) will apply in relation to disposals of assets after 19 September 1985. However, due to the backdating of the new provision, the Bill includes a transitional provision to provide relief for taxpayers who may otherwise be disadvantaged by the operation of subsection 160ZZS(2A) during the period 19 September 1985 up to 3 April 1992.

The transitional provision applies if, on the disposal of an asset subsection 160ZZS(1) operates to deem the asset to have been acquired by the taxpayer between 19 September 1985 and 3 April 1992 and, but for the enactment of subsection 160ZZS(2A), subsection 160ZZS(1) would not have applied at all during this period.

Where these conditions are satisfied, the transitional provision provides that if:

·
the taxpayer disposes of the asset before 3 April 1992; or
·
the taxpayer disposes of the asset after 2 April 1992,and at all times from 3 April 1992up to the time of the disposal, majority underlying interests in the asset were held by natural persons who, immediately before 3 April 1992, held majority underlying interests in the asset;

then section 160ZZS does not apply to deem the asset to have been acquired after 19 September 1985.

However, where the taxpayer disposes of the asset after 2 April 1992 and at the time of the disposal the natural persons, who immediately before 3 April 1992 held majority underlying interests in the asset, no longer hold those interests, section 160ZZS will apply. In this situation, the transitional provision provides that the asset is deemed to have been acquired at the time after 2 April 1992 when those natural persons first ceased to hold majority underlying interests. The market value of the asset at that time will form the cost base of the asset for CGT purposes.

Clauses involved in the proposed amendments

Paragraph 50(b) : Inserts new subsection 160ZZS(2A).

Subclause 67(3) : Provides that the amendment applies to disposals made after 19 September 1985.

Clause 73: Contains transitional provisions.

Disposal of Consideration on the Expiry of an Asset

Summary of the proposed amendments

An amendment to section 160ZD will ensure that where an asset expires, unless the taxpayer receives some consideration for the disposal, the asset will be taken to have been disposed of for nil consideration.

Background to the legislation

If a taxpayer disposes of an asset and either there is no consideration for the disposal, the consideration cannot be valued, or the consideration received is greater or less than the market value of the asset and the parties are not dealing at arms-length, then for CGT purposes subsections 160ZD(2) and 160ZD(2A) deem the consideration for the disposal to be equal to the market value of the asset having no regard to its impending disposal. This provision operates correctly in situations where the market value of the asset will be affected by its disposal, for example where a debt is forgiven or a share is cancelled.

However, the section does not operate correctly where there has been a disposal of an asset for CGT purposes due to the expiry of the asset. For example, if the asset is an asset that would be expected to expire in the normal course of events (such as a lease or an option) at the point when the asset expires the actual market value of the asset is nil. However, by subsection 160ZD(2A), the market value of the asset must be determined without regard to its expiry. Obviously in these circumstances, the market value of the asset assuming the expiry is not to occur, will exceed the actual market value of the expired asset (ie. nil).

Explanation of the proposed amendments

The Bill proposes an amendment to section 160ZD to ensure that where an asset expires, unless the taxpayer receives some consideration for the disposal, the asset will be taken to have been disposed of for nil consideration.

Commencement date

The amendment to section 160ZD applies to disposals of assets after 2 April 1992.

Clauses involved in the proposed amendments

Clause 28 : Amends subsection 160ZD(2) so that it does not apply on the expiry of an asset.

Subclause 67(5) : Provides that the amendment applies to disposals of assets after 2 April 1992.

Deeds of Family Arrangement

Summary of the proposed amendments

The Bill proposes an amendment to extend the CGT rollover relief available (under section 160X) for assets that pass to the beneficiaries of a deceased estate, to include assets which pass to beneficiaries named in a deed of arrangement executed in settlement of a claim to share in the estate of a deceased person.

Consequential amendments to the principal residence exemption contained in section 160ZZQ will ensure that beneficiaries under a deed of arrangement are not disadvantaged in comparison to other beneficiaries (eg. beneficiaries under a will).

Background to the legislation

Generally, section 160X provides a modified CGT rollover for assets which pass to the legal administrators of deceased estates and through them to beneficiaries. The effect of the rollover is that no CGT is payable on assets passing to beneficiaries of a deceased estate (unless the asset passes to a tax exempt beneficiary, in which case section 160Y deems the rollover provided by section 160X to be inapplicable). The accrued capital gains and losses on assets which form part of the estate of the deceased person (where the deceased person died after 19 September 1985) are deferred until the eventual disposal of the asset by the beneficiary.

By section 160J, the rollover under section 160X is only available for assets passing to beneficiaries under the terms of a will, an order of the court varying a will, or the operation of the laws of intestacy.

In some cases a dispute may arise between claimants to the assets of a deceased estate. The dispute may lead to litigation which eventually results in an order of the court to vary the will. Alternatively, the parties to the dispute may reach a compromise agreement, which binds the parties to an agreement setting out their respective entitlements to assets. This agreement is reached without recourse to litigation and results in the execution of a deed of settlement; alternatively known as a deed of family arrangement or a deed of compromise. Because such a deed does not constitute an order of a court in terms of section 160J, the rollover under section 160X does not apply.

Explanation of the proposed amendments

The Bill will amend section 160J to provide that a reference in the CGT provisions to an asset passing to a beneficiary of a deceased estate will include an asset passing to a person identified in a deed of settlement or deed of family arrangement as having a right to share in the distribution of the estate of the deceased person. [Clause 24]

What consideration is allowable?

For the section 160X rollover to apply to deeds of family arrangement, new sub-subparagraph 160J(b)(iii)(B) requires the consideration, if any, given by the beneficiary for the asset, to consist solely of the variation or waiver of the beneficiary's claims to the assets of the estate. However, it is not necessary for the beneficiary to give any consideration in order to obtain the benefit of the rollover.

Consequential Amendment - Section 160ZZQ Principal Residence Exemption

A proposed amendment to subsection 160ZZQ(6) of the principal residence exemption (PRE) provisions provides that a reference in section 160ZZQ to a taxpayer acquiring a dwelling as a beneficiary in the estate of a deceased person will include a reference to a taxpayer acquiring a dwelling under a deed of arrangement as described above. [Subclause 44(2)]

Is there a requirement that a dwelling be occupied for a certain period by the taxpayer?

In order to qualify for the PRE under section 160ZZQ, the taxpayer is generally required to occupy the dwelling (although there are some exceptions to this rule). If a dwelling is acquired by a taxpayer as a beneficiary of a deceased estate, the rules concerning occupation of the dwelling usually apply both to the beneficiary and the deceased person (see for example, subsections 160ZZQ(13) and (13A)). This will also be the case for a taxpayer who acquires a dwelling as a beneficiary under a deed of arrangement.

Transitional Provision

The amendment to section 160J will apply generally to deeds of arrangement executed after 2 April 1992. However, by a transitional provision, beneficiary taxpayers who have entered into deeds of arrangement on or prior to 2 April 1992 may lodge an election with the Commissioner of Taxation to have section 160J (as amended) applied retrospectively. Where a taxpayer makes the election, the assets transferred to the taxpayer under that deed of arrangement will be covered by this amendment.

Transitional Provision - Section 160ZZQ

The transitional provisions will also affect section 160ZZQ so that if a deed of arrangement has been executed on or prior to 2 April 1992, and as a consequence it cannot be said that for the purposes of the PRE the dwelling passed to a taxpayer as a beneficiary under the terms of a will, an order of a court varying a will, or by the operation of the laws of intestacy, the taxpayer may elect that subsection 160ZZQ(6) (as amended) applies at the time of the execution of the deed.

Commencement date

The amendments to section 160J and 160ZZQ made by [Clause 24 and Subclause 44(2)] apply in relation to deeds executed after 2 April 1992.

The transitional provisions made by [Clause 69] apply to deeds executed before 3 April 1992.

Clauses involved in the proposed amendments

Clause 24 : Inserts new subparagraph 160J(b)(iii) dealing with deeds of arrangement.

Subclause 44(2) : Inserts new paragraph 160ZZQ(6)(c) dealing with deeds of arrangement and the principal residence exemption.

Subclause 67(4) : Provides that the amendments apply to deeds of arrangement executed after 2 April 1992.

Clause 69 : Transitional arrangements - allow election to be lodged to have the amendments apply to deeds of arrangement executed before 3 April 1992.

Non-Resident Beneficiaries

Summary of the proposed amendments

The proposed amendment to section 160Y will ensure that accrued capital gains and losses on assets that form part of the estate of a deceased person who was a resident of Australia are subject to CGT if the assets are not "taxable Australian assets" and they pass to a non-resident beneficiary of the estate.

Background to the legislation

Broadly, on the death of a taxpayer section 160X provides a rollover for any accrued capital gains and losses on assets held by the deceased person at the time of death. The CGT liability is deferred until the subsequent disposal of the asset by the beneficiary (or where the asset does not pass to a beneficiary, the disposal by the legal personal representative). The rollover applies to any asset passing to a beneficiary of a deceased estate with the exception, under section 160Y, of assets bequeathed to tax advantaged persons, ie. a person who is exempt from tax. Where the beneficiary is exempt from tax, the estate of the deceased person is subject to the CGT provisions because any capital gain that had accrued on the asset while it was owned by the deceased person would otherwise not be taxed on the subsequent disposal of the asset by the tax exempt beneficiary.

Where an asset passes to a non-resident beneficiary the rollover provisions of section 160X may apply. If the asset falls within the category of a "taxable Australian asset", as set out in section 160T, the non-resident beneficiary is subject to capital gains tax on its subsequent disposal. However this is not the case if the asset is not a "taxable Australian asset"; a non-resident is not subject to CGT on the disposal of an asset which is not a "taxable Australian asset". In this latter case, any capital gain that had accrued on the asset in the hands of the deceased Australian resident (and his or her legal personal representative) would not be taxed.

Explanation of the proposed amendments

The Bill proposes an amendment to section 160Y which provides that where an asset, which is not a "taxable Australian asset" as set out in section 160T, passes to a non-resident beneficiary, the rollover provided under section 160X will not apply. By subsection 160Y(3), the asset will be deemed to have been disposed of by the deceased person immediately prior to death, and the deemed consideration for the disposal will be the market value of the asset at that date. Essentially, this will mean that capital gains and losses which accrued on the assets of the deceased person up to the time of death will be subject to CGT; the estate of the deceased person will bear any CGT liability.

Commencement date

The amendment to section 160Y applies to assets forming part of the estate of a person who died after 2 April 1992.

Clauses involved in the proposed amendments

Clause 26 : Inserts new subsection 160Y(2A) dealing with assets that are not taxable Australian assets passing to a non-resident beneficiary in the estate of a deceased person.

Payments for the Variation of a Lease

Summary of the proposed amendments

The Bill proposes an amendment to section 160ZT which will ensure that where a lessee receives an amount as consideration for agreeing to the variation or waiver of the terms of a lease, the amount by which that consideration exceeds the consideration given by the lessee for the acquisition of the lease, will be deemed to be a capital gain.

Background to the legislation

Section 160ZT contains specific rules governing the CGT treatment of payments made or received by a taxpayer for agreeing to the variation or waiver of the terms of a lease. Under the existing provisions of section 160ZT, if a lessor incurs expenditure in obtaining the agreement of a lessee to waive or vary the terms of the lease, the lessor is deemed to have incurred a capital loss equal to the amount of the expenditure. In addition, the cost base of the lease to the lessee is reduced by an amount equal to the consideration received by the lessee for agreeing to waive or vary the terms of the lease.

A deficiency has been identified in this provision as presently drafted. That is, if the payment to the lessee exceeds the consideration given by the lessee for the grant of the lease, although the lessee's cost base is reduced to nil, there is no mechanism for bringing the excess consideration to tax under the CGT provisions.

Explanation of the proposed amendments

The Bill will amend section 160ZT to ensure that where a payment is made by a lessor to a lessee as consideration for the lessee agreeing to the variation or waiver of the terms of the lease and the payment exceeds the indexed cost base of the lease, any excess will be deemed to be a capital gain to the lessee. This is achieved by deeming the lessee to have disposed of the lease at the time of the payment for consideration equal to the amount of the payment, and then to have immediately re-acquired the lease for nil consideration (paragraph 160ZT(1A)(d)).

If the amount received by the lessee for agreeing to the variation or waiver of the terms of the lease does not exceed the original amount given by the lessee to acquire the lease, then the cost base of the lease will be adjusted when the lessee subsequently disposes of the lease. The adjustments made to the cost base will depend on whether the lessee makes a capital gain or a capital loss on that disposal (paragraph 160ZT(1A)(e)).

In determining the capital gain (if applicable) on the disposal of the lease, the lessee will be deemed to have disposed of the lease at the time the variation or waiver was made for an amount equal to what would have been the indexed cost base of the lease at that time (ie. for no capital gain or loss). The lessee is then taken to have immediately re-acquired the lease for an amount equal to the excess of the indexed cost base over the payment received for agreeing to the variation or waiver. This reduced amount forms the new cost base of the lease in working out the capital gain on disposal.

In determining the capital loss (if applicable) on disposal of the lease, the lessee will be taken to have disposed of the lease at the time the variation or waiver was made for an amount equal to what would have been the indexed cost base of the lease at that time (ie. for no capital gain or loss). The lessee is then taken to have immediately re-acquired the lease for an amount equal to the excess of what would have been the reduced cost base at that time over the amount received by the lessee for agreeing to vary or waive the terms of the lease. Essentially, this means that on disposal the lessee's capital loss is reduced to take account of the earlier payment received by the lessee for agreeing to vary or waive the terms of the lease.

New subsection 160ZT(1B) ensures that if a lease is actually held for less than 12 months, and during this period the lessee receives a payment to which subsection 160ZT(1A) applies, then the lessee will not receive the benefit of indexation on the disposal of the lease.

Consequential Amendment - Section 160ZSA

Broadly, section 160ZSA allows a taxpayer to elect that the grant of a lease for a period of 50 years or more will be treated for CGT purposes in a similar way to a disposal of the freehold interest in the land (or the long term head lease if applicable). Existing sections 160ZS and 160ZT do not apply to disposals to which section 160ZSA applies.

Amendments to paragraphs 160ZSA(1)(e) and (f) will ensure that new subsections 160ZT(1A) and (1B) also do not apply to leases which are the subject of an election under section 160ZSA.

Commencement date

The amendments to sections 160ZT and 160ZSA apply to payments made to a lessee after 2 April 1992 to obtain the lessee's consent to the variation or waiver of the terms of the lease.

Clauses involved in the proposed amendments

Subclause 27(2) : Makes consequential amendments to subsection 160Z(5).

Clause 30 : Makes consequential amendments to section 160ZSA.

Clause 31 : Inserts new subsections 160ZT(1), (1A) and (1B).

Subclause 67(6) : Provides that the amendments apply in relation to payments made after 2 April 1992.

Motor Vehicles

Summary of the proposed amendments

The amendment will ensure that if a taxpayer owns an interest in a motor vehicle mentioned in section 160A, ie a motor vehicle which is not subject to CGT, the taxpayer's interest in the motor vehicle will also be excluded from CGT.

Background to the legislation

Section 160A excludes certain motor vehicles (broadly, motor cars, motor cycles and other vehicles designed to carry loads of less than 1 tonne or fewer than 9 passengers) from the CGT definition of the term "asset". This means that they will never be subject to the application of CGT. However, a problem may arise where the taxpayer does not own a motor vehicle directly, but owns an interest in the motor vehicle. Such an interest is itself an asset in terms of section 160A but under the existing provisions it may not be exempt from CGT.

Explanation of the proposed amendments

Existing section 160A is amended to specifically extend the exclusion from CGT for certain types of motor vehicles, to include an interest held in such a motor vehicle.

Commencement date

The amendment is backdated to 19 September 1985 and therefore applies to an interest in a motor vehicle disposed of after that date.

Clauses involved in the proposed amendments

Clause 23 : Amends the definition of asset in section 160A to exclude an interest in certain motor vehicles.

Subclause 67(3) : Provides that the amendment applies to disposals of assets after 19 September 1985.

Employee Share Schemes

Summary of the proposed amendments

The Bill will amend the CGT legislation to overcome the problems of double taxation that can arise where employees acquire shares or rights under an employee share acquisition scheme that is operated via an employee share trust.

Background to the legislation

Under the existing law problems are experienced in the interaction of the CGT provisions of the law with the employee share acquisition scheme provisions in section 26AAC. The problem arises where shares (or rights to acquire shares - these are discussed separately below) are first allotted by an employer to an employee share trust rather that by direct allotment to participating employees. For CGT purposes, the trustee of the scheme acquires the shares on allotment, generally for the lesser of the consideration given by the trustee for the shares or their market value at that time. On the subsequent distribution of the shares from the trust to an employee beneficiary, the trustee is usually treated as having disposed of the shares for consideration equal to their market value. If their value has increased during the period they were held by the trustee, the trustee may be liable to CGT on the accrued gain.

The problem arises because the employee beneficiary is also taxed under section 26AAC at the time the shares are distributed by the trustee. The value of the taxable benefit is the difference between the market value of the shares and the consideration (if any) paid by the employee to acquire them. In effect, the employee may be liable to tax on the same gain that has accrued on the shares during the period in which they were owned by the trustee and on which CGT has been paid. An example helps to illustrate the situation:

Assume XYZ Ltd has established an employee share scheme in which Ms A is to participate. The company allots 2000 shares to the XYZ Employee Share Trust, to be transferred to Ms A on completion of two years of further service with the company. On allotment of the shares to the trust, the shares are worth $10000 in total. The trustee pays XYZ Ltd $8000 to acquire them. Two years later, the shares are distributed by the trustee to Ms A. Under the terms of the share scheme, Ms A repays the $8000 incurred by the trustee in acquiring the shares. However, at that time, the shares are worth $20000. The discount received by Ms A is therefore $12000. Under section 26AAC, Ms A will pay tax on that discount.
The problem is that the trustee is treated like any other taxpayer which acquires and disposes of assets. When the 2000 shares were allotted to it by the company, the trustee acquired an asset with a cost base of $8000. When the trustee subsequently disposes of the shares to Ms A, the trustee is deemed to have disposed of them for consideration equal to their market value at that time, $20000. The trustee is therefore taken to have made a capital gain of approximately $12000 (calculated as $20000 less $8000 (indexed)) on which CGT is payable. However, that gain has also been taxed to Ms. A under s.26AAC.
The CGT provisions which are intended to prevent double tax arising on disposal of an asset (under both CGT and income tax) would not apply in these cases because different taxpayers are taxed on the income and the capital gain.

Essentially, the problem can be overcome by deeming ownership of the shares by the trustee to be ignored for CGT purposes if the shares are subsequently distributed to an employee who is taxed under s.26AAC on receipt of the shares. If the employee elects not to participate in the scheme and the trustee decides to sell the shares, then the trustee remains liable to CGT.

Although this discussion has concentrated on shares issued by a company to its employees via an employee share trust, similar difficulties arise where the company issues rights to acquire shares through such a trust. Accordingly, the amendment will operate to eliminate any double taxation which might arise where rights are issued instead of shares.

Explanation of the proposed amendments

Shares

The Bill will amend the CGT legislation to incorporate new section 160ZYJA dealing with employee shares trusts. Subsection 160ZYJA(1) provides that where:

·
taxpayer acquires a share from the trustee of an employee share trust (ie, a trust where the terms of the trust deed require or authorise the trustee to sell or transfer shares in a company to employees of the company or of another company or to relatives of those employees);
·
the consideration given by the taxpayer for the share is less than or equal to the indexed cost base (or cost base in the first 12 months) of the share to the trustee; and
·
an amount is included in the taxpayer's assessable income under section 26AAC (or would have been but for subsection 26AAC(4F)) as a result of the acquisition of the share;

then in these circumstances the trustee is not subject to CGT on the disposal of the share to the taxpayer.

The effect of the amendment is to ignore the disposal by the trustee for CGT purposes. Any increase in market value and the resulting capital gain that has accrued while the share was held by the trustee is not subject to CGT provided the employee is assessed under section 26AAC (generally on the market value of the share less any consideration given by the employee for the share).

Rights

Subsections 160ZYJA(2) and (3) deal specifically with rights to acquire shares which are distributed to taxpayers by the trustee of an employee share trust. The amendment operates in the same way as the amendment for shares. That is, the trustee is not subject to CGT on the disposal of rights to acquire shares to a taxpayer where:

·
the taxpayer acquires the right from the trustee of an employee share trust (ie, a trust where the terms of the trust deed require or authorise the trustee to sell or transfer shares in a company to employees of the company or of another company or to relatives of those employees);
·
the consideration given by the taxpayer for the right is less than or equal to the indexed cost base (or cost base in the first 12 months) of the right to the trustee; and
·
any one of the following applies:

(a)
an amount is included in the taxpayer's assessable income under subsection 26AAC(8C) (or would have been but for subsection 26AAC(4F)) as a result of the acquisition of the right; or
(b)
an amount is included in the taxpayer's assessable income under subsections 26AAC(7) or (8) as a result of the disposal of the right; or
(c)
an amount is included in the assessable income of the taxpayer under section 26AAC as a result of the acquisition by the taxpayer (or an associate) of shares in the company that were acquired by the exercise of the right; or
(d)
the taxpayer dies, the trustee of the estate of the deceased person exercises the right and acquires a share in the company and an amount is included in the assessable income of the trust estate of the deceased person under subsection 26AAC(9).

The overall effect of the amendment is to ignore, for CGT purposes, the disposal of a right to acquire shares by the trustee of an employee share trust to a taxpayer where the accrued increase in the value of the right, or the shares acquired by the exercise of the right, has been included in the taxpayer's assessable income (or, in the case of a deceased taxpayer, has been included in the assessable income of the trust estate).

Commencement date

The amendment inserting section 160ZYJA will apply to shares or rights to acquire shares disposed of by the trustee of an employee share trust after the date of introduction of this Bill.

Clauses involved in the proposed amendments

Clause 33 : Inserts new section 160ZYJA dealing with employee share trusts.

Subclause 67(7) : Provides that the amendments apply to shares or rights disposed of by a trustee after 2 April 1992.

Convertible Notes

Summary of the proposed amendments

This amendment makes clear that the provisions in the CGT legislation which deem the conversion of a convertible note into shares of a company or units of a unit trust not to constitute a disposal of the convertible note, apply only for the purposes of the CGT provisions of the Act.

Background to the legislation

Sections 16ZYZ and 160ZZBB of Part IIIA specifically provide that the conversion of a convertible note into shares or units does not result in the disposal of the convertible note. An argument has been raised that the operation of these sections is not confined to the CGT provisions of the law, but that they apply to the tax law generally. The Government believes that this is not the case. However, to put the position beyond doubt the Government has decided to amend the law to expressly provide that the application of sections 160ZYZ and 160ZZBB is confined solely to the CGT provisions of the law.

Explanation of the proposed amendments

Sections 160ZYZ and 160ZZBB are amended to expressly state that they operate only for the purposes of the CGT provisions of Part IIIA of the Act.

Commencement Date

The amendment applies to the conversion of a convertible note after the date of introduction of this Bill. As the amendment does not change the operation of the law but merely clarifies it, it only needs to apply from introduction.

The transitional provisions in [Clauses 70 and 71] ensure that in determining the meaning of section 160ZYZ and 160ZZBB up to introduction date, the new amendments are to be ignored. That is, the fact that these amendments have been made to clarify the operation of these sections, does not mean that prior to the amendments the sections did not operate in the same way as they operate after the amendment.

Clauses involved in the proposed amendments

Clause 34 - 35 : Amends sections 160ZYZ and 160ZZBB to provide that these sections only apply for the purposes of Part IIIA.

Subclause 67(8) : Provides that the amendments apply to conversions after 2 April 1992.

Clauses 70 - 71 : Transitional provisions which provide that these amendments are to be disregarded when determining the meaning of sections 160ZYZ and 160ZZBB to conversions before 3 April 1992.

De Facto Marriage Breakdown

Summary of the proposed amendments

The Bill proposes amendments to sections 160ZZM and 160ZZMA to allow CGT rollover for assets transferred pursuant to a court order following the breakdown of a de facto marriage.

Background to the legislation

Section 160ZZM provides a capital gains tax rollover for assets which are transferred from one spouse to another following the breakdown of a marriage. Section 160ZZMA provides a similar rollover where an asset is transferred from a company or trust to a spouse following the breakdown of a marriage. The effect of these rollovers is to provide for the deferral of CGT that would otherwise have been payable on the transfer of the asset, or in the case where the asset was acquired before 20 September 1985, to retain the asset's pre-CGT status.

These rollovers for marriage breakdowns are only available where the transfer of an asset is pursuant to a court order or registered maintenance agreement made under the Commonwealth Family Law Act or a comparable law of a foreign country. This has the effect that rollover relief is confined to the breakdown of legal marriages.

Some States have enacted legislation which provides for the transfer of property between defacto spouses on their separation. The Defacto Relationship Act 1984 (NSW) and amendments to the Property Law Act 1958 (Vic) empower courts in these States to determine fair entitlement to the property of defacto spouses and to order transfers of property between the defacto spouses on their separation. (In other States or Territories the role of the court is to merely determine the actual ownership of property. In these circumstances, each spouse will always have owned the asset and, since there is no transfer of property, there will be no resulting CGT consequences).

Explanation of the proposed amendments

The Bill will amend sections 160ZZM and 160ZZMA to extend the CGT rollover presently available to assets transferred following the breakdown of a legal marriage, to include the transfer of assets on the breakdown of defacto marriages where a State or Territory or foreign country has legislated to allow the court to order such a transfer.

Commencement date

The amendment will apply to transfers of property pursuant to court orders made after 2 April 1992.

Clauses involved in the proposed amendments

Clauses 38 - 39: Amends sections 160ZZM and 160ZZMA to apply to an order of a court relating to the breakdown of a de facto marriage.

Subclause 67(9) : Provides the amendments apply to court orders made after 2 April 1992.

Avoidance of Bonus Shares Rules

Summary of the proposed amendments

The amendment will ensure that rollover relief is not available for share exchanges (often referred to as share splits or share consolidations) under section 160ZZP unless the paid-up share capital of the company remains unchanged before and after the share exchange.

Background to the legislation

Broadly, Division 8A of the CGT legislation applies to partly or fully paid bonus shares issued after 30 June 1987 (other than bonus shares issued from a share premium account). The Division ensures that the bonus shares are treated as having been acquired by the shareholder at the time of their issue. Accordingly, if a company increases its paid-up capital by issuing bonus shares, the shares representing that additional capital will be subject to CGT, regardless of the acquisition date of the shareholder's original shareholding.

Section 160ZZP provides for rollover relief where there is a reorganisation of share capital within a company and as part of the reorganisation a shareholder has all of his or her shares of a particular class in the company cancelled or redeemed in exchange for other shares of the company. A rollover is available provided the shareholder receives no consideration for the original shares other than the new shares and the market value of the new shares immediately after their issue is not less than that of the original shares.

Where these conditions are satisfied and the shareholder makes the necessary election, the effect of the rollover is to provide for a deferral of tax on accrued gains or losses that would otherwise have been assessable or allowable as a result of the disposal of the original shares or, in the case where the original shares were acquired before 20 September 1985, the retention of their pre-CGT status.

There is no requirement in existing section 160ZZP for the paid-up capital of the company to remain unchanged before and after the share exchange. As a result, a company with shareholders who acquired their shareholdings before 20 September 1985 could use section 160ZZP to obtain an inappropriate advantage. That is, the company could increase its paid-up capital but, by virtue of section 160ZZP, the shares which represent that additional paid-up capital are taken to be pre-CGT assets. An example helps to illustrate this point. Assume a company has paid-up capital of $100 represented by 100 $1 shares, which were acquired by existing shareholders before 20 September 1985 and which are now worth $2 each. Under a share reorganisation, the company cancels the existing 100 shares and in exchange issues 100 fully paid $2 shares. The $100 additional capital is obtained, for example, by debiting the company's retained earnings. By section 160ZZP, the new shares are taken to be pre-CGT assets. Thus, the company has increased its paid-up capital (after 19 September 1985) yet the shares representing the additional capital have pre-CGT status.

This result is not consistent with the bonus share provisions of Division 8A. Essentially, the existing rollover provisions in section 160ZZP provide a mechanism for a company to avoid the consequences contemplated by the introduction of Division 8A. To prevent Division 8A from being circumvented in this way, the proposed amendment will limit the rollover relief available under section 160ZZP to situations where the paid-up capital of the company remains the same before and after the reorganisation.

Explanation of the proposed amendments

Section 160ZZP is amended to disallow rollover relief if the total paid-up share capital of the company immediately after the issue of the new shares is not equal to the total paid-up share capital of the company immediately before the redemption or cancellation of the original shares.

This amendment will ensure that the operation of section 160ZZP is consistent with the operation of the Bonus Share rules in Division 8A of the CGT legislation.

Commencement date

This amendment will apply to share exchanges, ie cancellations or redemptions of shares, after the date of introduction of this Bill.

Clauses involved in the proposed amendments

Clause 43: Inserts new paragraph 160ZZP(1)(fa).

Subclause 67(5) : Provides that the amendments apply to assets disposed of after 2 April 1992.

Rollover of Assets that are Trading Stock of Transferee

Summary of the proposed amendments

The amendment will ensure that rollover relief is not available if the asset transferred constitutes trading stock of the transferee.

Background to the legislation

Broadly, sections 160ZZN, 160ZZNA and 160ZZO provide rollover relief where an asset is disposed of by an individual, a trustee or a partnership to a company that is wholly owned by the transferor, or where one company disposes of an asset to another company and both companies are members of a 100% commonly-owned company group. The effect of the rollover is to provide for a deferral of tax on accrued gains that would otherwise have been assessable as a result of the disposal of the asset (or, in the situation where the asset was acquired before 20 September 1985, the retention of its pre-CGT status). Rollover relief is granted on the basis that the deferred gain will eventually be picked up on the subsequent disposal of the asset by the transferee company. On the rollover of the asset the transferee company is deemed to have acquired the asset for consideration equal to the (indexed) cost base of the asset in the hands of the transferor and, therefore, on the subsequent disposal of the asset by the transferee the full accrued capital gain would be subject to CGT.

However, in a case where the transferor disposes of an asset with an accrued capital gain under these rollover provisions and the asset becomes trading stock of the transferee, CGT may be avoided (subject to any application of the anti-avoidance provisions in Part IVA of the Income Tax Assessment Act). This is because the CGT provisions provide an exemption for trading stock and so on the subsequent disposal of the asset by the transferee company there is no CGT liability, ie. the accrued capital gain escapes tax. Nor is the gain picked up as assessable income under the trading stock provisions of the income tax law. Provided the transferee has paid market value for the asset, either in cash or by issuing shares to the transferor as consideration for the asset, the trading stock is brought into account at its market value. This means that the capital gain that had accrued on the asset up to the time of the rollover may escape tax altogether; only subsequent increases in market value would be included in assessable income (under the trading stock or ordinary income provisions of the law).

A similar problem can arise where, on the disposal of an asset as a result of a compulsory acquisition of the asset or as a result of the loss or destruction of the asset, rollover relief is granted for a replacement asset (under sections 160ZZK or 160ZZL). If the replacement asset constitutes trading stock of the taxpayer, the asset is again outside the scope of the CGT provisions. Any accrued capital gain on the original asset, which would ordinarily have been picked up on the disposal of the replacement asset, may not be taxed.

To overcome these problems the CGT rollover provisions are to be amended to incorporate a further requirement that must be satisfied before rollover relief is available; namely, the asset disposed of must not constitute trading stock of the transferee. That is the rollover asset must remain subject to CGT in the hands of the transferee.

Explanation of the proposed amendments

The Bill will amend the rollover provisions in:

·
sections 160ZZN, 160ZZNA and 160ZZO to disallow rollover relief where the asset disposed of (ie. the rollover asset) constitutes trading stock of the transferee immediately after its acquisition by the transferee; and
·
sections 160ZZK and 160ZZL to disallow rollover relief where the replacement asset acquired by the taxpayer on the disposal of the original asset constitutes trading stock of the taxpayer immediately after its acquisition by the taxpayer.

In the context of the amendment to sections 160ZZN, 160ZZNA and 160ZZO it will also be necessary to ensure that if the asset that is rolled over is an option (or a right or a convertible note) which is not trading stock of the transferee, but the exercise of the option results in the acquisition of a new asset which is trading stock of the transferee, rollover is not allowed on the disposal of the option. This additional amendment is required because the exercise of the option is not a disposal for CGT purposes; essentially any accrued capital gain on the option is deferred until the subsequent disposal of the new asset which was acquired as a result of the exercise of the option. If the new asset is trading stock, and therefore outside the scope of CGT provisions, the accrued gain may, once again, be lost.

The amendment will overcome this problem by disallowing rollover relief on the disposal of an option if the exercise of the option results in the acquisition of trading stock by the transferee. The amendment will also apply where the rollover asset is a right or a convertible note and the exercise of the right or the conversion of the convertible note results in the acquisition of trading stock by the taxpayer (ie. the transferee).

It is necessary that the asset acquired by the transferee under the rollover provisions remains subject to CGT on its subsequent disposal. Accordingly, the provisions of paragraph 160L(3)(a), 160L(4)(a) and 160L(5)(a) are amended to provide that the CGT exemption for trading stock only applies if the asset disposed of constitutes trading stock of the taxpayer throughout the period that the asset was owned by the taxpayer. This will ensure that the asset cannot be brought to account as trading stock at a subsequent date in order to escape CGT. [Clause 25]

Finally, consequential amendments are made to the record keeping requirements in subsections 160ZZU(3) and 160ZZU(3A) of the CGT legislation. Basically, these amendments will ensure that if a taxpayer disposes of an asset, which is an option, right or convertible note under the rollover provisions, and the exercise of the option or right or the conversion of the convertible note results in the acquisition of an asset (called the derived asset) which is trading stock in the hands of the transferee then, because the rollover is not allowed, records of the transaction, the company's group status etc., need only be kept for a maximum of 5 years after the time when the derived asset was acquired by the transferee.

Commencement date

These amendments apply to assets acquired by the transferee after the commencement of this Bill.

Clauses involved in the proposed amendments

Clause 25 : Amends section 160L in relation to trading stock.

Subclause 36(2) : Amends section 160ZZK.

Clause37 : Amends section 160ZZL.

Clauses 40 - 42: Amend sections 160ZZN, 160ZZNA, 160ZZO.

Clause 51 : Amends section 160ZZU in relation to records that are required to be kept.

Subclause 67(5) : Provides that the amendments apply to assets disposed of after 2 April 1992.

Subclause 67(11) : Provides that the record keeping changes apply to assets acquired after the commencement of the Bill.


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