Senate

Taxation Laws Amendment Bill (No. 2) 1994

Explanatory Memorandum

(Circulated by the authority of the Treasurer the Hon Ralph Willis, M.P.)

Chapter 9 Capital Gains Tax - Group company capital loss transfers - Subdivision H of Division 3 (Part 3) of the Bill

Overview

9.1 The Bill will amend section 160ZP of the Act, which deals with cost base adjustments in relation to transfers of losses between group companies, to:

·
provide that the reduction of the cost base of shares and debts held in the company that has transferred a loss will be determined having regard also to any payment (subvention payment) made by the transferee company in consideration for the transfer; and
·
allow an appropriate increase in the cost base of post-CGT shares in the transferee company.

Summary of proposed amendments

Purpose of amendments

9.2 The amendments will refine the adjustments made to the cost bases of the shares in group companies where one member of the group transfers a capital loss to another. They also provide appropriate cost base adjustments when a subvention payment is made [Clause 57].

Date of effect

9.3 The amendments will apply to net capital losses transferred for offset against the net capital gains of the transferee company for the 1993-94 income year or later years [Clause 59].

Background to the legislation

9.4 Section 160ZP of the Act provides for the transfer of a net capital loss within a company group. This allows a group company which incurs a net capital loss (the transferor) to agree with another company within the group (the transferee) to transfer the loss to that other company.

9.5 Subsection 160ZP(13) has the effect that the cost base of shares or debts acquired or commenced to be owed after 19 September 1985 which are held by other group companies in the transferor company will be reduced by reference to the amount of the capital loss transferred. The extent of the reduction will be proportional to the extent to which a particular share or debt forms part of the total interests held in the loss company. This prevents a capital loss being incurred on those shares or debts which is attributable to the loss which has been transferred.

9.6 The operation of subsection 160ZP(13) may disadvantage certain corporate structures. For instance, if a group company transfers to another company a capital loss incurred on the disposal of an asset, the value of the post-CGT shares held by its holding company and higher tier holding companies will be reduced under subsection 160ZP(13). This prevents a disposal of the shares in the transferor company giving rise to a capital loss which is attributable to the capital loss incurred on the asset. However, a capital gain may be realised on a disposal of the shares in the transferee company which is attributable to the tax benefit derived from the off-setting of a net capital gain by the transferred loss. This result could be overcome if an appropriate increase in the cost base of shares in the transferee company was made when the loss was transferred.

9.7 Another problem arises in relation to subvention payments, which are sums paid by the transferee company to the transferor as consideration for the transferred loss. These payments relate to the tax saving made by the transferee company because of the loss transfer. Subvention payments do not constitute income of the transferor (subsection 160ZP(11)), nor is a deduction allowable to the transferee for the payment (subsection 160ZP(12)). However, because the subvention payment increases the value of the transferor company, a capital gain may be generated upon a disposal of shares held in that company if an appropriate adjustment is not made to the cost base or indexed cost base of the shares.

Explanation of amendments

Compensating cost base increases

9.8 Subsection 160ZP(13) provides for an adjustment to the cost base, indexed cost base or reduced cost base, as the case may be, of shares held or debt provided by other group companies to the loss company. The adjustment is by such amount as is appropriate having regard to the direct or indirect interests of the group company in the loss company.

9.9 New subsection 160ZP(14) provides for an appropriate increase in the cost base of the shares or debts held by other group companies in the company to which the loss was transferred (the gain company). This subsection is modelled on subsection 160ZP(13). In making the appropriate adjustments to the cost base, regard is to be had to:

(a)
the amount of the loss transferred under subsection 160ZP(7);
(b)
the direct or indirect interests of the group company in the gain company; and
(c)
the amount, if any, of the payment made by the gain company, being a payment referred to in subsection 160ZP(12),(i.e. a subvention payment).

[Clause 58 - new subsection 160ZP(14)]

9.10 Subvention payments made both by a subsidiary to a parent and between sister companies can be taken into account for cost base adjustment purposes. The amount of the subsection 160ZP(12) subvention payment taken into account shall not exceed the amount of reduction in tax that would accrue to the gain company because of the loss transfer.

9.11 In any event, an increase in the cost base will be made only to the extent that the increase is reflected in the market value of the asset [Clause 58 - new subsection 160ZP(15)].

Subvention payments

9.12 Subsection 160ZP(12) describes how a loss company may receive a payment from the gain company as consideration for the whole or part of a net capital loss incurred by the loss company being treated under subsection 160ZP(7) as a capital loss incurred by the gain company.

9.13 The amendment to subsection 160ZP(13) will mean that where such a payment is received by the loss company, then the cost base, indexed cost base or reduced cost base, as the case may be, of shares held in or debts owed by the loss company is reduced having regard to:

(a)
the amount of the loss transferred under subsection 160ZP(7);
(b)
the direct or indirect interests of the group company in the loss company; and
(c)
the amount, if any, of the payment made by the gain company, being a payment referred to in subsection 160ZP(12).

[Clause 58 - amendment to subsection 160ZP(13)]


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