Explanatory Memorandum(Circulated by the authority of the Treasurer the Hon Ralph Willis, M.P.)
Chapter 11 - Capital Gains Tax - Division 19A and liquidators' distributions
11.1 The Bill will ensure that the provisions of Division 19A will not apply to interim or final distributions from liquidators where the liquidation is completed and the company dissolved within a period of three years after liquidation proceedings commenced, or within a further period allowed by the Commissioner.
11.2 The Bill will remove anomalies in relation to the interaction between the capital gains tax (CGT) provisions contained in Division 19A of Part IIIA of the Act, which was designed to apply to the disposal of shares in companies that have been subject to an asset strip, and those CGT provisions relating to the taxation treatment of liquidators' in specie distributions to shareholders [Clause 60].
11.3 Currently, it is arguable that each could simultaneously apply, to the detriment of taxpayers, to increase any capital gain, or reduce any capital loss, on interim or final in specie distributions of capital from a liquidator.
11.4 The amendments will apply in relation to disposals of assets after 6 December 1990, which is the date from which Division 19A applied to certain disposals of property [Clause 62].
11.5 Division 19A of the Act was designed to apply to the sale of shares in companies that had been subject to an asset strip. One way in which an asset strip could occur is where the market value of shares in a company is reduced by the transfer of assets out of the company to another company in the same company group for no consideration or for inadequate consideration. Roll-over relief can be claimed on the transfer of the asset to the other company in the group.
11.6 The shares in the company out of which the assets have been transferred are then disposed of at the reduced market value. As a result of this, the holding company, being the shareholder, could reduce a capital gain or create a capital loss.
11.7 In such cases, Division 19A generally operates to reduce the cost base of the shares in the company out of which the assets have been transferred by an amount equal to the lower of the indexed cost base or market value of the asset transferred. This would eliminate the capital loss or reduction in any capital gain that would have otherwise arisen as a result of the asset strip.
11.8 Correspondingly, Division 19A generally operates to increase the cost base of the shares held in the transferee company by the lower of the indexed cost base or market value of the asset transferred. This eliminates any excessive capital gain, or reduced capital loss, on any subsequent disposal of the shares of the company into which the assets have been transferred
11.9 A liquidator may distribute property of the company to its shareholders rather than realising the property and making cash distributions. These distributions of property are referred to as in specie distributions. Before final liquidation, which results in the cancellation and disposal of shares held in the liquidated company, a liquidator can make interim distributions to shareholders.
11.10 Under the provisions of section 160ZL, an interim in specie distribution of capital by a liquidator that is not rendered assessable as a dividend by any other provision of the Act will reduce the cost base or the indexed cost base (broadly, the cost base indexed for inflation) to the shareholder of the shares in the company that is being liquidated. Any excess of the amount of the distribution over the indexed cost base of the shares will be a capital gain.
11.11 The final distribution of capital, which results in the cancellation of the shares, is treated as consideration for the disposal of the shares. In computing the capital gain on the disposal, a deduction is allowed for the indexed cost base of the shares, as reduced having regard to the interim distributions of capital.
11.12 The interaction of Division 19A with the provisions relating to liquidators' distributions may give rise to unintended consequences.
11.13 Firstly, upon an interim in specie distribution of capital it is possible that the indexed cost or reduced cost base of the shares in the company being liquidated will be reduced both under both Division 19A and section 160ZL (to the extent that the distribution is not a dividend).
11.14 Secondly, upon the final in specie distribution of capital on liquidation:
- Division 19A will reduce the cost base, indexed cost base or reduced cost base of the shares held in the company under liquidation generally by an amount equal to the lower of the indexed cost base or market value of the property being distributed.
- at the same time the shares are cancelled and the distribution is also treated as consideration for the disposal of the shares that were held in the company .
11.15 As a result, upon the final in specie distribution of capital from a liquidator, there could be an unduly large capital gain or unduly reduced capital loss.
11.16 This Bill will amend Division 19A so that it does not apply to a distribution made by a liquidator in the course of winding up a company that is a member of a wholly owned company group [Clause 61; new subsection 160ZZRD(3)].
11.17 This exclusion will apply only if the company is dissolved within 3 years after the winding up commenced, or within such further time as the Commissioner allows [Clause 61; new paragraph 160ZZRD(3)(b)].