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House of Representatives

Taxation Laws Amendment Bill (No. 7) 2000

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)

General outline and financial impact

Income tax deductions for gifts

Schedule 1 to this Bill amends the income tax law to:

allow income tax deductions for gifts over $2 made to certain funds and organisations;
extend the period of time within which gifts to the Mount Macedon Memorial Cross Restoration, Development and Maintenance Trust Fund are tax deductible; and
update the index to the gift provisions for the new funds and organisations.

Date of effect : Applies to gifts made to:

The Global Foundation after 2 November 1999;
the Community Disaster Relief (Sydney Hail Storm Assistance) Fund after 14 April 1999 and before 15 April 2001;
the Australian Ex-Prisoners of War Memorial Fund after 19 October 1999 and before 20 October 2001;
the Foundation for Rural and Regional Renewal Public Fund after 28 March 2000;
the Mount Macedon Memorial Cross Restoration, Development and Maintenance Trust Fund after 30 June 2000 and before 1 July 2001;
the United Hellenic Earthquake Appeal after 6 September 1999 and before 7 September 2000;
the Foundation for Gambling Studies after 8 March 2000; and
the RSL and 6th Division Australian-Hellenic Educational Memorial Fund after 13 June 2000 and before 14 June 2002.

Proposal announced : At various times throughout 1999 and 2000.

Financial impact : Minimal.

Compliance cost impact : Minimal.

Pay as you go (PAYG) instalments for certain beneficiaries of trusts

Schedule 2 to this Bill makes amendments to the PAYG instalments legislation which will require beneficiaries who are absolutely entitled to the assets of a trust, to include in their instalment income for a period, their share of the amount that the trust has earned in that period.

The amendments will also require the beneficiaries of certain investment trusts to include in their instalment income for a particular period, any amounts distributed to them, or applied for their benefit, in that period. Those amounts will be included regardless of whether the amounts are assessable income of the income year which includes that period.

The PAYG instalments legislation will also be amended to make minor changes consequential upon measures contained in the New Business Tax System (Miscellaneous) Bill (No. 2) 2000.

Date of effect : The amendments will apply for the 2000-2001 income year and later income years.

Proposal announced : The measures contained in this Bill form part of the PAYG instalments regime as announced in ANTS but their detail has not previously been announced.

Financial impact : The measures will result in a gain to the revenue as set out in the following table:

2000-2001 2001-2002 2002-2003 2003-2004 2004-2005
$60m $5m $5m $5m $5m

Compliance cost impact : The measures will significantly reduce the compliance costs that would otherwise be imposed on both the affected beneficiaries and the trustees of the relevant trusts.

Summary of regulation impact statement

Regulation impact on business

Impact : The proposed amendments will:

simplify the way beneficiaries who are absolutely entitled to the assets of a trust and beneficiaries of certain investment trusts work out their instalment income; and
minimise the compliance burden on the trustees of those trusts,

while maintaining the PAYG instalments base.

Main points :

The affected beneficiaries will have a more certain and simpler way of working out their instalment income from the trusts.
The trustees of the affected trusts will be able to rely on the systems they already have in place to notify their beneficiaries of their income from the trust.
In some cases, this will mean that the return enjoyed by the beneficiaries on their investment in the affected trusts will not be diminished because of higher administration costs borne by the trustees.

CGT small business provisions

Schedule 3 to this Bill makes corrections to the capital gains tax (CGT) small business concessions in the Income Tax Assessment Act 1997 (ITAA 1997) to broaden access to the concessions introduced by the New Business Tax System (Capital Gains Tax) Act 1999.

Date of effect : The amendments apply to CGT events happening after 11.45 am, by legal time in the Australian Capital Territory, on 21 September 1999.

Proposal announced : The measures are consistent with the proposal announced in Treasurer's Press Release No. 58 of 21 September 1999 (refer to Attachments E and F) and Treasurer's Press Release No. 59 of the same date and are a consequence of consultation following the enactment of the CGT small business concessions.

Financial impact : Nil.

Compliance costs :Minimal.

Minor CGT changes

Schedule 4 to this Bill will make corrections to the CGT provisions in the ITAA 1997 and the Income Tax (Transitional Provisions) Act 1997 (ITTP 1997), rewritten as part of the Tax Law Improvement Project. Itwill also make a correction to the Income Tax Assessment Act 1936 (ITAA 1936).

The corrections to the CGT provisions reinstate the position of the ITAA 1936 or make other minor amendments such as rectifying incorrect cross-references. None of the corrections change the policy reflected in the ITAA 1936.

Date of effect : With the exception of the amendments proposed by items 2, 6 and 30 all of the amendments will apply to assessments for the 1998-1999 income year and later income years.

Details of the date of effect relating to items 2, 6 and 30 are included in the relevant Chapter of this Explanatory Memorandum.

Proposal announced : The amendments augment the rewritten provisions of the ITAA 1936 that were inserted in the ITAA 1997 by Act No. 46 of 1998.

Financial impact : Nil.

Compliance cost impact : There are no additional compliance costs associated with the corrections.

Technical amendment

Schedule 5 to this Bill makes a minor technical amendment to the ITAA 1997 to replace a reference to 'foreign public official' with 'public official' in the non-deductibility of bribes measures.

Date of effect : The amendments will apply from the date of Royal Assent of Taxation Laws Amendment Act (No. 2) 2000.

Proposal announced : Not previously announced.

Financial impact : Nil.

Compliance cost impact : Nil.

Discount capital gains: integrity measures

Schedule 6 to this Bill amends the ITAA 1997 to ensure the integrity measures in Division 115 operate more appropriately. The changes will also extend the availability of the CGT discount.

Date of effect : The amendments apply to CGT events happening after 11.45 am, by legal time in the Australian Capital Territory, on 21 September 1999.

Proposal announced : These measures are consistent with the proposal announced in Treasurer's Press Release No. 58 of 21 September 1999 (refer to Attachment D) and are a consequence of consultation following the enactment of Division 115. In addition, Assistant Treasurer's Press Release No. 26 of 16 June 2000 foreshadowed amendments to the CGT discount integrity measure.

Financial impact : Nil.

Compliance costs : These measures may impose some additional compliance costs on taxpayers by requiring calculations of notional capital gains.

Chapter 1 Income tax deductions for gifts

Outline of Chapter

1.1 Schedule 1 to this Bill will amend the Income Tax Assessment Act 1997 (ITAA 1997) to:

allow income tax deductions for gifts of $2 or more to a number of funds and organisations, listed in paragraph 1.6;
extend the period of time within which gifts to the Mount Macedon Memorial Cross Restoration, Development and Maintenance Trust Fund are tax deductible; and
update the index to the gift provisions for the new funds and organisations.

Background to the legislation

1.2 Broadly, Division 30 of the ITAA 1997 provides deductions for gifts of $2 or more to various funds, authorities or institutions. A deduction is allowable in the year of income in which the gift is made.

1.3 A fund or other body can be granted tax deductible gift status in 2 ways. First, it may qualify under one of the general categories listed in Division 30, for example, the general category of education, or specifically listed under one of those general categories. Second, it may be specifically listed in Division 30, either in the Register of Environmental Organisations or the Register of Cultural Organisations which are kept under Subdivisions 30-E and 30-F respectively.

1.4 In some circumstances, deductibility for a gift to a fund or organisation may only be available if the gift is made during a period specified in the law, for example, gifts to war memorials specifically listed in the Defence category are usually deductible for a period of 2 years only.

Summary of new law

1.5 The amendments will allow income tax deductions for donations made to the following funds and organisations:

the Community Disaster Relief (Sydney Hail Storm Assistance) Fund;
the Australian Ex-Prisoners of War Memorial Fund;
The Global Foundation;
the United Hellenic Earthquake Appeal;
the Foundation for Gambling Studies;
the Foundation for Rural and Regional Renewal Public Fund;
the RSL and 6th Division Australian-Hellenic Educational Memorial Fund; and
the Mount Macedon Memorial Cross Restoration, Development and Maintenance Trust Fund.

Comparison of key features of new law and current law

1.6 The amendments will allow income tax deductions for donations made to the following funds and organisations.

Fund/ organisation Proposed section and item reference New law special conditions Current law special conditions
Community Disaster Relief (Sydney Hail Storm Assistance) Fund 30-45(2) item 4.2.17 The gift must be made after 14 April 1999 and before 15 April 2001. N/A
Australian Ex-Prisoners of War Memorial Fund 30-50(2) item 5.2.9 The gift must be made after 19 October 1999 and before 20 October 2001. N/A
The Global Foundation 30-80(2) item 9.2.8 The gift must be made after 2 November 1999. N/A
United Hellenic Earthquake Appeal 30-80(2) item 9.2.9 The gift must be made after 6 September 1999 and before 7 September 2000. N/A
Foundation for Gambling Studies 30-25(2) item 2.2.19 The gift must be made after 8 March 2000. N/A
Foundation for Rural and Regional Renewal Public Fund 30-105 item 13.2.2 The gift must be made after 28 March 2000. N/A
RSL and 6th Division Australian-Hellenic Educational Memorial Fund 30-50(2) item 5.2.10 The gift must be made after 13 June 2000 and before 14 June 2002. N/A
Mount Macedon Memorial Cross Restoration, Development and Maintenance Trust Fund 30-50(2) item 5.2.8 The gift must be made after 30 June 2000 and before 1 July 2001. The gift must be made after 8 February 1998 and before 9 February 1999.

Detailed explanation of new law

1.7 It was announced in Assistant Treasurer's Press Release No. 24 of 27 May 1999 that the Government intended to amend the ITAA 1997 to allow deductions for gifts of $2 or more to the Community Disaster Relief (Sydney Hail Storm Assistance) Fund.

1.8 The Community Disaster Relief (Sydney Hail Storm Assistance) Fund has been established to raise money for those affected by the severe hail storm that caused wide spread damage to parts of Sydney in April of 1999. [Schedule 1, item 2]

1.9 It was announced in Assistant Treasurer's Press Release No. 27 of 28 June 1999 that the Government intended to amend the ITAA 1997 to allow deductions for gifts of $2 or more to the Australian Ex-Prisoners of War Memorial Fund.

1.10 The Australian Ex-Prisoners of War Memorial Fund has been established to raise funds for a national memorial to be erected in the city of Ballarat. The objective of the memorial project is to promote community recognition of the service and sacrifice made by Australian prisoners of war. [Schedule 1, item 4]

1.11 It was announced in Assistant Treasurer's Press Release No. 50 of 3 November 1999 that the Government intended to amend the ITAA 1997 to allow deductions for gifts of $2 or more to The Global Foundation.

1.12 The Global Foundation is a non-profit organisation established to promote and encourage Australia's national development and international orientation, with a particular focus on the nation's Centenary of Federation. It is a citizens' initiative which brings together the expertise and influence of eminent people. [Schedule 1, item 5]

1.13 It was announced in Assistant Treasurer's Press Release No. 59 of 8 December 1999 that the Government intended to amend the ITAA 1997 to allow deductions for gifts of $2 or more to the United Hellenic Earthquake Appeal.

1.14 The United Hellenic Earthquake Appeal has been established to raise money for the victims of the earthquake tragedy that devastated Athens in September 1999. [Schedule 1, item 5]

1.15 It was announced in Assistant Treasurer's Press Release No. 10 of 8 March 2000 that the Government intended to amend the ITAA 1997 to allow deductions for gifts of $2 or more to the Foundation for Gambling Studies.

1.16 The Foundation for Gambling Studies has been established to support independent research on gambling, which is a growing industry in Australia. The Foundation's activities include funding scholarships and commissioning research. Reliable and independent research will assist the Government and the community to develop policies relating to gambling. [Schedule 1, item 1]

1.17 It was announced in Assistant Treasurer's and Deputy Prime Minister's joint Media Release No. 11 of 29 March 2000 that the Government intended to amend the ITAA 1997 to allow deductions for gifts of $2 or more to the Foundation for Rural and Regional Renewal Public Fund.

1.18 The Foundation for Rural and Regional Renewal Public Fund has been established to raise money for the purpose of providing a viable social and economic future for Australia's rural and regional communities. It aims to encourage innovative collaboration between business, community and government in philanthropic endeavours that will boost the economic and social stocks of regional Australia. Its emphasis will be on economic development and job creation. [Schedule 1, item 6]

1.19 It was announced in Assistant Treasurer's Press Release No. 24 of the 26 May 2000 that the Government intended to amend the ITAA 1997 to allow deductions for gifts of $2 or more to the RSL and 6th Division Australian-Hellenic Educational Memorial Fund. This was conditional on the fund satisfying the usual public fund requirements.

1.20 The Assistant Treasurer's Press Release No. 25 of 14 June 2000 advised that the RSL and 6th Division Australian-Hellenic Educational Memorial Fund has been established to raise money to assist, each year, a deserving Greek citizen in the island of Crete, who is under the age of 25 years, to undertake tertiary education. Gifts of $2 or more to the fund after 13 June 2000 will be deductible for income tax purposes. [Schedule 1, item 4]

1.21 The Government has agreed to amend the ITAA 1997 to extend gift deductibility status for a period of one year to the Mount Macedon Memorial Cross Restoration, Development and Maintenance Trust Fund.

1.22 The Mount Macedon Memorial Cross Restoration, Development and Maintenance Trust Fund has been established to raise money for the ongoing maintenance of the Mount Macedon Memorial Cross. The Cross was built in 1934-1935 to commemorate the memory of those who served in the Great War, and is considered to be one of the most significant war memorials in Victoria. [Schedule 1, item 3]

Application and transitional provisions

1.23 The amendments will apply from the date of Royal Assent of this Bill.

Chapter 2 Pay as you go (PAYG) instalments for certain beneficiaries of trusts

Outline of Chapter

2.1 This Chapter explains the amendments to the PAYG instalments regime that are contained in Schedule 2 to this Bill.

2.2 The PAYG instalments regime replaces the existing company and superannuation fund instalment system and provisional tax system with effect for the 2000-2001 income year and later income years. Broadly, the regime ensures that entities pay:

quarterly or annual instalments of their tax liabilities that reflect their current trading and investment conditions;
annual instalments based on last year's tax liabilities; or
quarterly instalments based on last year's tax liabilities with an adjustment for gross domestic product.

2.3 Schedule 2 will amend the PAYG instalments legislation to insert special rules that, broadly, affect the way beneficiaries who are absolutely entitled to the assets of a trust and beneficiaries of certain investment trusts work out their instalment income. It will also make minor amendments consequential upon measures contained in New Business Tax System (Miscellaneous) Bill (No. 2) 2000.

2.4 Unless otherwise stated, legislative references are to provisions in Schedule 1 to the Taxation Administration Act 1953.

Context of reform

2.5 Under the PAYG instalments regime, taxpayers will generally be required to pay quarterly instalments of their tax liability for a year. They will work out the amount of their quarterly PAYG instalment by multiplying the instalment income they earn in that quarter by an instalment rate calculated by the Commissioner of Taxation or a rate they choose.

2.6 The general rule for most taxpayers is that the instalment income for a quarter is the ordinary income the taxpayer earns in that quarter. Sales, fees, interest, dividends and royalties are examples of ordinary income. However, an amount that is not assessable income of the income year that includes the relevant instalment quarter is not included in the taxpayer's instalment income. In addition, there are a limited number of special rules that require taxpayers to include other amounts in their instalment income. One of these special rules affects beneficiaries of trusts.

2.7 Under the PAYG instalments regime, a beneficiary is required to include in instalment income for an instalment period a share of the instalment income of each trust of which they are a beneficiary during that period. The share of the trust's instalment income is worked out having regard to the beneficiary's assessable income from the trust for the previous year and the trust's instalment income of the previous year. In essence, the beneficiary is required to report instalment income from the trust on an 'entitlements basis'.

2.8 Indirectly, this means that the trustees of trusts are required to provide the beneficiaries with details of the trust's instalment income for both the current quarter and the preceding income year. This imposes a significant compliance burden on trustees of some investment trusts many of which have large numbers of beneficiaries. It also imposes an unnecessary compliance burden on the trustees of some trusts whose beneficiaries are absolutely entitled to the trust assets.

2.9 The proposed amendments will:

simplify the way some beneficiaries who are absolutely entitled to the assets of a trust and beneficiaries of certain investment trusts work out their instalment income; and
minimise the compliance burden on the trustees of those trusts,

while maintaining the PAYG instalments base.

2.10 The PAYG instalments legislation also contains special rules for life insurance entities. Two of the proposed amendments will be made to those special rules and are consequential upon changes made by the New Business Tax System (Miscellaneous) Bill (No. 2) 2000. They are minor corrections.

Summary of new law

2.11 As a result of the proposed amendments, some beneficiaries who are absolutely entitled to the assets of a trust and beneficiaries of certain investment unit trusts will be required to include in their instalment income the amount that:

the trust earns in the period; or
the investment trust distributes to them, or applies for their benefit, during the instalment period.

For the beneficiaries of investment unit trusts, the amount distributed or applied will be included in their instalment income regardless of whether the distribution or applied amount will be assessable income of those beneficiaries for the income year in which the distribution or application occurs. Without this aspect of the new rules, there would be a loss of revenue.

2.12 When this Chapter refers to a beneficiary who is absolutely entitled to the assets of a trust, it will generally be referring to a beneficiary of trust where:

the trustee of that trust does not have any active duties to perform in the management of the trust (other than to deal with the income and capital of the trust according to the instructions of the beneficiary of the trust);
the beneficiary of the trust is absolutely entitled to its interest in the trust assets; and
the beneficiary has a vested and indefeasible interest in the income of the trust.

2.13 The new rules for working out the instalment income of beneficiaries of investment unit trusts fall into 2 categories.

2.14 First, all of the beneficiaries of certain broadly held trusts will include in their instalment income any amount the trust distributes to them, or applies for their benefit. This rule applies to all the beneficiaries of a trust if it:

is a unit trust that is a resident unit trust;
only carries on specified investment activities; and
has at least 50 members, or is offered to the public or has its units listed on a stock exchange. (This is the basic test to determine whether a trust is 'broadly held'.)

2.15 There will be a requirement that a trust is genuinely broadly held in that the beneficial interests in the trust will have to be held by more than 20 individuals.

2.16 Secondly, certain beneficiaries of resident investment unit trusts that are not broadly held will include in their instalment income any amount the trust distributes to them, or applies for their benefit. This rule applies to a beneficiary that is:

a broadly held resident investment unit trust;
a resident investment trust in which the beneficiaries are absolutely entitled to the trust assets and which satisfies certain other conditions;
exempt from tax;
a superannuation entity; or
the statutory fund of a life insurance company.

2.17 The PAYG instalments legislation will also be amended to make minor amendments consequential upon reforms to the way in which the income of life insurance entities are taxed contained in the New Business Tax System (Miscellaneous) Bill (No. 2) 2000.

2.18 The amendments will apply to the 2000-2001 income year and later income years as does the PAYG instalments regime.

Comparison of key features of new law and current law
New law Current law
The instalment income of a beneficiary that is absolutely entitled to the assets of a trust will include that beneficiary's proportional interest in the instalment income earned by the trust.

The instalment income of a beneficiary of a broadly held resident investment unit trust will include the amounts distributed to, or applied for the benefit of, the beneficiary by the trustee. This is so, regardless of whether that amount is assessable income of the year in which it is distributed or applied.

The instalment income of certain beneficiaries of resident investment unit trusts that are not broadly held will include the amounts distributed to, or applied for the benefit of, the beneficiary by the trustee. This is so, regardless of whether that amount is assessable income of the year in which it is distributed or applied. The beneficiary must be:

an entity that is exempt from tax;
the trustee of a broadly held resident investment unit trust;
the trustee of a complying superannuation fund, complying approved deposit fund or pooled superannuation trust;
a statutory fund of a life insurance company (which includes the life insurance business of a friendly society); or
a trustee of a trust that meets specified requirements including that the beneficiaries are absolutely entitled to the assets of the trust.

The instalment income of all beneficiaries of trusts, other than a corporate unit trust or public trading trust, is determined on an 'entitlements basis' having regard to:

the beneficiary's assessable income of the previous year;
the trust's instalment income of the previous year; and
the trust's instalment income of the current instalment quarter or year.

Detailed explanation of new law

2.19 The special rule for beneficiaries in subsection 45-280(1) of the PAYG instalments regime, requires beneficiaries to include in their instalment income for an instalment period, a share of the instalment income of each trust of which they are a beneficiary during that period. The share of the trust's instalment income is worked out having regard to the beneficiary's assessable income from the trust for the previous year and the trust's instalment income of the previous year. In essence, the beneficiary is required to report instalment income from the trust on an 'entitlements basis'.

2.20 Apart from minor consequential amendments, the amendments proposed to the PAYG instalments regime will constitute exceptions to the special rule in subsection 45-280(1).

Instalment income of beneficiaries who are absolutely entitled to the assets of a trust

2.21 A new exception to the special rule in subsection 45-280(1) - the first new exception - will be added for beneficiaries who are absolutely entitled to the assets of a trust. Such a beneficiary will include in its instalment income for an instalment period, its proportionate share of the instalment income earned by the trust in that period. [Schedule 2, item 1, subsection 45-280(6)]

2.22 This first new exception applies to a beneficiary if:

the trustee's only active duties in managing the trust are to deal with trust income and trust capital according to the requests or directions of the beneficiary or beneficiaries;
the beneficiary is, or beneficiaries are, absolutely entitled to the trust assets; and
the beneficiary has a vested and indefeasible interest in all of the trust income or, if there is more than one beneficiary, each beneficiary has a vested and indefeasible interest in a proportion of the trust income that corresponds with the beneficiary's proportional interest in the trust capital.

[Schedule 2, item 1, paragraphs 45-280(6)(a) to (c)]

2.23 A beneficiary of one of these trusts will be treated as having received its share of the trust income as soon as that income is earned in the trust. This will relieve the trustee of the compliance burden imposed by subsection 45-280(1).

2.24 Whether or not a particular trust comes within the terms of this exception must be determined on a case by case basis. However, a trustee will not be taken to have active duties in managing the trust simply because that trustee performs those duties that the trust law requires all trustees of trusts, which satisfy the requirements of subsection 45-280(6), to perform. Such duties include keeping records appropriate to the trust, accounting to the beneficiaries and maintaining the trust property. Similarly, such a trustee will not be taken to have active duties simply because it incurs expenditure in carrying out those duties required by trust law or because it is entitled to reimburse itself from the trust funds for such expenditure.

Instalment income of beneficiaries of broadly held resident investment unit trusts

2.25 Another new exception to the special rule in subsection 45-280(1) - the second new exception - will be added for the beneficiaries of certain investment unit trusts. Instead of applying subsection 45-280(1) when working out its instalment income, a beneficiary of one of these unit trusts will apply the rules in new subsection 45-285(1) . [Schedule 2, item 1, subsection 45-280(5)]

2.26 This second new exception will achieve 2 outcomes. First, it will simplify the way these particular beneficiaries work out their instalment income from the trust because they will work out their instalment income on what is effectively a 'receipts basis'. Secondly, it will relieve the trustees of the indirect requirement to notify the beneficiaries of the trust's instalment income for each instalment quarter of the current year and the instalment income of the preceding year.

2.27 The beneficiary's instalment income for an instalment period will include any trust income or trust capital that the trust distributes to them, or applies for their benefit, during the instalment period. This is why the beneficiaries are said to determine their instalment income on a 'receipts basis'. [Schedule 2, item 2, subsection 45-285(1)]

2.28 In working out the instalment income on this 'receipts basis', the rule is that it will not matter whether the trust income or trust capital is included in the beneficiary's assessable income for the income year in which the distribution or application occurs. [Schedule 2, item 2, subsection 45-285(1)]

2.29 There are 2 reasons for this rule. First, it is necessary to protect the PAYG instalments base. Without this rule, only so much of the amount distributed or applied as assessable income of the income year in which the amount is distributed or applied, would be included in instalment income. As there is generally one quarterly or one half yearly distribution made by these trusts after the end of the income year to which the amount relates, these amounts would not be instalment income and there would be a cost to the revenue. Secondly, in practice, the trustees of these trusts will not be able to determine how much of the amount distributed, or applied, is assessable income until after the end of the income year. This makes the rule a practical necessity.

2.30 A unit trust will be required to satisfy 4 conditions before the beneficiaries are entitled to determine their instalment income on a 'receipts basis' under subsection 45-285(1) (rather than on the 'entitlements basis' required by subsection 45-280(1)).

The unit trust must be resident

2.31 The unit trust must be a resident unit trust within the meaning of section 102Q of the Income Tax Assessment Act 1936 (ITAA 1936) for the income year of the trust that is, or includes, the instalment period. [Schedule 2, item 2, paragraph 45-285(1)(a)]

2.32 A unit trust is resident under that section if:

either any property of the unit trust is situated in Australia or the trustee carries on business in Australia; and
either the central management and control of the unit trust is in Australia or Australian residents hold more than 50% of the beneficial interests in the income or property of the trust.

The unit trust must be broadly held

2.33 The unit trust will be broadly held for the purposes of these provisions if, throughout the relevant instalment period, the units in the unit trust were:

listed on a stock exchange in Australia or elsewhere;
offered to the public; or
held by at least 50 persons.

[Schedule 2, item 2, paragraph 45-285(1)(b)] 2.34 When a trust is working out how many unit holders it has, the trustee may count the beneficiaries of a trust that holds its units instead of those trustee unit holders. This rule will apply if:

there is another trust (the 'holdingtrust') that is a unit holder in the unit trust;
the holding trust is a trust of the kind covered by subsection 45-280(6), that is a trust in which the beneficiaries are absolutely entitled to the assets of the trust as discussed in paragraph 2.22; and
the beneficiary's or beneficiaries' absolute entitlement exists at all times while the holding trust is in existence.

[Schedule 2, item 2, subsection 45-285(3)]

Ownership of the trust must not be concentrated in 20 or fewer individuals

2.35 The trust must satisfy tests relating to the 'ownership' of the trust contained in new section 45-287 . [Schedule 2, item 2, paragraph 45-285(1)(c)]

2.36 The tests are that the beneficial interests in a unit trust must not be concentrated in the hands of 20 or fewer individuals. They will be so concentrated if an individual, or up to 20 individuals, hold between them directly or indirectly and for their own benefit, interests in the trust carrying:

fixed entitlements to at least 75% of the trust's income or the trust's capital; or
at least 75% of the voting rights of the trust if applicable.

[Schedule 2, item 2, subsection 45-287(1)]

2.37 An individual and his or her associates and nominees are taken to be a single individual for the purposes of those tests. [Schedule 2, item 2, subsection 45-287(2)]

2.38 The beneficial interests in a unit trust will also be taken to be concentrated in the hands of 20 or fewer individuals if it is reasonable to conclude that the beneficial interests in the unit trust are concentrated in terms of subsection 45-287(1), having regard to:

any constituent document, contract, agreement or instrument that authorises the variation or abrogation of the rights attaching to any of the interests in the trust or relates to conversion, cancellation, extinguishment or redemption of those interests;
any contract, arrangement, option or instrument under which a person has power to acquire an interest in the trust; or
any power, authority or discretion in a person in relation to the rights attaching to any of the interests in the trust.

[Schedule 2, item 2, subsection 45-287(3)]

2.39 Indirectly, the rule in subsection 45-287(1) requires the trustee of the unit trust to determine how many individuals ultimately hold an interest in the units. This is because the information that the beneficiary will require from the trust will be affected by the outcome.

2.40 If a trustee or company holds the units, it will be necessary to trace through to individuals. If a government body holds units in the trust, it will not be necessary to trace through to the individuals.

2.41 The tracing process will be simplified by a special rule for the trustees of superannuation funds where:

a superannuation fund with more than 50 members is a unit-holder in the unit trust, those units will be taken to be held by more than 20 individuals instead of by the superannuation fund [Schedule 2, item 2, paragraph 45-287(4)(a)] ; and
a superannuation fund with 50 or fewer members is a unit-holder in the unit trust, those units will be taken to be held by each member in equal proportions instead of by the superannuation fund [Schedule 2, item 2, paragraph 45-287(4)(b)] .

2.42 These 2 rules for superannuation funds are similar to tracing rules used for the purposes of the trust loss rules of Schedule 2F to the ITAA 1936.

The unit trust's activities must be limited to certain investment activities

2.43 The unit trust's activities will have to consist only of the investment activities listed in the section 102M of the ITAA 1936 definition of 'eligible investment business'throughout the relevant instalment period [Schedule 2, item 2, paragraph 45-285(1)(d)] . These activities will include investing in land to earn rent. They also include investing or trading in various securities including:

loans (which includes deposits with financial institutions);
bonds, debentures or stocks;
shares;
units in a unit trust;
futures and forward contracts;
interest rate and currency swap contracts;
forward exchange rate and interest rate contracts;
life insurance policies; and
rights or options over such loans, securities and shares.

Instalment income of beneficiaries of certain other resident investment unit trusts

2.44 The third new exception to the special rule in subsection 45-280(1), like the second exception, is contained in subsection 45-280(5). It will apply to the beneficiaries of certain 'narrowly held' resident investment unit trusts. Instead of applying subsection 45-280(1), some of the beneficiaries of these unit trusts will also determine their instalment income from the trust on a 'receipts basis' under the rule in new subsection 45-285(2) . [Schedule 2, item 1, subsection 45-280(5)]

2.45 The proposed rules will relieve the trustee of the unit trust of the burden of notifying specified beneficiaries of the trust's instalment income for an instalment quarter and the preceding income year even if the trust is not broadly held.

2.46 The instalment income of a specified beneficiary for an instalment period will include any trust income or trust capital that a unit trust distributes to, or applies for the benefit of, the beneficiary during the instalment period. As with subsection 45-285(1), it will not matter whether the trust income or trust capital that the trust distributes to them, or applies for their benefit, is included in the beneficiary's assessable income for the income year in which the distribution or application occurs. [Schedule 2, item 2, subsection 45-285(2)]

2.47 If a particular beneficiary is to determine its instalment income from a unit trust on a 'receipts basis' under subsection 45-285(2) (rather than on the 'entitlements basis' required by subsection 45-280(1)), there are conditions that the unit trust and the beneficiary must satisfy.

2.48 The tests that the unit trust must satisfy are that:

the unit trust is a resident trust within the meaning of section 102Q of the ITAA 1936 (that test was discussed in paragraphs 2.31 and 2.32) [Schedule 2, item 2, paragraph 45-285(2)(b)] ; and
the trust's activities consisted only of the activities listed in the section 102M of the ITAA 1936 definition of 'eligible investment business' (that test was discussed in paragraph 2.43) [Schedule 2, item 2, paragraph 45-285(2)(c)] .

2.49 The first condition the beneficiary must satisfy is that the beneficiary must not be required to include the trust income or trust capital distributed to, or applied for, it under subsection 45-285(1) [Schedule 2, item 2, paragraph 45-285(2)(a)] . The second condition is that the beneficiary must, throughout the instalment period, be one of the following:

the trustee of a trust that is a broadly held resident investment unit trust that satisfies all the tests of paragraphs 45-285(1)(a) to (d);
exempt from tax;
a complying superannuation fund, complying approved deposit fund or pooled superannuation trust;
a statutory fund of a life insurance company (which includes a friendly society in respect of its life insurance business); or
the trustee of one or more trusts covered by new section 45-288 .

[Schedule 2, item 2, paragraph 45-285(2)(d)]

2.50 New section 45-288 is expressed to cover a trust if all of the following conditions are satisfied:

the trust is a resident trust within the meaning of section 102Q of the ITAA 1936 (that test is discussed in paragraphs 2.31 and 2.32);
the trust is a trust of the kind covered by subsection 45-280(6) (that subsection is discussed in paragraphs 2.21 to 2.24);
the investment activities carried out by the trustee at the direction or request of the beneficiary or beneficiaries are within the activities listed in the section 102M of the ITAA 1936 definition of 'eligible investment business' (that test was discussed above in paragraph 2.43);
all of the beneficiaries became beneficiaries of the trust as a result of an offer made to the public to invest in the trust; and
the trust has at least 50 members or if the trustee of the trust is also the trustee of one or more other trusts that satisfy the above conditions, those trusts together have at least 50 beneficiaries.

[Schedule 2, item 2, paragraphs 45-288(a) to (e)]

Diagram 2.1

Example 2.1: Analysis of Diagram 2.1

The 20,000 beneficiaries of the Trust No. 2 will determine their instalment income from it on a 'receipts basis' under subsection 45-285(1) if it is a resident trust within the meaning of section 102Q of the ITAA 1936.

The trustees of the Trust No. 2 will determine their instalment income from the Trust No. 1 on a 'receipts basis' under subsection 45-285(2) if the Trust No. 2 is a resident trust within the meaning of section 102Q of the ITAA 1936. However, it will be unlikely that its trustees will need to work out the instalment income of the Trust No. 2. This is because, in practice, such trustees will rarely be liable to be assessed for income of the trust to which no beneficiaries are presently entitled, or for a beneficiary who is presently entitled but is under a legal disability. (Generally, these trusts do not permit investment by minors or other persons under a legal disability).

The 15 beneficiaries of the Family Trust will determine their instalment income from that trust on an 'entitlements basis' under subsection 45-280(1).

As the beneficiaries of the Family Trust need to determine their instalment income from that trust on an 'entitlements basis', the trustees of that trust also need to determine the trust's instalment income so that they can notify the beneficiaries of the Family Trust. The trustees of the Family Trust will determine the instalment income of that trust on an 'entitlements basis' under subsection 45-280(1). That is because:

the Trust No. 1 is not a broadly held trust of the type covered by subsection 45-285(1); and
the Family Trust is not a beneficiary of the kind covered by paragraph 45-285(2)(d).

The 2 superannuation funds will determine their instalment income from the Trust No. 1 on a 'receipts basis' provided that the Trust No. 1 is a resident trust. This is because each superannuation fund is a beneficiary of the kind covered by paragraph 45-285(2)(d).

Diagram 2.2

Example 2.2: Analysis of Diagram 2.2

Diagram 2.2 differs from Diagram 2.1 only because of the addition of the Trust No. 3 as an investor in the Trust No. 1.

As a result of adding the Trust No. 3, which is assumed to be a trust in which all of the beneficiaries are absolutely entitled to the assets of the trust, all of the beneficiaries of the Trust No. 1 will be able to determine their instalment income on a 'receipts basis' under subsection 45-285(1). This is because the 100 beneficiaries of the Trust No. 3 who directed their investment to the Trust No. 1 would be counted as members of that trust under subsection 45-285(3).

Further, on the facts assumed, ownership of the Trust No. 1 will not be concentrated in the hands of 20 or fewer individuals. While there is clearly 20% of the interests in the trust in the hands of the 15 individual beneficiaries of the Family Trust, 50% of the interests in the trust are held in the hands of 40 or more individuals according to paragraph 45-285(4)(a).

Minor technical amendments consequential upon New Business Tax System (Miscellaneous) Bill (No. 2) 2000

2.51 Section 45-290 contains references to the terms 'life insurance entity', 'registered organisation' and 'CS/RA class of its assessable income'. Each of these expressions takes its meaning from aspects of the tax laws dealing with life insurance entities.

2.52 New Business Tax System (Miscellaneous) Bill (No. 2) 2000 contains amendments which reform the tax laws dealing with life insurance entities. That Bill uses the defined term 'life insurance company' to replace references to 'life insurance entity' and 'registered organisation'. It also uses the expression 'complying superannuation class of its taxable income' instead of 'CS/RA class of its assessable income'.

2.53 Subsection 45-290(3) will be consequentially amended to delete references to the existing terms and substitute references to the new terms [Schedule 2, items 3 and 4] . These consequential amendments were omitted from the New Business Tax System (Miscellaneous) Bill (No. 2) 2000.

Application and transitional provisions

2.54 Schedule 2 will apply to the 2000-2001 income year and later income years. This will ensure that the amendments made by this Schedule apply for the same period as the PAYG instalments regime. [Schedule 2, item 5]

Consequential amendments

2.55 There are no consequential amendments arising from the amendments contained in Schedule 2 .

Regulation impact statement

Policy objective

2.56 The amendments to the PAYG instalments regime, other than the minor consequential amendments, will modify the way in which beneficiaries who are absolutely entitled to the assets of a trust and beneficiaries of certain broadly held investment trusts are required to work out their instalment income from those trusts.

2.57 The proposed amendments will insert limited exceptions to an existing special rule that specifies how beneficiaries of trusts should work out their instalment income from the trusts. They will:

simplify the way beneficiaries of such trusts work out their instalment income; and
relieve the trustees of those trusts of a compliance burden,

while maintaining the PAYG instalments base.

Implementation options

2.58 In so far as the PAYG instalments measures affect the beneficiaries who are absolutely entitled to the assets of a trust, where that trust is not involved in the investment industry, the only effective implementation option was the one adopted in this Bill. It reflects the current administrative practice and taxpayer behaviour.

2.59 In so far as the PAYG instalments regime affects the beneficiaries of resident investment unit trusts 3 options were considered.

2.60 None of these options were considered to be appropriate if they did not incorporate a collection measure to maintain the PAYG instalments base.

Option 1: Beneficiaries of investment trusts with 300 or more beneficiaries

2.61 The first option considered was that only beneficiaries of resident investment unit trusts with 300 or more beneficiaries would potentially come within the proposed measures and be entitled to work out their instalment income from the trust on a receipts basis rather than an entitlements basis as required by the current law.

Option 2: Beneficiaries of investment trusts with 50 or more beneficiaries

2.62 The second option considered was that only beneficiaries of resident investment unit trusts with 50 or more beneficiaries would potentially come within the proposed measures and be entitled to work out their instalment income from the trust on a receipts basis rather than an entitlements basis as required by the current law.

Option 3: Beneficiaries of investment trusts with 50 or more beneficiaries and certain beneficiaries of other investment trusts

2.63 The third option considered was that both:

beneficiaries of resident investment unit trusts with 50 or more beneficiaries; and
certain types of beneficiaries of other investment trusts,

would potentially come within the proposed measures and be entitled to work out their instalment income from the trust on a receipts basis rather than an entitlements basis as required by the current law.

2.64 The third option is reflected in the proposed amendments. It is proposed because, of the 3 options, it provides the best balance between the objects of the PAYG instalments regime and minimising the compliance burden on trustees of certain trusts operating within the investment and financial services industry. It also relieves beneficiaries who are absolutely entitled to the assets of trusts of an unnecessary compliance burden.

Assessment of impacts

2.65 As stated above, the proposed PAYG instalments amendments will:

simplify the way beneficiaries who are absolutely entitled to the assets of a trust and beneficiaries of certain investment trusts work out their instalment income; and
minimise the compliance burden imposed on the trustees of those trusts,

while maintaining the PAYG instalments base.

Impact group identification

2.66 First, the proposed PAYG instalments amendments may affect many different kinds of investors in resident investment unit trusts including:

individuals (including retirees, whether self-funded or pensioners);
superannuation funds (including both small self-managed funds and large industry funds);
life insurance and other companies.

2.67 Secondly, the proposed amendments will affect beneficiaries who are absolutely entitled to the assets of a trust, whether or not they are investment trusts.

2.68 Thirdly, the amendments will affect the trustees of trusts in which the beneficiaries are absolutely entitled to the assets of the trust, and the trustees of certain resident investment unit trusts. It has been estimated that this has the potential to benefit up to 20,000 trusts (and their beneficiaries).

Analysis of costs / benefits

Compliance costs

2.69 Trustees of the affected investment trusts will benefit from the proposals as they will be able to rely on existing systems they have in place to notify their beneficiaries of their entitlements under the trust. They will not have to put in place additional computer and other systems to comply with the notification requirements of the PAYG instalments legislation as currently enacted.

2.70 Beneficiaries of the affected trusts will have greater certainty as to how to work out their instalment income.

Administration costs

2.71 The proposed PAYG instalments amendments do not require a change to any of the administrative systems established by the ATO for the PAYG instalments regime. However, they will require changes to material prepared for use for taxpayer education about the regime.

Government revenue

2.72 The proposed amendments will result in a gain to revenue of $60 million in 2000-2001 and $5 million in subsequent years. The $5 million gain in the 2001-2002 year and subsequent years is attributable to growth in the investment industry. The $60 million arises because the revenue impact of the PAYG instalments regime as originally introduced into Parliament, so far as it related to beneficiaries of trusts, assumed that three-quarters of the income earned by trusts in the period 1 July 2000 to 30 June 2001 would be included in instalment income during that period. The other one-quarter was assumed to be collected in the period, 1 July 2001 to 30 June 2002 in the instalment payable on 21 July 2001. Therefore, in the 2001-2002 and subsequent years, a full year's trust income is collected through the PAYG instalments regime, being one-quarter of the trust's income of the previous year and three-quarters of the current year's trust income.

Economic benefits

2.73 By reducing the compliance costs faced by the trustees of investment unit trusts, the proposed PAYG instalments amendments ensure that the trustees and beneficiaries of those trusts do not incur higher administration costs. This ensures that the return on the funds invested by the affected trusts is not reduced by increased administration costs incurred by the investment trusts.

Other issues - consultation

2.74 The policy for these measures was developed with input from investment and financial services industry representatives. Draft legislation was also released to those representatives for their comment. The amendments have industry support.

Conclusion and recommended option

2.75 The PAYG instalments amendments should be adopted to reduce the compliance costs which would otherwise be incurred by the affected beneficiaries and trustees.

Chapter 3 CGT small business provisions

Outline of Chapter

3.1 Certain amendments in Schedule 3 to this Bill will make minor amendments to the small business capital gains tax (CGT) concessions in Division 152 of the Income Tax Assessment Act 1997 (ITAA 1997).

Background to the legislation

3.2 The streamlined small business CGT concessions were inserted into the ITAA 1997 by the New Business Tax System (Capital Gains Tax) Act 1999. Since then, unintended consequences to those concessions have been identified.

3.3 These amendments give effect to the Government's intended policy and are consistent with the Government's streamlined small business CGT concessions implemented in 1999.

Summary of new law

3.4 These amendments will improve the operation of the small business CGT concessions by clarifying and ensuring the provisions concerning these concessions have the intended consequences.

3.5 Some of the amendments will provide greater access to the provisions, and are beneficial to taxpayers. Other amendments will clarify certain aspects of the application of the provisions.

Detailed explanation of new law

Table 3.1: Summary of amendments
What the provision does What the amendment will do
Signposts provisions which disregard the 'market value substitution rule'. Insert a reference to section 139-20 which was inadvertently omitted when the Note was amended on introduction of the small business CGT concessions amendments.

[Schedule 3, item 1, subsection 116-30(1)]

Identifies basic conditions that must be met before being able to access the small business concessions. Background

A requirement that must be satisfied before the small business CGT concessions in Division 152 can apply to a capital gain is that the asset the capital gain relates to must be yours. While it is the intention to allow the concessions in Division 152 to apply to intangible assets, such as restrictive covenants, this requirement prevents this result because they are created in the other entity without being owned by the entity making the gain.

Enable intangible assets (such as restrictive covenants and other rights that are created in another entity) that are inherently connected with an entity's business to satisfy the ownership and active asset tests.

[Schedule 3, items 2, 3 and 5, section 152-12 and paragraphs 152-10(1)(a) and (d)]

Example 3.1 Bryan is a sole trader who operates a butchery business. He has agreed to sell the assets of his business to Fred's Meats. As part of the agreement Bryan undertakes not to operate a butchery business within 5 kilometres of the current business. In return for this undertaking Fred's Meats pays Bryan an amount of $10,000. The $10,000 is a capital gain arising from CGT event D1 as Bryan creates a right, being a restrictive covenant, in Fred's Meats. This right qualifies as an active asset because it is inherently connected with other CGT assets of Bryan's that satisfy the active asset test.

Excludes the small business concessions, except roll-over relief, from applying to CGT events J2 and J3 (these events crystallise a gain previously disregarded when circumstances change). Allow capital gains rolled over under the roll-over relief in Subdivision 152-E to become exempt when the small business retirement exemption conditions in Subdivision 152-D are met.

[Schedule 3, item 4, subsection 152-10(4)]

Includes in the $5 million net asset test the net value of CGT assets of an entity's small business affiliate or of an entity connected with a small business affiliate. Prevent assets that are assets of an entity connected with both the entity and the entity's small business affiliate from being included twice in the $5 million net asset test.

[Schedule 3, item 6, paragraph 152-15(a)(iii)]

Excludes particular assets from the small business $5 million net asset test. Ensure that assets of an entity connected with a small business entity's affiliate are excluded from the net asset test if they are not used in carrying on a business of the entity.

Example 3.2 Ray and Pat (husband and wife) operate a dairy farm.Pat also wholly owns Rural Homes Cleaning Ltd that operates a home cleaning business in the local town. Ray has no involvement with this business.Ray sells his interest in the dairy farm and seeks to claim the small business CGT concessions.In applying the $5 million net asset test, Ray does not include the net assets of Rural Homes Cleaning Ltd.

[Schedule 3, item 7, subsection 152-20(3)]

Describes the rules in determining the period an asset has been owned where it has been acquired to replace an asset that has been compulsorily acquired, lost or destroyed. Change the heading to accurately reflect the provision.

[Schedule 3, items 8 and 9, subsections 152-45(1) and 152-115(1)]

Describes the requirements for payments to CGT concession stakeholders to be exempt if the small business 15-year exemption has applied. Ensure that capital gains made by companies or trusts on pre-CGT active assets, held for at least 15 years, are exempt when distributed to CGT concession stakeholders.

[Schedule 3, item 10, subsection 152-125(1)]

Describes the requirements for the small business 50% reduction of capital gains made on small business active assets. Ensure that capital gains eligible for the small business retirement exemption and/or roll-over relief do not need to be reduced under Subdivision 152-C prior to applying those concessions. This might increase the exempt component of the eligible termination payment ultimately paid to the employee.

[Schedule 3, item 11, section 152-220]

Describes the requirements for the small business retirement exemption. Include money or property applied for the entity's benefit, rather than paid directly to the entity in calculating the amount of capital proceeds received for a CGT asset.

[Schedule 3, items 12 to 14, subsections 152-325(4) and (7) and paragraph 152-305(1)(b)]

Describes the small business roll-over relief rules where an individual who has obtained a roll-over dies. Ensure that exceptions to the provisions that crystallise rolled over gains are taken into account.

[Schedule 3, item 15, section 152-425]

Application and transitional provisions

3.6 The amendments will apply to CGT events that happen after 11.45 am, by legal time in the Australian Capital Territory, on 21 September 1999. This is the commencement date of the small business CGT concessions contained in Division 152 of the ITAA 1997. [Schedule 3, items 16 and 17]

Chapter 4 Minor CGT changes

Outline of Chapter

4.1 Certain amendments in Schedule 4 to this Bill will make corrections to the capital gains tax (CGT) provisions in the Income Tax Assessment Act 1997 (ITAA 1997) and the Income Tax (Transitional Provisions) Act 1997 (ITTP Act). Items 1 to 5 will make a correction to the Income Tax Assessment Act 1936 (ITAA 1936).

Background to the legislation

4.2 The CGT provisions in the ITAA 1936 were rewritten as part of the Tax Law Improvement Project (TLIP) and inserted into the ITAA 1997 by Tax Law Improvement Act (No. 1) 1998. The ITAA 1997 provisions apply to the 1998-1999 and later income years. Since the CGT rewrite was inserted into the ITAA 1997, unintended consequences to the CGT provisions have been identified which arose in the CGT rewrite process. Amendments are required to the ITAA 1997 and the ITTP Act. An unintended consequence also requires amendments to the ITAA 1936.

4.3 The amendments reinstate the position of the ITAA 1936 or make other minor amendments such as rectifying incorrect cross-references. Some of the amendments will reinstate a tax benefit to taxpayers which was inadvertently removed by the CGT rewrite. Conversely, other amendments will remove a tax benefit which inappropriately resulted from the process. None of the corrections change the policy reflected in the ITAA 1936.

4.4 These amendments are the third instalment of CGT rewrite refinements. The first instalment was in Taxation Laws Amendment Act (No. 4) 1999 and the second instalment is now before the Parliament in Taxation Laws Amendment Bill (No. 11) 1999.

Date of effect

4.5 With the exception of the amendments proposed by items 2, 6 and 30 all of the amendments will apply to assessments for the 1998-1999 income year and later income years [Schedule 4, item 65]. This date of effect reflects recommendation 5 of Joint Committee of Public Accounts and Audit (JCPAA) Report 356 (An Advisory Report on the Tax Law Improvement Bill (No. 2) 1997) which reads:

In correcting unintended consequences introduced by the Tax Law Improvement Bill (No. 2) 1997, the correction should be made retrospective to the commencement of the 1998-99 year of income, irrespective of whether the error had adversely affected the taxpayer or the revenue. This principle should remain in force for the first two years of the operation of the provisions of the Tax Law Improvement Act (No. 2) 1997.

4.6 The TLIP CGT amendments already made by the Taxation Laws Amendment Act (No. 4) 1999 have already applied (and those proposed to be made by the Taxation Laws Amendment Bill (No. 11) 1999 are proposed to apply) from the beginning of the 1998-1999 income year consistent with recommendation 5 of JCPAA Report 356.

4.7 The amendment proposed by item 2 (which relates to Part IVA of the ITAA 1936 and which favours taxpayers) will apply to schemes entered into after 3.00 pm, by legal time in the Australian capital Territory on 29 April 1997. This was the proposed application date for an amendment that earlier was not successfully made in consequence of the TLIP rewrite process.

4.8 Item 6 (relating to non-operative Guide material in Division 100 of the ITAA 1997 and which does not disadvantage taxpayers) does not have an application provision. Having an application provision would cause unneeded complexity by requiring 2 versions of the provision: the first until the commencement of Division 152 of the ITAA 1997 and the second afterwards.

4.9 The amendment proposed by item 30 (relating to the correction of a typographical error and which does not disadvantage taxpayers) will apply to things done on or after 1 July 1998, the date from which the correction needs to apply.

4.10 Items 46 and 50 (relating to the repealed and replaced CGT small business concessions in Subdivision 118-F and Division 123 of the ITAA 1997) have a special commencement provision to ensure that they can apply from the beginning of the 1998-1999 income year as intended. More detail on this point is included in the explanation for those items.

Detailed explanation of new law

Table 4.1: Amendments to the Income Tax Assessment Act 1936
What the provision does What the amendment will do
Part IVA - general anti-avoidance provisions. Ensure that intended consequential amendments to Part IVA include references to the rewritten CGT provisions are made.

Capital losses made in an income year before the 1998-1999 income year have the meaning given by Part IIIA of the ITAA 1936.

[Schedule 4, items 1 to 5]

Table 4.2: Amendments to the Income Tax Assessment Act 1997
What the provision does What the amendment will do
100-30(2) - Provides a guide to the types of CGT exemptions.

(1) Ensure that the correct number of exemptions categories is listed (4 not 5).

(2) Remove the reference to the category of exempt receipts as it is no longer relevant.

(3) Rename the category of exempt transactions as exempt or loss denying transactions to make it consistent with the heading of section 118-37.

(4) Amend the note so that it does not suggest that all CGT exemptions are in Division 118.

[Schedule 4, item 6]

103-5 - Provides that a payment, cost or expenditure can include the market value of property given (based on its market value) to the extent that a provision in the CGT law says that it does. Remove a possible ambiguity in the wording to ensure that section 103-5 applies as intended to the extent that a provision in the CGT law says that it applies (rather than to the extent that property is given).

[Schedule 4, item 7]

104-10(5)(b) - Describes the exceptions to CGT event A1 (disposal of a CGT asset). Ensure that the exception providing that a capital gain or loss for a CGT lease granted, renewed or extended before 20 September 1985 applies only to the lessor. At present, the provision is capable of technically being construed as applying also to assignees of a lessee's interest under a lease. The equivalent provision in the ITAA 1936 applied only to lessors. The amendment ensures the provision applies in the same way as the ITAA 1936.

[Schedule 4, item 8]

104-25(5)(b) - Describes the exceptions to CGT event C2 (cancellation, surrender and similar endings). Make an equivalent change for CGT event C2 to that explained for item 8.

[Schedule 4, item 9]

104-60(5)(b) - Describes when CGT event E2 (transferring a CGT asset to a trust) does not happen. Correctly reflect the ITAA 1936 by ensuring the exception to CGT event E2 in paragraph 104-60(5)(b) reflects the exception in subparagraph 160M(3)(a)(ii) of the ITAA 1936.

The exception applies where there is a transfer of an asset to a trustee to hold on terms of an existing trust where the only change that occurs is a change of trustee. This reflects a continuation of the approach taken in the ITAA 1936.

[Schedule 4, item 10]

104-70(2) - CGT event E4 (capital payment for trust interest). Ensure that non-assessable amounts are reduced by amounts repaid, consistent with the repaid rule for capital proceeds in section 116-50.

[Schedule 4, items 11 to 12]

104-70(5) - Describes the effect of a capital gain made from CGT event E4 on the cost base and reduced cost base of an interest or unit in a trust. Include a signpost to an additional transitional provision proposed by item 60.

[Schedule 4, item 13]

104-135(1A) and (1B) - CGT event G1 (capital payment for shares). Ensure that non-dividend amounts are reduced by amounts repaid, consistent with the repaid rule for capital proceeds in section 116-50. [Schedule 4, item 14]
104-135(3) - Describes the effect of a capital gain made from CGT event G1 on the cost base and reduced cost base of a company share. Include a signpost to an additional transitional provision proposed by item 61.

[Schedule 4, items 15 and 16]

104-150(1A) and (1B) - CGT event H1 (deposit forfeiture). Ensure that deposit amounts are reduced by amounts repaid, consistent with the repaid rule for capital proceeds in section 116-50.

[Schedule 4, item 17]

104-J - Heading for the Subdivision. More accurately reflect the content of the Subdivision.

[Schedule 4, item 18]

104-175(7) - Provides for an exception to CGT event J1 (company ceasing to be group member after roll-over). Reinstate the ITAA 1936 position by removing an arguable position that the subsection inappropriately prevents Division 149 and any other similar ungrandfathering provisions from applying.

[Schedule 4, item 19]

104-185(1)(a) - Describes when CGT event J2 (change of status of replacement asset) happens. Clarify that CGT event J2 happens if the asset ceases to be an active asset of the taxpayer.

[Schedule 4, item 20]

104-185(1) - Describes when CGT event J2 (change of status of replacement asset) happens.

(1) Renumber the existing note as note 1.

(2) Include a signpost to an additional transitional provision proposed by item 62.

[Schedule 4, item 22]

104-190(1) - Describes when CGT event J3 (change of circumstances where a share or interest is a replacement asset) happens. Include a signpost to an additional transitional provision proposed by item 62.

[Schedule 4, item 23]

104-205(3) - Describes the effect of a capital gain made from CGT event K1 on the cost base and reduced cost base of an item of intellectual property.

(1) Renumber the existing note as note 1.

(2) Include a signpost to an additional transitional provision proposed by item 63.

[Schedule 4, items 24 and 25]

108-50 - Provides for separate CGT asset treatment (e.g. for major capital improvements to pre-CGT assets). Provide a signpost to alert the reader to the fact that sections 124-595 (Crown lease roll-over) and 124-725 (prospecting or mining entitlement roll-over) can also provide for separate CGT asset treatment. At present, a reader could wrongly assume that Subdivision 108-D deals comprehensively with separate asset treatment.

[Schedule 4, item 26]

Division 109 - Provides acquisition rules for CGT assets. Clarify that Division 109 is not limited to the timing of acquisition of a CGT asset, by stating clearly that Division 109 provides for both how and when an asset is acquired.

See also item 58.

[Schedule 4, items 27 to 29]

109-55 (table item 9) - Describes the acquisition rules for bonus equities. Correct a typographical error by deleting the word not.

[Schedule 4, item 30]

Subdivision 110-A (section 110-40 onwards) - Provides rules for what does not form part of cost base. Ensure that for assets acquired at or after 7.30 pm, 13 May 1997, deductible expenditure is (for the first, fourth and fifth elements of cost base) initially included in the asset's cost base and is excluded when the CGT event happens. This treatment gives the taxpayer the benefit of any indexation component on that expenditure.

[Schedule 4, items 31 to 36]

112-97 - Lists CGT cost base modifications outside of the CGT provisions.

(1) Correct table items 10 and 11 which incorrectly state that sections 159GZZZBC and 159GZZZBD (CGT assets used in gold mining) modify the total cost base or reduced cost base when in fact they modify only the first element (acquisition consideration).

(2) Include a missing reference to section 159GZZZZE (infrastructure borrowings) of the ITAA 1936.

[Schedule 4, item 39]

112-115 - Lists replacement-asset roll-overs. Ensure that table item 1 correctly reflects the roll-over provisions in sections 122-40 to 122-65 by referring to the disposal or creation of assets by an individual or trustee to a wholly-owned company.

[Schedule 4, item 40]

116-75 - Provides that the capital proceeds from the expiry, surrender or forfeiture of a lease includes a payment by the lessor to the lessee (because of the lease ending) for the lessee's capital expenditure in improving the leased property. Correctly reflect the ITAA 1936 by omitting specific references to CGT event C2. These references incorrectly suggest that section 116-75 can apply only in relation to CGT event C2 when it can also apply in some cases in relation to CGT event A1 (disposals): see Taxation Ruling TR 1999/18.

This amendment will ensure that section 116-75 applies consistently with its predecessor in the ITAA 1936 (subsection 160ZV(1)).

[Schedule 4, item 41]

118-10 - Describes when capital gains and capital losses made from collectables and personal use assets are disregarded. Ensure that the provisions can interact with the cost base market value substitution rule in section 112-20.

[Schedule 4, items 42 and 43]

118-A - Describes the general exemptions to CGT. Reflect the ITAA 1936 by providing that a capital loss made by an exempt entity is disregarded.

[Schedule 4, item 44]

118-210(5)(a) - Identifies the CGT events for which the main residence exemption applies to a trustee for a dwelling acquired under a will. Reflect the ITAA 1936 by providing that CGT event E5 (beneficiary becoming entitled to a trust asset) is an event that attracts the trustee main residence exemption.

[Schedule 4, item 45]

Subdivision 118-F and the small business roll-over (Division 123) - Previously provided for the CGT retirement exemption. Ensure that the CGT small business concessions could apply, as intended, to capital gains arising from creating rights.

These amendments favour taxpayers and restore the position in the ITAA 1936.

The previous small business concessions in the ITAA 1997 had already applied to most CGT events involving creating rights inherently linked to carrying on a business.

This is because the concessions applied to capital gains from CGT events that happened in relation to a CGT asset.

For example, CGT events D2 (granting an option), D3 (granting a right to income from mining) and F1 (granting a lease) involve underlying assets which satisfy the nexus requirement that the CGT event happens in relation to the CGT asset.

CGT event D1 (creating contractual or other rights) also typically involves an underlying asset. For creating rights under a restrictive covenant, business goodwill is the relevant underlying asset.

CGT event D1, however, can apply where it the CGT event does not happen in relation to an underlying asset. This amendment, therefore, provides special rules for CGT event D1 to overcome this difficulty.

Subdivision 118-F and Division 123 have been repealed with effect from 21 September 1999 and have been replaced by Division 152 (small business relief).

These amendments are necessary to cover the period from the beginning of the 1998-1999 income year to when Division 152 first applied.

Special commencement provisions have been included to complement the application provision and to ensure that the amendment is effective, given that it relates to repealed provisions.

It is also proposed to make an equivalent amendment for Division 152.

[Schedule 4, item 46]

112-A (Heading) - Describes the CGT consequences of transferring ownership of an asset to a wholly-owned company. More accurately reflect the content of Subdivision 122-A by including a reference to trustees, consistent with section 122-15 providing that the roll-over applies to individuals and trustees.

[Schedule 4, item 47]

122-25(5) - Describes a test which must be met to allow a Subdivision 122-A roll-over. Reflect the ITAA 1936 by providing that the income of a company must not be exempt. At present, the requirement incorrectly applies only if the company is exempt under Division 50 (the main, but not the only, provisions conferring exemptions).

[Schedule 4, item 48]

122-135(5) - Describes a test which must be met to allow a Subdivision 122-B roll-over (disposal or creation of assets by partners to a wholly-owned company). Reflect the ITAA 1936 by providing that the income of a company must not be exempt. At present, the requirement incorrectly applies only if the company is exempt under Division 50 (the main, but not the only, provisions conferring exemptions).

[Schedule 4, item 49]

Former Division 123 - Previously provided for the CGT small business rollover. See explanation for the amendment proposed by item 46.

[Schedule 4, item 50]

124-140(1) - Describes when there is a roll-over of a capital gain made on a statutory licence. Correctly summarise the roll-over consequences in 'Note 1' where 2 or more licences may be converted into a single licence.

[Schedule 4, item 51]

126-50(4) - Describes a test which must be met for a roll-over to be allowed. Reflect the ITAA 1936 by providing that the income of a company must not be exempt. At present, the requirement incorrectly applies only if the company is exempt under Division 50 (the main, but not the only, provisions conferring exemptions).

[Schedule 4, item 52]

126-60(3) (Note) - Signposts Divisions that identify the rules for when a capital gain or loss made from a CGT asset acquired before 20 September 1985 is disregarded. Correctly reflect that Division 149 (when an asset stops being a pre-CGT asset on changes in underlying ownership) is not the only set of provisions that removes the exemption for pre-CGT assets.

[Schedule 4, item 53]

130-20(2) - Describes the first element of bonus equities' cost base. Correct a typographical error by changing the second note 3 to note 4.

[Schedule 4, item 54]

130-83(3) - Determines the date of acquisition of employee shares. Correctly reflect the ITAA 1936. At present this provision incorrectly results in a fresh acquisition of the asset.

[Schedule 4, item 55]

134-1 - Describes the effect of the exercise of an option on the option's cost base and reduced cost base. Provide a signpost to Subdivision 130-D and section 112-15 for options acquired under an employee share scheme.

[Schedule 4, item 56]

140-15(2) - Describes the circumstances in which a share value shift happens. State more directly that the reference to 'entity' is to an entity that is a controller (for CGT purposes) of the company.

[Schedule 4, item 57]

995-1(1) - Defines the term 'acquire'.

(1) Reflect the ITAA 1936 by clarifying that the term 'acquire' applies in relation to CGT assets only in their capacity as CGT assets.

(2) Clarify that the acquisition rules in Division 109 are not limited to the timing of acquisition of a CGT asset, but also extend to how an asset is acquired.

(3) Clarify that the definition extends to other acquisition rules signposted by Subdivision 109-B.

See also items 27 to 29.

[Schedule 4, item 58]

995-1(1) - Defines the term 'dispose of'. Reflect the ITAA 1936 by clarifying that the term 'dispose of' applies to CGT assets only in their capacity as CGT assets.

[Schedule 4, item 59]

Table 4.3: Amendments to the Income Tax (Transitional Provisions) Act 1997
What the provision does What the amendment will do
104-70(3) - Describes the effect of a capital gain made from CGT event E4 (capital payment for trust interest) on the cost base and reduced cost base of an interest or unit in a trust. Ensure that if a capital gain arose before the 1998-1999 income year under section 160ZM of the ITAA 1936, the cost base and reduced cost base are reduced to nil in the same way that they are reduced to nil if a capital gain arises under CGT event E4.

[Schedule 4, item 60]

104-135 - Describes the effect of a capital gain made from CGT event G1 (capital payment for shares) on the cost base and reduced cost base of a company share. Ensure that if a capital gain arose before the 1998-1999 income year under section 160ZL of the ITAA 1936, the cost base and reduced cost base are reduced to nil in the same way that they are reduced to nil if a capital gain arises under CGT event G1.

[Schedule 4, item 61]

104-185 and 104-190 (CGT events J2 and J3) - Describes when a capital gain rolled over under the ITAA 1936 can become assessable under the ITAA 1997. Accurately link the ITAA 1936 to the ITAA 1997 to enable CGT events J2 and J3 (change of status or circumstances for a replacement asset under the small business roll-over) to apply when the small business roll-over was allowed under the ITAA 1936. It will also enable these CGT events to apply when a small business roll-over was allowed under the former Division 123 of the ITAA 1997.

[Schedule 4, item 62]

104-205 - Describes the effect of a capital gain made from CGT event K1 (partial realisation of intellectual property right) on the cost base and reduced cost base of an item of intellectual property. Ensure that if a capital gain arose before the 1998-1999 income year under section 160ZZD of the ITAA 1936, the cost base and reduced cost base are reduced to nil in the same way that they are reduced to nil if a capital gain arises under CGT event K1.

[Schedule 4, item 63]

118-10(2) - Describes when a capital gain or loss made from an interest in collectables is disregarded. Correctly reflect the transitional provision needed to support the amendments proposed by item 42.

[Schedule 4, item 64]

Chapter 5 Technical amendment

Outline of Chapter

5.1 Schedule 5 to this Bill will make a minor technical amendment to the Income Tax Assessment Act 1997 (ITAA 1997) to remove an incorrect reference to 'foreign public official' in paragraph 26-53(2)(c).

Summary of the amendments

Purpose of the amendments

5.2 The purpose of the amendments is to remove a reference to 'foreign' public official in the section dealing with bribes to public officials.

Date of effect

5.3 The amendments will apply from the date of Royal Assent of Taxation Laws Amendment Act (No. 2) 2000.

Detailed explanation of new law

5.4 Item 1 removes a reference to 'foreign' in paragraph 26-53(2)(c) of the ITAA 1997. Measures relating to the denial of tax deductibility of bribes to foreign public officials were contained in Taxation Laws Amendment Bill (No. 8) 1999.

5.5A Senate amendment to these measures introduced a new section which extended the non-deductibility of bribes to Australian public officials. New section 26-53 , mirrored, in construction, section 26-52, with references to 'foreign public official' replaced by 'public official'. In paragraph 26-53(2)(c), however, a reference to 'foreign public official' was not replaced. Consequently, an amendment is needed to remove the incorrect reference to 'foreign'.

Chapter 6 Discount capital gains: integrity measures

Outline of Chapter

6.1 A capital gains tax (CGT) discount is available to an individual, complying superannuation entity and trust if the entity has made a discount capital gain. Schedule 6 to this Bill amends the CGT provisions in the Income Tax Assessment Act 1997 (ITAA 1997) to correct certain aspects of the CGT discount provisions.

Background to the legislation

6.2 Under the current law the CGT discount is not available:

for a capital gain arising from a CGT event happening to an equity interest in a company or trust if more than half of the assets of the company or trust were acquired within 12 months before the sale of the equity interest; or
if the capital gain is worked out using a cost base that includes indexation.

6.3 In certain situations these rules produce an inappropriate result. Schedule 6 modifies these rules, ensuring taxpayers can obtain the benefit of the CGT discount in appropriate circumstances.

Summary of new law

6.4 Section 115-45 of the ITAA 1997 is an integrity measure that ensures that the 12 month ownership test under the CGT discount rules is not undermined if a capital gain is made from a CGT event happening to an equity interest in a company or trust.

6.5 Amendments to section 115-45 will remove unintended applications of this integrity measure and allow the CGT discount where the 12 month ownership test is effectively satisfied.

6.6 In certain circumstances amendments to section 115-20 will allow a taxpayer to recalculate the cost base of an asset to exclude indexation in order to treat a capital gain as a discount capital gain.

Comparison of key features of new law and current law
New law Current law
Two additional conditions now apply before a capital gain on an equity interest is not a discount capital gain. That is:

the taxpayer (including associates) has at least 10% equity in the entity before the CGT event; and
the notional net capital gain made on assets held by the company or trust just before the CGT event, and acquired less than 12 months before, is greater than 50% of the notional net capital gain on all assets held by the company or trust at that time.

If any of the 3 conditions is not met, the gain is a discount capital gain.

Section 115-45 contains only one condition in determining whether a capital gain on an equity interest is not a discount capital gain. That is:

the cost bases of assets acquired by the company or trust within 12 months of the CGT event is more than half of the total of the cost bases of the CGT assets of the company or trust at that time.

Section 115-45 does not preclude a capital gain made because of CGT event E4 from being a discount capital gain, if the gain was a discount capital gain for the trustee. It is possible that section 115-45 may preclude a capital gain, made because CGT event E4 happens, from being a discount capital gain.
A taxpayer who is deemed to have a cost base element that includes indexation can recalculate their cost base to exclude the indexation in order for the capital gain to be a discount capital gain. A capital gain may not be a discount capital gain if the cost base used to calculate the gain included an indexation component as a result of the application of a provision which deemed an element of the cost base to include an indexation amount.

Detailed explanation of new law

Capital gains that are not discount capital gains

6.7 Section 115-45 operates to deny a CGT discount for a CGT event happening to a share in a company or an interest in a trust, if the CGT discount would not have been allowed if the taxpayer owned the underlying assets of the company or trust and a CGT event had happened to those assets.

6.8 The current test denies the discount if the total of the cost bases of CGT assets acquired by a non-widely held company or trust less than 12 months before the disposal of the membership interest is more than half the total of the cost bases of the CGT assets of the company or trust at that time. The test applies only to an entity with less than 300 equity holders.

6.9 Inappropriate tax consequences have been identified in applying the current test, denying the CGT discount for a capital gain from a CGT event happening to an equity interest in situations such as:

the disposal of an interest in a trading business with significant internally generated goodwill may fail the section 115-45 test as the goodwill has a negligible cost base while assets such as trading stock, cash and receivables, more likely to have been acquired in the previous 12 months, may have relatively higher cost bases;
the test may capture an asset acquired and disposed of in the 12 months before the CGT event; and
if an asset with a relatively high cost base has been purchased within the previous 12 months, a taxpayer may fail the test even though the unrealised gain on that asset may represent a negligible portion of the total unrealised gains on all the assets held by the entity.

6.10 Schedule 6 replaces section 115-45 and adds 2 further conditions to the existing cost base condition [Schedule 6, item 3, subsection 115-45(4)] to correct these inappropriate consequences. These conditions, which must be met before a capital gain is denied access to the CGT discount, are:

a de minimus condition requiring the taxpayer to have at least 10% of the equity in the entity before the CGT event (including any interests of associates); and
a notional capital gain condition, requiring the notional net capital gain made on assets held by the company or trust just before the CGT event, and acquired less than 12 months before, to be greater than 50% of the notional net capital gain on all assets held by the company or trust at that time.

[Schedule 6, item 3, subsections 115-45(3) and (5) to (7)]

6.11 The notional capital gain condition allows for CGT concessions to be taken into account when calculating the notional net capital gain for assets acquired less than 12 months before the CGT event and the notional net capital gain for assets held just before that CGT event. In calculating the latter notional net capital gain, capital gains and losses that would normally be disregarded, are included in the calculation. This treatment avoids the possibility of the condition being met because the company or trust owned pre-CGT assets with significant 'notional' capital gains and ensures that pre-CGT assets are not adversely affected.

6.12 It may not be necessary to apply all 3 conditions in section 115-45. If any one of the conditions is not met, the capital gain is a discount capital gain.

Example 6.1 Kate sold her 8% shareholding in Autumn Leaves Ltd (a non-widely held entity) making a capital gain of $10,000. Kate had owned the shares for 3 years.The de minimus condition in subsection 115-45(3) precludes section 115-45 from applying (Kate owned less than 10% of the equity in Autumn Leaves Ltd). This means that Kate has access to the CGT discount.

Example 6.2 Fred sold his 20% shareholding in Prestige Property Rentals Ltd (a non-widely held entity) making a capital gain of $25,000. Fred had owned the shares for 4 years. At the time of the sale Prestige Property Rentals Ltd owned the following assets:

Asset Period owned Cost base Market value
1 12 months $500 $1,200
2 12 months $8,000 $13,000
3 <12 months $2,000 $13,000
4 <12 months $30,000 $32,000
Applying the 3 conditions in section 115-45 produced the following results:De minimus condition - Fred owned 20% of the shares in Prestige Property Rentals Ltd (condition met).Cost base condition - $32,000 (cost base of less than 12 months assets) is greater than 50% of $40,500 (cost base of all assets) (condition met).Notional capital gain condition (assuming no CGT concessions available) - $13,000 (notional capital gain of less than 12 months assets) is greater than 50% of $18,700 (notional capital gain of all assets) (condition met).Section 115-45 applies to deny Fred access to the CGT discount.

Example 6.3 John was one of 3 shareholders in Top Gain Investments Ltd (a non-widely held entity) that was wound up on 1 June 2000. John had owned the shares for 5 years. On 30 March 2000 the liquidator sold 3 of the company's assets for $26,000 making a capital gain of $2,000. The remaining asset that had been owned for a number of years had a cost base of $8,000 and a market value of $13,000 at 1 June 2000. The company also held $26,000 cash from the sale of the assets at that time.On 1 June 2000 when the company was wound up John was paid $13,000 by the liquidator. John had a CGT event C2 in respect of his shares in the company and made a capital gain of $11,000.Applying the 3 conditions in section 115-45 produced the following results:De minimus condition - John owned 331/3% of the shares in Top Gain Investments Ltd (condition met).Cost base condition - $26,000 (cost base of less than 12 months assets) is greater than 50% of $34,000 (cost base of all assets) (condition met).Notional capital gain condition - nil (notional capital gain of less than 12 month assets) is not greater than 50% of $5,000 (notional capital gain of all assets) (condition not met).Section 115-45 does not apply to deny John access to the CGT discount.

6.13 In applying the conditions in section 115-45 it is appropriate that acquisition dates be preserved in situations where the assets of the company or trust are acquired under a same asset or replacement asset roll-over or through a deceased estate. The acquisition rules in section 115-30, providing the time when a company or trust is taken to have acquired such assets for the purposes of applying the CGT discount provisions, are extended to section 115-45. [Schedule 6, item 2, subsection 115-30(1)]

6.14 Currently, section 115-45 may prevent a capital gain made under CGT event E4 from being a discount capital gain, if the trust paying the non-assessable amount (the CGT discount allowed in the trust), fails the threshold tests in section 115-45. This is also an unintended consequence as any CGT event E4 gain arising from the payment of the CGT discount should be able to be a discount capital gain.

6.15 The CGT discount integrity rules are amended to ensure that, to the extent that the distribution is from a discount capital gain, section 115-45 will not prevent a capital gain arising on the happening of CGT event E4 to the interest holder from being a discount capital gain. [Schedule 6, item 4, section 115-60]

Indexation and discount capital gains

6.16 A capital gain cannot be a discount capital gain if any element of the cost base is indexed. If, for example, a person acquired an asset under a replacement asset roll-over, the cost base for that person becomes the first element of their cost base for the replacement asset. The original cost base may have included an indexation amount.

6.17 Currently, when a subsequent CGT event happens to this asset, a discount capital gain cannot be made, as the entity could not recalculate the cost base to exclude indexation.

6.18 The proposed amendment ensures that the cost base in these circumstances can be recalculated to exclude indexation if the application of another provision in the Income Tax Assessment Act 1936 (ITAA 1936) and the ITAA 1997 included indexation in the cost base. This will enable the entity to make a discount capital gain if the other tests are met. [Schedule 6, item 1, section 115-20]

Example 6.4 In 1995 Katherine acquired shares in Stinger Ltd under the roll-over provisions in section 160ZZN of the ITAA 1936. At that time Katherine was deemed to have acquired the shares for $5,600 being the indexed cost base of the assets she transferred to Stinger Ltd. The cost base of the assets at the time was $4,000. In April 2000 Katherine sold the shares for $15,000. Assuming the integrity measure in section 115-45 does not apply, Katherine's discount capital gain is $11,000 (capital proceeds $15,000 less cost base $4,000).

Capital gains from a CGT event

6.19 The general rule that a capital gain can only be made if a CGT event happens is modified if a beneficiary is taken to have made an extra capital gain under subsection 115-215(3) of the ITAA 1997. [Schedule 6, item 5, subsection 115-215(4)]

6.20 This subsection effectively excludes the capital gain amount from the share of the net income to which a beneficiary is presently entitled. The beneficiary is taken to have made an extra capital gain, which is a capital gain not made as a result of a CGT event happening to the beneficiary. After offsetting any capital losses against this gain and then applying the appropriate CGT concessions, the balance is included in the beneficiary's net capital gain for the year.

Application and transitional provisions

6.21 The amendments to Division 115 of the ITAA 1997 made by Schedule 6 apply to assessments for the income year including 21 September 1999 and all later years, in relation to CGT events happening after 11.45 am, by legal time in the Australian Capital Territory, on 21 September 1999. [Schedule 6, item 6]

Index

Schedule 1: Income tax deductions for gifts
Bill reference Paragraph no.
Item 1 1.16
Item 2 1.8
Item 3 1.22
Item 4 1.10, 1.20
Item 5 1.12, 1.14
Item 6 1.18

Schedule 2: Pay as you go (PAYG) instalments for certain beneficiaries of trusts
Bill reference Paragraph no.
Item 1, subsection 45-280(5) 2.25, 2.44
Item 1, subsection 45-280(6) 2.21
Item 1, paragraphs 45-280(6)(a) to (c) 2.22
Item 2, subsection 45-285(1) 2.27, 2.28
Item 2, paragraph 45-285(1)(a) 2.31
Item 2, paragraph 45-285(1)(b) 2.33
Item 2, paragraph 45-285(1)(c) 2.35
Item 2, paragraph 45-285(1)(d) 2.43
Item 2, subsection 45-285(2) 2.46
Item 2, paragraph 45-285(2)(a) 2.49
Item 2, paragraph 45-285(2)(b) 2.48
Item 2, paragraph 45-285(2)(c) 2.48
Item 2, paragraph 45-285(2)(d) 2.49
Item 2, subsection 45-285(3) 2.34
Item 2, subsection 45-287(1) 2.36
Item 2, subsection 45-287(2) 2.37
Item 2, subsection 45-287(3) 2.38
Item 2, paragraph 45-287(4)(a) 2.41
Item 2, paragraph 45-287(4)(b) 2.41
Item 2, paragraphs 45-288(a) to (e) 2.50
Items 3 and 4 2.53
Item 5 2.54

Schedule 3: CGT small business provisions
Bill reference Paragraph no.
Item 1, subsection 116-30(1) Table 3.1
Items 2, 3 and 5, section 152-12 and paragraphs 152-10(1)(a) and (d) Table 3.1
Item 4, subsection 152-10(4) Table 3.1
Item 6, paragraph 152-15(a)(iii) Table 3.1
Item 7, subsection 152-20(3) Table 3.1
Items 8 and 9, subsections 152-45(1) and 152-115(1) Table 3.1
Item 10, subsection 152-125(1) Table 3.1
Item 11, section 152-220 Table 3.1
Items 12 to 14, subsections 152-325(4) and (7) and paragraph 152-305(1)(b) Table 3.1
Item 15, section 152-425 Table 3.1
Items 16 and 17 3.6

Schedule 4: Minor CGT changes
Bill reference Paragraph no.
Items 1 to 5 Table 4.1
Item 6 to 59 Table 4.2
Item 60 to 64 Table 4.3
Item 65 4.5

Schedule 6: Discount capital gains: integrity measures
Bill reference Paragraph no.
Item 1, section 115-20 6.18
Item 2, subsection 115-30(1) 6.13
Item 3, subsection 115-45(4) 6.10
Item 3, subsections 115-45(3) and (5) to (7) 6.10
Item 4, section 115-60 6.15
Item 5, subsection 115-215(4) 6.19
Item 6 6.20


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