Tax Law Improvement Act (No. 1) 1998 (46 of 1998)

Schedule 1   Amendment of the Income Tax Assessment Act 1997

1   Part 3-1 Division 116

Division 116 - Capital proceeds

Guide to Division 116

116-1 What this Division is about

This Division tells you how to work out what the capital proceeds from a CGT event are. You need to know this to work out if you made a capital gain or loss from the event.

Table of sections

116-5 General rules

116-10 Modifications to general rules

General rules

116-20 General rules about capital proceeds

Modifications to general rules

116-25 Table of modifications to the general rules

116-30 Market value substitution rule: modification 1

116-40 Apportionment rule: modification 2

116-45 Non-receipt rule: modification 3

116-50 Repaid rule: modification 4

116-55 Assumption of liability rule: modification 5

Special rules

116-65 Disposal of a CGT asset the subject of an option

116-70 Option requiring both acquisition and disposal

116-75 Special rule for CGT event C2 happening to a lease

116-80 Special rule if CGT asset is shares or an interest in a trust

116-85 Section 47A of 1936 Act applying to rolled-over asset

116-95 Company changes residence from an unlisted country

116-5 General rules

Section 116-20 sets out the general rules about capital proceeds. They are relevant to each CGT event that is listed in the table in section 116-25.

116-10 Modifications to general rules

(1) There are 5 modifications to the general rules that may be relevant. The table in section 116-25 lists which ones may be relevant to each CGT event listed in the table.

Explanation of modifications

(2) The first is a market value substitution rule. It is relevant if:

• you receive no capital proceeds from a CGT event; or

• some or all of the capital proceeds cannot be valued; or

• you did not deal at arm's length with another entity in connection with the event.

(3) The second is an apportionment rule. It is relevant if a payment you receive in connection with a transaction relates in part only to a CGT event.

Example: You sell 3 CGT assets for a total of $100,000. The $100,000 needs to be apportioned between the 3 assets.

(4) The third is a non-receipt rule. It is relevant if you do not receive, or are not likely to receive, some or all of the capital proceeds from a CGT event.

(5) The fourth is a repaid rule. It is relevant if you are required to repay some or all of the capital proceeds from a CGT event.

(6) The fifth is relevant only if another entity assumes a liability in connection with a CGT event.

Note: Also, these provisions of the Income Tax Assessment Act 1936 modify capital proceeds:

· sections 159GZZZF and 159GZZZG (cancellation of shares in a holding company);

· sections 159GZZZQ and 159GZZZS (buy-backs of shares);

· sections 401, 422, 423 and 461 (CFC's);

· section 613 (foreign investment funds).

[This is the end of the Guide]

General rules

116-20 General rules about capital proceeds

(1) The capital proceeds from a *CGT event are the total of:

(a) the money you have received, or are entitled to receive, in respect of the event happening; and

(b) the market value of any other property you have received, or are entitled to receive, in respect of the event happening (worked out as at the time of the event).

Note 1: The timing rules for each event are in Division 104.

Note 2: In some situations you are treated as having received money or other property, or being entitled to receive it: see section 103-10.

Note 3: If you dispose of shares in a buy-back, the capital proceeds are worked out under Division 16K of the Income Tax Assessment Act 1936.

(2) This table sets out what the capital proceeds from *CGT events F1, F2 and H2 are:

(3) In working out the market value of the property the subject of the grant, renewal or extension of a long-term lease:

(a) include the market value of any building, part of a building, structure or improvement that is treated as a separate *CGT asset from the property; and

(b) disregard any *plant for which the lessor has deducted or can deduct an amount for depreciation under this Act.

Note: Subdivision 108-D sets out when a building, structure or improvement is treated as a separate CGT asset.

(4) In working out the amount of any premium paid or payable to the lessor for the grant, renewal or extension of a long-term lease, disregard any part of it that is attributable to *plant of that kind.

The payment of any premium can include giving property: see section 103-5.

Modifications to general rules

116-25 Table of modifications to the general rules

There are 5 modifications to the general rules that may be relevant to a *CGT event. This table tells you:

• each *CGT event for which the general rules about *capital proceeds are relevant; and

• the modifications that can apply to that event; and

• any special rules that apply to that event.

116-30 Market value substitution rule: modification 1

No capital proceeds

(1) If you received no *capital proceeds from a *CGT event, you are taken to have received the market value of the *CGT asset that is the subject of the event. (The market value is worked out as at the time of the event.)

Example: You give a CGT asset to another entity. You are taken to have received the market value of the CGT asset.

There are capital proceeds

(2) The *capital proceeds from a *CGT event are replaced with the market value of the *CGT asset that is the subject of the event if:

(a) some or all of those proceeds cannot be valued; or

(b) those capital proceeds are more or less than the market value of the asset and:

(i) you and the entity that *acquired the asset from you did not deal with each other at arm's length in connection with the event; or

(ii) the CGT event is the redemption, release, abandonment, surrender, forfeiture or cancellation of the asset.

(The market value is worked out as at the time of the event.)

Note: The matters set out in subparagraph (2)(b)(ii) are examples of CGT event C2.

Market value for CGT event C2

(3) Subsection (1) does not apply to:

(a) these examples of *CGT event C2:

(i) the expiry of a *CGT asset you own;

(ii) the cancellation of your statutory licence; or

(b) *CGT event D1 (about creating contractual or other rights).

(3A) If you need to work out the market value of a *CGT asset that is the subject of *CGT event C2, work it out as if the event had not occurred and was never proposed to occur.

Example: A company cancels shares you own in it. You work out the market value of the shares by disregarding the cancellation.

CGT assets the subject of certain events

(4) To avoid doubt, the *CGT asset that is the subject of a *CGT event specified in this table is the asset so specified.

116-40 Apportionment rule: modification 2

(1) If you receive a payment in connection with a transaction that relates to more than one *CGT event, the capital proceeds from each event are so much of the payment as is reasonably attributable to that event.

Example: You sell a block of land and a boat for a total of $100,000. This transaction involves 2 CGT events.

The $100,000 must be divided among the 2 events. The capital proceeds from the disposal of the land are so much of the $100,000 as is reasonably attributable to it. The rest relates to the boat.

(2) If you receive a payment in connection with a transaction that relates to one *CGT event and something else, the capital proceeds from the event are so much of the payment as is reasonably attributable to the event.

Example: You are an architect. You receive $70,000 for selling a block of land and giving advice to the new owner. This transaction involves one CGT event: the disposal of the land.

The capital proceeds from the disposal of the land is so much of the $70,000 as is reasonably attributable to that disposal.

(3) The payment can include giving property: see section 103-5.

116-45 Non-receipt rule: modification 3

(1) The *capital proceeds from a *CGT event are reduced if:

(a) you are not likely to receive some or all (the unpaid amount ) of those proceeds; and

(b) this is not because of anything you (or your *associate) have done or omitted to do; and

(c) you took all reasonable steps to get the unpaid amount paid.

The *capital proceeds are reduced by the unpaid amount.

Note: This rule exists because the general rules treat you as having received an amount when you are entitled to receive it.

Example You sell a painting to another entity for $5,000 (the capital proceeds). You agree to accept monthly instalments of $100.

You receive $2,000, but then the other entity stops making payments. It becomes clear that you are not likely to receive the remaining $3,000. The capital proceeds are reduced to $2,000.

(2) There is a further consequence if:

(a) those proceeds are reduced by the unpaid amount; but

(b) you later receive a part of that amount.

Those proceeds are increased by that part.

(3) This Part and Part 3-3 apply to the debt owed to you (the unpaid amount) as if it were not a *CGT asset.

116-50 Repaid rule: modification 4

(1) The *capital proceeds from a *CGT event are reduced by:

(a) any part of them that you repay; or

(b) any compensation you pay that can reasonably be regarded as a repayment of part of them.

However, the *capital proceeds are not reduced by any part of the payment that you can deduct.

Example: You sell a block of land for $50,000 (the capital proceeds). The purchaser later finds out that you misrepresented a term in the contract. The purchaser sues you and the court orders you to pay $10,000 in damages to the purchaser.

The capital proceeds are reduced by $10,000.

(2) The payment can include giving property: see section 103-5.

116-55 Assumption of liability rule: modification 5

The *capital proceeds from a *CGT event are increased if another entity *acquires the *CGT asset (the subject of the event) subject to a liability by way of security over the asset.

They are increased by the amount of the liability the other entity assumes.

Example: You sell land for $150,000. You receive $50,000 (the capital proceeds) and the buyer becomes responsible for a $100,000 liability under an outstanding mortgage. The capital proceeds are increased by $100,000 to $150,000.

Special rules

116-65 Disposal of a CGT asset the subject of an option

If you *dispose of a *CGT asset because another entity exercises an option you granted in relation to the asset, the *capital proceeds from the disposal include any payment you received for granting the option.

The payment can include giving property: see section 103-5.

Note: This situation is an example of CGT event A1.

116-70 Option requiring both acquisition and disposal

If an option you granted requires you both to *acquire and *dispose of a *CGT asset, the option is treated as 2 separate options and half of the *capital proceeds from the grant is attributed to each option.

116-75 Special rule for CGT event C2 happening to a lease

The *capital proceeds from the expiry, surrender or forfeiture of a lease (an example of *CGT event C2) include any payment (because of the lease ending) by the lessor to the lessee for expenditure of a capital nature incurred by the lessee in making improvements to the leased property.

The payment or expenditure can include giving property: see section 103-5.

116-80 Special rule if CGT asset is shares or an interest in a trust

(1) This section sets out what happens if:

(a) there is a fall in the market value of a *personal use asset (other than a car, motor cycle or similar vehicle) or a *collectable of a company or trust; and

(b) *CGT event A1, C2 or E8 happens to:

(i) *shares you own in the company (or in a company that is a member of the same *wholly-owned group); or

(ii) an interest you have in the trust.

Note: The full list of CGT events is in section 104-5.

(2) The *capital proceeds from the event are replaced with the market value of the *shares, or the interest in the trust.

The market value is worked out as at the time of the event as if the fall in market value of the *personal use asset or *collectable had not occurred.

Note: You may also make a collectable loss: see CGT event K5.

116-85 Section 47A of 1936 Act applying to rolled-over asset

(1) You reduce the *capital proceeds from a *CGT event that happens in relation to a *CGT asset you have if the conditions in this table are satisfied.

Note: For roll-overs: see Divisions 122, 124 and 126.

(2) The reduction is the lesser of:

(a) the amount of the dividend; and

(b) the amount of any *capital gain that, apart from the roll-over, the company or *CFC would have made from the *CGT event if its *capital proceeds from the event had been the asset's market value (at the time of the event).

(3) The amount of that *capital gain is worked out:

(a) for the company - under this Part and Part 3-3; or

(b) for the *CFC - under this Part and Part 3-3 in their application for the purpose of calculating the *attributable income of the CFC in relation to the entity referred to in paragraph (b) of condition 3 in the table in subsection (1).

Note: This section is disregarded in calculating the attributable income of a CFC: see section 410 of the Income Tax Assessment Act 1936.

116-95 Company changes residence from an unlisted country

(1) This section sets out what happens if:

(a) a *CFC ceases at a time (the residency change time ) to be a resident of an *unlisted country and becomes a resident of a *listed country; and

(aa) subsection 457(3) of the Income Tax Assessment Act 1936 does not apply to the change of residence; and

(b) because of the change in its residency status, an amount is included in an entity's assessable income under section 457 of the Income Tax Assessment Act 1936 (including because of paragraph 58(1)(d) of the Taxation Laws Amendment (Foreign Income) Act 1990); and

(c) a *CGT event happens in relation to a *CGT asset (the CFC asset ) that has the *necessary connection with Australia and that the CFC owned since the residency change time.

(2) If the conditions in subsection (3) are satisfied, the *capital proceeds from the *CGT event are reduced by the amount worked out under subsection (4). If the conditions in subsection (5) are satisfied, those capital proceeds are increased by the amount worked out under subsection (6).

Reduction of capital proceeds

(3) If all the *CFC's assets were *disposed of at the residency change time for their market values in the circumstances mentioned in subparagraph 457(2)(a)(i) of the Income Tax Assessment Act 1936:

(a) *distributable profits of the CFC of a particular amount (the distributable profit amount ) would be created, or its distributable profits would be increased by an amount (also the distributable profit amount ); and

(b) the CFC would have made a profit (the CFC asset profit ) on the disposal of the CFC asset.

(4) The *capital proceeds are reduced by:

Distributable profit amount * (CFC asset profit / Total asset profits)

where:

total asset profits is the sum of the profits that the CFC would have made if all its assets were *disposed of at the residency change time for their market values (ignoring disposals that would not result in a profit).

Increase in capital proceeds

(5) If all the *CFC's assets were *disposed of at the residency change time for their market values in the circumstances mentioned in subparagraph 457(2)(a)(i) of the Income Tax Assessment Act 1936:

(a) the *distributable profits of the CFC would be reduced by an amount (the distributable profit reduction amount ); and

(b) the CFC would have made a loss (the CFC asset loss ) on the disposal of the CFC asset.

(6) The *capital proceeds are increased by:

Distributable profit reduction amount * (CFC asset loss / Total asset losses)

where:

total asset losses is the sum of the losses that the CFC would have made if all its assets were *disposed of at the residency change time for their market values (ignoring disposals that would not result in a loss).

Note: This section is disregarded in calculating the attributable income of a CFC: see section 410 of the Income Tax Assessment Act 1936.