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 106

Division 106 - Entity making the gain or loss

Table of Subdivisions

Guide to Division 106

106-A Partnerships

106-B Bankruptcy and liquidation

106-C Absolutely entitled beneficiaries

106-D Security holders

Guide to Division 106

106-1 What this Division is about

This Division sets out the cases where a capital gain or loss is made by someone other than the entity to which a CGT event happens.

The entities affected are:

· partnerships (Subdivision 106-A);

· bankruptcy trustees and company liquidators (Subdivision 106-B);

· trustees where there is an absolutely entitled beneficiary (Subdivision 106-C);

· security holders (Subdivision 106-D).

Subdivision 106-A - Partnerships

106-5 Partnerships

(1) Any *capital gain or *capital loss from a *CGT event happening in relation to a partnership or one of its *CGT assets is made by the partners individually.

Each partner's gain or loss is calculated by reference to the partnership agreement, or partnership law if there is no agreement.

Example 1: A partnership creates contractual rights in another entity (CGT event D1). Each partner's capital gain or loss is calculated by allocating an appropriate share of the capital proceeds from the event and the incidental costs that relate to the event (according to the partnership agreement, or partnership law if there is no agreement).

Example 2: Helen and Clare set up a business in partnership. Helen contributes a block of land to the partnership capital. Their partnership agreement recognises that Helen has a 75% interest in the land and Clare 25%. The agreement is silent as to their interests in other assets and profit sharing.

When the land is sold, Helen's capital gain or loss will be determined on the basis of her 75% interest. For other partnership assets, Helen's gain or loss will be determined on the basis of her 50% interest (under the relevant Partnership Act).

(2) Each partner has a separate *cost base and *reduced cost base for the partner's interest in each *CGT asset of the partnership.

(3) If a partner leaves a partnership, a remaining partner *acquires a separate *CGT asset to the extent that the remaining partner acquires a share of the departing partner's interest in a partnership asset.

Note: The remaining partners would not be affected if the departing partner sells its interests to an entity that was not a partner.

Example: (Indexation is ignored for the purpose of this example).

John, Wil and Patricia form a partnership (in equal shares).

John contributes a building (which is a pre-20 September 1985 asset) having a market value of $200,000. Wil and Patricia contribute $200,000 each in cash.

The partnership buys another asset for $400,000.

John is taken to have disposed of 2/3 of his interest in the building (1/3 to Wil and 1/3 to Patricia). His remaining 1/3 share in the building remains a pre-CGT asset. The 1/3 shares that Wil and Patricia acquire are post-CGT assets.

Wil retires from the partnership when the partnership assets have a market value of $1,200,000 ($500,000 for the building and $700,000 for the other asset). John and Patricia pay Wil $400,000 for his interest in the partnership.

Wil has a capital gain of $100,000 on the building and $100,000 on the other asset. John and Patricia each acquire an additional 1/6 interest in the partnership assets. These additional interests are separate assets and post-CGT assets.

(4) If a new partner is admitted to a partnership:

(a) the new partner *acquires a share (according to the partnership agreement, or partnership law if there is no agreement) of each partnership asset; and

(b) the existing partners are treated as having *disposed of part of their interest in each partnership asset to the extent that the new partner has acquired it.

Example: (Indexation is ignored for the purpose of this example).

Lyn and Barry form a partnership, each contributing $15,000 to its capital. The partnership buys land for $30,000.

The land increases in value to $300,000.

Andrew is admitted as an equal partner, paying Lyn and Barry $50,000 each to acquire a 1/3 share in the land. His cost base is $100,000.

Lyn and Barry have each disposed of 1/3 of their interest in the land. Each has a cost base for that interest of $5,000, and capital proceeds of $50,000, leaving them with a capital gain of $45,000 each on Andrew's admission to the partnership.

The land is sold for its market value.

Andrew has no capital gain on the land.

Lyn and Barry have disposed of their remaining 2/3 original interest in the land for capital proceeds of $100,000, leaving each of them with a capital gain of:

$100,000 - ($15,000 - $5,000) = $90,000

Subdivision 106-B - Bankruptcy and liquidation

Table of sections

106-30 Effect of bankruptcy

106-35 Effect of liquidation

106-30 Effect of bankruptcy

(1) For the purposes of this Part and Part 3-3, the vesting of the individual's *CGT assets in the trustee under the Bankruptcy Act 1966 or under a similar foreign law is ignored.

(2) This Part and Part 3-3 apply to an act done in relation to a *CGT asset of an individual in these circumstances as if it had been done by the individual:

(a) as a result of the bankruptcy of the individual by the Official Trustee in Bankruptcy or a registered trustee, or the holder of a similar office under a *foreign law;

(b) by a trustee under a deed of assignment or arrangement made under Part X of the Bankruptcy Act 1966, or under a similar instrument under a foreign law;

(c) by a trustee as a result of an arrangement with creditors under that Act or a foreign law.

106-35 Effect of liquidation

This Part and Part 3-3 apply to an act done by a liquidator of a company, or the holder of a similar office under a *foreign law, as if the act had been done instead by the company.

Example: Ben, a liquidator of a company, sells a CGT asset of the company. Any capital gain or loss is made by the company, not by Ben.

Subdivision 106-C - Absolutely entitled beneficiaries

106-50 Absolutely entitled beneficiaries

If you are absolutely entitled to a *CGT asset as against the trustee of a trust (disregarding any legal disability), this Part and Part 3-3 apply to an act done by the trustee in relation to the asset as if you had done it.

Subdivision 106-D - Security holders

106-60 Acts by security holders

This Part and Part 3-3 apply to an act done by an entity (or an agent of the entity) in relation to a *CGT asset for the purpose of enforcing or giving effect to a security, charge or encumbrance the entity holds over the asset as if the act had been done instead by the person who provided the security.

Example: A lender sells property under a power of sale after the failure of the owner of the property to make payments on the loan. Any capital gain or loss is made by the owner of the property, not the lender.