NTLG Losses and CGT Sub-committee minutes - 9 June 2004

Meeting details

Next meeting: Wednesday, 10 November 2004 (Melbourne).

Previous meeting: Losses session - Friday, 7 November 2003 (Sydney).

CGT session - Wednesday, 12 November 2003 (Melbourne).

Attendees

Australian Taxation Office
(Tax Office) and Treasury

Professional Bodies

Apologies

Mr Glenn Davies (Chair)

Ms Linda Skinner

Ms Deborah Boyd

Mr David Holz

Mr Martin Keating

Mr Malcolm Allen

Mr Anthony Marvello

Mr Grahame Hager

Mr John Burge (Treasury)

Mr Tony Regan (Treasury)

Mr Andrew Orme (Treasury)

Ms Anne McCarthy (Treasury)

Ms Deb Morrison (Secretary)

Mr Nick Seal (Secretary)

Consolidations (11am - 1pm)

Mr Scott Burrows

Mr Jim Targett

Ms Annamaria Carey, Law Council of Australia (LCA)

Mr Lance Cunningham, National Institute of Accountants (NIA)

Mr Robert Warnock, National Tax and Accountants Association (NTAA)

Ms Karen Smith, Institute of Chartered Accountants (ICAA)

Mr Anthony Stolarek, ICAA

Mr Mark Ferrier, ICAA

Mr Carlo Moretti, Taxation Institute of Australia (TIA)

Consolidations (11am - 1pm)

Ms Anne Edwards, CPA Australia (CPAA)

Mr Craig McCormick, HBL MannJudd

Mr Geoff Lehmann, TIA

Mr Adrian Green

PriceWaterhouseCoopers (PWC)

Mr Matthew Hayes, TIA

Mr Ken Spence, TIA - conference caller

Mr Peter Murray, TIA - conference caller

Mr Andrew Jackson, Australian Bankers Association (ABA) - conference caller

Mr John Brazzale, CPAA

Mr Garry Addison, CPAA

Opening comments

Mr Davies (Tax Office) opened and chaired the meeting.

Apologies: as noted.

[H2]Minutes of November 2003 subcommittee meetings

The minutes of the previous meetings held in Sydney on 7 November 2003 (losses session) and Melbourne on 11 November 2003 (CGT session) were confirmed subject to the clarification of the answer in 8.3 (d) of the CGT session.

Update

The minutes of the 11 November 2003 CGT session have been updated at item 8.3(d) and published on the Tax Office website.

Additional items

An additional agenda item was tabled concerning certain CGT implications of the recent High Court decision in Commissioner of Taxationv. Hart [2004] HCA 26.

It has been suggested that investors in split loan arrangements who are subject to the operation of Part IVA may be entitled to include the disallowed interest in the cost base of the investment property as a 'non capital cost of ownership' under subsection 110-25(4).

Can the Tax Office comment on this suggestion?

Comments

The CGT implications of the Hart decision are being considered as a matter of priority.

Action item

The subcommittee will be advised when a view has been reached.

Update

TR 98/22 considers this issue, and has now been partially withdrawn. A new ruling is being prepared.

Updates on action items

2.1 Updates on action items from 12 November 2003 (CGT session) - Tax Office

Technical Issues Management Subcommittee (TIMS)

The TIMS has endorsed a process for sponsoring technical amendments. Issues should be escalated to Treasury via a joint submission from a representative of the professional bodies and the Tax Office. To initiate consideration of a particular technical amendment, professional body representatives are requested to complete the TIMS template.

Consolidations and scrip for scrip

The Tax Office advised that there was no administrative solution to the issue involving cost base push-down where the significant or common stakeholder rules in the scrip for scrip provisions had applied to limit the acquisition cost of the acquiring entity's shares.

The matter has been referred to the Consolidation Centre of Expertise for further consideration.

Demergers and Part IVA

3.1 Sections 45A, 45B and 45C guidance materials - ICAA

Where sections 45A, 45B and 45C of the Income Tax Assessment Act 1936 are concerned, there currently does not seem to be adequate Tax Office guidance available setting out its views on the application of these provisions - which compounds the problems arising from delays in obtaining rulings. Some indication of Tax Office thinking can be gauged from the various Class Rulings, which have issued for specific deals in recent times, but these rulings do not provide sufficient insight into the background circumstances to guide tax practitioners working on other transactions. The lack of any established criteria for the practical application of these provisions means that a 'safety first' approach of seeking a ruling from the Tax Office is now the usual course of action. Public guidelines from the Tax Office may in some instances remove the need to apply to the Tax Office for a ruling where the corporate restructure is clearly within an established 'safe harbour' framework.

In addition, with the introduction of demergers, the relevant provisions in the income tax law are likely to impact on a broader range of taxpayers.

Is the Tax Office in the process of preparing any guidance materials setting out its views on the application of these provisions in this strategic area?

Comments

The Tax Office advised at the September 2003 meeting of the NTLG, that it proposed to release a Law Administration Practice Statement (LA PS) on the application of section 45B to demergers. The release of the Practice Statement has been delayed to ensure that the range of issues arising out of the demerger transactions that have occurred to date, or that are currently being contemplated, are addressed. The LA PS is expected to issue in July 2004.

Update

A draft practice statement addressing the issue has been prepared and released to the NTLG members for comment. Subcommittee members interested in participating in the review of the draft can do so by contacting a member representing their professional association on the NTLG.

CGT event D1 and Debt/Equity measures

4.1 CGT Event D1 and Redeemable Preference Shares (RPS) - ICAA

Reference is made to Agenda item 1.0 from the NTLG-Finance and Investment subcommittee meeting of 10 February 2004 (attached as Appendix 1 in the Agenda) concerning the interpretation of ss104-35(5)(c) as a result of New Business Tax System (Debt and Equity) Act 2001.

From the minutes of that meeting, it is understood that the Tax Office is reconsidering whether an interpretative solution is available. Failing that, a minute was to be prepared jointly by the CGT Centre of Expertise and the Finance & Investment Centre of Expertise.

Is the Tax Office able to provide the NTLG Losses and CGT subcommittee with an update in this regard, given that it concerns CGT Event D1?

Comments

The Tax Office has reviewed the issue, but as it has been unable to find an acceptable interpretative or administrative solution, it has made formal representations to Treasury.

Representations have been made to the Policy Implementation Forum (PIF) concerning the administration of ss104-35(5)(c) and whether a taxpayer is required to assess in accordance with the current law or self-assess in anticipation of any changed law.

Action item

The subcommittee will be advised once an outcome is confirmed.

Update

The Minister for Revenue and Assistant Treasurer issued Press Release number CO68/04 on 5 August 2004. A link to the Treasury website was sent out to subcommittee members the same day.

The press release and associated documentation state, among other things, that the Government proposes to introduce amending legislation to extend the present exception to CGT events D1 and H2 to cover the issue or allotment of non-equity shares. These amendments are proposed to be back-dated to 1 July 2001, the commencement date of the debt/equity provisions.

Following the press release, the PIF has advised that taxpayers can self-assess in anticipation of the proposed amendments. Refer to the Tax Office website at Administrative Treatment of Retrospective Legislation

 

Parliament was prorogued on 31 August 2004. The current government is in caretaker mode and the Tax Office will follow the caretaker conventions issued by the Department of Prime Minister and Cabinet.

The Tax Office is unable to advise about the probability of particular government announcements of proposals to change the tax laws (not introduced before the Parliament was prorogued) being introduced by an incoming government.

Consolidations (11am to 1pm)

5.1 Tax cost setting amounts and elements of cost base and reduced cost base for capital gains tax purposes - ICAA

The Tax Office has issued ATO ID 2004/238 which states that when a subsidiary exits the group, and the tax cost of its shares is reset, the tax cost setting amount on exit is to be included in the first element of cost base for the shares (based on existing legislation).

Can incidental costs that accrue in respect of the exit be included in the second element? This issue is not specifically addressed in the ATO ID.

Comments

Refer to issue 13 in the consolidation issues listed at Attachment A .

Update

ATO ID 2004/500 was published on 18 June 2004. It states that incidental costs as defined in paragraph 110-35(1)(b) of the ITAA 1997, paid to an entity that is not a member of the consolidated group, can be included in the cost base and reduced cost base of membership interests in a leaving subsidiary, provided the costs have been incurred in relation to the CGT event that happens on the subsidiary's leaving the group.

5.2 Recognition of third party costs incurred in an intra-group transaction that is disregarded under the single entity rule - ICAA

A more important issue which is arising already on corporates selling subsidiaries out of consolidated groups is whether incidental costs that relate to an intra-group transfer during consolidation can be included in cost base. We think that this issue can be addressed based on existing legislation (although there appear to be some tensions with s.110-25(3)), or by extending the ATO ID.

In our view costs incurred with a third party, in respect of an intra-group transaction should be recognised for tax purposes, either during consolidation (for example, if the expenditure would otherwise be deductible - e.g. borrowing costs, tax advice etc) or should be recognised in the tax cost of the asset at the time the asset exits the group (for stamp duty and other costs that form part of the 'cost' of the asset).

This issue seems similar to Issue # 11 on the NTLG single entity rule issues register. We would like to discuss whether this issue can be clarified firmly in time for consolidated groups to properly calculate their CGT cost bases on existing subsidiaries.

Comments

Refer to issue 18 in the consolidation issues listed at Attachment A .

The Consolidation Centre of Expertise is working towards a final position on this issue.

5.3 Consolidation issues - Tax Office

Mr Davies welcomed to this session Messrs Burrows and Targett from the Consolidations Centre of Expertise and representatives of the NTLG Consolidations subcommittee (those present in person and conference callers).

The subcommittee was briefed on some 26 issues, not intended to be an exhaustive list, involving the interaction between consolidations and CGT being considered by the Tax Office. A summary of these issues, along with a summary of comments provided by subcommittee members, are set out in Attachment A .

Issues 1 to 12 have a proposed Tax Office view on which draft TDs have been developed and are awaiting final sign-off. As these draft TDs are at an advanced stage, they will not be changed to reflect comments made by subcommittee members before they issue as drafts. However, any such comments will be noted and will be taken into account as part of the usual consultation process following the release of the drafts.

Issues 13 to 26 are more contentious issues and the Tax Office is continuing to work towards a position. A phone hook-up will be convened to progress these issues and interested members will be invited to participate. Arrangements for the hook-up will be notified.

The Tax Office advised that it is not in a position to commit to a deadline in respect of reaching a position on issues 13 to 26. It is anticipated that the release of the Tax Office view would coincide with the release of the consolidation ruling on the meaning of 'asset' for consolidation purposes

A number of the issues concern the extent to which the single entity rule can give way to the operation of other rules, thereby allowing for the recognition of intra-group interests in a consolidated group ( TR 2004/D2 ). The role and scope of Section 701-85 may also be relevant in this context.

Update

Final TDs have been issued in relation to issues 1 to 12. They are available on the legal database. Attachment A contains links to these TDs.

In respect of issues 13 to 26, a phone hook-up was held 4 August 2004. The specific issues considered were:

n Whether a 'new event' happens for Subdivision 170-D purposes if:

a. the originating company for the pre-consolidation 'deferral event' leaves the group, but the asset remains within the group (issue 21); and

b. the pre-consolidation 'deferral event' happened on the transfer of shares in a company, and post-consolidation, that company is deregistered following a liquidation process (issue 22).

n Whether the exemption in section 152-125 can apply to a payment to an individual who is a concession stakeholder of the head company if the payment relates to an exemption obtained by the head company in relation to a capital gain on an asset owned by a subsidiary member (issue 26).

n The application of the CGT and consolidation rules if an entity contracts to buy [sell] a CGT asset before joining a consolidated group and the contract settles thereafter (issues 15 and 16).

n The application of the CGT and consolidation rules if an entity contracts to buy [sell] a CGT asset while a member of a consolidated group and the contract settles thereafter (issues 23 and 24).

n Draft Tax Determinations have been published in respect of issues 15, 16, 21, 22, 23 and 26 and one will be published soon for issue 24. Attachment A contains links to these TDs.

In addition the following TD has been published on an issue not listed in Attachment A:

n TD 2004/D67 - Income tax: consolidation: capital gains: if an entity makes a capital gain prior to becoming a subsidiary member of a consolidated group, can it choose to apply the small business replacement asset roll-over under Subdivision 152-E of the Income Tax Assessment Act 1997 if it acquires a replacement asset after it has joined the consolidated group?

TDs that have recently been issued on other related consolidation issues include:

n TD 2004/33 - Income tax: consolidation: capital gains: does a CGT event happen to the head company of a consolidated group if a debt is created within the consolidated group and later transferred to a non-group entity? (previously issued as TD 2004/D23).

n TD 2004/34 - Income tax: consolidation: capital gains: does section 104-10 (CGT event A1) of the Income Tax Assessment Act 1997 apply to the head company of a consolidated group where an option granted within the consolidated group is later transferred to a non-group entity? (previously issued as TD 2004/D24).

n TD 2004/35 - Income tax: consolidation and capital gains tax: does section 104-10 (CGT event A1) of the Income Tax Assessment Act 1997 apply to the head company of a consolidated group where a license granted within the consolidated group is later transferred to a non-group entity for no capital proceeds? (previously issued as TD 2004/D42).

Cost base

6.1 Definition of '*controller (for CGT purposes)' - ICAA

The terms '*controller (for CGT purposes)' is used in s110-55(7) of the ITAA 1997 - which concerns the reduction of the reduced cost base for shares in regard to certain pre-acquisition profits.

The definition in s995-1 states:

Controller (for CGT purposes): an entity is a controller (for CGT purposes) of a company in the circumstances mentioned in section 140-20.

Division 140 was repealed by Act No. 90 of 2002. However, the definition may still be relevant because there is a saving provision, which specifies that Division 140 continues to apply to schemes to which Division 725 (value shifting) does not.

The definition of '*controller (for CGT purposes)' relies on the definition of '*associate inclusive control interest' and the definition of that term in s995-1 has been repealed - even though it would seem that technically it continues to exist in s140-22 due to the saving provision referred to above. The Bill that repealed Division 140 repealed the definition of '*associate inclusive control interest', inserted a new definition of 'control (for value shifting purposes)', but did not repeal the definition of 'controller (for CGT purposes)'.

Can the Tax Office please comment on the above and in particular, indicate their view as to how the '*controller (for CGT purposes)' phrase is to be interpreted in the light of the amendments made by Act No. 90 of 2002?

Comments

The broad effect of items 11 and 15 of Schedule 15 of the New Business Tax System (Consolidated, Value Shifting, Demergers and Other Measures) Act 2002 is that Division 140 is repealed in relation to any scheme entered into after 30 June 2002. A share value shifting scheme entered into after that date falls under Division 725.

It is considered that the repeal of Division 140 only applies to the extent that the Division dealt with 'share value shifting'. The definitions contained in Division 140 continue to apply to the extent that they are referred to in provisions outside of that Division.

Update

The Government introduced Tax Laws Amendment (2004 Measures No.4) Bill 2004 into Parliament on 24 June 2004. Schedule 3, Part 1, item 5 of the Bill proposed to reinstate the definitions of 'controller (for CGT purposes)' and 'associate inclusive control interest' as new sections 975-155 and 975-160 respectively at the end of existing Subdivision 975-A (which defines general concepts about companies). These amendments are proposed to apply to assessments for the 2002-03 and later income years (Schedule 3, Part 3, sub-item 111(2) of the Bill).

 

Parliament was prorogued on 31 August 2004 and any Bills remaining in Parliament have lapsed. The current government is in caretaker mode and the Tax Office will follow the caretaker conventions issued by the Department of Prime Minister and Cabinet.

Measures in the lapsed Bills may or may not be reintroduced by an incoming government. The Tax Office is unable to advise about the probability of particular measures being reintroduced by an incoming government.

6.2 Cost base and Division 43 - NTAA

Many taxpayers, who purchase a rental property and are entitled to claim a deduction under Division 43 ITAA 1997, do not claim the deduction because they do not have the relevant information to determine the 'construction expenditure'. When these taxpayers sell the rental property and calculate their capital gain they do not reduce the cost base of the property under subsection 110-45(4) because they have not claimed a Division 43 deduction.

Subsection 110-45(4) provides that:

'the cost base is reduced to the extent that you have deducted or can deduct for an income year capital expenditure incurred by another entity in respect of the CGT asset.' (emphasis added)

Can the Tax Office please confirm that even though a taxpayer either deliberately or mistakenly does not claim a deduction under Division 43 the cost base of the asset must still be reduced by the deduction that could be claimed because subsection 110-45(4) provides that the cost base is to be reduced to the extent that the taxpayer can deduct an amount under Division 43.

If the Tax Office confirms this view as stated above can the Tax Office please consider making this view more widely known to taxpayers and tax agents? In particular could the Tax Office please make its views known to tax agents via the Tax Agent Newsletter and other similar products.

Comments

There was general discussion on the issue.

Action Item

The subcommittee will be advised once a position is confirmed.

Update

The Tax Office is considering this issue in the context of the Priority Technical Issue process.

6.3 Cost base and sinking fund expenses - NTAA

The NTAA is seeking to clarify whether or not sinking fund expenses incurred by rental property owners that are capital in nature, can be included in the cost base of a rental property.

Background

Generally, a body corporate may charge two different types of fees and levies. The first is a fee to cover the day to day administration and general maintenance/repair of the common property. The second is a fee (usually referred to as a 'special purpose fee') to cover non-routine expenses such as the cost of capital works (eg, initial repairs and improvements) to the common property.

Our understanding is that a body corporate fee or levy can only be claimed as a deduction (by a unit owner deriving rent from their unit) to the extent it relates to day to day administration, maintenance and repairs of the common property. To the extent a body corporate fee relates to the cost of capital works, it will not be deductible under section 8-1 - refer to Case W83 89 ATC 731 and Case T108 86 ATC 1196.

Issue

Can the special purpose fee collected from the unit owners be included in the cost base of the property being sold?

Example

Joe has owned a rental property since 1995. Every quarter since January 1996, he has made a contribution of $400 into the sinking fund. He makes 36 contributions of $400 each (totalling $14,400) to the sinking fund. As the apartment block and common property is in good repair, no capital works have been required, and so Joe's contributions remain in the sinking fund account.

In June 2004, Joe sells the property and makes a capital gain. Can the $14,400 fees paid by Joe be included in the apartment's cost base? Joe is not entitled to a refund of the fees when he sells the apartment.

Comments

The Tax Office noted that the relevant CGT asset in respect of payments to a sinking fund would appear to be the bundle of rights a proprietor holds as a member of the body corporate. However, there is some difficulty in identifying an element of cost base in respect of that asset to which non-deductible sinking fund payments could be added. There would be similar difficulties in adding such payments to the cost base of another asset such as the interest the proprietor has in the common property (with the possible exception of payments made for capital works specifically commissioned by the proprietors).

Work will continue on this issue.

Action item

The subcommittee will be advised once a position is confirmed.

Update

The Business and Personal Tax Centre of Expertise have advised that the payment of a levy by the proprietor of a strata title unit to an administrative fund or a general purpose sinking fund is deductible under section 8-1 of the ITAA 1997 for the income year in which the payment is made.

However, a payment to a special purpose fund levied by a body corporate to pay for particular capital expenditure is not deductible. Similarly, if the body corporate levies a special contribution for major capital expenses to be paid out of the general purpose sinking fund, the special contribution is not deductible.

Guidance material will be clarified accordingly.

Work on the CGT issue is continuing.

6.4 Deposit guarantee - NTAA

In ATO ID 2003/113 the ATO states that a fee paid in respect of a bank guarantee entered into by a purchaser of real estate in lieu of payment of a deposit is not deductible, however it 'may form part of the property's cost base for capital gains tax purposes'.

Which element of cost base do such fees come under?

Comments

The Tax Office noted that there appeared to be two types of fees charged for these products: an establishment fee and regular ongoing fees. The establishment fee would be regarded as first element expenditure in respect of the acquisition of a CGT asset being the bundle of rights acquired under the guarantee agreement.

A Tax Office view as to the characterisation of the ongoing fees is being developed in consultation with the Business and Personal Tax, and Finance and Investment Centres of Expertise. The Tax Office will review ATO ID 2003/113. It is possible that the analysis contained in the ATO ID supports the conclusion that the expenses are not deductible because they did not have the requisite nexus with assessable income, rather than because they were capital in nature.

The Tax Office is currently reviewing the cost base issue.

Action item

The subcommittee will be advised once a position is confirmed.

Compliance

7.1 CGT project on property sales in Victoria - NTAA

There have been recent reports in Victorian newspapers that the Tax Office is undertaking a CGT project on property sales in Victoria. These newspaper reports state that the Tax Office will be cross-referencing its data with data of property sales from Victorian State Government departments. Can the Tax Office please advise whether these newspaper reports are correct and if so can the Tax Office please provide information about the project? In particular:

a. at what stage is the project up to

b. how many taxpayers will be affected

c. what are the steps in the project (questionnaires, reviews, audits etc)

d. the project's time frame

e. the aim of the project.

Comments

The subcommittee was briefed on the current status of the joint GST and CGT compliance project which is looking at property sales in Victoria in the three years from 1 July 2000 to 30 July 2003. Sales in this period potentially affect one million taxpayers. Obtaining data and final approval from the Privacy Commissioner on the Privacy Protocol has taken longer than expected. Data matching against Tax Office systems is currently taking place. Active compliance work will then commence to identify and address non-compliance with taxation obligations.

7.2 Emerging compliance issues for CGT and losses - Tax Office

Members were advised that the Tax Office compliance plan, due for release in August 2004, will detail the focus of compliance activities across all the market segments. The broad areas of CGT focus are:

n for the individuals segment, ensuring that capital gains on shares and real estate are correctly returned

n for the micro and SME segments, disposal of business assets and the operation of the small business concessions, and

n for the large business segment, aggressive tax planning including CGT reduction arrangements of the type described in TD 2003/3, use of the scrip for scrip provisions and CGT issues arising on consolidation.

In relation to compliance in the context of losses specifically, the following five areas of focus are noted:

n validity of loss origin

n arithmetic accuracy of loss calculation

n whether requirements of utilisation provisions met eg. continuity of ownership, same business test, and transfer rules

n schemes and integrity measures, and

n the capital/revenue distinction.

7.3 SB CGT Concession Questionnaire - Tax Office

The subcommittee were advised that the first stage of the project involved the review of twenty randomly selected cases. Of these:

n 11 cases were not considered to warrant further action

n 8 were escalated for specific issue audits (three of these cases have been finalised with concession claims disallowed representing $3.1m in capital gains), and

n 1 will be progressed in the second stage of the project.

Thirty-eight cases (representing 48 entities) were selected for the second stage of the project which focuses on the $5m net asset test. Questionnaires were issued in early May 2004. No cases have yet been finalised and a number of extensions of time to respond have been granted. Where a case does meet the $5m net asset test, the tests of the specific concession claimed will then be examined.

It is likely that the project will extend to a third stage with a focus on the retirement exemption. This follows indications that many claims under this concession are likely to fail the 'controlling individual' tests.

In applying the small business net asset test for the small business concession, agents should:

n ensure all associated and connected entities are taken into account when calculating the net asset position

n ensure that a net market value is established for all assets 'just before' the CGT event

n establish a clear relationship between liabilities and business assets in calculating the net capital gain

n exclude 'contingent ' liabilities - provisions for future liabilities, or liabilities not yet quantified, and

n in respect of small business retirement exemption claims, ensure that the relevant 'controlling individual' tests are satisfied.

8. GIO shareholders

8.1 Payments to (former) GIO shareholders as a result of class action - ICAA

Reference is made to the class action against GIO for representations made to shareholders at the time of a hostile takeover bid by AMP - King v AG Australia Holdings Ltd (formerly known as GIO Australia Holdings Ltd).

On 26 August 2003, the Federal Court approved a $97 million agreed settlement of the GIO class action with the group members receiving payments during the current financial year. The ICAA understands that the vast majority of the group members are small investors.

1.Is the ATO planning to provide any guidance as to the tax implications for those who have received the payments, given that there are over 22,000 group members involved many of whom are small investors?

Comments

The Losses and CGT Centre of Expertise has completed the technical analysis of the tax implications for the former GIO shareholders who received payments as a result of the recent class action. Under the principle set out in TR 95/35, affected taxpayers are to treat the payment as part of the capital proceeds from the original disposal of the GIO shares. This conclusion however, gives rise to a number of administrative issues which the Tax Office is currently examining. These include:

n the development of procedures for amendment of assessments (including extensions of time for amendment)

n the remission of penalties and general interest charge, and

n appropriate means of providing guidance to affected taxpayers.

It was noted that there are a number of similar class actions currently being litigated and, therefore, these issues have wider significance.

Action item

The Tax Office will advise the subcommittee when guidance material is available.

Update

Guidance material has been published on the Tax office website at Compensation received under the GIO class action . A draft Law Administration Practice Statement to address the issue has been prepared and is at present subject to internal review processes.

CGT discount and financial products

9.1 CGT discount and financial products containing options - Tax Office

At the Nov 2001 meeting the Tax Office advised, in Comments to an NIA question,

'Section 115-40 is intended to apply in circumstances where put or call options have been used. Section 115-40 is an essential integrity provision intended to have effect beyond legal binding contracts. Legally binding contracts would already give effect to a disposal under the normal timing rules.

The availability of the CGT discount is limited to where there is essentially unfettered ownership of the asset for at least 12 months. The CGT discount should only be accessible where the taxpayer is exposed to both 'up-side' and 'down-side' risks during the period of ownership.'

We have been asked whether this means that financial products, such as instalment warrants where put options are used for 'capital protection' (that is, the investor can 'put' the shares back to the issuer in full satisfaction of the loan granted to acquire the underlying shares) will not be eligible for the CGT discount, because an option is granted within the 12 month period which limits the investor's down-side risks.

Comments

The Tax Office has clarified its view of the scope of Section 115-40 previously advised to the subcommittee.

Section 115-40 requires (in its reference to the event being 'under an agreement') that the relevant agreement is a 'meeting of minds' that the CGT event will (not may) happen. In the case of disposal by sale after 12 months, Section115-40 will be attracted if the buyer and seller had previously agreed that the sale would be made. An 'agreement' for these purposes does not require a binding contract.

The use of a put or call option over an asset may, in certain circumstances, support an inference that a relevant agreement exists. One such circumstance is where an option is issued with such a high premium and low exercise price that it is evident that the parties fully intend that it will be exercised.

The Tax Office considers that the existence of put options in instalment warrants and other capital protected products does not, in the absence of other circumstances, give rise to the inference that the parties have entered into an agreement for the sale of the underlying shares. On the contrary, it will generally be assumed that the investor is hopeful that the value of the shares will rise so that the option will not need to be exercised.

Integrated Insurance Planning case

10.1 Capital gains implications of Integrated Insurance Planning Pty Ltd v Commissioner of Taxation [2004] FCA 35 - ICAA

There appears to be a number of issues arising from the decision of the Court in this case. We would appreciate answers to the following questions in light of the attached analysis (at Appendix 2 of the Agenda):

a. as any debt forgiveness by Colonial would have been CGT event C2 for it, why did the ATO argue that CGT event D1 occurred when subsection 104-35(5)(b) states that CGT event D1 does not happen if 'the right requires you [i.e. Colonial] to do something that is another CGT event that happens to you'?

b. why was the 'interface' issue with the debt forgiveness rules that was raised by the taxpayer apparently ignored by the Tax Office?

c. what 'limits' will the Tax Office place on itself when identifying contractual rights as 'assets' for capital gains purposes?; and

d. why did the Tax Office argue that the market value of the loan waivers was the amount of each waiver that actually occurred ? Subsection 116-30(3A) states that if a taxpayer needs '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' (our emphasis). So, in working out the market value of a right to have a loan waived (being the relevant CGT asset covered by CGT event C2), a taxpayer is required to assume that the right still exists and that it is not going to be exercised - either now, in the immediate future or ever.

We are conscious that the decision, while being a single judge decision and arguably obiter dicta in its CGT analysis, will have significant enduring relevance in CGT circles.

Comments

In relation to the specific questions posed by the ICAA, the following explanations were provided:

a. The concern raised in the analysis was how the taxpayer could acquire a rights asset if CGT event D1 did not happen to Colonial. Under the general acquisition rule (subsection 109-5(1)) the taxpayer would acquire a CGT asset irrespective of whether CGT event D1 happened to Colonial.

b. In general the forgiveness of a debt has no CGT implications for the debtor. However, this was not a standard debt forgiveness case. It concerned an agreement which conferred on the debtor a right to have a debt forgiven. That right is a CGT asset. It should also be noted that the commercial debt forgiveness provisions are not a code.

c. The Tax Office has confirmed a number of times that it will look through any contractual rights which are created for the acquisition of an underlying CGT asset. It does not consider that further limits are required. The mere existence of a CGT asset is not enough to give rise to adverse CGT implications. There must also to be a relevant CGT event and capital proceeds from that event for such implications to arise. Generally that would not be the case for standard trade or commercial contracts such as the supply contacts raised in the analysis.

d. While subsection 116-30(3A) requires the event to be ignored, it does not create the further statutory fiction that the nature of the asset and its inherent value is also to be ignored. The provision is directed to endings of assets where the nature of the ending strips the asset of the value it previously had (eg a share cancellation). It also deals with endings where the process involved can affect the value of the asset (eg in the share cancellation case, the mere announcement by a company that shares are to be cancelled can affect the share value).

The facts of this case were unusual and the Tax Office would not seek to apply the principles to 'vanilla' debt forgiveness transactions. It was also pointed out that the CGT analysis was used primarily as a back-up to the revenue case (which was the main purpose of the litigation), and the court confirmed that the forgiven amount was assessable on revenue account.

Action item

The Tax Office will provide a summary of its views relating to Integrated Insurance Planning case.

Update

The comments above provide the Tax Office view.

Partnership interests in goodwill

11.1 Partnership interest in goodwill - Tax Office

In TR 1999/16 it is suggested that goodwill is a composite asset that cannot be held part pre-CGT and part post-CGT (paragraph 25). Paragraph 26 addresses interests in goodwill, including partnership interests, and says that interests in goodwill are not composite assets. It has been put to us that in situations where, after 19 September 1985, one partner buys out other partners in a pre-CGT partnership running a business (which commenced pre-CGT), what the business owner then owns is the entire business, including the entire goodwill, and that as goodwill is a composite asset the business owner would own that goodwill as a composite (pre-CGT) asset.

Comments

Where a partner acquires successive fractional interests in a partnership asset, the original fraction and each additional fraction are treated as separate CGT assets where this is necessary to preserve the relevant acquisition dates (eg to determine pre-CGT/post-CGT status, availability of CGT discount to each fractional interest). This CGT treatment continues to apply in relation to partnership assets in which a partner acquires a 100% interest (see subsection 106-5(3) and TD 2000/31).

It follows that where one partner ('the buyer') purchases the balance of the assets that comprise a partnership business, the relevant CGT assets thereby acquired are the additional fractional interests in each of the assets. Those additional fractional interests are not subsumed into the pre-existing interest already held by the former partner for the purposes of determining the relevant dates of acquisition.

The Tax Office considers this principle applies equally to goodwill. TR 1999/16 states that goodwill is a 'composite asset' and, as such, must have a single acquisition date. However, in the case of a partner who subsequently acquires the entirety of partnership goodwill, the relevant CGT assets are the fractional interests successively acquired by buyer. Each of those fractional interests has a separate acquisition date for CGT purposes.

Small Business

12.1 Remission of penalties and GIC where replacement asset not acquired - NTAA

The Tax Office has recently withdrawn ATO IDs 2003/94, 2003/686 and 2003/687. The reason stated for the withdrawal is because the Tax Office is reconsidering the position stated in the ATO IDs.

In all of the ATO IDs the taxpayer chooses the small business rollover and due to poor health (or in the case of ATO ID 2003/94 for some other valid reason) did not buy a replacement asset within the required period. In each ATO ID the Tax Office remitted penalty tax and GIC in full.

The fact that the Tax Office has withdrawn the ATO IDs is of concern. Does this mean the Tax Office will apply GIC and penalties where a taxpayer fails to acquire a replacement asset within the required period due to poor health or some other similar valid reason? Can the Tax Office please provide further background and explanation as to why these ATO IDs were withdrawn and the Tax Office's current position as to the remission of GIC and penalties where a taxpayer, who has chosen the small business rollover in subdivision 152-E (or former Division 123) ITAA 1997, does not acquire a replacement asset within the required period.

Comments

ATO IDs 2003/94, 2003/686 and 2003/687 were withdrawn as a consequence of the decision of the Administrative Appeals Tribunal in Re Sherlinc Enterprises and FCT 2004 ATC 2022. The Tax Office is considering whether to implement an administrative practice of allowing taxpayers to exclude the capital gain up front on the basis that a replacement asset will be purchased. Should the Tax Office adopt such a practice, it will be confirmed by the issue of a Law Administration Practice Statement.

The Sherlinc decision demonstrates that the TLIP rewrite does not operate in the same way as the ITAA 1936. A technical amendment template will be needed to escalate the issues to Treasury.

Action item

The Tax Office will provide advice to the subcommittee on whether a capital gain intended to be rolled-over is required to be included in returns lodged before the replacement assets are acquired.

Update

The NTAA has submitted a TIMs template seeking an amendment to clarify that a taxpayer can choose the rollover before acquiring the replacement asset. The template has been referred to the TIM subcommittee for action.

A draft Law Administration Practice Statement to address the issue has been prepared and is at present subject to internal review processes.

12.2 CGT event F1 and small business concessions - NTAA

Can the small business concessions apply to CGT event F1? In order for the CGT small business concessions to apply a CGT event must happen in relation to a CGT asset of the taxpayer - refer paragraph 152-10(1)(a). If CGT event F1 happens does the CGT event happen in relation to an asset being the premises or is the asset the lease.

For example, a taxpayer that owns and operates a motel grants a lease to a third party to use the premises and run the motel business in consideration of the third party paying the taxpayer a lump sum. Does CGT event F1 happen in relation to an active asset being the business premises or is the relevant asset the lease, in which case it was not active (or in existence) just before the CGT event and therefore the small business concessions would not apply?

Comments

The Tax Office considers that the words 'in relation to a CGT asset' in paragraph 152-10(1)(a) are wide enough to cover the grant of a lease over an underlying asset such as land (the motel in the example submitted). If CGT event F1 happens, that event can be said to happen in relation to the underlying land and accordingly paragraph 152-10(1)(a) can be satisfied.

Support for this view is found in the Explanatory Memorandum to Taxation Laws Amendment Act (No. 7) 2000, which inserted provisions that substituted basic conditions for CGT event D1. The Explanatory Memorandum specifically referred to CGT event F1, as well as CGT events D2 and D3, as involving assets which satisfy the requirement that the CGT event happens in relation to the CGT asset.

The Tax Office noted that there is also a requirement that the underlying asset satisfies the active asset test in paragraph 152-10(1)(d).

An ATO ID will be issued to clarify the Tax Office position that the small business concessions are available for CGT event F1.

Update

ATO ID 2004/650 was published on 8 August 2004. It states that a capital gain from CGT event F1 will qualify for small business CGT relief on the basis that the CGT event happens 'in relation to' the underlying premises, so satisfying paragraph 152-10(1)(a) of the ITAA 1997.

12.3 Replacement assets and section 152-405(2) - NTAA

Can a taxpayer satisfy s.152-405(2) by constructing a new building (eg warehouse, office etc.) on land that the taxpayer already owns?

Section 152-405(2) requires the taxpayer to 'acquire a replacement asset'. On the one hand the taxpayer is acquiring many replacement assets being bricks, timber and other construction materials but on the other hand the taxpayer is merely improving an existing asset being the land. Would the Tax Office's answer be different if the building was treated under the CGT provisions as a separate asset to the land (eg where the land was acquired by the taxpayer before 20 September 1985)?

Comments

A taxpayer can satisfy subsection 152-405(2) by constructing a new building on land that the taxpayer already owns if the land is a pre-CGT asset, or if depreciating assets that are part of the building are separate assets from the land. The provision cannot be satisfied if all that is done is to improve a separate asset such that no new asset arises.

A building constructed on post-CGT land can be a separate asset from the land if it is a depreciating asset under Subdivision 40-D. Subdivision 40-D does not apply for capital works for which a deduction is allowed under Division 43. A building would be a capital work for which a deduction is allowed under Division 43.

It is considered that building materials acquired to construct a building are not replacement assets as they are not active assets under subsection 152-40(4). The building that is constructed from the building materials is the relevant thing to consider.

This issue could be escalated by the professional bodies by filling out a TIMs template.

Update

The NTAA has submitted a TIMs template seeking an amendment so that a newly constructed building can be treated as a replacement asset. The template has been referred to the TIM subcommittee for action.

12.4 CGT retirement exemption - Subdivision 152-D - NTAA

A taxpayer is a shareholder, director, secretary and common law employee of his family company. The taxpayer's wife is also a shareholder and director of the family company. The company sells an asset and makes a capital gain. The company wishes to choose the small business retirement exemption under subdivision 152-D. Will subsection 152-325(1) be satisfied if the taxpayer terminates his position as secretary but remains as a common law employee and director of the company?

The Tax Office accepts that subsection 152-325(1) will be satisfied where a taxpayer terminates their role as either a director or as a common law employee of the company (refer ATO ID's 2002/493 and 2003/748) and therefore presumably would also accept that the subsection can be satisfied when the taxpayer terminates their role as secretary but remains as director and as a common law employee. This also appears to be supported by TR 2003/13.

Comments

The Tax Office is currently reviewing the issue.

Action item

The subcommittee will be advised once a position is confirmed.

12.5 - Active Assets - NTAA

Paragraph 152-40(1)(c) provides that an asset of a taxpayer can be an active asset where it is used in the course of carrying on a business by an entity connected with the taxpayer. If the taxpayer is a trust and the business is carried on by a partnership we seek confirmation that the entity referred to in paragraph 152-40(1)(c) is the partners.

For example if the business is carried on by a partnership of individuals (eg mum and dad) and the trust owns the business premises used by the partnership then provided mum or dad is connected with the trust paragraph 152-40(1)(c) will be satisfied. A partnership is not an 'entity' for these purposes. This is an important issue having regard to the proposed amendments to subsection 152-30(5).

Comments

The Tax Office advised that, in this context, the reference to 'another entity that is connected with you' in paragraph 152-40(1)(c) is to the partnership. A partnership is an entity for these purposes and as such can be a connected entity. If a trust and the partnership are both controlled by the same third entity they will be connected entities.

12.6 Small business 15 year exemption - Division 149 - ATO

For a company or a trust to be eligible for the small business 15 year exemption the conditions in section 152-110 of the ITAA 1997 must be met. In particular, the entity must have continuously owned the CGT asset for the 15-year period ending just before the CGT event (paragraph 152-110(1)(b) of the ITAA 1997). As well, at all times during the whole period for which the entity owned the asset, the entity must have had a controlling individual (even if it was not the same controlling individual during the whole period) (paragraph 152-110(1)(c) of the ITAA 1997).

If an asset owned by an entity stops being a pre-CGT asset because of a change in majority underlying interests in the asset the question arises as to when the relevant period of ownership begins for the purposes of paragraphs 152-110(1)(b) and (c) of the ITAA 1997.

Comments

The Tax Office has changed its view expressed at the June 2001 subcommittee meeting in relation to the requirement in paragraph 152-110(1)(c) that there must be a controlling individual for the whole period of ownership of the asset.

It is considered that the relevant ownership periods for both 152-110(1)(b) & (c) purposes do not restart upon a Division 149 change in majority underlying interests in an asset. Rather, the relevant period is the actual ownership period starting from the original acquisition.

For a company or a trust to be eligible for the small business 15 year exemption the conditions in section 152-110 of the ITAA 1997 must be met. In particular, the entity must have continuously owned the CGT asset for the 15-year period ending just before the CGT event (paragraph 152-110(1)(b) of the ITAA 1997). In addition, at all times during the whole period for which the entity owned the asset, the entity must have had a controlling individual (even if it was not the same controlling individual during the whole period) (paragraph 152-110(1)(c) of the ITAA 1997).

If an asset owned by an entity stops being a pre-CGT asset because of a change in majority underlying interests in the asset, the question arises as to when the relevant period of ownership begins for the purposes of paragraphs 152-110(1)(b) and (c) of the ITAA 1997.

There are implications with respect to the 15 year continuous ownership requirement in 152-110(1)(b) if the period restarts and in particular, pre-CGT assets would be afforded less favourable treatment than post-CGT assets.

A Tax Determination is currently being prepared and is expected to be published by the end of December 2004.

13. Update on progress of major CGT issues, ruling and practice statements - Tax Office

Comments

The subcommittee was updated on the progress of major CGT issues (see Attachment B ). In particular:

n Absolute entitlement: Work is continuing with the Public Rulings Panel to further develop the ruling. A Practice Statement in relation to families and absolute entitlement is under consideration. Consultation with the subcommittee will occur when the ruling is further progressed.

Update

n the draft TR and Practice Statement was sent to the subcommittee for their comment on 27 August

1. consultation with other interested parties is currently being undertaken.

n TR 93/15 review ('earnouts'): A number of the interpretative issues arising in the course of the review have now been presented to the Public Rulings Panel. At this stage it is considered unlikely that the Tax Office will change its view on the CGT implications of earnout agreements for the recipient of the right. However, the Panel's initial view is that, contrary to the view taken in TR 93/15, the grant of an earnout right is 'giving property' so that the value of the right is to be included in the grantor's cost base for the asset acquired under the earnout agreement. The appropriate characterisation of payments made by the grantor to discharge the obligations arising out of the earnout agreement, are still under consideration. Note: The detailed submission made by the ICAA on this review will be the subject of a separate response.

n Division 149: TR 2004/7 ('Application of Division 149 of the Income Tax Assessment Act 1997 and Division 20 of Par IIIA of the Income Tax Assessment Act 1936 to public entities') was published on 23 June 2004.

n LA PS Trust capital gain: In order to make the PS as practical as possible, work is continuing on issues such as the correct tax treatment for trusts in income years for which there is no trust law income, the effect of clauses in trust deeds equating trust income with net income, and hybrid or discretionary trusts, and whether the agreement requirements can be made less onerous.

n Draft LA PS Foreign bank accounts: Alternative calculation methods for cost base have been proposed. The Tax Office is seeking a practical approach for the issues addressed. The draft LA PS was tabled at the meeting and comment from the professional bodies invited.

n K6 ruling: Draft TR 2004/D6 ('Application of CGT event K6 in section 104-230 of the Income Tax Assessment Act 1997'), was published on 23 June 2004.

n E4 and reversal of timing differences: It is possible that, on a broad reading, subsection 118-20(1A) provides relief in these circumstances. However, there is no provision allowing for a cost base reduction where a capital loss is incurred. The Tax Office is still examining the operation of the legislation and is considering options for an administrative solution.

Updates of action items

14.1 Updates of action items from 7 November 2003 subcommittee meeting (Losses session)

Telstra share buy-back

As noted in the minutes of the NTLG CGT session of 11 November 2003, Press Release C104/02 relating to the simplified imputation system (SIS) covered the issue, and it was expected that the proposed amendments introduced in Tax Laws Amendment (2004 Measure No. 4) Bill 2004 (specifically Schedule 3, Part 2, Items 48 to 51) would reinstate the position under the previous law. This will not affect capital losses made by individuals.

Section 165-20 Deductions and Loss Transfers

A discussion paper was circulated to subcommittee members on 14 November 2003. To date no feedback has been received.

Family Trust Elections

15.1 Multiple Family Trust Elections and PS LA 2004/1 (GA) - ICAA

There is an issue in paragraph 17 of PS LA 2004/1 (GA) that we understand is causing some confusion when read with paragraph 4.

It is the role of a trust making a family trust election (FTE) to be a member of the specified individual's family group. This is particularly important where there are 2 or more family trusts selecting the same specified individual.

Section 272-90(3) states that a trust with a family trust election is a member of the specified individual's family group. If there are two such trusts there seems no impediment to them both being members of the family group at the same time. There should thus be no need for them both to do interposed entity elections (IEEs) as well as the family trust elections should the trusts distribute to each other. Paragraph 17 of the Practice Statement would appear to indicate a need for the IEE as well as the FTE.

Many practitioners have been doing both the FTEs and the IEEs, ie all 4 elections, to be 'safe'.

a. What is the Tax Office's view in regard to the above? It would be useful if the Tax Office could provide clarification on this point, possibly by providing an addendum to the Practice Statement.

b. To follow the release of PS LA 2004/1 (GA), is the Tax Office planning to provide further guidance to taxpayers on its website (especially in regard to the franking credit trading measures and the company loss tracing measures)?

Comments

The Tax Office advised that an ATO ID will be published shortly confirming the requirement to lodge two family trust elections (FTE) and two interposed entity elections (IEE). It was further noted that additional guidance material on FTE and IEE for the purposes of trust loss, company loss and franking credit trading measures were being considered to capture Tax Office views and will be published as the need arises. Subcommittee members were encouraged to bring to the attention of the Tax Office instances where additional guidance material would be beneficial.

Update

ATO ID 2004/697 was published on 8 August 2004. It states that the two family trusts are only members of the family group in respect of the family trust election (FTE) each trust has made. Each family trust must make an interposed entity election (IEE) to become a member of the same family group.

Tax Office initiated matters

16.1 Update on progress of major loss issues and rulings

Update of major loss issues

The subcommittee was updated on the progress of major loss issues (see Attachment C ). Members were invited to comment on the impacts and relative priorities of the loss issues.

Comments

The subcommittee was updated on announced legislative changes concerning company loss recoupment rules (see Assistant Treasurer's Press Release C021/04). Drafting is in progress and Treasury intends to undertake consultation on the measure in early July 2004. Consultation meetings will take place in Sydney and Melbourne (and elsewhere according to demand).

Submissions on policy issues should be made to the Minister for Revenue and Assistant Treasurer, and Treasury would appreciate being copied in on any such submissions.

Mr Stolarek commented that the losses incurred in earlier years are generally only available for deduction by a company where it passes the continuity of ownership test (COT) or failing that, the same business test (SBT). It was noted that losses which will not benefit from the new COT test will need to satisfy the existing rules. When the draft legislation becomes available, business will question the treatment of pre 2002 losses. Taxpayers will require guidance if they are experiencing trouble passing the COT test.

The subcommittee was advised that this matter has been addressed at the main NTLG in the past. On those occasions it has been noted that the COT contained in subdivision 165-D ITAA 1997 requires an examination of the facts and circumstances in each case to determine whether it is objectively reasonable to assume that continuity of underlying ownership has been maintained. Accordingly, whether or not it is reasonably arguable that a company has passed or failed the ownership tests is dependent on gathering all the information that a reasonable person would conclude is relevant to the making of this type of assumption and determining what can be reasonably inferred from that information. As a consequence, the Tax Office does not intend at this time to provide further clarification. Further, the legislation contained in Taxation Laws Amendment Bill (No. 5) 2003, enables companies to access the same business test in circumstances where it is not practicable to meet the COT.

Trust loss issues

A non-binding Tax Office discussion paper was circulated on selected trust issues and the Tax Office sought support from professional body representatives to form a working group to assist in the development of guidance material. Naturally, client confidentiality issues would be respected. The following three issues were outlined in the discussion paper:

n Fixed Entitlement: meaning of 'vested and indefeasible interest'

n Fixed Entitlement: Commissioner's discretion, and

n Control test: Control of a non-fixed trust.

It was agreed by subcommittee members that interested professional bodies would nominate participants by 30 June 2004, with the view to meeting out of session, probably in July 2004.

Action Item

The Tax Office will seek nominations from professional bodies to form a working group to assist in the development of guidance materials.

Update

Nominations have been received from professional bodies. The first meeting of the group is planned to take place on Wednesday, 27 October 2004.

Conclusion

Mr Davies thanked everyone for their efforts in preparing for the meeting, and for their participation, and advised that the next meeting of the Losses & CGT subcommittee would be held on Wednesday 10 November 2004 in Melbourne.

Attachment A

Consolidation: CGT interaction issues and proposed Tax Office view

Number

1

Issue

If a CGT event happens to a share or trust interest that is a membership interest in a subsidiary member (company or trust) of a consolidated group, will the company or trust satisfy the controlling individual test in paragraph 152-10(2)(a) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Proposed Tax Office view

No. The company or trust will not have a controlling individual. It, and not the head company, is the relevant entity to be tested under this rule. [The result of this view is that the small business CGT concessions cannot apply to a capital gain from a CGT event happening to an interest in a subsidiary member of a consolidated group.]

Discussion points and draft TD links

ClicTD 2004/47

Number

2

Issue

If a subsidiary member of a consolidated group sells an asset which is taken for income tax purposes to have been disposed of by the head company, is the controlling individual condition in paragraphs 152-110(1)(c) or 152-305(2)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) applied to the head company of the consolidated group?

Proposed Tax Office view

Yes. The effect of the single entity rule in section 701-1 of the ITAA 1997 is that the controlling individual condition in paragraph 152-110(1)(c) or 152-305(2)(b) of the ITAA 1997 is applied to the head company of the consolidated group. [The result of this view is that the small business CGT concessions may apply if the asset sold is other than a membership interest in a subsidiary.]

Discussion points and draft TD links

Mr Spence observed that the Tax Office view that section 701-85 does not alter the outcome of the controlling individual condition in this situation is a welcome result, albeit one that may be surprising to many practitioners.

TD 2004/45 and TD2004/46

Number

3

Issue

Does the transfer of an asset between members of a consolidated group affect the ownership period of the head company for the purposes of applying the small business 15 year exemption?

Proposed Tax Office view

No. The effect of the single entity rule in section 701-1 of the Income Tax Assessment Act 1997 (ITAA 1997) is to ignore intra-group dealings. The transfer of an asset between members of a consolidated group will not affect the continued ownership of the asset by the head company.

Discussion points and draft TD links

TD 2004/44

Number

4

Issue

Is the ownership of an asset by a subsidiary member who brings it to the consolidated group taken into account in determining whether the head company has continuously owned the asset for the purposes of the small business 15 year exemption?

Proposed Tax Office view

Yes. The ownership of an asset by the subsidiary member who brings it into the consolidated group is taken into account in determining whether the head company has owned it for the 15 year period referred to in paragraph 152-110(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997).

Discussion points and draft TD links

Incorporated into TD 2004/43.

Number

5

Issue

For the purposes of Subdivision 125-C of the Income Tax Assessment Act 1997 (ITAA 1997), can the head company of a consolidated group meet the requirements of a demerging entity in subsection 125-70(7) where, under a demerger, the shares held in a subsidiary member of a group are transferred to the head company's shareholders?

Proposed Tax Office view

Yes. The head company of the consolidated group can satisfy the requirements of a demerging entity in subsection 125-70(7) of the ITAA 1997.

Discussion points and draft TD links

TD 2004/48

Number

6

Issue

Does the single entity rule apply in determining whether the consequences in Subdivision 125-C of the Income Tax Assessment Act 1997 (ITAA 1997) apply to the head company of a consolidated group where one or more subsidiary members hold ownership interests in an entity outside the group that is being demerged?

Proposed Tax Office view

Yes. The single entity rule in section 701-1 of the ITAA 1997 has effect in determining whether Subdivision 125-C applies to a capital gain or capital loss made by the head company of the consolidated group from a CGT event happening to the subsidiary members' ownership interests in the entity being demerged (the 'demerged entity').

Discussion points and draft TD links

TD 2004/49

Number

7

Issue

For the purposes of the capital gains tax rules in Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 (ITAA 1997), is the head company of a consolidated group taken to have acquired an asset which a subsidiary member brings to the group at the same time that the subsidiary member acquired it?

Proposed Tax Office view

Yes. If the asset is not a depreciating asset to which subsection 701-55(2) of the ITAA 1997 applies, the head company will be taken to have acquired it, for the purposes of the capital gains tax rules in Parts 3-1 and 3-3 of the ITAA 1997 at the same time as the subsidiary member acquired it.

Discussion points and draft TD links

Mr Spence raised the issue of whether the proposed Tax Office view has implications for indexation. Mr Davies that the Tax Office's focus in respect of this issue has been on its implications for determining pre-CGT or post-CGT status.

A discussion followed on the implications of the proposed Tax Office view for section 115-45 and the recoupment provisions.

TD 2004/43

Number

8

Issue

If a company which is a subsidiary member of a consolidated group stops being an Australian resident, can CGT event I1 in section 104-160 of the Income Tax Assessment Act 1997 (ITAA 1997) happen in relation to the assets that the company takes with it from the consolidated group?

Proposed Tax Office view

Yes. In working out the capital gains and capital losses from CGT event I1 happening in these circumstances, the single entity rule in section 701-1 of the ITAA 1997 does not have the effect that the company owned no CGT assets just before it stopped being an Australian resident.

Discussion points and draft TD links

TD 2004/42

Number

9

Issue

If an entity, that is a subsidiary member of a consolidated group, acquires shares in a non-consolidated company (original company) under a scrip-for-scrip arrangement, is the single entity rule in section 701-1 of the Income Tax Assessment Act 1997 (ITAA 1997) relevant in determining the eligibility for rollover of shareholders in the original company?

Proposed Tax Office view

No. The single entity rule in section 701-1 of the ITAA 1997 is not relevant in determining the eligibility for rollover of the shareholders of the original company. They are not members of the consolidated group. From their perspective, the relevant conditions for the arrangement and for the rollover in Subdivision 124-M must be considered on the basis that the acquiring company and its head company (and any interposed entities) are separate entities for income tax purposes.

Discussion points and draft TD links

The Tax Office advised that it has received a number of Class Rulings whose outcome depends on the matters raised at 9 and 10. TD 2004/50

Number

10

Issue

Does the single entity rule in section 701-1 of the Income Tax Assessment Act 1997 (ITAA 1997) mean that section 124-784 of the ITAA 1997 does not apply to the consolidated group in relation to shares issued by a subsidiary member to the head company under a scrip for scrip arrangement?

Proposed Tax Office view

Yes. Section 124-784 of the ITAA 1997 has no effect for the consolidated group because intra-group equity and loans are not recognised under the single entity rule in section 701-1 of the ITAA 1997.

Discussion points and draft TD links

TD 2004/51

Number

11

Issue

If shares in a subsidiary member of a consolidated group are sold to a purchaser outside the group under a contract made while the subsidiary was a member of the group, does CGT event A1 in section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997) happen when the contract was made?

Proposed Tax Office view

Yes. The timing rule for CGT event A1 in paragraph 104-10(3)(a) of the ITAA 1997 applies so that the time of the event is when the contract is made to dispose of the shares.

Discussion points and draft TD links

Mr Davies invited external subcommittee members to provide the Tax Office with details of relevant cases they have on hand so the proposed Tax Office view can be further tested.

TD 2004/40 and TD 2004/41

Number

12

Issue

Does CGT event A1 in section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997) happen to the head company of a consolidated group if an asset is sold by a subsidiary member to an entity outside the group?

Proposed Tax Office view

Yes. CGT event A1 happens to the head company of the consolidated group because, as a result of the single entity rule in section 701-1 of the ITAA 1997, the head company is the only taxpayer recognised in respect of the group

Discussion points and draft TD links

TD 2004/39

[H17]Consolidation: other CGT interaction issues

Entry issues: tax cost setting - straddles

Topic

Tax cost setting [first element]

Issue

Does the tax cost setting amount for each asset subject to the cost base and reduced cost base modification in subsection 701-55(5) of the ITAA 1997 become the first element of the cost base and reduced cost base for the asset when it becomes an asset of the head company?
701-55(5) does not say whether the whole of the tax cost setting amount becomes first element or whether it is allocated to the various elements in proportion to the expenditure included in each element just before the asset became that of the head company.
The Tax Office took the view in ATO ID 2004/238 that the whole of the tax cost setting amount for an asset becomes the first element of its cost base and reduced cost base.

Comments

Mr Lehmann said he favoured the 'clean slate' approach taken in ATOID 20004/238, describing it as the 'ideal solution'.
Mr Stolarek stated that the policy of the consolidation measure is to ensure that entity acquisitions and asset acquisitions have the same tax outcome. He said that this policy aim is evident from the reports which preceded the release of the final Ralph report.
There was a discussion among subcommittee members on the impact of the Tax Office interpretation on the 'stick/spread' decision and of its implications for 'earnout' arrangements.

Topic

Tax cost setting [entry history rule]

Issue

After the tax cost of a CGT asset is set under subsection 701-55(5), can the entry history rule apply to vary that amount if, for example, recoupments of the purchase price paid by a joining entity are received post-consolidation?
On one view, the tax cost setting rule overrides the entry history rule in this regard. That is, the tax cost of an asset in the hands of the head company is deemed to be the first element of its cost base and reduced cost base as at the reset time. Therefore, it cannot be reduced, for example, by a subsequent recoupment because the recoupment is not of an amount 'incurred' by the head company. But does that give the correct result in all cases?
A related issue is whether subsection 132-10(2) can apply in circumstances where an entity makes a choice to apply CGT event F2 on the grant of a long term lease, joins a consolidated group, and the land is later disposed of. How (if at all) does the entry history rule apply here?

Comments

 

Topic

Straddle (buy)

Issue

If a contract to acquire a CGT asset is entered into by an entity before it joins a consolidated group as a subsidiary member, and the change of ownership happens at settlement of the contract while the entity is a subsidiary member of the group, which entity acquires the asset, and when?
On one view the combined effect of the single entity and entry history rules is that the head company is taken to acquire the asset at the time the contract was entered into by the subsidiary. Under the single entity rule, the head company, rather than the subsidiary, is taken to obtain legal ownership of the asset on settlement of the contract. But an asset is acquired for CGT purposes at the contract time: see 109-5(2), table item 1 and, under the entry history rule, the head company is taken to have entered into the contract at the time the subsidiary entered into it.

Alternative view
An alternative view is that the head company is taken to acquire the asset on settlement of the contract. However, such an approach ignores the effect of the entry history rule under which the head company inherits the relevant tax history of a subsidiary.
Tax cost setting issues are being considered.

Comments

TD 2004/D71

Topic

Straddle (sale)

Issue

If a contract to dispose of a CGT asset is entered into by an entity before it joins a consolidated group as a subsidiary member, and the change of ownership happens at settlement of the contract while the entity is a subsidiary member of the group, to which entity does CGT event A1 (section 104-10) of the ITAA 1997 happen, and at what time does it happen?
One view is that the disposal happens to the head company, and it happens at the time of the actual change of ownership, that is, on settlement of the contract. Under the single entity rule, the head company, rather than the subsidiary, is taken to have disposed of the asset on settlement of the contract.
This will also be the time that CGT event A1 occurs, unless 'you' (that is, the entity that disposed of the asset) entered into a contract for its disposal. In that case, CGT event A1 happens at the time the contract was entered into. The head company did not enter into a contract as a question of fact and the entry history rule does not treat it as having done so. The effect of the entry history rule applying could only be to cause CGT event A1 to happen to the head company during a period
before the entities are grouped. Therefore, the entry history rule has no application (because it only has effect for working out the head company's income tax liability for the period after consolidation and not for the period before consolidation).

Alternative view
An alternative view is that CGT event A1 happens to the subsidiary at the contract time. This view requires a narrow reading of the single entity rule. That is, it requires you to say that the single entity rule does not apply to deem the change of legal ownership at the contract time to be something that happened to the head company. The rationale would be that the single entity rule only applies for the purposes of calculating the group's income tax liability whereas the timing rule means that the event has happened to the subsidiary before it became a group member. Therefore, the change of legal ownership is not relevant to working out the group's income tax liability and the single entity rule does not apply.
Tax cost setting issues are being considered.

Comments

Mr Davies discussed the problems that arise in calculating the tax cost setting amount in situations where there are liabilities present. He said that the Tax Office intends to develop a more detailed analysis dealing with straddle cases.
Mr Lehmann observed that the problem requires a legislative solution. He also suggested that the Tax Office take 'tax funding agreements' into account as part of its analysis.
Mr Ferrier referred to the situation where a subsidiary member enters into a contract for the sale of an asset, but exits the consolidated group prior to settlement of the agreement. He queried whether a CGT event could happen to the subsidiary member, given the time of the event is the date of the contract, at which time the existence of the subsidiary was ignored as a result of the single entity rule.
TD 2004/D72

Small business 15 year exemption

Topic

15 year exemption

Issue

In determining whether a head company has, for the purposes of applying the small business 15 year exemption, continually owned a CGT asset for the required period in paragraph 152-110(1)(b) of the ITAA 1997, is any prior ownership by entities ( other than the joining member that brought the asset to the group) taken into account under the entry history rule in section 701-5?
On one view, it might be thought that the effect of the head company inheriting the tax history of all its subsidiaries under the entry history rule is to turn separate pre-consolidation ownership periods by subsidiaries in respect of an asset into a single continuous period for the purposes of applying the 15 year exemption to the head company post-consolidation.

Alternative views

An alternative view is that the head company does not inherit the total history in respect of an asset. Rather it inherits only the history of the asset from the perspective of the subsidiary that actually brings the asset into the group. It is therefore the date on which that subsidiary acquired the asset that is the relevant starting point in determining whether the 15 year exemption applies to the head company (and not the date it was acquired by a previous owner that also becomes a member of the group).
A third possibility is that the entry history rule does bring in the total history, but that includes the various disposals and acquisitions which must be factored into the determination of whether there is a continuous period for the purposes of the 15 year exemption.

Comments

 

Intra group dealings - incidental costs

Topic

Cost base (incidental costs)

Issue

Can incidental costs be included, under subsection 110-25(3) and section 110-55 of the ITAA 1997, in the second element of the cost base and reduced cost base of an asset that is transferred between members of a consolidated group?
Because, under the single entity rule, an intra-group asset transfer is ignored, that is, it does not result in an acquisition of the asset by the head company or in a CGT event happening to the asset, then it is arguable that incidental costs in relation to the transfer cannot be included in the asset's cost base or reduced cost base. On that same basis, any money or property given in respect of the transfer could also not be included in the asset's cost base or reduced cost base.

Comments

 

Exit issues: acquisition dates - K6 - loss deferral - contracts - straddles - incidental costs

Topic

Acquisition of membership interests on exit

Issue

When a subsidiary member leaves a consolidated group, at what time are membership interests in the subsidiary company taken to be acquired by the head company?
Generally, membership interests in a subsidiary are taken to have been acquired by the head company just before the subsidiary leaves the group. This is when tax costs are set for such interests under Division 711. However, there are other consolidation rules that may treat some or all of the membership interests in a leaving entity that holds 'pre-CGT factor' assets as having been acquired before 20 September 1985.
In a relatively small number of cases it is necessary under section 701-85 to recognise the existence of a subsidiary member and membership interests in it. This is where, for example, the CGT rules impose a test, requirement or condition on a subsidiary member of the group and that test, requirement or condition turns on identifying the subsidiary, membership interests in it or its assets. Examples are the application of the small business controlling individual test (if the asset upon which the gain was made was membership interests in a subsidiary) and demerger relief. However, this recognition does not in any way alter the date of acquisition of those interests by the head company as discussed in the previous paragraph.

Comments

 

Topic

CGT event K6

Issue

Can CGT event K6 in section 104-230 of the ITAA 1997 happen on the disposal of (or other relevant CGT event happening to) shares held in a subsidiary member of a consolidated group?
On one view CGT event K6 can happen provided all the relevant conditions are satisfied. The condition in subsection 104-230(2) refers to property of the entity
just before the relevant CGT event. Section 701-85 permits the actual property of the subsidiary to be examined for the purposes of applying CGT event K6.
Are there alternative views that CGT event K6 does not happen, or should not happen?

Comments

Mr Lehmann said there is a widely-held assumption that that the pre-CGT factor rules were inserted into the consolidation measure as a substitute for CGT event K6. A number of subcommittee members considered that the application of CGT event K6 in addition to the pre-CGT factor rules, would effectively expose consolidated groups to double, or triple taxation.
Mr Spence also raised the issue of whether pre-CGT factors are impacted if Division 149 happens to a subsidiary. He said that the legislation appears to be deficient.

Topic

Loss deferral [new event]

Issue

If the originating company for a 'deferral event' under section 170-255 of the ITAA 1997 becomes a member of a consolidated group, does a 'new event' happen under section 170-275 if the company leaves the group but does not take with it the asset that triggered the deferral event?
On one view, a new event happens under 170-255 if the originating entity in respect of the deferral event, or the asset, leaves the 'linked group'. No new event happens here because the head company (which under the entry history rule is now regarded as the 'originating company' in respect of the deferral event) has not left the group nor has the asset left the group
An alternative view is that section 701-85 applies such that the originating entity is the same entity (the subsidiary) and a new event is triggered.

Comments

In relation to items 21 and 22, Mr Davies welcomed any views of subcommittee members regarding the operation of subdivision 170-D in this context. He added that the Tax Office's examination of these issues links in closely with work being done by the Consolidations Centre of Expertise on liquidations generally.

TD 2004/D68

Topic

Loss deferral [entity ends]

Issue

If the transfer of shares in a company is a 'deferral event' under section 170-255, does the deregistration of the company following a liquidation process after it has become a subsidiary member of a consolidated group cause a 'new event' to happen for the purposes of section 170-275?
A new event happens under 170-255 if the asset ceases to exist. On one view a new event happens here because the assets, namely shares in the subsidiary, have ceased to exist and this happens on deregistration.
Arguably, the assets do not cease to exist merely because membership interests in the subsidiary cease to be recognised for income tax purposes under the single entity rule. Arguably, 'ceases to exist' as that expression is used in 170-255 means ceases to exist as a matter of fact and law. It does not mean ceases to be recognised under the single entity rule.
An alternative approach would be to say that because the shares are already not recognised under the single entity rule, the deregistration has no effect. This interpretation would extinguish, and therefore deny, completely the deferred loss which would be contrary to the policy underpinning Subdivision 170-D. Section 701-85 may assist in obtaining a result in this case which accords with the policy of Subdivision 170-D.

Comments

TD 2004/D69

Topic

Straddle (buy)

Issue

If a contract to acquire a CGT asset is entered into by an entity while it is a subsidiary member of a consolidated group, and the change of ownership happens at settlement of the contract to the subsidiary after it has left the group, which entity (head company or ex-subsidiary) acquires the asset, and at what time is it acquired?
On one view, ex-subsidiary acquires the asset at the time the contract was entered into. The change of ownership happens after the ex-subsidiary has ceased to be a member of a consolidated group. The single entity rule does not apply at that time and therefore the ex-subsidiary (and not the head company) is the owner of the asset. Under 109-5(2), table item 1, the acquisition is at the contract time.
Tax cost setting issues are being considered.
Is there an alternative view?

Comments

TD 2004/D73

Topic

Straddle (sale)

Issue

If a contract to dispose of a CGT asset by a subsidiary member of a group is taken to be entered into by the head company, and the change of ownership happens at settlement of the contract after the entity is no longer a subsidiary member (ex-subsidiary) of the group, to which entity does CGT event A1 (section 104-10) of the ITAA 1997 Act happen, and at what time does it happen?
On one view the disposal happens to the ex-subsidiary at the time of the actual change of ownership, that is, on settlement of the contract. Because that happens after the ex-subsidiary has left the group, that change of ownership happens to the ex-subsidiary and not to the head company. This will be the time of CGT event A1 unless the disposal was under a contract entered into by the ex-subsidiary. The disposal was under a contract but that contract was not entered into by the subsidiary, but was entered into by the head company as a result of the single entity rule.

Alternative view

An alternative view is that the ex-subsidiary made the gain or loss at a time when it was part of the consolidated group but it cannot separately be assessed, and the head company did not actually dispose of the asset, so no one can make the capital gain or capital loss. It would not be consistent with the purposes of the Act to construe the provisions such that a CGT event in these circumstances could have no tax consequences.
Is there another possible view?

Tax cost setting issues are being considered.

Comments

 

Topic

Cost base (incidental costs)

Issue

Can incidental costs be included under subsection 110-25(3) and section 110-55 of the ITAA 1997 in the second element of the cost base and reduced cost base of membership interests in a subsidiary member of a consolidated group on the subsidiary leaving the group?
On one view, they can, provided the costs have been incurred in relation to the CGT event that triggers the leaving, for example, in relation to CGT event A1 happening on a disposal of membership interests in the subsidiary to an entity outside the group.
Under this view, the tax cost setting process in section 711-15 or 711-55(5), which establishes the first element of the cost base and reduced cost base of the membership interests in a leaving entity for the purposes of section 701-60 and subsection 701-55(5), does not preclude the inclusion of second element expenditure outside that process.

Comments

 

Entities outside the group

Topic

Concession stakeholder exemption

Issue

Can the exemption in section 152-125 apply to a payment to an individual who is a concession stakeholder of the head company if the payment relates to an exemption obtained by the head company in relation to a capital gain made on an asset owned by a subsidiary member?
Broadly, under section 152-125 if a capital gain is exempt in the hands of a company or trust under the small business 15 year exemption, then a distribution of that amount to a concession stakeholder of the company or trust will also be exempt in the hands of the stakeholder.
On one view, the exemption does not apply to the stakeholder. For example, one of the conditions in section 152-125 is that the payment relates to a capital gain of the paying entity that is disregarded under the small business 15 year exemption. But the single entity rule is not relevant to an entity outside the group and so from the perspective of the concession stakeholder the capital gain that is disregarded is a gain made by the subsidiary and the subsidiary's gain is not exempt.
An alternative view would be that the calculation of a group's income tax, and the payment of that tax, by the head company establishes a relationship between the head company and the Tax Office in relation to those matters which exists in fact and is therefore something that can be recognised by an entity outside the group. In other words, while the treatment of the group as a single entity is not recognised by an outsider, things that the head company actually does as a result of single entity treatment, such as the payment of tax and calculations leading to that payment, can be recognised by outsiders. But is this a valid distinction and is it capable of application in all relevant scenarios?

Comments

TD 2004/D70

Attachment B

Major CGT issues under consideration by the Tax Office (or with Treasury)

 

Issue

Current thinking

Status

 

Application of exceptions to CGT events E1 and E2

The exceptions are not limited to change of trustee cases

Cost base of asset is transferred (no uplift or reduction)

 

Finalised by issue of TD 2004/14.

 

Meaning of 'passing' of an asset in the context of deceased estates

An asset may pass to a beneficiary before the asset is transferred to the beneficiary if the beneficiary is absolutely entitled to the asset as against the trustee

Finalised by issue of TD 2004/3 .

 

Meaning of 'legal personal representative' in Division 128 of the ITAA 1997

The reference to a 'legal personal representative' in Division 128 can include the trustee of a testamentary trust created under the will of the deceased person

Finalised by issue of Practice Statement 2003/12.

 

Taxation of trust capital gains where there are separate income and capital beneficiaries

Although the legal position requires the assessment of the income beneficiaries the Commissioner will in certain circumstances accept the taxation of the capital beneficiaries or trustee.

Finalised by issue of Practice Statement 2004/3. PS LA 2004/3 currently under review.

 

CGT and foreign bank accounts

CGT event C2 occurs when an account-holder withdraws funds from a foreign bank account (a withdrawal of less than the balance will be a part-disposal of the contractual rights against the bank). Section 112-30 provides how the cost base for a part-disposal is to be calculated. Movements in the exchange rate between date of deposit and date of withdrawal can cause a capital gain or loss to arise.

ATO ID 2003/803 issued. Practice Statement in course of preparation.

 

Assignment of agricultural fixtures separately from underlying lease

For CGT purpose the fixtures cannot be separately assigned from the lease

Finalised by issue of ATOID 2003/595

 

Issue

Current thinking

Status

 

CGT implications of lease surrender

A lessor acquires a CGT asset on entering a lease. If the lessor receives a lease surrender payment, CGT event C2 occurs. The capital gain will be a discount capital gain if the lease was entered into more than 12 months prior to the surrender.

Draft ruling issued on 6 October 2004. Click here to view TR 2004/D18.

 

Application of Subdivision

126-B roll-over to asset transfers between foreign residents

If an Australia resident company transfers an asset under rollover to a foreign resident company, subsection 126-50(7) will not prevent the foreign resident company from subsequently transferring the asset under rollover to another foreign resident company.

Finalised by issue of ATOID 2004/459.

 

Foreign resident selling shares in a foreign resident company which subsequently becomes a resident.

If a foreign resident disposes of shares in a foreign resident company to an Australian resident, resulting in the foreign resident company immediately becoming an Australian resident under the voting power test, the shares disposed of by the foreign resident will not be considered to have the necessary connection with Australia

ATOID to be prepared

 

Correctness of approach in TR 97/18 - interposed entity rollover applies to a singular (not plural) original company - in question

TR inconsistent with literal interpretation of the law in some cases.

Issue considered at Public Rulings Panel meeting on 4/5/04. Further issues to be considered.

 

Application of Div 149 where a charity is a shareholder

Entities should be allowed to treat charities as 'natural persons' under Div 149. The law does not provide adequately for this.

Treasury advised of need for legislative amendment.

 

Application of Div 149 where shareholders hold redeemable preference shares

Some possible approaches have been developed for applying Div 149 to cases involving redeemable preference shares.

Redeemable Preference Share issue to be raised at NTLG Subcommittee. TR 2004/7 (which finalised this TR 1999/D9) does not deal with this issue.

 

Issue

Current thinking

Status

 

The scope of 'natural person' in the application of Div 149

A mutual insurance organisation as defined cannot be a 'natural person'.

To be finalised July 2004.

 

Small business CGT concessions: connected entities charitable beneficiaries

Tax Office view is outlined in ATOID 2002/921.

Legislative change included in TLAB (2004 Measures No 1) Bill which received Royal assent 29/06/04.


 

Application of CGT event K6

'Property' has general meaning

Can't aggregate results under paragraphs 104-230(2) (a) and (b) for 75% test

In net value test - 'assets' means property and other economic interests owned by an entity that can be turned to account. 'Liabilities' has its narrow jurisprudential meaning

Ultimately what is a reasonable attribution is a question of fact but Tax office will try to provide guidance:

 

TR 2004/D6 released

 

Meaning of absolute entitlement

AE not limited to bare trusts

AE not relevant for unit trusts

Beneficiary must have vested and indefeasible interest in trust asset or be able to direct trustee how to deal with it

Multiple beneficiaries will generally have difficulty in establishing AE

 

Draft ruling considered by Public Rulings Panel 28 May 04. Plan to release issue draft ruling July 04.

 

Capital gain reduction schemes

Issue has been handed back to business line.

LB&I is co-ordinating action. A case is expected to be heard in the Federal Court soon.

 

Scrip for scrip and Part IVA

We are reviewing cases where call options are being used to circumvent the application of the significant stakeholder tests

Part IVA Panel has agreed to pursue application of Part IVA in a particular case. Public Ruling being considered.

 

Issue

Current thinking

Status

 

Review and rewrite of TR 93/15

Position of purchaser being reconsidered

Directions given by the Public Rulings Panel in May 2004.

 

State or nature TD

Can an amount be included in the forth element of the cost base of an asset if it is merely reflected in the asset's value?

 

Finalised by issue of TD 2004/2.

 

Demerger - section 45B Practice Statement

Practice Statement to provide guidance on application of section 45B in the context of demergers

Centre providing input as requested by LB&I. Anticipate release July/August 04.

 

GVSR publications

Recognise need for Tax Office view in relation to a range of GVSR issues

Guide and Fact Sheet have been published. Guide listed as a source of ATO view.

 

(a) Value shifts from interests held by tax-exempt entities;

(b) Application of value shifting rules to dividends deemed to be paid under Div 7A

(a) Adjustments are available for interests to which value shifted; and

(b) the exclusion in Div 727 that applies to dividends and distributions applies to deemed dividends.

(a) ATO ID 2003/1139 published.

(b) under consideration.

 

Review of International Taxation

Government has announced a review of the tax treatment of non-residents

Centre providing technical input into proposed legislation as requested

 

Consolidation and CGT interaction

There are a range of issues around the interaction of the single entity rule and CGT provisions

Centre will contribute to Public Rulings announced to NTLG Consolidation Subcommittee

Centre authored TDs 2004/D10 - D21 published on 30 June 2004.

 

CGT and Compensation

A range of issues arising. Advice being sought from business lines regarding application of TR95/35

Review of TR95/35 to be considered as a potential Priority Technical Issue

 

Treatment of legal life estates

Is there a basis for treating the creation of a legal life estate as a part disposal of a property?

ATO IDs 2003/1116 and 1117 published. Identified as a potential Priority Technical Issue

 

Application of section 104-70 to default beneficiaries of discretionary trusts

 

Finalised by issue of TD 2003/26

 

Treatment of water rights

This is emerging as an important issue given recent State legislative changes and Water Taskforce established by PM&C

Ongoing

 

Effect on capital losses where Part IVA tax benefit relates to a capital gain

Available capital losses will be absorbed to the extent of the capital gain that would have been made but for the scheme

Not a Priority Technical Issue

 

CGT event D1 and mutual exchange of rights

Issue being looked at on a case by case basis to assess the true nature of the transaction (For example, the simple acquisition of contractual rights in a mutual exchange of rights situation will generally not be considered to be capital proceeds for a CGT event D1 ie property received for creating rights in the counter-party).

ATO IDs issued in relevant cases. Implications are being considered in the context of the TR 93/15 review

 

Listed investment company concession

Ruling on the application of the LIC discount concession.

Centre providing input to public ruling. To be considered by Public Rulings Panel 28 May 04.

Attachment C - Major Company and Trust Loss issues under consideration by the Tax Office (or with Treasury)

 

Topic

Issue

Status

 

Company Loss Rules

General application, in particular to widely held entities.

Government announcement on 7 April 2004

(loss recoupment proposal).

 

Same Business Test (SBT) and Consolidated and MEC Groups

Application of SBT to losses and bad debt deductions of consolidated and MEC groups.

Released as discussion paper on 8 April 2004.

Closing date for submissions 28 May 2004.

Submissions being considered.

 

Family Trust Tracing Concession

165-207, ITAA 1997

Change in the identity of the trustee, joint trustees and interaction with COT, including loss integrity rules.

Included as technical change - loss recoupment proposal.

 

Ownership test period

165-12, ITAA 1997

Treatment of a company that comes into existence during a loss year.

As above

 

Ownership test period

165-12, ITAA 1997

Treatment of a company that becomes deregistered during a loss year.

As above

 

Alternative test

165-12(6)

165-37(3)

165-123(6), ITAA 1997

Test can only be applied if a company owned shares in the loss company at the start of the ownership test period.

As above

 

Topic

Issue

Status

 

Companies limited by guarantee, mutuals, co-op's etc.

Application of Loss Recoupment Rules

Assistant Treasurer & Minister for Revenue - Press Release C088/03 indicates that TLAB (No. 5) 2003, will be amended to ensure these rules on accessing SBT will apply, as intended, to companies limited by guarantee and similar kinds of companies that do not have share capital. With a further amendment to ensure that tax losses otherwise deducted under established Tax Office administrative practices (ITR 1627) applying to the COT will not be denied as a result of new SBT access rules.

Matter with Treasury

 

Companies with substituted accounting periods (SAP's)

Can losses ever be incurred or recouped in a SAP transitional year of less than or more than 12 months? The decision in Norwich Superannuation Services P/L v FCT 99 ATC 2015 continues to raise technical problems in this regard.

Issue is being considered.

 

Grouping tests

Can companies access both tests in 975-500 to satisfy grouping for the purposes of 170-A, ITAA 1997.

ATO view expressed in ATO ID 2002/835

 

Grouping tests

Can companies satisfy the paragraph (b) test in 975-500 for the whole of the period specified in 170-30(2), ITAA 1997 if the 3rd company parent is not the same company throughout that period?

ATO view expressed in ATO ID 2003/1047

 

Topic

Issue

Status

 

Deducting part of a tax loss (section 165-20) and 170-35(3) of Subdiv 170-A, ITAA 1997

Can a 165-20 loss be transferred?

Under consideration.

The discussion paper was circulated to sub-committee members on 14 November 2003. No feedback to date has been received.

 

Application of 165-20(1), ITAA 1997

Can the 'part of the tax loss' made deductible by subsection 165-20(1) ITAA 1997 be the whole of the tax loss? - Yes

An ATO ID will be published shortly.

 

Deducting part of a tax loss: section 165-20, ITAA 1997

Can a loss under 165-20 ITAA 1997 be calculated on a pro rata basis. How to treat full year deductions?

An ATO view is being considered.

 

Fixed entitlement

272-5(1) Sch 2F, ITAA 1936

Meaning of the term 'vested and indefeasible' for establishing whether a fixed entitlement exists.

Introduced as part of trust loss measures now linked to other provisions such as scrip for scrip rollover. Trust loss policy drivers and general common law principles being applied to all cases reliant on Sch 2F definitions.

See Tax Office Non -binding discussion paper on trust loss issues.

 

Topic

Issue

Status

 

Fixed entitlement

272-5(3) Sch 2F, ITAA 1936

Circumstances where the Commissioner will exercise the discretion to treat entitlements as fixed.

Majority of unit trust deeds give powers to the trustee that may result in vested but defeasible interests of beneficiaries actually being defeased Currently, cases involve extensive analysis of [individual] powers contained in trust deeds to determine 'likelihood' of defeasance & presence of tax losses per Sch 2F policy guidance.

As above

 

Family Trust Elections

Circumstances where family trust elections have not been validly made - can they be treated as valid.

There is no discretion within Sch 2F to consider FTE's which have been lodged late, made incorrectly or invalidly.

Impact of on trust and company loss recoupment and franking credit trading measures.

PS LA 2004/1 (GA) released 15 April 2004.

2004 Budget announcement.

 

Trust Loss Provisions - Control test.

Control test - whether more than one group can control a non-fixed trust via the control conditions in para's (1)(a) to (f) of 269-95 Sch 2F, ITAA 1936.

Each control condition in para's 269-95(1)(a) to (f) needs to be tested independently whereby more than one group can satisfy a control condition without necessarily have effectual outright control of the trust.

See Tax Office Non -binding discussion paper on trust loss issues.

 

Topic

Issue

Status

 

Trust loss provisions

269-95(4) Sch 2F, 1936 ITAA

In what circumstances will the Commissioner exercise discretion to ignore 'change in control'?

Cases being determined on their merits without precedential guidelines outlining relevant factors.

See Tax Office Non -binding discussion paper on trust loss issues.

 

Debt forgiveness provisions

Does a payment under a guarantee constitute a forgiveness under 245-35 of Sch 2C of the ITAA 1936?

Current view - does not constitute forgiveness.

TD 2004/D6 issued. No external comments received. Draft is being finalised.

Guide is being prepared.

 

Loss Integrity Measures

Application of loss integrity rules.

Issues being considered in conjunction with Consolidation CE.