House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Treasurer, the Hon John Dawkins, M.P.)

Capital Gains Tax - Concessional Taxing Provisions

Summary of proposed amendments

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Purpose of amendment: The amendment will ensure that the capital gains provisions do not apply to tax an amount:

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where the amount would otherwise be included in assessable income, the whole or part of that amount is specifically not included in assessable income; and

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where the amount would not otherwise be included in the taxpayer's assessable income, part of that amount is specifically included in assessable income.

Date of effect: The amendment applies to amounts received as a result of the disposal of an asset which was created after 25 June 1992. [Clause 47]

Background to the legislation

The capital gains provisions contained in Part IIIA of the Income Tax Assessment Act 1936 (the Act) provide a method for calculating capital gains and capital losses and for determining the amount of a net capital gain to be included in a taxpayer's assessable income. However, those provisions do not operate in isolation from the rest of the Act. Broadly speaking, Part IIIA contains provisions designed to ensure that the same amount of "profit" is not taxed more than once [subsection 160ZA(4)], that most deductible expenditure is not included in the cost base of an asset [section 160ZH], and that the amount of a capital loss does not include losses which are allowable for income tax purposes [section 160ZK]. The proposed amendment is concerned with the operation of subsection 160ZA(4).

Subsection 160ZA(4) applies where a taxpayer has a capital gain as a result of disposing of an asset, and an amount is also included in the taxpayer's assessable income under another provision of the Act - for example, where the proceeds of the disposal of the asset are included in assessable income under section 25. Where the amount of the capital gain is equal to or less than the amount included as assessable income, the amount of the capital gain is taken to be nil. If the amount of the capital gain exceeds the amount included as assessable income, the amount of the capital gain is taken to be the amount of the excess. In this way, the same amount of "profit" is not taxed more than once.

The Taxation Laws Amendment Bill (No 4) 1992 proposes to amend the definition of asset for capital gains tax purposes. The amendment will make it clear that an asset includes legal or equitable rights, whether or not those rights are a form of property - that is, whether or not those rights are capable of assignment or transmission. Examples of the type of rights that come within the definition is a right to redundancy payments contained in an employment contract or industrial award, and a right under a statute to a payment. Where a payment is received in satisfaction of the right, the right is taken to be disposed of for the purposes of the capital gains provisions. The amount of the payment will generally be a capital gain to the taxpayer, as the asset (the right) is likely to have little or no cost base.

Where that amount is also included in assessable income, subsection 160ZA(4) will operate to prevent the amount being taxed twice. However, the amount of the payment may be concessionally taxed under the other provisions of the Act. This could be because:

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the whole or part of an otherwise assessable amount is specifically not included in assessable income; or

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part of an otherwise non-assessable amount is specifically included in assessable income.

In either case, subsection 160ZA(4) does not take account of the amount (or part of the amount) that is not included in assessable income. The result is that the amount which is excluded from assessable income may be taxed as a capital gain.

Explanation of proposed amendments

The proposed amendment will apply in respect of amounts that are taxed concessionally in either of two ways:

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where an amount would otherwise be included in assessable income, but the whole or part of the amount is specifically not included in assessable income [for example, where a person has a right under an employment contract to receive income in the form of a fringe benefit, income derived in that way is exempt - section 23L]; and

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where an amount would otherwise NOT be included in assessable income, but only part of the amount is specified to be included in assessable income [for example, only 5% of the concessional component, such as a bona fide redundancy payment, of an eligible termination payment that has not been rolled-over is included in assessable income - subsection 27C(2)].

New subsection 160ZA(7) will apply in the first situation. It will provide that, in applying subsection 160ZA(4), the provisions which excludes the whole or part of an amount from assessable income is to be disregarded. That is, subsection 160ZA(4) will apply as though the whole of the amount was included in assessable income. [Clause 46]

In the example above, the right to receive the fringe benefit is an asset. If the benefit is the provision of property, the right is satisfied when the property is received, thereby constituting a disposal of the right - paragraph 160M(3)(b). A capital gain equal to the value of the property would accrue, as the right is likely to have little or no cost base. However, the effect of the amendment is that subsection 160ZA(4) will apply as though the value of the property was included in the taxpayer's assessable income. Accordingly, no capital gain will accrue to the taxpayer as a result of the receipt of the benefit. [Tax may be paid in respect of the benefit in terms of the Fringe Benefits Tax Assessment Act 1986 .]

New subsection 160ZA(8) will apply in the second of the situations mentioned above where an amount is taxed concessionally. It will provide that, in applying subsection 160ZA(4), the whole of the amount (only part of which is included in assessable income) is to be treated as though it was included in assessable income. [Clause 46]

For example, where a taxpayer receives a bona fide redundancy payment of $1,000 which is not rolled-over, $50 (5% of $1,000) is included in the taxpayer's assessable income. The $1,000 would also be a capital gain, being the amount received for the disposal of an asset (the right to the payment) with a nil cost base (in most cases). Subsection 160ZA(4) would presently apply to reduce that capital gain to $950. New subsection 160ZA(8), by requiring subsection 160ZA(4) to apply as though the $1,000 was included in the taxpayer's assessable income, will ensure that the capital gain is reduced to nil in these circumstances.

Subsection 160ZA(8) will not apply where section 25 assesses part of an amount; effectively, where section 25 assesses the net profit arising from the disposal of an asset. This is consistent with the present operation of subsection 160ZA(4) in such cases. However, the ability to include non-capital costs in the cost base of assets acquired on or after 21 August 1991 should limit the number of circumstances in which the amount of a capital gain arising from the disposal of an asset will exceed the amount of net profit assessed under section 25.

New subsections 160ZA(7) and (8) will also apply to amounts which are included in the assessable income of a partnership, but are concessionally taxed (in the manner described above).