Senate

Taxation Laws Amendment Bill (No. 3) 1997

Explanatory Memorandum

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

Chapter 1 - CGT exemption: disposing of small business retirement assets

Overview

1.1 Part 1 of Schedule 1 of the Bill will insert new Division17B into the Income Tax Assessment Act1936 (the Act) and will amend the superannuation related provisions of the Act to provide an exemption from tax on capital gains made on the sale of a small business where the proceeds are used for retirement.

1.2 Section 1 of this chapter explains the new Division 17B and section 2 of this chapter explains the amendments to the superannuation related provisions.

Section 1 - Amendment of CGT provisions

Summary of the amendments

Purpose of the amendments

1.3 New Division 17B will provide small business taxpayers with an exemption from tax on capital gains made on the disposal of some or all of their active assets if the proceeds are used for retirement.

Date of effect

1.4 The amendments will apply to assets disposed of on or after 1July1997.

[Item45 of Part3]

Background to the legislation

1.5 Currently, the capital gains tax (CGT) provisions apply where an asset that is acquired after 19September1985 is disposed of. A capital gain arises if the proceeds from a disposal exceed the cost base or indexed cost base of the asset. The capital gain (net of capital losses) must be included as assessable income of the taxpayer in respect of the disposal year of income.

1.6 New Division17B will allow taxpayers, in certain circumstances, to claim an exemption from tax on capital gains made on the sale of the assets of a small business if the proceeds are used for retirement. This measure was announced by the Treasurer in the 1996-97 Budget and in the Treasurers press release of 20August1996.

Explanation of the amendments

Which taxpayers are eligible for the CGT retirement exemption?

1.7 A taxpayer is only eligible for the CGT retirement exemption if the taxpayer is:

·
an individual;
·
a private company; or
·
a trust that is not a publicly traded unit trust.

Which assets could this exemption apply to?

1.8 Individuals, private companies and trusts can qualify for the CGT retirement exemption on both existing and new assets. For the purposes of this exemption an asset has the same meaning as in the small business CGT roll-over relief provisions [definition of asset in new section160ZZPZM] . That is, an 'asset' in relation to an entity is an asset as defined in section160A of PartIIIA of the Act but includes all types of motor vehicles and also part of an asset. However, where a taxpayer is an individual (not acting as trustee), assets will not include assets owned by the taxpayer that are being used solely for the personal use and enjoyment of the taxpayer or associates. Assets, in relation to an individual, will also not include a policy of life assurance of a person or a right to payments or assets of a superannuation fund or approved deposit fund (ADF). See definition of asset in subsection160ZZPL(1).

How to qualify for the CGT retirement exemption

1.9 To qualify for the CGT retirement exemption all taxpayers must satisfy the following requirements:

·
the asset must satisfy the criteria contained in paragraphs160ZZPQ(1)(a) to (d) of the small business CGT roll-over relief provisions (see discussion on what criteria an asset needs to satisfy in paragraphs1.20 to 1.29) [new paragraphs160ZZPZD(1)(a), 160ZZPZH(2)(a) and 160ZZPZI(2)(a)] ;
·
the taxpayer must elect that this exemption is to apply in respect of the asset (see discussion on elections in paragraphs1.30 to 1.33) [new paragraphs160ZZPZD(2)(a), 160ZZPZH(4)(a) and 160ZZPZI(4)(a)] ;
·
the amount for which the exemption is claimed must not exceed the amount of the capital gain concerned [new paragraphs160ZZPZD(2)(c), 160ZZPZH(4)(c) and 160ZZPZI(4)(c)] ; and
·
the taxpayer must not have previously made an election under section160ZZPQ to apply the Division 17A CGT roll-over relief provisions to the disposal [new paragraphs160ZZPZD(2)(e), 160ZZPZH(4)(e) and 160ZZPZI(4)(f)] .

1.10 In addition, a taxpayer also needs to satisfy other specific conditions. The specific conditions that a taxpayer needs to satisfy however will depend on whether the taxpayer is an individual (other than an individual who disposes of the asset acting as a trustee), a private company or a trust that is not a publicly traded unit trust.

Specific conditions that an individual taxpayer also needs to satisfy

1.11 If the taxpayer is an individual (other than an individual who disposes of the asset acting as a trustee) then, to qualify for the CGT retirement exemption, the following conditions must also be satisfied:

·
immediately before the election is made, the asset's CGT exempt amount must not exceed the individual's CGT retirement exemption limit (see discussions on what is an asset's CGT exempt amount in paragraphs1.34 to 1.43 and what is an individual's CGT retirement exemption limit in paragraphs1.47 and 1.48) [new paragraphs160ZZPZD(2)(d) and new section160ZZPZN] ; and
·
the individual must receive all of the actual consideration for the disposal of the asset within the period beginning one year before, and ending two years after, the disposal (see discussion on what is the actual consideration for the disposal of an asset in paragraphs1.61 to 1.63). However, the actual consideration can be received in instalments provided all of the instalments are paid by the end of the relevant period (ie. beginning 1year before, and ending 2years after, the disposal of the asset) [new paragraph160ZZPZD(1)(b)].

Specific conditions that a private company or a trust that is not a publicly traded unit trust also needs to satisfy

1.12 If the taxpayer is a private company or a trust that is not a publicly traded unit trust then, to qualify for the CGT retirement exemption, the following conditions must also be satisfied:

·
the company or trust must receive all of the actual consideration for the disposal of the asset within the period beginning one year before, and ending two years after, the disposal (see discussion on what is the actual consideration for the disposal of an asset in paragraphs1.61 to 1.63). However, the actual consideration can be received in instalments provided all of the instalments are made by the end of the relevant period (ie. beginning 1year before, and ending 2years after, the disposal of the asset) [new paragraphs160ZZPZH(2)(b) and 160ZZPZI(2)(b)] ; and
·
there must be either one or two controlling individuals of the company or trust immediately before the disposal of the asset (see discussion on who is a controlling individual in paragraphs 1.49 to 1.55) [new subsections160ZZPZH(3) and 160ZZPZI(3)] ; and
·
if there is only one controlling individual, the asset's CGT exempt amount must not exceed the controlling individual's CGT retirement exemption limit immediately before the election is made [new paragraph160ZZPZH(4)(d) and new section160ZZPZN] . (For a discussion on what is an asset's CGT exempt amount and what an individual's CGT retirement exemption limit see paragraphs1.34 to1.43 and paragraphs1.47 and 1.48 respectively); or
·
if there are two controlling individuals, then for each controlling individual, the individuals exemption percentage of the assets CGT exempt amount must not exceed that individual's CGT retirement exemption limit immediately before the election is made [new paragraph160ZZPZI(4)(e) and new section160ZZPZN]. An individuals exemption percentage is the percentage of the assets CGT exempt amount that is to be attributable to that individual. One of the percentages can be nil, but the two percentages must add up to 100% [new paragraph160ZZPZI(4)(d)].

1.13 In addition, a private company or trust must make an eligible termination payment (ETP) to the controlling individual(s) within 7days after making the election or within 7days after the taxpayer receives an amount of actual consideration.

1.14 The amount of the ETP that must be paid will depend on whether the company has one or two controlling individuals. If the company or trust has only one controlling individual, the amount of the ETP that must be paid must be at least equal to the amount received as actual consideration. If the company or trust has two controlling individuals, the amount of the ETP that must be paid to each of the two controlling individuals must be at least equal to each of the controlling individuals exemption percentage of the actual consideration. [New subsections160ZZPZH(5) and160ZZPZI(5)]

1.15 However, if the actual consideration to be paid out plus the total amount of actual consideration previously received exceeds the asset's CGT exempt amount, then the amount of the actual consideration that must be paid as an ETP to the controlling individual(s) is reduced by the amount of the excess. [New subsections160ZZPZH(8) and 160ZZPZI(5)]

1.16 Also, if a controlling individual of a taxpayer is under age 55 at the date of disposal of the asset, the company or trust must pay the CGT exempt amount of the ETP for that individual directly into a complying superannuation fund, a complying ADF or Retirement Savings Account (RSA) selected by that controlling individual. [New subsections 160ZZPZH(7) and 160ZZPZI(5)]

1.17 To qualify as an ETP, the amount must be paid to the controlling individual in consequence of the termination of his or her employment.

1.18 If the controlling individual is aged 55 or more at the date of disposal of the asset and wants to roll-over the ETP into a roll-over fund or an eligible annuity (including a deferred annuity), the amount must be paid into a roll-over fund immediately after the ETP is made. This is in accordance with the rules about rolling over ETPs which are contained in SubdivisionAA of Division2 of Part III of the Act.

1.19 Individuals aged under 55 immediately prior to the disposal of the asset are not eligible to roll-over the CGT exempt amount of the ETP component into a eligible annuity or deferred annuity because these products do not have a preservation requirement. However, life insurance companies will be able to receive the CGT exempt amount of the ETP through RSAs and indirectly, if rolled over from a complying superannuation fund, a complying ADF or an RSA.

What criteria does an asset need to satisfy?

1.20 To be eligible to claim the CGT retirement exemption, the asset must satisfy the criteria in paragraphs160ZZPQ(1)(a) to (d) which are explained in paragraph1.21. These criteria also need to be satisfied in order to claim the small business CGT roll-over relief included in new Division17A of PartIII of the Act (to be inserted by Part1 of Schedule5 of Taxation Laws Amendment Bill (No.1) 1997). For a full explanation of the criteria, refer to the explanations relating to the operation of paragraphs160ZZPQ(1)(a)-(d) in Chapter 7 of the Explanatory Memorandum that accompanied Bill No.1.

1.21 The relevant criteria contained in paragraphs160ZZPQ(1)(a) to (d) are as follows:

·
the asset must be a roll-over asset;
·
a capital gain must otherwise accrue to the taxpayer as a result of the disposal (notional capital gain);
·
the asset must be an active asset at the disposal test time;
·
if the asset was not an active asset at the disposal test time, it must have been an active asset immediately before the business (in respect of which the asset was used) ceased to be carried on. In addition, the cessation of the business must have occurred no more than twelve months before the disposal test time; and
·
the asset must have been an active asset during more than one half of the period in which it was owned by the taxpayer.

[New paragraphs160ZZPZD(1)(a), 160ZZPZH(2)(a) and 160ZZPZI(2)(a)]

1.22 In addition, the asset must be disposed of on or after 1July 1997. [Item45 of Part3]

1.23 The date of disposal of an asset is defined for the purposes of the CGT provisions in section 160U.

What is a roll-over asset?

1.24 A roll-over asset is an asset disposed of by a taxpayer who has assets (including assets of entities connected with the taxpayer) with a net value that does not exceed $5million (subsection160ZZPL(7); section160ZZPP).

1.25 The net value of assets is the sum of the market values of the assets of an entity less the sum of the liabilities of the entity that relate to those assets. Specifically excluded are liabilities that relate to an asset that is excluded for the purposes of the $5million threshold by paragraphs160ZZPL(1)(a), (b), (c) and (d) (subsection160ZZPP(5)).

What is an active asset?

1.26 The CGT retirement exemption and the small business roll-over relief measure are only available for assets that are active assets at the disposal test time. The disposal test time is the time immediately before the disposal of the relevant asset (section160ZZPK).

1.27 An active asset is one which, at a particular point in time, is used by the taxpayer in carrying on a business, for example, plant, machinery and a factory of a manufacturing business. An active asset also includes an asset which is held ready for use in that business or an intangible asset which is inherently connected with the business, such as goodwill (subsection160ZZPL(3)).

1.28 Active assets do not include shares in a company and interests in trusts. Assets whose predominant use is to derive interest income, annuities, rent, royalties or foreign exchange gains are also not active assets (subsection 160ZZPL(4)). However, this exclusion will not apply to an asset disposed of by the taxpayer where the market value of the asset substantially appreciated because of the taxpayer's efforts in substantially developing, altering or improving the asset (subsection160ZZPL(5)).

1.29 Active assets also do not include financial instruments such as loans, debenture stock, futures contracts, forward contracts, currency swap contracts and promissory notes (paragraph160ZZPL(4)(d)).

Elections

1.30 To claim the CGT retirement exemption, the taxpayer must elect in writing that this exemption is to apply in respect of the disposal of the asset. The election must be made on or before the date the taxpayer lodges a return for the year of income in which the asset was disposed of [new paragraphs160ZZPZD(2)(a), 160ZZPZH(4)(a) and 160ZZPZI(4)(a)] . The election must also specify an amount, not greater than the amount of the capital gain, as the asset's CGT exempt amount [new paragraphs160ZZPZD(2)(b), 160ZZPZH(4)(b) and 160ZZPZI(4)(b)] .

1.31 Further, if the taxpayer is a company or trust and there are two controlling individuals of the company or trust, the election must also specify the percentage of the asset's CGT exempt amount that is attributable to each of the controlling individuals (ie. the exemption percentage). [New paragraph160ZZPZI(4)(d)]

1.32 It is not necessary for the taxpayer to include the election in his or her return. The taxpayer simply needs to prepare the election on or before the date of lodgement of the return and then retain the election so it can be made available to the Commissioner if he requests it.

1.33 The taxpayer cannot make an election for the purposes of this Division in respect of the disposal of an asset if the taxpayer has previously elected for the Division17A CGT roll-over relief provisions to apply to the disposal. [New paragraphs160ZZPZD(2)(e), 160ZZPZH(4)(e) and 160ZZPZI(4)(f)]

What is an assets CGT exempt amount?

1.34 An assets CGT exempt amount is the amount of the capital gain that would, but for these amendments have accrued to the taxpayer on the disposal of an asset and which the taxpayer elects to be exempt under new Division17B [new paragraphs160ZZPZD(2)(b), 160ZZPZH(4)(b) and 160ZZPZI(4)(b)] . However, before the CGT exempt amount is calculated, the capital gain on the asset must be reduced by the taxpayer's prior year net capital losses in the order in which those losses were incurred (see discussion of net capital losses in paragraphs1.44 to1.46) [new paragraphs160ZZPZD(2)(c), 160ZZPZH(4)(c) and 160ZZPZI(4)(c)] .

1.35 The CGT exempt amount must also satisfy the following criteria:

·
it must not be greater than the amount of the capital gain concerned [new paragraphs160ZZPZD(2)(c), 160ZZPZH(4)(c) and 160ZZPZI(4)(c)] ;
·
if the taxpayer is an individual then, immediately before the election is made, the assets CGT exempt amount must not exceed the individuals CGT retirement exemption limit (see discussion on an individuals CGT retirement exemption limit in paragraphs 1.47 and 1.48) [new paragraph160ZZPZD(2)(d)] ;
·
if the taxpayer is a company or trust that has only one controlling individual (see discussion on who is a controlling individual in paragraphs 1.49 to 1.55) then, immediately before the election is made, the assets CGT exempt amount must not exceed the controlling individuals CGT retirement exemption limit [new paragraph160ZZPZH(4)(d)] .

1.36 If the taxpayer is a company or trust that has two controlling individuals then, immediately before the election is made , the individuals exemption percentage of the assets CGT exempt amount must not exceed that individuals CGT retirement exemption limit. [New paragraph160ZZPZI(4)(e)]

1.37 In addition, the assets CGT exempt amount may be reduced if the taxpayer is a company or trust and for the period the taxpayer owned the asset, the controlling individual(s) did not control the taxpayer. The amount of the reduction will depend on whether the taxpayer has one or two controlling individuals.

1.38 If the company or trust has only one controlling individual immediately before the disposal of the asset concerned, the assets CGT exempt amount is reduced by the following amount:

Asset's CGT exempt amount X Period during which the individual was not the controlling individual of the taxpayer when the taxpayer owned the asset
------------------------------------------
Period the taxpayer owned the asset

1.39 In working out the period the taxpayer owned the asset, years of income prior to 1992-93 can be ignored. However, if the taxpayer has records to establish that the individual was a controlling individual of the company or trust during years prior to the 1992-93 year of income then these years can be taken into account.

1.40 If these prior years are taken into account, then the asset's CGT exempt amount is reduced by the lesser of the two reduction amounts calculated.

[New subsections 160ZZPZK(1) and (2)]

Example 1 A company acquires an asset on 1 July 1986 and sells the asset on 30June1998 (ie,12years later). The asset's CGT exempt amount is $300. Melissa was a controlling individual of the company at the time of disposal and was a controlling individual of the company from 1July1989 to 30June1995 and again from 1July1996 to 30June1998 (ie,a total of 8years).As Melissa was not a controlling individual of the company for the full period the asset was owned, the assets CGT exempt amount must be reduced. The amount of the reduction is the lesser of the following two amounts:

·
the amount of the reduction if all the relevant years of income are taken into account which is $100 (ie,$300 x4/12); and
·
the amount of the reduction if the years of income prior to 1992-93 are ignored which is $50 (ie,$300 X 1/6).
That is, the amount of the reduction will be $50. As a consequence, the assets CGT exempt amount will be $250 (ie,$300-$50).

1.41 If the company or trust has two controlling individuals immediately before the disposal of the asset concerned, the amount the assets CGT exempt amount is reduced by the sum of the amount calculated for each individual using the following formula:

Individual's exemption percentage X Asset's CGT exempt amount X Period during which the individual was not the controlling individual of the taxpayer when the taxpayer owned the asset
----------------------------------------
Period the taxpayer owned the asset

1.42 In working out the period the taxpayer owned the asset, years of income prior to 1992-93 can be ignored. However, if the taxpayer has records to establish that the individual was a controlling individual of the company or trust during years prior to the 1992-93 year of income then these years can be taken into account.

1.43 If these prior years are taken into account, then the amount the asset's CGT exempt amount will be reduced by for each controlling individual is the lesser of the two amounts calculated.

[New subsection160ZZPZK(3)]

Example 2 Assume in example1, Louise was also a controlling individual of the company at the time of disposal and was a controlling individual of the company from 1July1986 to 30June1991 and again from 1July1995 to 30June1998 (ie,also for a total of 8years). In addition, Melissas and Louises exemption percentage is 50% each.As both Melissa and Louise were not controlling individuals of the company for the full period the asset was owned, the assets CGT exempt amount must be reduced. The amount of the reduction is the sum of Melissas and Louises exemption percentage of the reduction amounts that would otherwise be required if Melissa or Louise was the only controlling individual.That is, the reduction required in relation to Melissa will be $25 (ie,50%x$50).The reduction required in relation to Louise will be 50% of the lesser of the following two amounts:

·
the amount of the reduction if all the relevant years of income are taken into account which is $100 (ie,$300 X 4/12); and
·
the amount of the reduction if the years of income prior to 1992-93 are ignored which is $150 (ie, $300 X 3/6).

That is, the amount of the reduction required for Louise will be $50 (ie,50%x$100).Therefore, the total amount of the reduction will be $75 (ie,$25+$50). As a consequence, the assets CGT exempt amount will be $225 (ie,$300-$75).

Net capital losses

1.44 New section160ZZPZL reduces the amount of the CGT retirement exemption available to the taxpayer to the extent to which net capital losses are available from previous years. Where a taxpayer elects for the CGT retirement exemption to apply to a disposal of an asset and the taxpayer has incurred net capital losses in respect of earlier years of income which have not previously been recouped, then the capital gain in respect of the disposal is reduced by the prior year net capital losses [new subsection160ZZPZL(2)] . However, the capital gain is only reduced if these losses would otherwise be available to offset against capital gains under PartIIIA of the Act [new paragraph160ZZPZL(1)(c)] . Prior year net capital losses must first be offset against new Division17B capital gains before being applied under section160ZC and Division17A [new subsection160ZZPZL(5)] .

1.45 Prior year net capital losses must be offset in the order that they are incurred [new subsection160ZZPZL(3)] . (However, a net capital loss in respect of a year of income before 1995-96, to the extent it has not been recouped, will be reflected in the amount of a net capital loss in respect of the 1995-96 year of income.) Further, capital gains made on the disposal of an asset must be reduced by prior year net capital losses in the order in which the taxpayer made the elections to have new Division17B apply to the disposal of the assets [new subsection160ZZPZL(4)] .

1.46 An example of how prior year net capital losses reduce the capital gain on the disposal of an asset is set out in new subsection160ZZPZL(6) .

What is an individuals CGT retirement exemption limit?

1.47 An individuals CGT retirement exemption limit is subject to a maximum of $500000. This is the total amount an individual can be exempt on as a consequence of this Division. This amount is a life time limit applicable to each individual taxpayer. [New subsection160ZZPZB(3)]

1.48 An individuals CGT retirement exemption limit at a particular time is $500000 less the total of CGT exempt amounts specified in previous elections that relate to the individual [new subsection160ZZPZN(1)] . For the purposes of this calculation, if an individual was one of two controlling individuals in a company or trust, only that individuals exemption percentage of the CGT exempt amount is included in the total of CGT exempt amounts [new subsection160ZZPZN(2)] .

Who is a controlling individual?

1.49 An individual will be a controlling individual of a private company at a point in time if:

·
the individual is an employee of the company at that time; and
·
the individual holds the legal and equitable interests in shares that carry the following rights:

·
the right to exercise 50% or more of the voting power in the company; and
·
the right to receive 50% or more of the dividends that the company may pay; and
·
the right to receive 50% or more of any distribution of capital of the company.

[New subsection 160ZZPZP(2)]

1.50 In determining who holds the legal and equitable interest in the shares of a company, redeemable shares are ignored. [New subsection160ZZPZP(7)]

1.51 An individual will be a controlling individual in a fixed trust at a point in time if, at that time:

·
the individual is an employee of the trust; and
·
the individual has entitlements to a 50% or more share of the income and capital of the trust.

[New subsection160ZZPZP(3)]

1.52 A trust is a fixed trust if persons have entitlements to all of the income and capital of the trust. [New subsection160ZZPZP(5)]

1.53 An individual will be a controlling individual in a trust that is not a fixed trust at a particular time (the test time) if:

·
the individual is an employee of the trust at the test time; and
·
the trust passes the pattern of distributions test, for the test year in relation to the individual (see discussion on pattern of distributions test and test year in paragraphs 1.56 to 1.60).

[New subsection160ZZPZP(4)]

Who is an employee?

1.54 For the purposes of these definitions, a taxpayer will be an employee if the person is treated as an employee for the purposes of the Superannuation Guarantee (Administration) Act1992 , assuming that subsection12(11) of that Act had not been enacted [new subsection160ZZPZP(6)] . By assuming subsection12(11) had not been enacted, domestic workers covered by that provision can be employees for the purposes of the CGT retirement exemption.

When must an individual be a controlling individual?

1.55 The taxpayer must be a controlling individual immediately before the time of disposal of the asset in order to qualify for the CGT retirement exemption in respect of that disposal. [New subsections160ZZPZH(3) and 160ZZPZI(3)]

Pattern of distributions test

1.56 The pattern of distributions test concept is used in determining whether a trust that is not a fixed trust has a controlling individual at any point in time.

1.57 The pattern of distributions test is passed for the test year in relation to an individual if:

·
the trust has made a distribution of income or capital during the test year; and
·
the trust has distributed 50% or more of all distributions of income during the test year to the individual for his or her own benefit; and
·
the trust has distributed 50% or more of all distributions of capital during the test year to the individual for his or her own benefit.

[New subsection 160ZZPZQ(1)]

1.58 A person is distributed something for his or her own benefit if the person is distributed the thing otherwise than in the capacity of a trustee.

1.59 The percentage of any distribution of income or capital for any income year distributed by a trust to an individual is the total income or capital distributed to the individual as a percentage of the total income or capital for that year distributed by the trust.

What is a 'test year'?

1.60 The pattern of distributions test is a yearly test to determine if the trust has a controlling individual. In the year that the disposal of the asset takes place, an individual is taken to be a controlling individual of a trust that is not a fixed trust if he or she was a controlling individual in the year of income immediately before the year in which the disposal occurred (ie. the test year). In a year of income other than the disposal year, an individual is taken to be a controlling individual of a trust that is not a fixed trust if he or she was a controlling individual for that year of income (ie. the test year). [New subsection160ZZPZQ(2)]

What is the actual consideration for the disposal of an asset

1.61 In working out the actual consideration received for the disposal of an asset under new Division17B subsection160ZD(2) is ignored. Subsection160ZD(2) provides that in certain circumstances a taxpayer is deemed to have received consideration for the disposal of an asset equal to the market value of that asset. For example, where a taxpayer gifts an asset to another person and receives no consideration for the disposal, subsection160ZD(2) deems consideration equal to the asset's market value to have been received. [New subsection160ZZPZO(1)]

1.62 The effect of new subsection 160ZZPZO(1) is that a taxpayer must actually receive consideration for the disposal of an asset in order to claim the CGT retirement exemption. This is consistent with the Government's policy of providing a CGT exemption on disposal of the assets of a small business where the proceeds are used for retirement.

1.63 Where the consideration for the disposal of an asset is an obligation to pay money (such as a promissory note) or to do some other thing (such as discharging a mortgage) the actual consideration is not taken to be received until the money is actually paid or the other thing is actually done [new subsection160ZZPZO(2)] . This provision only applies for the purposes of new Division17B.

What happens to the capital gain accrued in respect of the asset if the disposal is exempt?

1.64 If all of the relevant conditions that apply to the taxpayer are satisfied, the amount of the capital gain that would otherwise have accrued to the taxpayer in respect of the disposal concerned is reduced (but not below nil) by the asset's CGT exempt amount (explained in paragraphs1.34 and1.43). Any capital gain in excess of the CGT exempt amount will be included as assessable income of the taxpayer as a capital gain in the year of income in which the asset was disposed of. [New subsections160ZZPZE(2) and 160ZZPZJ(2)]

1.65 In addition, if any part of the actual consideration from the disposal of an asset is exempt under this Division, then any exemptions or roll-overs provided under Divisions15, 17, 17A, 18 and 19 of PartIIIA of the Act cannot apply in respect of the disposal of the asset. [New subsections160ZZPZE(3) and 160ZZPZJ(3)]

1.66 Other consequences that apply to a taxpayer that satisfies all of the relevant conditions depends on whether the taxpayer is an individual (other than an individual who disposes of the asset acting as a trustee), a private company or a trust that is not a publicly traded unit trust.

Other consequences that will apply to an individual taxpayer that satisfies all of the relevant conditions

1.67 If a taxpayer operates his or her business as a sole trader or in a partnership and the taxpayer receives an amount as actual consideration in respect of the disposal, an amount equal to the actual consideration is initially taken to be an ETP made in relation to the taxpayer for the purposes of SubdivisionAA of Division2 of PartIII of the Act. However, if the amount that is taken to be an ETP exceeds the asset's CGT exempt amount, then the amount of the ETP is reduced so that it equals the CGT exempt amount [new subsections160ZZPZE(4) and160ZZPZE(5)] . Although an amount equal to the actual consideration is taken to be an ETP made in relation to the taxpayer no expenditure has actually been incurred. Consequently, the taxpayer cannot claim a tax deduction for this amount.

1.68 If the taxpayer is under age 55 at the date of disposal of the asset, the ETP must be rolled over into a complying superannuation fund, a complying ADF or a RSA immediately after the actual consideration for the disposal is received and then preserved until the superannuation preservation age (currently age 55) [new subsection160ZZPZF(1)] . If a taxpayer is under age 55 immediately prior to the disposal and does not roll-over the deemed ETP, the taxpayer does not qualify for the CGT retirement exemption in respect of the asset disposed of and the election for the exemption is taken never to have been made [new subsection160ZZPZF(2)] .

1.69 If the taxpayer is aged 55 or more at the date of disposal of the asset and wants to roll-over the ETP into a roll-over fund or an eligible annuity (including a deferred annuity) then the taxpayer must pay the proceeds into a roll-over fund immediately after the proceeds are received. This is in accordance with the rules about rolling over ETPs which are contained in SubdivisionAA of Division2 of Part III of the Act.

1.70 Individuals aged under 55 immediately prior to the disposal of the asset are not eligible to roll-over the ETP into an eligible annuity or deferred annuity because these products do not have a preservation requirement. However, life insurance companies will be able to receive the CGT exempt amount of the ETP through RSAs and indirectly, if rolled over from a complying superannuation fund, a complying ADF or an RSA.

Other consequences that will apply to a private company or trust that satisfies all of the previous relevant conditions

1.71 The CGT exempt amount of an ETP is not an allowable deduction of the taxpayer. [New paragraph160ZZPZJ(4)(b)]

Section 2 - Amendment of superannuation related provisions

ETP provisions

1.72 The CGT exempt amount calculated under new Division17B will be deemed to be an ETP if the taxpayer is operating a business as a sole trader or partner in a partnership. If the taxpayer is a private company or trust the CGT exempt amount will be paid out to the controlling individual as an ETP and taxed under SubdivisionAA of Division2 of PartIII of the Act.

1.73 CGT exempt amounts paid as ETPs because of new Division17B will not be subject to taxation in the hands of the individual unless they are in excess of the recipient's reasonable benefit limit (RBL). They will not be included in taxable contributions when rolled over to a roll-over fund. Nor will they be surchargeable contributions for superannuation contributions surcharge purposes [Item 44 of Part 2] .

1.74 If the CGT exempt amount is paid to an employee of a company or a trust, the payment will be an ETP under paragraph(a) of the definition of 'eligible termination payment' in subsection27A(1). If the amount arises because of the operation of new subsection160ZZPZE(4) , the amount will be an ETP under new paragraph(jaa) of that definition. [Items5 and6 of Part1]

Components of ETPs

1.75 Subsection 27AA(1) of the Act breaks ETPs into one or more components. An ETP is split into components because each component is taxed differently. The tax treatment of the CGT exempt amount is different from the tax treatment of the other ETP components. Therefore a new component is created, namely the CGT exempt component.

1.76 The CGT exempt component is defined in subsection 27A(1) to be:

·
if the ETP is covered by new subsection 160ZZPZE(4) , the amount of the ETP; or
·
if the whole or part of an ETP is taken by new subsection160ZZPZJ(4) to consist solely of a CGT exempt component, the amount of that component.

[Item4 of Part1]

1.77 Subsection 27AA(1) sets out the components of an ETP and is amended to identify the CGT exempt component [Item7 of Part 1] . Also, the formulae used to calculate the pre-July83 component in subparagraphs27AA(1)(d)(i) and (ii) are amended to recognise the CGT exempt component [Items 8 to 10 of Part 1] . For this purpose, the CGT exempt component is treated in the same way as the concessional component and the post-June1994 invalidity component. Consequently, the pre-July83 component will be the lesser of the following amounts:

·
the amount of the ETP reduced by the concessional component, the post-June 1994 invalidity component, the non-qualifying component, the excessive component and the CGT exempt component, multiplied by the proportion of the number of days in the eligible service period that occurred before 1July1983 to the total number of days in the eligible service period; and
·
the amount of the ETP reduced by the concessional component, the post-June 1994 invalidity component, the non-qualifying component, the excessive component, the CGT exempt component and the undeducted contributions.

1.78 Subsection 27AA(3) applies to effectively treat the pre-July83 and post-June83 components of an ETP as an excessive component if the ETP is reportable for RBL purposes and the Commissioner does not make an RBL determination in relation to the ETP. Subsection27AA(3) will apply to treat the CGT exempt component as an excessive component in the same circumstances. [Item11 of Part1]

1.79 Section 27AB identifies the taxed and untaxed elements of the post-June83 component of an ETP. A new paragraph(jaa) ETP will not contain a post-June83 component. However, as all the paragraphs in the definition of 'eligible termination payment' in subsection27A(1) are listed in the Table of Taxed Elements in subsection27AB(1), new paragraph(jaa) is being listed so that no part of the amount is a taxed element. [Item12 of Part1]

1.80 To work out the amount of an ETP to be included in a taxpayers assessable income it is necessary to calculate:

·
the amount of each component of an ETP not rolled over (referred to as 'the retained amount of the ETP'); and
·
the amount or amounts of each component rolled over (referred to as the 'applied amount').

1.81 These amounts are calculated in sections27AC and 27D respectively. Amendments similar to those outlined in paragraph1.77 will be made to subsections27AC(2), 27D(2) and 27D(5) to appropriately recognise the CGT exempt component [Items 13 to 18 and 20 to 25 of Part 1] .

Exclusion of the CGT exempt component from assessable income

1.82 To ensure the retained amount of the CGTexempt component is not assessable under any provision of the Act, subsection27CB(1) will be amended to exempt the component in the same way that the tax-free amount of bona fide redundancy payments, approved early retirement scheme payments and the post-June 1994 invalidity component are exempted [Item19 of Part1] . That is, the CGT exempt component is excluded from assessable income and is ignored when calculating whether a capital gain accrues to a taxpayer.

Reasonable benefit limits

1.83 The retained amount of the CGT exempt component will be assessed against the taxpayers RBL. A taxpayers RBL refers to the amount of concessionally taxed superannuation benefits he or she can receive. The provisions that relate to RBLs are contained in Division14 of PartIII of the Act.

1.84 Division 14 is being amended to ensure that the retained amount of the CGTexempt component is counted towards a taxpayers RBL. The CGT exempt component will be defined in section140C to have the same meaning as in section27A. [Item26 of Part1]

1.85 Section 140F applies so that the retained amount of the CGTexempt component of the ETP will be appropriately worked out under section27AC.

RBL notification requirements

1.86 Subject to certain exceptions, SubdivisionC of Division14 requires the payer of a benefit to notify the Commissioner of the payment of the benefit. A 'payer' is defined in section140C as a person or other entity that makes, or is liable to make, a payment of a benefit. The definition of 'payer' is amended to include an individual who receives a benefit that is an ETP because of new subsection160ZZPZE(4) . This amendment is necessary to ensure that Division14 will apply appropriately if the payer and the person receiving the benefit are the same taxpayer, as will be the case of a sole proprietor or a partner who receives a CGT exempt component of an ETP. [Item27 of Part1]

1.87 Section 140D provides that a payer is not taken to have made an ETP to the extent that it is rolled-over. In these circumstances the ETP does not have to be reported, and consequently is not counted, for RBL purposes. Section140ZH defines when a particular component of an ETP has been rolled-over and is being amended so that it applies appropriately to the amount of the CGT exempt component that is rolled-over. [Item28 of Part1]

1.88 To the extent that the CGT exempt component is not rolled over the payer must, regardless of the amount, notify the Commissioner. Subsection140M(1)(a) is amended to include any ETPs that include a CGTexempt component [Items29 and 30 of Part 1] .

1.89 In addition, new subsection140M(6) will be inserted to apply to an ETP that is taken to have been made to a person under new subsection160ZZPZE(4) . In these circumstances the payer and the recipient are the same person. New subsection140M(6) provides that:

·
the person is taken to be the payer of the ETP; and
·
the notice to be given in subsection 140M(1) must be given to the Commissioner before the end of the 14th day of the month after the payment month, or before the end of such further period as the Commissioner allows.

[Item 31 of Part 1]

1.90 Section 140N is amended to provide for the automatic quotation of the person's tax file number if the CGT exempt amount is made to a person under new subsection160ZZPZE(4) . This is because the payer and the recipient are the same person. [Item32 of Part1]

1.91 Section 140P requires a payer of a benefit to provide a copy of a notice to the recipient. This section will not apply if the benefit is an ETP made to a person under new subsection160ZZPZE(4) . This is because the payer and the recipient are the same person. [Item33 of Part1] How much of the CGT exempt component is counted towards the person's RBL?

1.92 SubdivisionH of Division14 applies to work out the RBL amount of an ETP, superannuation pension or annuity. The RBL amount of an ETP, superannuation pension or annuity is the amount of the benefit that is counted for RBL purposes.

1.93 The RBL amount is worked out under:

·
if the benefit is an ETP paid by a superannuation fund, RSA or ADF section 140ZH;
·
if the benefit is an ETP paid by a life assurance company or registered organisation - section 140ZI;
·
if the benefit is an ETP paid by an employer section 140ZJ;
·
if the benefit is a superannuation pension other than a disability superannuation pension - section140ZK;
·
if the benefit is a disability superannuation pension - section 140ZL;
·
if the benefit is an annuity - section 140ZM.

1.94 If the CGT exempt component is paid out as an ETP or is included in the purchase price of an annuity, the RBL amount will include 100% of the retained amount of the CGT exempt component. [Items 34 to 37 and 39 to 41 of Part1]

1.95 If the CGT exempt component is paid out as an ETP that arises because of new subsection160ZZPZE(4) , new section140ZJA will apply so that the RBL amount of the ETP is 100% of the retained amount of the CGT component of the ETP. [Item 38 of Part 1]

1.96 The RBL amount of a superannuation pension worked out under section140ZK and section140ZL is based on the capital value of the pension worked out under section140ZO. The capital value of a pension is, broadly, the present value of the pension reduced by the undeducted purchase price (UPP).

1.97 The CGT exempt component of an ETP that is used to purchase a superannuation pension will be part of the UPP of the pension under the definition of 'undeducted purchase price' in subsection27A(1). Therefore, the definitions of 'Undeducted purchase price' in subsection140ZO(1) and 'Excess undeducted purchase price' in subsection140ZO(3) will be amended so that the CGT exempt component is included in the capital value of the pension under section140ZO. [Items42 and43 of Part1]


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