House of Representatives

Taxation Laws Amendment Bill (No. 11) 1999

Explanatory Memorandum

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

Chapter 4 - Technical amendments

SECTION 1 - CAPITAL GAINS TAX - MINOR AMENDMENTS

Overview

4.1 Certain amendments in Schedule 4 to this Bill will make corrections to the capital gains tax (CGT) provisions in the Income Tax Assessment Act 1997 (ITAA 1997). Amendments in the Schedule will also make corrections to the Income Tax (Transitional Provisions) Act 1997 (IT (TP) Act) and the Income Tax Assessment Act 1936 (ITAA 1936).

Background

4.2 The CGT provisions in the ITAA 1936 were rewritten as part of the Tax Law Improvement Project (TLIP) and inserted into the ITAA 1997 by Tax Law Improvement Act (No. 1) 1998 . Since then, some unintended consequences have been identified which resulted from the rewrite. Amendments are required to the ITAA 1997 and the IT(TP) Act. Another unintended consequence also requires an amendment to the ITAA 1936.

4.3 The amendments will merely reinstate the position of the ITAA 1936. One of the amendments will reinstate a tax benefit to taxpayers which was inadvertently removed as a result of the CGT rewrite process. Other amendments will remove a tax benefit which inappropriately resulted from the process. None of the amendments change the policy reflected in the ITAA 1936.

4.4 The amendments will also satisfy the Joint Committee of Public Accounts and Audit (JCPAA)'s Report 356: An Advisory Report on the Tax Law Improvement Bill (No. 2) 1997 .

4.5 The amendments are the second instalment of refinements. The first instalment was contained in Taxation Laws Amendment Act (No. 4) 1999 .

Date of effect

4.6 The amendments will apply to assessments for the 1998-99 income year and later income years [subitem 82(1)] . The date of effect reflects the view expressed by the JCPAA.

4.7 However, an amendment to the record keeping requirements contained in section 121-30 of the ITAA 1997 is to apply only from the date of Royal Assent so that taxpayers will not be disadvantaged. [Subitem82(2)]

Explanation of the amendments

4.8 The effects of the amendments are set out in the third column of the table below. The first column in the table identifies the amendment number.

Amendments to the Income Tax Assessment Act 1997
Item number in Schedule 4 What the provision does. What the amendment will do.
Items 3, 4, 15, 51, 52, 57 and 73 104-15(1)(b): Describes when title in an asset passes for CGT event B1 (use and enjoyment before title passes). Clarifies that where the title to an asset passes at or before the end of the agreement CGT event B1 will apply.
This preserves the position of paragraph 160M(3)(d) of the ITAA 1936.
Consequential amendments are made to paragraph 104-15(4)(a), subsection 109-5(2) (table item B1), paragraph 126-5(3)(b), subsections 126-45(3), and 138-15(5) of the ITAA 1997 and paragraph 104-15(c) of the IT(TP) Act.
Items 6 and 11 104-35(5), 104-155(5): Describes the exceptions to CGT events D1 (Creating contractual or other rights) and H2 (Receipt for event relating to a CGT asset). Clarifies that the granting of an option to an entity to acquire shares, units or debentures does not give rise to CGT events D1 or H2.
This preserves the position of subsection 160ZZC(3A) of the ITAA 1936.
Item 9 104-135: CGT event G1 defines the CGT treatment of share capital payments received. Reinstates wording used in section 160ZL of the ITAA 1936 to clarify that any share capital payment received may trigger CGT event G1. This wording is consistent with that used in subsection 104-70(1) (CGT event E4).
Item 12 104-230(6): Defines the method for calculating the capital gain for CGT event K6. Clarifies that the cost base used in determining the capital gain is not the cost base of the underlying property but the cost base of the underlying property that can be reasonably attributed to the shares disposed of.
This preserves the position of subsection 160ZZT of the ITAA 1936.
Item 14 108-70(2): When is a capital improvement a separate asset? Excludes events arising directly from a person's death from the operation of the provision.
This preserves the position of section 160P of the ITAA 1936 and the Commissioner's interpretation in Taxation Determination 96/18.
Item 16 109-15: When you acquire a CGT asset without a CGT event. Ensures the provision reflects subsection 104-10(7) of the ITAA 1997 amended by Taxation Laws Amendment Act (No. 4) 1999 (TLAA No. 4).
Item 17 109-55: Other acquisition rules. Amends column 3 in item 11 so that it reflects the amendment made to subsection 130-60(2) of the ITAA 1997 (see item 54).
Items 18, 19, 20, 21, 22, 23, 24, 25 110-45 and 110-50: Identifies expenditure which does not form part of an asset's cost base. Ensures that recouped expenditure and the second and third elements of the cost base that are deductible do not form part of the cost base. This excludes the indexed component related to these expenditures from the cost base and thus restores the position in section 160ZJB of the ITAA 1936.
It also ensures that cost base adjustment rules apply to capital expenditure:

·
that is incurred after 30 June 1999 on land and buildings; and
·
that forms part of the fourth element of the cost base.

This clarifies the application of the transitional rule at present in subsection 110-53(3) as foreshadowed in Treasurer's Press Release No. 117 of 2 November 1997. The clarification is needed because the TLIP rewrite of section 160P of the ITAA 1936 does not generally treat capital improvements to land and buildings as a separate asset.
Subsection 110-53(3) is being repealed (see item 26).
Items 27, 28, 29, 30, 31 and 32 112-20: Market value substitution rule for cost base and reduced cost base. Replicates the exception to the market value rule in subsection 160ZH(9) of the ITAA 1936 where the acquisition results from another person doing an act or thing that does not constitute a disposal for the purpose of Part IIIA of the ITAA 1936. The amendments to subsections 112-20(1) and (2) will adopt an equivalent structure as used in the ITAA 1936.
Amends item 3 of the table in subsection 112-20(3) to limit the exception to the market value substitution rule to where CGT event D1 happens.
Amends items 5 and 6 of the table to include as an exception to the market value substitution rule to where CGT event C3 happens.
Item 35 114-15(2): Indexes cost base modification from the quarter in which the modification occurs. Options
Inserts subsection 114-15(5) to ensure that an amount paid for an option, and an amount paid to exercise an option are indexed from the quarter in which the liability to pay the amounts are incurred.
This adopts the interpretation contained in Taxation Determination 17 that was available to taxpayers under the ITAA 1936.
Convertible notes
Inserts subsection 114-15(6) to ensure that an amount paid to acquire a convertible note, and an amount paid to convert the note are indexed from the quarter in which the liability to pay the amounts are incurred.
This adopts the existing practice of the Australian Taxation Office (ATO) under ITAA 1936.
A note is inserted to new subsections 114-15(5) and (6) which makes it clear that where an amount is paid on shares or units after the date of acquisition the amount is indexed from the quarter in which the relevant amount is paid. This is consistent with the rule in subsection 960-275(3).
Items 37, 38 and 40 118-15: Exempts compensation for surrendering firearms. Repeals section 118-15 as amended by TLAA No. 4 and replaces it with subsection 118-37(3) which will preserve the effect of subsection 160Z(6A) of the ITAA 1936. Section 118-15 disregards the compensation payment in working out the net capital gain or net capital loss when it should be disregarding the capital gain a taxpayer makes on receiving a compensation payment.
Item 41 118-192: Special rule for when main residence is first used to produce income. Recognises that section 118-192 applies from 20 August 1996.
Item 42 118-197: Special rule for surviving joint tenant. Inserts section 118-197 which maintains the position in the ITAA 1936 by treating a surviving joint tenant of a deceased person as a beneficiary of the deceased's estate.
Item 43 118-250: Exempts part of a capital gain attributable to goodwill. Maintains the position in the ITAA 1936 by excluding partnerships from the definition of entity for the purposes of the section. The effect is that a partner's assets are used for the threshold rather than the assets of the partnership.
Item 45 121-30: Exceptions to the record keeping requirements. Clarifies that records are to be kept where a net capital gain has been rolled over.
This amendment will have effect from the date of Royal Assent.
Items 46, 47, 48, 49 and 50 Division 124: Replacement asset rollovers. Ensures that net capital gains cannot be rolled over into the cost base of an exempt CGT asset (i.e. car, motor cycle or similar vehicle).
Item 53 130-60(1)(table item 3): Units acquired by converting a non traditional convertible note. Ensures that the provision only applies to a convertible note issued by the trustee of a unit trust after 28 January 1988.
Item 54 130-60(2): Shares or units acquired by converting a convertible note. Ensures that the acquisition date of the share or unit is the date of conversion of the convertible note.
Items 58, 59, 60 and 61 138-160(2) and 138-160(3): Assets acquired before common ownership for the purposes of value shifting. Inserts references to section 149-5 of the IT(TP) Act to ensure that if a deemed acquisition occurred under Division 20 of the ITAA 1936 it is ignored for the purpose of these rules.
Item 64 170-135(1)(a): Describes the requirements companies within wholly-owned groups must satisfy to be able to transfer their net capital losses. Ensures prescribed dual resident companies are unable to transfer their net capital losses to another group company.
Items 66 and 67 960-275(3): Sets out the indexation factor. Ensures that:

·
where an amount is paid or given to acquire a share in a company or unit in a unit trust before or at the time of acquiring a share or unit the amount is indexed from the quarter when the liability to pay the amount is incurred; and
·
where an amount is paid to acquire a share or unit after the time of acquiring a share in a company or a unit in a unit trust the amount is indexed from the quarter when it is actually paid or given.

This will reinstate the position in subsection 160ZJ(3A) of the ITAA 1936.
Item 68 995-1: Defines resident trust for CGT purposes.' Clarifies that only one trustee of a trust needs to be an Australian resident for the trust to be treated as a resident trust for CGT purposes.
Amendments to the Income Tax (Transitional Provisions) Act 1997
Item number in Schedule 4 What the provision does. What the amendment will do.
Items 5 and 74 104-25: Provides a link between the ITAA 1936 and the ITAA 1997 for CGT event C2 (Cancellation, surrender and similar endings to a CGT asset). Inserts a transitional provision to ensure that no double taxation arises where the following happens:

·
before the 1998-1999 income year a company makes an interim distribution that was assessed as a capital gain under subsection 160ZL(3) of the ITAA 1936; and
·
after the commencement of the 1998-1999 income year the company makes a final liquidation distribution (a CGT event C2) within 18 months of the interim distribution.

In the absence of the amendment double taxation arises because subsection 104-25(3) includes that capital gain in the calculation of the capital proceeds for that CGT event C2.
Inserts a signpost after section 104-25 of the ITAA 1997.
Items 7, 8 and 74 104-40(5): Provides a link between the ITAA 1936 and the ITAA 1997 for CGT event D2 (Granting an option). Inserts a transitional provision to ensure that a capital gain that arises from a grant, renewal or extension of an option in the 1997-1998 or earlier income year is disregarded if the option is exercised in the 1998-1999 income year of a later income year. The amendment ensures that double taxation will not arise.
Inserts a signpost after subsection 104-40(5) of the ITAA 1997.
Items 13 and 78 108-5: Provides a link between the ITAA 1936 and the ITAA 1997 for the definition of CGT asset. Provides that a thing' that was not treated as an asset before 26 June 1992 under the ITAA 1936 will not be treated as a CGT asset.
Amends signpost after section 108-5 ITAA 1997.
Amendments to the Income Tax Assessment Act 1936
Item number in Schedule 4 What the provision does. What the amendment will do.
Item 1 47(1A): Distributions by a liquidator. Clarifies the method statement to ensure that capital gains that have been disregarded (e.g. under a rollover provision) are not income derived by the company. This correctly reflects the intention of the provision.

SECTION 2 - Minor CORRECTIONS

Overview

4.9 Certain amendments in Schedule 4 to this Bill will make corrections to provisions in the ITAA 1997. Some amendments contained in Schedule 4 will also make minor technical corrections to the IT(TP) Act and the ITAA 1936.

Background

4.10 These amendments will improve the readability of the rewrite of the CGT and certain other provisions, correct references, insert additional signposts and make slight changes that improve the wording of the rewrite. There will also be some other minor technical amendments to the ITAA 1997, the IT(TP) Act and the ITAA 1936. However, none of these amendments change the meaning of the law and many merely delete inappropriate asterisks or insert them where required.

Date of effect

4.11 The amendments will apply to assessments for the 1998-1999 income year and later income years. [Subitem 82(1)]

Explanation of the amendments

4.12 The effects of the amendments are set out in the third column of the table below. The first column in the table identifies the amendment number.

Amendments to the Income Tax Assessment Act 1997
Item number in Schedule 4 What the provision does. What the amendment will do.
Item 10 104-135(6): Describes an exception to CGT event G1 (Capital payment for shares). Places beyond doubt that the last sentence in this subsection is intended to be a signpost.
Item 26 110-53(3): Exceptions to what does not form a cost base. Repeals subsection 110-53(3) which is redundant because of proposed amendments to 110-45 and 110-50 (see items 18 and 22).
Items 33 and 34 112-30: Apportionment rules on acquisition or disposal of part of an asset. Corrects the references to the subsections in the Example.
Item 36 116-30(3): Excludes CGT events C2 and D1 from the market value substitution rule. Corrects the heading to the subsection so that it also refers to CGT event D1.
Item 39 118-37(2)(a): Compensation, damages etc. Corrects the reference to include a reference to the renamed program.
Item 44 118-255: Exception to the Small Business Goodwill CGT exemption. Corrects the reference to the ITAA 1936 provision by replacing it with the ITAA 1997 provision.
Item 55 136-10: Making a capital gain or loss from most CGT events. Corrects the phrase.
Item 56 136-25: When an asset has the necessary connection with Australia. Inserts a note to section 136-25 of the IT(TP) Act which provides another circumstance when an asset has the necessary connection with Australia.
Item 62 140-55(5): Value shift to shares acquired on or after 20 September 1985. In the second line of the example change the words just after' to just before'.
Item 63 170-125(2): Tax treatment of consideration for transferred tax loss. Corrects section reference in note.
Item 65 960-265: Identifies the provisions for which indexation is relevant. Corrects a reference by replacing Subdivision 42-K with section 42-80.
Item 69 995-1: Defines second continuity period'. Corrects a reference by replacing section 165-110 with section 165-120.
Item 70 995-1: Defines shareholding interest'. Corrects a reference by replacing section 175-65 with section 175-95.
Item 71 Division 165; 166; 170 and 175: Corporate taxpayers and corporate distributions. Either delete inappropriate asterisks or insert them where required.
Amendments to the Income Tax (Transitional Provisions) Act 1997
Item number in Schedule 4 What the provision does. What the amendment will do.
Item 72 102-5(2)(a): Provides a link between the ITAA 1936 and the ITAA 1997 for working out capital gains and losses. Accurately links the ITAA 1936 to the ITAA 1997 by using the terminology that is used in the ITAA 1936.
Item 75 104-70(1): Provides a link between the ITAA 1936 and the ITAA 1997 for the CGT treatment of trust capital payments received before 18 December 1986. Clarifies that the section referred to is a section of the ITAA 1997 and not of the IT (TP) Act.
Item 76 104-72: Provides a link between the 1936 Act and the 1997 Act for the CGT treatment of capital works deductions in respect of trust capital payments. Clarifies that the section referred to is a section of the ITAA 1997 and not of the IT (TP) Act.
Item 77 104-175(1): Provides a link between the ITAA 1936 and the ITAA 1997 for the CGT treatment of when a company ceases to be member of wholly-owned group after a rollover. Puts beyond doubt that section 104-175 (CGT event J1) of the ITAA 1997 can apply if the rollover was under section 160ZZO of the ITAA 1936.
This will mean, for example, that the reference in subsection 104-175(7) of the ITAA 1997 to Subdivision 126-B can also extend to section 160ZZO of the ITAA 1936.
Item 79 and 80 130-95(1) and (2): Provides a link between the ITAA 1936 and the ITAA 1997 for the CGT treatment of when a company ceases to be a member of a wholly owned group after a CGT amount has been rolled over. Clarifies that the Subdivision referred to is a Subdivision of the ITAA 1997 and not of the IT (TP) Act.
Item 81 140-15(8)(b): Provides a link between the ITAA 1936 and the ITAA 1997 for the CGT treatment of off-market share buy backs. Replaces the reference to Taxation Laws Amendment Act (No. 1) 1996 with the correct citation.
Amendments to the Income Tax Assessment Act 1936
Item number in Schedule 4 What the provision does. What the amendment will do.
Item 2 124ZN: Exemption of income from sale of shares in a pooled development fund. Correct a cross reference from section 118-138 to section 118-13.

CGT Finding Tables

4.13 This Chapter will also make 2 corrections to the finding table in the Explanatory Memorandum to Act No. 46 of 1998.

4.14 Finding Table 1 - New Law to Current Law

New law Current law
130-60(1) 160ZZBAA

4.15 Finding Table 2 - Current Law to New Law

Current law New law
160ZZBAA 130-60(1)

4.16 Finding Table 1 - New Law to Current Law

New law Current law
Replace 130-60(2) with 130-60(3) 160ZZBB

4.17 Finding Table 2 - Current Law to New law

Current law New law
160ZZBB Replace 130-60(2) with 130-60(3)


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