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Taxation Laws Amendment Bill (No. 1) 1997
1996-97
THE PARLIAMENT OF THE COMMONWEALTH OF
AUSTRALIA
SENATE
TAXATION LAWS AMENDMENT BILL (NO. 1)
1997
EXPLANATORY MEMORANDUM
(Circulated by authority of the
Treasurer, the Hon Peter Costello, MP)
80791 Cat. No. 96 7245 1 ISBN 0644
498285
GENERAL OUTLINE AND FINANCIAL IMPACT
Special
depreciation on trading ships
Brings to an end the 20 per cent prime
cost depreciation rate for trading ships.
Date of effect:
Applies to ships for which construction or purchase contracts are signed
on or after 1 May 1996 and which are delivered and registered in Australia on or
after 1 July 1997.
Proposal announced: Announced on 1 May
1996 by the Minister for Transport and Regional Development when introducing the
Shipping Grants Legislation Bill 1996.
Financial impact:
Estimated revenue savings of $10 million in 1997-98 year, $15 million in 1998-99
and $15 million in 1999-2000.
Compliance cost impact: Nil.
Commonwealth education or training payments
Amends the
PAYE, rebate and exemption provisions in the income tax law to define, in a
generic way, Commonwealth education or training payments.
Date of
effect: The proposed amendments to the PAYE provisions will apply to
payments made after the 28th day after Royal Assent so as to not impose any
retrospective PAYE obligations on the Commonwealth's paying agencies. The
proposed amendments to the income tax exemption and rebate provisions will apply
from 1 July 1996 so that they can operate to benefit taxpayers for a full year
of income, avoiding the complications of pro rata entitlements.
Proposal announced: Legislation previously introduced by
the former government (Taxation Laws Amendment Bill (No.5) 1995) which lapsed
due to the 1996 election.
Financial impact: The proposed
amendments are not expected to have any impact on revenue.
Compliance cost impact: Commonwealth paying agencies may
be required to deduct and remit PAYE tax instalments from a broader range than
at present. Those agencies already deduct PAYE instalments from some of their
payments, such that the additional burden on them is not expected to be
significant.
Commonwealth education or training payment recipients who
have received an assessable benefit may be required to lodge an income tax
return. This is not a new requirement but may be clearer because of the
amendments.
Controlled foreign companies and foreign investment
funds
Amends various provisions relating to the taxation of foreign
source income to:
* ensure that exclusions from the section 47A deemed
dividend rules operate correctly.
Date of effect: The
amendments will apply from 3 June 1990 (ie. from the commencement of section
47A).
Proposal announced: Not previously announced.
Financial impact: No significant impact on revenue.
Compliance cost impact: Compliance costs will be reduced
because the measure will provide greater certainty in the law.
* ensure
that the 'gross turnover' of a controlled foreign company (CFC) for the purposes
of the de minimis exemption in subsection 385(4) is not reduced by amounts
excluded from the active income test under section 436.
Date of
effect: The amendments will apply from the commencement of the CFC
measures (ie. for statutory accounting periods of CFCs commencing on or after 1
July 1990).
Proposal announced: Not previously announced.
Financial impact: Negligible impact on revenue.
Compliance cost impact: Compliance costs will be reduced
for CFCs which satisfy the de minimis exemption following the amendments.
* take account of changes to the Migration Act 1958 which:
- have the effect that temporary entry permits are now called temporary
visas; and
- allow citizens of New Zealand to visit Australia without a
temporary visa.
Date of effect: The amendments will apply
from 1 September 1994.
Proposal announced: Not previously
announced.
Financial impact: Negligible impact on revenue.
Compliance cost impact: Compliance costs will be reduced
because it will be clear that the temporary visitor exemption is available to
holders of temporary visas and to citizens of New Zealand who can visit
Australia without a temporary visa.
* allow a notional deduction for a
loss of a capital nature where a gain of a capital nature would be included in a
foreign investment fund's (FIF's) calculated profit.
Date of
effect: The amendments will apply from the commencement of the FIF
measures (ie. from 1 January 1993).
Proposal announced:
Not previously announced.
Financial impact: No significant
impact on revenue.
Compliance cost impact: The measure
will have no effect on compliance costs.
Dividend
imputation
Amends Taxation Laws Amendment Act (No. 4) 1995 to
allow companies the option of deferring conversion to the class C franking
account after they are paid a class C franked dividend or a trust or partnership
amount with class C franking credits attached. The Bill also eliminates an
unintended dual liability to class A franking deficit tax or franking additional
tax which may arise in certain situations.
Date of effect:
The amendments will apply from 1 July 1995.
Proposal
announced: The measures were announced by the Treasurer in a Press
Release (No. 54) dated 31 July 1996.
Financial impact: The
proposed amendments will prevent an unintended gain to the revenue. However,
there is insufficient data available on which a reliable estimate of what this
unintended gain could be made.
Compliance cost impact: The
proposed amendments will not increase compliance costs for companies.
Employee share schemes
Amends the employee share scheme
provisions of the Income Tax Assessment Act 1936 (the Act) to broaden
access to benefits, to increase the benefits available in some cases and to make
a number of minor amendments.
Date of effect: The
amendments to Division 13A of the Act to broaden access to benefits and to
increase the benefits available in some cases will apply from 1 July 1996. The
minor amendments have various application dates.
Proposal
announced: The amendments easing the participation requirements and
increasing the benefits available under Division 13A were announced by the
Treasurer in the Budget statement of 20 August 1996. While it was indicated in
the Budget statement that there would be some technical amendments, the details
of the other amendments in the Bill have not been previously announced.
Financial impact: The amendments to Division 13A to
broaden access to benefits and to increase the benefits available in some cases
will have a cost to the revenue of $15 million per annum from 1996-97 onwards.
The cost to the revenue of the other amendments is expected to be negligible.
Compliance cost impact: Some measures may reduce
compliance costs by creating greater certainty in the law. The remaining
measures will not affect compliance costs.
Capital gains tax -
majority underlying interests in assets
The capital gains tax (CGT)
provisions of the Income Tax Assessment Act 1936 (the Act) generally only
apply to assets acquired by a taxpayer on or after 20 September 1985. Section
160ZZS of the Act determines when assets acquired by a taxpayer before 20
September 1985 lose their pre-CGT status as a result of a change in majority
underlying interests held by natural persons. Majority underlying interests
refers to more than one-half of the beneficial interests held by natural persons
in the asset and income from the asset, regardless of how those interests are
held. Section 160ZZS currently requires taxpayers (including public entities) to
determine whether their majority underlying interests in assets has changed and,
if so, the date on which that change occurred in order to determine the time
when the pre-CGT assets became post-CGT. They must then value the affected
assets as at the date of the change.
The amendments contained in
Schedule 4 of the Bill (the amendments) will require public
entities (public companies, publicly traded unit trusts and mutual insurance
organisations) to periodically test, on prescribed dates, whether there has been
a change in majority underlying interests in the entity's assets between the
testing time and immediately before 20 September 1985. The amendments will also
provide streamlined methods for testing whether there has been a change in
majority underlying interests.
Date of effect: The
amendments take effect from 20 January 1997 and apply for the 1996-97 year of
income and subsequent years of income.
Proposal announced:
1996-97 Budget, 20 August 1996 and Assistant Treasurer's press release of 20
September 1996.
Financial impact: A small bring forward of
tax revenue will be produced as public entities will be aware of the post-CGT
status of assets earlier than they may have under the existing law. The
estimated increase in revenue will be $15 million in 1997-98, 1998-99 and
1999-2000.
Compliance cost impact: Some increase in
immediate compliance costs will arise where companies which do not have to test
under the current law, or have to test earlier than they would otherwise have
had to, are required to test under the new rules or value assets. There will be
a reduction in compliance costs due to the introduction of simplified methods of
tracing underlying interests.
Capital gains tax - disposals of small
business assets
Inserts new Division 17A into Part IIIA of the
Income Tax Assessment Act 1936 to allow rollover relief for the disposal
of some or all of the active assets of a small business, where replacement
active assets are acquired.
Date of effect: This measure
will apply to disposals of assets from 1 July 1997.
Proposal
announced: Foreshadowed in the Government's policy document 'Capital
Gains and Fringe Benefits Tax Reform' of 18 February 1996. Design details were
announced in the 1996-97 Budget on 20 August 1996 and in the Treasurer's press
release of 3 December 1996.
Financial impact: This measure
will have no revenue impact in 1997-98. A cost to revenue of $200 million in
1998-99 and $215 million in 1999-2000 is expected.
Compliance cost
impact: It will be necessary for small business taxpayers electing for
rollover relief to keep records of capital gains to be deferred, to calculate
the amount to be applied in reduction of cost bases of new assets and to
nominate the assets whose cost bases are to be reduced.
These
requirements result in compliance costs additional to those already incurred in
complying with the existing law. More specifically, the additional compliance
cost is in being aware of these changes in the law and ensuring that the cost
bases of new assets are appropriately reduced and the reductions properly
recorded.
Forgiveness of commercial debts
Amends the
provisions relating to the forgiveness of commercial debts contained in the
Income Tax Assessment Act 1936 ('the Act') as proposed to be amended by
the Taxation Laws Amendment Bill (No. 2) 1996, to ensure the following:
the definition of 'commercial debt' excludes taxation debts due to the
Commonwealth;
the exception to the general rule for valuing a debt
contained in proposed subsection 245-55(4) does not apply where the creditor is
a non-resident unless the debt was a taxable Australian asset of the creditor;
the rule that treats the amount of consideration in respect of
forgiveness as equal to the market value of the debt does not apply where the
creditor is a non-resident unless the debt was a taxable Australian asset of the
creditor;
the table of deductible expenditure includes expenditure
incurred on research and development under section 73B of the Act and capital
expenditure incurred in establishing horticultural plants under Division 10F of
Part III of the Act;
the reduced cost base of an asset nominated by the
debtor is calculated as if the asset had been disposed of at its market value at
the time of deemed disposal;
a gross forgiven amount in respect of a
debt be apportioned between commercial debtors on the basis of the number of
commercial debtors who are jointly and/or severally liable for the particular
debt;
the special rule - that applies in certain circumstances to treat
a company that was not under common ownership with the debtor company as a
company within the group for the purposes of the apportionment of a net forgiven
amount - applies to a company which, at the relevant times, controls or is
controlled by the debtor company; and
a loss incurred by a debtor
company in respect of the forgiveness year of income that is transferred to a
group company is prevented from qualifying as a deductible revenue loss of the
group company (by virtue of paragraph 80G(6)(f) of the Act) for the purposes of
allocating a net forgiven amount of the debtor company.
Date of
effect: 27 June 1996.
Proposal announced: Not
previously announced.
Financial impact: These amendments
ensure that the provisions operate as intended. There is no discernible
financial impact.
Compliance cost: None.
Tax
file numbers
Amends the Superannuation Industry (Supervision) Act
1993 to allow eligible superannuation entities more time (30 days rather
than the proposed 7 days) in which to request the tax file numbers of new
beneficiaries of the entity (if they do not already have them).
Date of effect: The amendment will apply from the 60th day
after Royal Assent to Taxation Laws Amendment Bill (No. 2) 1996.
Proposal announced: Not previously announced.
Financial impact: No impact on revenue is expected.
Compliance cost impact: The amendment will reduce
compliance costs by allowing eligible superannuation entities more time to
process new beneficiaries and a greater opportunity to coincide tax file number
requests with other mailouts.
Equity investments in small-medium
enterprises
Amends the provisions relating to equity investments in
small and medium enterprises (SMEs) which are set out in Item 14 of Schedule 1
to the Taxation Laws Amendment Bill (No. 3) 1996 to clarify the operation of
those provisions. The amendments ensure that a subsidiary company of a taxpayer
which was engaged in a business of lending money can receive capital gains tax
treatment on any gain or loss made from an eligible equity investment in small
and medium enterprises.
Date of effect: The amendments
apply to eligible equity investments made on or after 1 July 1996.
Amendment announced: Not previously announced.
Financial impact: Nil.
Compliance cost
impact: None.
1 - SPECIAL DEPRECIATION ON TRADING
SHIPS
Overview
1.1 Part 1 of Schedule 1 will
bring to an end the 20 per cent prime cost depreciation rate for trading ships.
Section 57AM of the Income Tax Assessment Act 1936 (the Act) will be
amended so that the special depreciation rate will no longer apply after 30 June
1996, except in relation to ships that already qualify and ships contracted for
construction or purchase before 1 May 1996 that are delivered to the shipowner
and registered in Australia before 1 July 1997. [Item
1]
Summary of the amendment
Purpose of the
amendment
1.2 Eligibility for the tax concession under section 57AM
of the Act is linked to the operation of the Ships (Capital Grants) Act
1987 (SCG Act). The SCG Act is being amended to deny capital grants in
respect of ships commissioned and registered in Australia after 30 June 1996,
except where the contract for the construction or purchase of the ship was
signed by the shipowner before 1 May 1996 and the ship is delivered to the
shipowner and registered in Australia before 1 July 1997.
1.3 The
purpose of the amendment to section 57AM is to bring to an end the 20 per cent
prime cost depreciation rate for trading ships except ships that remain eligible
for capital grants under those transitional rules.
Date of
effect
1.4 The amendment applies to ships for which construction or
purchase contracts are signed on or after 1 May 1996 and which are delivered and
registered in Australia on or after 1 July 1997.
Background to the
legislation
1.5 Taxation Laws Amendment Act (No. 3) 1995
extended the application of the 20 per cent prime cost depreciation rate for
trading ships until 30 June 2002. Eligible ships are depreciated over 5 years at
20 per cent per year beginning in the pre-commissioning year. Eligibility for
the accelerated depreciation is conditional upon the ship continuing to meet the
criteria laid down in the SCG Act, including appropriate manning levels by
Australians. Once a ship no longer meets the criteria, it loses eligibility for
the accelerated rate of depreciation.
Explanation of the
amendments
1.6 Paragraph 57AM(4)(ba) requires that a ship which
qualifies under the SCG Act, to be eligible for the special depreciation, must
be delivered to the shipowner and registered under the Shipping Registration
Act 1981, before 1 July 2002.
1.7 The amendment changes the
termination date from 1 July 2002 to 1 July 1997 in paragraph 57AM(4)(ba). That
means that ships for which contracts for construction or purchase were signed
before 1 May 1996 would need to be delivered to the shipowner and registered in
Australia before 1 July 1997 to qualify for the accelerated depreciation.
1.8 The amendment does not affect ships which already qualify for the
accelerated depreciation. Nor does it affect ships for which contracts for
construction or purchase were signed before 1 May 1996 and which are delivered
to the shipowner and registered before 1 July 1997, if they meet the criteria of
the SCG Act. Such ships will continue to qualify for the accelerated rate of
depreciation. Any new ship purchased, or for which a construction contract is
signed, on or after 1 May 1996 will be subject to the application of normal
depreciation rates.
2 COMMONWEALTH EDUCATION OR TRAINING
PAYMENTS
Overview
2.1 Part 2 of Schedule
1 of the Bill will amend the pay-as-you-earn (PAYE) provisions in the
Income Tax Assessment Act 1936 (the Act).
2.2 The amendments will
define, in a generic way, Commonwealth education or training payments subject to
PAYE. The generic term will also be used in certain exemption and rebate
provisions to deal with the income tax treatment of Commonwealth education or
training payments.
Summary of the amendments
Purpose of
the amendments
2.3 The amendments will replace the current references
to specific Commonwealth education or training programmes in the PAYE, rebate
and exemption provisions of the Act with a generic term.
Date of
effect
2.4 The proposed amendments to the PAYE provisions will apply
to payments made after the 28th day after Royal Assent so as to not impose any
retrospective PAYE obligations on the Commonwealth's paying agencies [subitem
16(2)]. The proposed amendments to the income tax exemption and rebate
provisions will apply from 1 July 1996 [subitem 16(1)]. This means that
to the extent that all or part of a Commonwealth education or training payment
may be exempt from tax, or may qualify the recipient for a beneficiary rebate,
the amendments avoid having to apportion the exemption treatment or rebate
entitlement over part of a year of income.
Background to the
legislation
2.5 Not all of the payments currently made by the
Department of Employment, Education, Training and Youth Affairs (DEETYA) in
respect of the education or training schemes that they administer are covered by
the definition of 'salary or wages'.
2.6 There has been significant
expansion in recent years in the number of education or training schemes
administered by DEETYA. Because of this it is appropriate to replace current
references to specific education or training programs with a general expression.
A simple update of the current list of DEETYA's programs would be extensive and
would leave the need for frequent amendment.
2.7 A similar situation
exists in relation to certain rebate and exemption provisions of the income tax
law. Broadly, the intended effect of the provisions is that no income tax is
payable on amounts paid under the education or training schemes to the extent
that they are consistent with Jobsearch or Newstart allowances paid by the
Department of Social Security (DSS). Many of the DEETYA payments are similar in
nature to a DSS allowance. If the allowance is the only income of the recipient,
it is not subject to income tax through the application of those rebate and
exemption provisions.
2.8 The use of the general expression in the
rebate and exemption provisions to describe the Commonwealth education or
training scheme payments administered by DEETYA and some other Commonwealth
agencies will ensure the taxation result intended to apply to such payments is
consistently achieved even when changes are made to those schemes.
Explanation of the amendments
2.9 The amendments are
contained in Part 2 of Schedule 1 of the Bill.
2.10 A 'Commonwealth education or training payment' will be defined in subsection 6(1) of the Act [item 2]. The definition, expressed in general terms, will replace the existing specific references in the existing definition of 'salary or wages' in subsection 221A(1) of the Act to various schemes of assistance administered by the Commonwealth (for example the Veterans' Children Education Scheme). The use of a general term will do away with the need to amend the tax law, whenever a new scheme of assistance is introduced, to ensure that payments under the scheme are covered by the PAYE provisions.
2.11 All or part of a Commonwealth education or training payment may also be exempt from tax and may qualify the recipient for a rebate (see paragraph 2.23 below).
2.12 A payment is a Commonwealth education or training payment only if it is paid by the Commonwealth as an allowance or reimbursement. Consequently, payments made in connection with an education or training program to, for example, employers or service providers are not covered by the definition. Those payments are in the nature of subsidies or remuneration for services.
2.13 Further, the definition applies only where the payment is made to or on behalf of a participant in a 'Commonwealth labour market program' [paragraph (a) of the definition] or a student, being 16 years or older, who receives the payment as assistance under one of the Commonwealth's student assistance schemes [paragraph (b) of the definition].
2.14 The term 'Commonwealth labour market program' is also to be defined in subsection 6(1) of the Act [item 3]. The definition covers all Commonwealth programs that exist to provide training or assistance to unemployed persons to help them obtain employment or to become self-employed, or to employed persons to assist them to continue to be employed. The majority of those programs are currently administered by the Department of Employment, Education, Training and Youth Affairs.
2.15 A Commonwealth student assistance scheme would include schemes currently known as Austudy and Abstudy. Although specific reference to those schemes in the tax law will be removed, the taxation treatment of their payments is unaffected.
Amendments to exemption and rebate provisions
2.16 The definition of 'Commonwealth education or training payment' [item 2] for the purposes of the PAYE provisions enables that general term to be used to replace other specific references in the Act to schemes of assistance covered by that term, and in doing so to correct certain anomalies. As with the PAYE provisions, the use of the general term has the benefit of doing away with the need to amend the tax law whenever a new scheme of assistance is introduced.
The exemption amendments
2.17 Accordingly, existing references in paragraphs 23(z) and 23(zaa) of the Act to schemes of assistance covered by the general term are replaced by that term [items 4 to 6]. This does not change the tax treatment of any payments that are presently exempt under those paragraphs. In particular, the current exemption for certain educational payments in respect of children under 16 years of age is maintained as the payments are covered by the introductory words to paragraphs 23(z) and 23 (zaa) of the Act, but not by the term 'Commonwealth education or training payment'. That term only covers student assistance payments in respect of persons who have turned 16 years of age.
2.18 While the term 'Commonwealth education or training payment' is broad enough to cover an education entry payment under Part 2.13A of the Social Security Act 1991, specific reference in paragraphs 23(z) and 23(zaa) of the Act to education entry payment is maintained to reflect the specific treatment of education entry payment in Division 1AA of Part III of the Act (section 24ABNA of the Act).
2.19 In addition, Subdivision BA of Division 1AA of the Act, which currently applies to exempt from tax certain components of youth training allowances, is replaced by broader provisions which cover all Commonwealth education or training payments [items 7 to 9]. This corrects an anomaly where the non-living allowance (or supplementary amounts) of some education or training payments were exempt from tax, but in other cases were taxable. Commonwealth education or training payments will now generally receive similar treatment to benefits such as Jobsearch or Newstart allowances paid under the Social Security Act 1991 such that, in broad terms, the living allowance will be assessable, and the supplementary amounts exempt [item 9 - new subsection 24ABZF(1)].
2.20 The only exception is in respect of payments by way of a scholarship, bursary or other educational assistance that are made on condition that services will (or will if required) be rendered or continue to be rendered to the Commonwealth. No part of payments of this kind will be exempt [item 9 - new subsection 24ABZF(2)]. This preserves the rule currently contained in subparagraph 23(z)(i) of the Act.
2.21 New section 24ABZE describes the amounts of a Commonwealth education or training payment which will qualify as supplementary amounts. Provided a payment is made to assist with the costs of one or more of the listed items, or is by way of pharmaceutical allowance, it will be exempt from tax. This would be so even if the recipient did not himself or herself meet the initial cost, for example, where rent or a telephone bill was paid by the recipient's partner.
2.22 New paragraph 24ABZE(2)(m) is designed to cover
Commonwealth education or training payments that are made to cover extraordinary
expenses that may otherwise prevent a person from undertaking the education or
training.
The beneficiary rebate amendments
2.23 Section
160AAA of the Act provides for a rebate of tax (commonly known as the
beneficiary rebate) in respect of certain amounts ('rebatable benefit'). Only
some Commonwealth education or training payments are currently included in the
definition of rebatable benefit. As with the exemption provisions discussed
above, this is anomalous in that some payments qualify for a rebate but others
do not, depending on the program under which they are paid.
2.24 To
correct this, references in the definition of rebatable benefit in subsection
160AAA(1) of the Act to schemes of assistance which are covered by the term
'Commonwealth education or training payment' are replaced by that term [items
11 to 13]. The result is that the living allowance amount of Commonwealth
education or training payments will generally qualify for beneficiary rebate in
the same way as the living allowance amount of benefits such as Jobsearch or
Newstart allowances paid under the Social Security Act 1991. Payments
which presently qualify for beneficiary rebate are unaffected by this change.
For example, payments of Textile, Clothing and Footwear Special Allowance, which
is currently covered by paragraph 160AAA(1)(e) of the Act, will now be covered
by the general term.
2.25 Two types of payment are specifically excluded from entitlement to the rebate. The first relates to payments made to or on behalf of a person who is an employee of an employer who is entitled to a Commonwealth subsidy in respect of the employment of the person [item 11 - new subparagraph 160AAA(1)(b)(i)]. It is inappropriate for people in these circumstances, who are in effect in receipt of payment for the services they provide to their employer, to qualify for a rebate which is designed to assist recipients of a living allowance paid as part of a government benefit.
2.26 It may be noted that all or part of a Commonwealth education or training payment to which new subparagraph 160AAA(1)(b)(i) applies may nevertheless qualify for exemption under new section 24ABZF as a supplementary amount. This reflects the fact that payments which satisfy the definition of supplementary amounts in new section 24ABZE are not paid either for services provided or as a living allowance, but rather as government assistance to defray certain costs.
2.27 If all of a Commonwealth education or training payment is exempt under new section 24ABZF then the recipient will not qualify for a beneficiary rebate because no part of the Commonwealth education or training payment is included in the recipient's assessable income (subsection 160AAA(3) of the Act).
2.28 The second type of Commonwealth education or training payment which does not entitle the recipient to a beneficiary rebate is one paid by way of a scholarship, bursary or other educational assistance on condition that services will (or will if required) be rendered or continue to be rendered to the Commonwealth. Again, it is inappropriate for people in these circumstances, who are receiving payment for the services they provide (and who are not exempt under paragraph 23(z) of the Act), to qualify for a beneficiary rebate [new subparagraph 160AAA(1)(b)(ii)].
2.29 Commonwealth education or training payments are already referred to within the definition of 'eligible income' in subsection 159ZR(1) of the Act, but the new term is not used. Item 10 substitutes the term for consistency.
3 CONTROLLED FOREIGN COMPANIES AND FOREIGN INVESTMENT FUINDS
Overview
3.1 Part 3 of Schedule 1 of the
Bill will amend the Income Tax Assessment Act 1936 (the Act) to:
* ensure that exclusions from the section 47A deemed dividend rules
operate correctly;
* ensure that the 'gross turnover' of a controlled
foreign company (CFC) for the purposes of the de minimis exemption in subsection
385(4) is not reduced by amounts excluded from the active income test under
section 436;
* take account of changes to the Migration Act 1958
which:
- have the effect that temporary entry permits are now called
temporary visas; and
- allow citizens of New Zealand to visit Australia
without a temporary visa; and
* allow a notional deduction for a loss of
a capital nature where a gain of a capital nature would be included in a foreign
investment fund's (FIF's) calculated profit.
Application of the
deemed dividend rules in section 47A to share acquisitions and payments relating
to calls on shares
Summary of the amendments
Purpose
of the amendments
3.2 The amendments correct a technical problem in
the law which may have the effect that exclusions from the section 47A deemed
dividend rules, for certain share acquisitions and payments relating to calls on
shares, are not available in cases when they should apply.
Date of
effect
3.3 The amendments are to have effect from 3 June 1990 (ie.
from the commencement of section 47A). [Subclause 2(2)]
Background to the legislation
3.4 A CFC resident in an
unlisted country is deemed in certain circumstances to have paid a dividend
where it purchases shares in another company (subsection 47A(8)). This treatment
ensures tax is not avoided on a CFC's low taxed profits by the transfer of those
profits to another entity in a form other than a dividend.
3.5 There is
an exclusion from the deemed dividend rules that allows shares to be purchased
by an unlisted country CFC (or by another entity using amounts originating from
the CFC's profits) without triggering the rules (subsection 47A(9)). The
exclusion is available only if the share purchase is in a company not partly
owned by an associate of the purchaser. An exclusion is provided in these
circumstances because there is little risk that capital or profits of the
company can be diverted by dividend payments or transferred in another form to
an associate of the purchaser.
3.6 A technical problem exists in
subsection 47A(9) which may have the effect that the above exclusion will not
apply in some cases where it should be available. The problem arises because
interpreted literally the tests for determining whether the exclusion applies
have regard to shares held by the purchaser. It was not intended, however, that
this shareholding be taken into account in determining whether the exclusion is
available.
3.7 The following example illustrates the problem with the
exclusion.
|
Holding
Company |
Equity
|
First
Company (the provider) |
Equity
|
Subsidiary
company (the recipient) |
3.8 In the example a purchase by the first company (the provider) of
shares in the subsidiary company (the recipient) would constitute the provision
of an eligible benefit under subsection 47A(8). This eligible benefit is also a
distribution benefit under subsection 47A(3) and therefore may be treated as a
deemed dividend under subsection 47A(1).
3.9 Subsection 47A(9) should
operate in this case to prevent the eligible benefit from being treated as a
distribution benefit because the holding company does not have an eligible
equity interest in the recipient other than through the provider of the benefit
(ie. the first company). An eligible equity interest includes shares, interests
in shares, rights to acquire shares and options to acquire shares in a company
(subsection 47A(21)).
3.10 Technically, however, an exclusion under
subsection 47A(9) may not be available for the eligible benefit because an
associate of the holding company is also the holder of an eligible equity
interest in the recipient. In this regard, the first company is an associate of
the holding company (paragraph 318(2)(e)) and has an eligible equity interest
(shares) in the subsidiary company. The first company therefore will not satisfy
the requirements of subsection 47A(9) in relation to the share purchase even
though the exclusion was intended to apply.
3.11 There is a similar
problem in the exclusion from the deemed dividend rules for certain payments in
relation to a call on shares subsection 47A(12)). The problem also exists in
subsection 47A(13) which denies the exclusions if the conditions on which they
are provided cease to be satisfied at some point in the
future.
Explanation of the amendments
3.12 The Bill amends
subsection 47A(9) by inserting the words 'other than the provider' after 'there
is no entity' in the opening passage of the subsection [item 17]. This
clarifies that the provider of the benefit will not be treated as an associate
of its holding company for the purposes of applying the exclusion. The first
company in the example above, for instance, would be able to satisfy the
exclusion.
3.13 Comparable amendments have been made to subsections
47A(12) and 47A(13). [Item 18 and 19]
Meaning of 'gross
turnover'
Summary of the amendments
Purpose of the
amendments
3.14 The amendments will ensure that amounts excluded from
'gross turnover' for the purposes of the active income test will not be excluded
in determining the de minimis exemption from accruals taxation under the CFC
measures.
Date of effect
3.15 The amendments are to
have effect from the commencement of the CFC measures (ie. for statutory
accounting periods of CFCs commencing on or after 1 July 1990). [Item
21]
Background to the legislation
3.16 The proposed
changes will correct a technical problem with the de minimis exemption. The
exemption is available for small amounts of tainted income derived by a listed
country CFC and is provided to reduce compliance costs. The exemption applies
where low taxed tainted income and certain other attributable amounts derived by
a CFC do not exceed the lesser of $50,000 or 5 per cent of the CFC's 'gross
turnover'.
3.17 Broadly, the 'gross turnover' of a CFC is the sum of net
gains and gross revenue shown in the CFC's recognised accounts (section 434).
The 'gross turnover' is reduced for the purposes of determining the active
income test by amounts that have been comparably taxed in a listed country or
have been taxed in Australia and therefore fall outside consideration under the
CFC rules (section 436). The active income test is used to determine whether the
tainted income derived by a CFC is incidental to the conduct of an active
business and an exemption is provided from accruals taxation if the test is
satisfied.
3.18 Problems may currently arise because amounts excluded
from the 'gross turnover' of a CFC should be excluded only for the purpose of
applying the active income test. These amounts should be included in the 'gross
turnover' for the purposes of applying the de minimis
exemption.
Explanation of the amendments
3.19 The
amendments will make it clear that 'gross turnover' for the purposes of the de
minimis exemption is not reduced by amounts excluded from the active income
test. This will be achieved by new subsection 385(5) which modifies 'gross
turnover' to include amounts normally excluded under section 436. [Item
20]
Changes to the temporary visitor exemption from the foreign
investment fund (FIF) measures
Summary of the
amendments
Purpose of the amendments
3.20 The
amendments ensure that the temporary visitor exemption from the FIF measures
will apply to persons with temporary visas and will continue to apply to persons
with temporary entry permits. The amendments also ensure the temporary visitor
exemption can apply to citizens of New Zealand who are permitted to visit
Australia without a temporary visa.
Date of effect
3.21 The
amendments are to have effect from the commencement of section 3 of the
Migration Reform Act 1992 (ie. from 1 September 1994). [Subclause
2(4)]
Background to the legislation
3.22 Broadly, the
temporary visitor exemption (section 517) is available to persons visiting
Australia for a period not exceeding four years. These short term visitors may
be treated as residents of Australia for taxation purposes and thus, in the
absence of a specific exemption, may be subject to accruals taxation under the
FIF measures. An exemption from the FIF measures has been provided for short
term visitors because it is unlikely their foreign investments are held to defer
Australian tax.
3.23 The terminology used in the temporary visitor
exemption requires updating because temporary visas are now issued in place of
temporary entry permits following recent changes to the Migration Act
1958 (the Migration Act). The references to temporary entry permits in the
temporary visitor exemption should therefore now be to temporary
visas.
3.24 Another change to the Migration Act is that citizens of New
Zealand can visit Australia without a temporary visa. This may create problems
because the temporary visitor exemption is available only if a visitor holds a
temporary entry permit (now called a temporary visa). One possible
interpretation of the existing law is that citizens of New Zealand who visit
Australia without a temporary visa cannot claim the temporary visitor
exemption.
Explanation of the amendments
3.25 The
amendments replace paragraphs 517(2)(a) and (b) with new paragraphs that refer
to temporary visas [item 22]. Subsection 517(3) is added to ensure
that the exemption will continue to apply to persons with 'temporary entry
permits' issued prior to changes to the Migration Act [item
23.]
3.26 New subsection 517(4) allows visitors from New Zealand who
are not required to obtain a temporary visa to qualify for the temporary visitor
exemption. A citizen of New Zealand who does not have a temporary entry visa can
satisfy the exemption if he or she:
• has been a resident of
Australia for a continuous period not exceeding four years;
• would
have been required to hold a temporary visa if not a citizen of New Zealand;
and
• has not come to live in Australia
permanently.
[Item 23]
Treatment of capital losses under
the calculation method
Summary of the
amendments
Purpose of the amendments
3.27 The
amendments will allow a notional deduction under the calculation method for
determining FIF income where a FIF incurs a net capital loss.
Date of
effect
3.28 The amendments are to have effect from the commencement
of the FIF measures (ie. from 1 January 1993). [Subclause
2(3)]
Background to the legislation
3.29 The
calculation method relies on information in the accounts of a FIF to determine
the profit the FIF has derived for a particular period (called a notional
accounting period). The calculated profit is determined using simplified rules
to reduce the compliance burden.
3.30 Problems may currently arise under
the calculation method because a notional deduction cannot be claimed for a loss
on the disposal of an asset unless the loss relates to a gain or profit of a
revenue nature (section 567). This treatment is inequitable because a gain on
the disposal of an asset is included in a FIFs calculated profit (section
560).
3.31 The calculated profit of a FIF should be reduced for net
losses of a capital nature to ensure FIF income does not arise for profits which
do not exist. The reduction can be achieved by allowing a notional deduction for
net losses of a capital nature.
Explanation of the
amendments
3.32 The amendments will provide a notional deduction for
net capital losses incurred by a FIF during a notional accounting period (new
subsection 567A(1)). They will also ensure that an amount cannot be deducted
twice (subsection 567A(2)). In this regard, the net amount brought to account
will exclude any amount previously allowed as a notional deduction (paragraph
567A(2)(a)). It will also exclude amounts that would have been allowed as a
notional deduction if the calculation method had applied in a previous period
(paragraph 567A(2)(b)). This Taxation Laws Amendment Bill (No. 1) 1997
will be relevant, for instance, if it was not necessary to calculate FIF
income in an earlier period because of an exemption from the FIF measures.
[Item 24]
CHAPTER 4 - DIVIDEND
IMPUTATION
Overview
4.1 Schedule 2 of the
Bill will amend Taxation Laws Amendment Act (No. 4) 1995 to allow
companies the option to defer conversion to the class C franking account after
they are paid a class C franked dividend or a trust or partnership amount with
class C franking credits attached.
4.2 Where a company exercises the
option to defer conversion the amendments will allow the company to treat the
dividend as either:
(a) not having been franked for the purposes of
determining whether a class C franking credit arose to the company;
or
(b) having been paid up to fourteen days after actual payment for the
purpose of determining when a class C franking credit arose to the company (the
Commissioner of Taxation will be given a discretion to extend the fourteen day
period in appropriate circumstances).
4.3 The amendments will also
eliminate an unintended dual liability to class A franking deficit tax or
franking additional tax which may arise in certain situations.
Summary
of the amendments
Purpose of the amendments
4.4 The
purpose of the amendments is to:
• assist companies by providing
them with greater flexibility in converting to the class C franking account;
and
• correct an unintended dual liability to class A franking
deficit tax or franking additional tax which may arise in certain
circumstances.
Date of effect
4.5 The amendments will apply
from 1 July 1995.
Background to the
legislation
Conversion to class C franking
account
4.6 As a result of the increase in the company tax rate from
33 per cent to 36 per cent from the 1995-96 income year, Taxation Laws
Amendment Act (No. 4) 1995 introduced provisions that require companies to
establish a class C franking account and to convert their existing class A and B
franking account balances to that account.
4.7 Under that Act companies
are required to convert to the class C franking account at the time the first of
the following events occurs:
• when the first class C franking
credit of the company arises (e.g. from the payment of a company tax instalment
in respect of the 1995-96 income year, or upon being paid a class C franked
dividend); or
• at the end of their 1995-96 franking
year.
Companies also have the option to convert to the class C franking
account before either of these events.
4.8 Once a company has converted
to the class C franking account it should not pay class A or B franked
dividends. To do so attracts penalties.
4.9 Some companies have
unwittingly exposed themselves to these penalties because of the requirement to
convert to the class C franking account upon being paid a class C franked
dividend. For example, some companies were unaware that, immediately before they
paid a class A or B franked dividend to their shareholders, they were paid a
class C franked dividend themselves (that triggered
conversion).
4.10 Further difficulties have arisen for companies that
were effectively committed to paying a class A or B franked dividend and were
then unexpectedly paid a class C franked dividend, however small.
Dual
liability to class A franking deficit tax
4.11 Taxation
Laws Amendment Act (No. 4) 1995 also contains transitional franking deficit
tax provisions to ensure that, where a liability to class A franking deficit
would have arisen but for the conversion to a class C franking account, that
liability will remain. Similarly, where a liability to class A franking
additional tax would have arisen but for the conversion to a class C franking
account, that liability will also remain.
4.12 In the absence of such
provisions the conversion to the class C franking account would provide
companies with an opportunity to offset a class A franking deficit with a class
B franking surplus. This would have enabled companies to over-distribute class A
franking credits to their shareholders prior to conversion.
4.13 In
determining the liability of a company to the class A franking deficit tax
imposed by the transitional provisions, any further class A franking debits that
the company generates after conversion (e.g. from the payment of a class A
franked dividend) are taken into account.
4.14 However, if a company pays
a class A franked dividend after conversion, in addition to the resulting class
A franking debit being taken into account under the transitional provisions, a
class A franking debit also arises under the ordinary provisions of the
Income Assessment Act 1936 (which are preserved by Taxation Laws
Amendment Act (No. 4) 1995). Because the franking debit arising under the
ordinary provisions cannot be offset by subsequent franking credits, it will
give rise to class A franking deficit tax at the end of a company's franking
year.
4.15 Therefore where a company's franking account is in deficit at
the time it converts to the class C franking account and it pays a class A
franked dividend after that time, the class A franking debit associated with
that dividend will be used in determining the company's liability to class A
franking deficit tax under both the transitional and the ordinary provisions.
Similarly, the class A franking debit associated with that dividend will be used
in determining the company's liability to class A franking additional tax under
both provisions. The potential dual liability to class A franking deficit tax or
class A franking additional tax is an unintended outcome.
Explanation
of the amendments
What is the effect for a company deferring
conversion?
4.16 The proposed amendments will provide companies
with the option to defer conversion to the class C franking account during their
1995-96 franking year. [Item 3; new section 159A]
4.17 For the
purposes of deferring conversion companies may elect that the class C franking
credit attached to a franked dividend or trust or partnership amount
either:
• does not arise; or
• arises fourteen days
later (or within such longer period as the Commissioner allows).
[Item
3; new subsection 159A(2)]
4.18 If a company elects the deferral
option, the company's fourteen day deferment period commences when the company
receives its first class C franking credit from a franked dividend or a trust or
partnership amount and the franking credit will arise at the end of the deferral
period. For example, if a company is paid a class C franked dividend on a Monday
and it elects to defer the franking credit attached to that dividend, the
company will derive the franking credit (and therefore convert to the class C
franking account) on the Monday fortnight. If a company elects the forfeiture
option, the franking credit will never arise. Neither option will, however,
permit companies to defer conversion beyond the time a class C franking credit
arises from either the payment of tax or the end of their 1995-96 franking year.
[Item 3; new subsections 159A(2) and (3)]
4.19 Companies will be
allowed to elect to forfeit the franking credit attaching to a particular
dividend or trust or partnership amount and then elect to defer the franking
credit attaching to a subsequent dividend or trust or partnership amount. For
example, if a company is paid a class C franked dividend on one day and is paid
another class C franked dividend on the following day, the company May forfeit
the franking credit attaching to the first franked dividend and elect to defer
the franking credit attaching to the second franked dividend. The company's
fourteen day deferment period would, therefore, commence on the day the second
franked dividend was paid.
4.20 Companies may forfeit the franking
credits attaching to different class C franked dividends or trust or partnership
amounts as many times as they chose. However, in relation to a particular
dividend or amount, the franking credit can be deferred once only. [Item 3;
new subsection 159A(1)]
4.21 The proposed amendment will not affect
the timing of conversion by a company due to an event other than being
paid:
• a class C franked dividend;
• a trust amount
giving rise to a class C franking credit; or
• a partnership amount
giving rise to a class C franking credit.
4.22 Therefore, if a company is
paid a class C franked dividend and then, one week later, pays an instalment of
tax for its 1995-96 income year (at 36 per cent), the company will have to
convert by the time of the payment of the tax instalment. [Item 3; new
subsection 159A(1)]
When will extensions of time to the 14 day
deferment period be granted?
4.23 Where companies elect the
deferral option, the Commissioner will have the power to extend the fourteen day
period in appropriate circumstances. Relevant factors in determining whether an
extension will be allowed include:
(a) the reason the company has not
recognised that it has converted to the class C franking account at the
prescribed time and has paid a class A or B franked dividend after that time
(e.g. the company may have been paid a large number of dividends during the
relevant period and failed to recognise that it was paid a class C franked
dividend because the amount of the dividend was relatively small and the
shareholding representing the dividend was not an important component of the
company's portfolio);
(b) the extent to which the company was committed
to paying a class A or B franked dividend more than fourteen days after being
paid a class C franked dividend (e.g. the company may have declared a class A or
B franked final dividend which is due to be paid more than fourteen days after
the class C franked dividend was paid and it would be impractical to change the
class A or B franked dividend to a class C franked dividend);
and
(c) whether any undue tax advantage was obtained by the company or
shareholders due to the delay in conversion.
4.24 Companies may apply for
an extension of the fourteen day period at any time.
How do
companies elect to defer conversion?
4.25 The election made by
companies to defer or forfeit the class C franking credit attaching to a
particular class C franked dividend or trust or partnership amount must be in
writing and is irrevocable. However, companies need not notify the Australian
Taxation Office of their election unless requested. Companies will be allowed to
make the election at any time. [Item 3; new subsection 159A
(4)]
What is the effect of deferment on other areas of the tax
law?
4.26 The election to defer conversion does not affect the
timing of when a company will be assessed on the dividend or trust or
partnership amount. Similarly, the election to defer or forfeit the class C
franking credit attaching to a class C franked dividend or trust or partnership
amount comprising class C franked dividend income will not prevent the dividend
or the amount being franked for other purposes: for example, in determining
whether a dividend paid to a private company is rebatable or not (see section
46F of the Income Tax Assessment Act 1936).
How is the
potential dual liability to class A franking deficit tax
removed?
4.27 To remove the potential dual liability to class A
franking deficit tax the amendments provide that where, after conversion to the
class C franking account, a franking debit arises from the payment of a class A
franked dividend under subsection 160AQB(1) of the Income Tax Assessment Act
1936, the debit is to be ignored for the purpose of identifying the class A
franking deficit tax liability under the transitional provisions (i.e.
subsection 159(1) of Taxation Laws Amendment Act (No. 4) 1995).
Equivalent amendments are made to remove the potential dual liability to class A
franking additional tax. [Items 1 and 2; amend paragraphs 159(1)(c) and
159(3)(c)]
CHAPTER 5 - EMPLOYEE SHARE
SCHEMES
Overview
5.1 The Bill will amend the
employee share scheme provisions of the Income Tax Assessment Act 1936
(the Act) to broaden access to benefits, increase the benefits available in
some cases and to make other, mainly technical, amendments.
Summary of
the amendments
Purpose of the amendments
5.2 The
overall purpose of the amendments is to clarify and improve the operation of the
law and to broaden access to, and increase the benefits of, participation in
employee share schemes.
5.3 Schedule 3 amends the law
to:
• ensure that section 26AAC cannot apply to a transaction that
has been taxed under Division 13A [item 1];
• exclude
acquisitions of shares or rights from the application of section 26AAC where no
benefit is gained by the taxpayer [item 2];
• validate
employees' elections under subsection 26AAC(15A) in relation to shares acquired
by a trustee on their behalf [items 3 to 5];
• increase the
potential benefits, to employers and employees, of participation in certain
types of employee share schemes under Division 13A, from $500 to $1,000 per
employee per year [items 6 and 12];
• reduce the percentage
of employees who must be invited to participate for a scheme to gain access to
benefits under Division 13A from three quarters to two thirds, and apply the
percentage to permanent employees only [items 8, 9, 20 and
21];
• increase the time in which employers should provide
information to employees concerning the market value of shares or rights, from
thirty to sixty days [item 17];
• provide for the
calculation of market value of shares and rights where they are offered to
employees on the first day of trading on a stock market [item 13 and
14];
• include the value of a right to acquire unissued shares
in the cost base of a share purchased by its exercise [items 23 and
24];
• make minor technical amendments to Division 13A,
including correction of subsections 139C(5), and 139CD(8), and 139CE(4) and
section 139FN; and to correct the application of section 139FH through amendment
to section 139FA [items 7, 10, 11, 15,16,18,19 and 22.]
Date of
effect
5.4 The amendment to section 26AAC to exclude shares or rights
from its application where they were taxed under Division 13A has the same date
of effect as Division 13A [item 25(1).] The amendments to validate
elections under subsection 26AAC(15A) apply to shares acquired on or after 20
September 1985 [item 25(3).]
5.5. The amendments to the
calculation of the cost base of shares purchased through the exercise of rights
apply to rights exercised on or after 20 September 1985 [item 25(5).]
Taxpayers will be able to amend their prior year assessments to give effect
to this amendment.
5.6 The amendments increasing the maximum exemption
concession and matching income tax deduction from $500 to $1,000, and reducing
the employee participation requirements from three quarters to two thirds of
permanent employees apply to acquisitions of shares or rights on or after 1 July
1996. [Item 25(4)]
5.7 The amendment ensuring that section 26AAC
can not apply to a transaction where no benefit was obtained by the taxpayer
will apply from the date of Royal Assent. The amendment increasing the time in
which employers should provide information to employees concerning the market
value of shares or rights will also apply from Royal Assent. [Item
25(2).]
5.8 The amendments providing for a statutory calculation of
the market value of listed shares or rights which are first listed on a stock
exchange on the date of valuation, or where no market transactions have occurred
in the shares or rights on or before the date of valuation will have the same
application as Division 13A. The technical amendments to Division 13A and the
replacement of section 139FH with an amendment to paragraph 139FA(b) will also
have the same application as the Division itself. [Item
25(1)]
Background to the legislation
5.9 The taxation
of benefits arising under employee share schemes in respect of shares, or rights
to acquire shares ('rights'), issued after 6 pm ACT time on 28 March 1995 is
generally covered by Division 13A of Part 111 of the Act. Section 26AAC of the
Act continues to apply where Division 13A does not.
Explanation of the
amendments
Section 26AA C
Acquisitions
excluded from the application of section 26AAC
5.10 One important
difference between section 26AAC and Division 13A is that Division 13A does not
apply to the acquisition of shares or rights 'if the consideration paid is equal
to, or more than, the market value of the share or right at the time that it is
acquired' (subsection 139C(3)).
5.11 Subsection 26AAC(4AA) is amended by
item 2 to provide that subsection 26AAC does not apply to shares or rights which
have been acquired at or above market value. Market value has the same meaning
as in subdivision F of Division 13A of the Act. This means that shares or rights
which are acquired at or above market value after the date of Royal Assent to
this Bill will not come within the scope of the employee share scheme taxation
provisions.
5.12 Consequently, section 26AAC will not apply to any shares
or rights which are acquired after the date of Royal Assent to this measure.
Acquisitions of shares or rights to which Division 13A does not apply will
therefore be subject to the normal taxing provisions of the
Act.
Subsection 26AAC(15A) elections
5.13 Where a taxpayer
acquires shares or rights under an employee share scheme covered by section
26AAC, and the taxpayer's right to dispose of the shares is restricted or the
taxpayer is subject to a condition, the taxpayer is deemed to acquire the shares
or rights when the restriction or condition ceases (subsection 26AAC(15)). The
consequence of this rule is that the value of any discount received on the
acquisition is taxed when the restriction or condition ceases, and any increase
in the value of the shares or rights from the time they were issued until the
time the restriction or condition ceases is also included in the taxpayer's
assessable income in the year that the restriction or condition
ceases.
5.14 Taxpayers who were issued shares or rights with restrictions
after 19 September 1985 were given the option of electing to have the benefit
assessed at the time those shares or rights were issued to the taxpayer
(subsection 26AAC(15A)). Any increase in their value following acquisition is
subject to capital gains tax (CGT) on sale. The purpose of this election is to
alter the time at which a discount on acquisition of shares or rights are taxed
and to give the taxpayer the benefit of the CGT indexation
provisions.
5.15 An election under subsection 26AAC(15A) must be made on
or before the date of lodgment of the taxpayer's income tax return for the year
in which the share was issued unless the Commissioner allows a further period
for lodgment of the election (subsection 26AAC(15B).
5.16 In a recent
Federal Court decision, it was held that where shares are issued under an
employee share scheme to a trustee on behalf of a taxpayer, subsection
26AAC(15A) does not apply to allow the taxpayer to make an election as s/he is
not the person to whom the shares were issued. However, many taxpayers in the
circumstances in question believed they had made elections under subsection
26AAC(15A). On 20 August 1996 the Treasurer announced the Government's intention
of amending the law to validate these elections.
5.17 Item 3
amends subsection 26AAC(15A) to provide that a taxpayer can make an election
under the subsection when shares or rights are acquired by him or her. This
allows a taxpayer to make the election when shares or rights are issued to
another person, such as a trustee, on his or her behalf, as well as when shares
or rights are issued directly to the taxpayer.
5.18 Until the decision
referred to in paragraph 5.16 above, it was generally accepted that taxpayers
could make the election if shares were issued to a trustee on their behalf.
Therefore, many taxpayers made elections they believed to be valid. To ensure
these taxpayers are not disadvantaged, item 3 applies from 24 June 1986,
which is the date the election became available.
5.19 Subsection
26AAC(15AB) is also amended to apply to shares acquired and not shares issued.
Item 5 amends the subsection as it applies now, and item 4 amends
the subsection as it applied from 24 June 1986, so that overall the amendment
has the same application as that made to subsection 26AAC(15A).
Minor
technical change
5.20 Subsection 26AAC(4AA) is intended to prevent
section 26AAC from applying to discounts taxed under Division 13A. However, the
wording of the subsection may not operate as intended where shares or rights
have been issued to the associate of an employee and thus the person making the
acquisition is not the person subject to tax. Item 1 amends the subsection to
correct its application.
Division 13A
Increases
in concessions
5.21 The two broad types of mutually exclusive income
tax benefits which may be obtained by employees under Division 13A are (1)
deferral of income tax, and (2) an exemption concession. The requirements which
must be met for participants of the scheme to obtain the deferral of income tax
benefit include a requirement that at least three quarters of employees are or
have been entitled to acquire shares or rights in the employer under the
employee share scheme, or in the employer or a holding company of the employer
under another employee share scheme (subsection 139CD(5)). This requirement
applies to shares, but not to rights to acquire shares (subsection
139CD(1)).
5.22 The Bill alters the proportion of employees mentioned in
subsection 139CD(5) from three quarters of employees to two thirds of permanent
employees [items 8 and 9.] This will mean that, where two thirds of
permanent employees of an employer are or have been entitled to acquire shares
or rights in the employer under the employer share scheme, or in the employer or
a holding company of the employer under another employee share scheme, and other
requirements listed in section 139CD are met, participants in the share scheme
will be entitled to the deferral of income tax benefit. This makes it easier for
an employee share scheme to qualify for concessional tax treatment under
Division 13A.
5.23 On a discount on acquisition that qualifies for the
exemption benefit, up to $500 can be excluded from assessable income (section
139BA) and claimed as a deduction from income by the provider (section 139DC).
For an acquisition under a scheme to qualify for this concession, a number of
conditions must be met in addition to those applicable for deferral of income
tax. These include a condition that participation in the scheme is open to at
least three quarters of permanent employees (whether the scheme involves shares
or rights), and that the essential features of the offer of shares or rights and
of any offer of financial assistance are the same for at least three quarters of
permanent employees (subsections 139GF(2) and (4)).
5.24 Items 20 and
21 alter the proportions in subsections 139GF(2) and (4) respectively, from
three quarters to two thirds of permanent employees. This makes it easier for
discounts on acquisitions under employee share schemes to qualify for the
exemption from tax provided to employees by section 139BA, and the deduction to
employers provided by section 139DC.
5.25 Subsection 139BA(2) is amended
by item 6 to allow an employee who acquires shares or rights which
attract the exemption concession to claim an exemption from tax on the discount
received, of up to $1,000. This will allow an employee who is eligible to claim
an exemption from tax on the discount, to claim the amount of the discount, up
to a maximum of $1,000 per year,
5.26 Paragraph 139DC(2)(a) is amended by
item 12 so that an employer who provides shares or rights which attract
the exemption concession can claim an income tax deduction for the discount
provided, of up to $1,000. This will allow an employer who is entitled to claim
a deduction under section 139DC for discounts provided to employees, to claim a
deduction of up to $1,000 per employee per year under that
section.
Minor amendments
Market
value
5.27 An employee needs to determine the market value of shares
or rights acquired under an employee share scheme in order to determine the
amount of any assessable discount. Division 13A contains provisions to assist
taxpayers in determining the market value of shares or rights, by requiring the
provision of information to interested parties and by providing statutory
calculations and definitions in relation to market value.
5.28 Employers
are required to take all reasonable steps to provide an employee with the
information necessary to determine market value within thirty days of a request
by an employee (section 139FI). This Bill increases that time limit to sixty
days [item 17.]
5.29 A statutory method for calculating market
value of listed shares or rights is provided by section 139FA. This method
determines the market value by averaging the weighted value of trading prices
during the week before the day of valuation. However, the method cannot
determine a market value where the valuation is made on the day that shares or
rights are first listed or where there has been no market trading in the right.
Item 13 amends paragraph 139FA(a) to provide for a calculation of market
value determined over a period which includes the day of valuation. Item
14 provides for valuation of shares or rights as though they were unlisted,
where there has been no trading in the shares or rights.
5.30 Section
139FH provides a definition, for the purposes of Division 13A, of the term
'published price'. This term is not actually used in the Division. The section
is repealed by item 16, and the reference to the definition is omitted by
item 22. As the terms of section 139FH also allow taxpayers to choose
which stock market valuation to use if more than one is appropriate, item 15
inserts a similar provision into section 139FA.
Technical
amendments
5.31 In addition, there are some technical errors in the
Division. Subsection 139C(5) refers to a trust where a reference to a trustee of
a trust would be more appropriate. This reference is corrected by item
7.
5.32 Subsection 139CD(8) currently refers to 'shares or rights'
with reference to subsection 139CD(5), while that section applies to shares
only. Item 10 amends subsection 139CD(8) so that it refers to shares,
rather than to shares or rights. This will not affect the operation of section
139CD, but will clarify the operation of subsections 139CD(5) and
(8).
5.33 Subsection 139CE(4) provides a reference to section 139GE which
is corrected to a reference to section 139GF by item
11
5.34 Section 139FN which deals with the calculation of market
value is intended to define an exercise period then refer to that period. A
technical error in the wording of subsections 139FN(2) and (3) makes the
operation of the subsections unclear. This is corrected by items 18 and
19.
Capital gains tax - cost base of
shares
5.35 Where a right ('option') is exercised and the share
acquired by that exercise is disposed of, the capital gains tax (CGT) provisions
of the Act do not operate as intended. The intention of subsections 160ZZC(8)
and (9) of the Act was to include the cost of acquiring an option in the cost
base of any share purchased by its exercise. However, under the current law,
where the option results in a new share being created by a company, the cost of
the option is not included in the cost base of the new share.
5.36 The
amendment made by item 23 allows the cost of acquiring an option to be included
in the cost base of the share purchased by its exercise, where the shares are
issued by the company they are in. This ensures that the original intention of
the provisions is achieved. Item 24 allows taxpayers to amend their
income tax returns to give effect to item 23, regardless of the date
assessments were issued for those returns.
CHAPTER 6 - CAPITAL
GAINS TAX - MAJORITY UNDERLYING INTERESTS IN
ASSETS
Overview
6.1 Schedule 4 of the
Bill will amend the Income Tax Assessment Act 1936 (the Act) to change
the way certain public entities determine whether assets acquired on or before
19 September 1985 will become subject to the capital gains tax (CGT) rules
because of a change in the majority underlying interests in those
assets.
Summary of the amendments
Purpose of the
amendments
6.2 The amendments contained in Schedule 4 of the Bill
(the amendments) will amend the Act to require public entities (public
companies, publicly traded unit trusts and mutual insurance organisations) to
periodically test on prescribed dates whether there has been a change in a
majority of underlying interests in assets of the entity since 19 September
1985. The amendments will:
• require public entities to make a
determination on 20 January 1997 and at 5 year intervals showing whether the
majority underlying interests in the assets owned by the public entity have
changed since 19 September 1985;
• require public entities to test
for changes in the majority underlying interest in their assets when there is
abnormal trading in instruments of ownership;
• provide clear
legislative consequences if there has been a change in majority underlying
interest and if the test is not conducted as required;
• where a
change in ownership has been found, require entities to determine the cost base
for CGT purposes of affected assets on the basis of market value at the date the
test was required; and
• provide streamlined rules for testing
whether there has been a change in majority underlying interests.
6.3 The
new tests for changes in majority underlying interests will differ from the
current test under section 160ZZS in two significant aspects.
First,
testing for changes in majority underlying interests in the assets of the public
entity will be periodic rather than at all times after 19 September
1985.
Secondly, when a public company or publicly listed unit trust is
required to determine whether there has been a change in majority underlying
interests in its assets the following rules may be applied by the public company
or publicly listed unit trust:
- all registered shareholdings or
unitholdings in the public company or publicly listed unit trust that are less
than 1% will be taken to be owned by a notional holder who is a natural
person;
- direct and indirect holdings of a complying superannuation
fund, complying approved deposit fund, foreign superannuation funds, certain
companies and government bodies may in certain circumstances be treated as if
they were natural persons who held all the interests of the fund, company or
government body in its own right.
6.4 This means that, for certain
categories of shareholders or unitholders, a public company or publicly listed
unit trust may choose not to identify the actual individuals who hold the
underlying interests in its assets. Rather, the notional holder, fund, company
or government body may be taken to hold those interests as a natural
person.
Date of effect
6.5 The amendments will take effect
from 20 January 1997 and apply for the 1996-97 year of income and subsequent
years of income. The amendments will only apply to assets disposed of by public
entities on or after 20 January 1997.
Background to the
legislation
6.6 The CGT provisions of the Act generally only apply to
assets acquired by a taxpayer on or after 20 September 1985. Section 160ZZS of
the Act provides that an asset acquired by a taxpayer before 20 September 1985
will be deemed to have been acquired on or after that date unless the
Commissioner of Taxation is satisfied or considers it reasonable to assume that
there has been continuity of majority underlying interests in the
asset.
6.7 The term "majority underlying interests" refers to more than
one-half of the beneficial interests held by natural persons in the asset and
income from the asset, regardless of how those interests are held. [Item 2 -
new subsection 160ZZRR(1)]
6.8 Section 160ZZS currently requires
taxpayers (including public entities) to determine whether the majority
underlying interests in its assets has changed and, if so, the date on which
that change occurred in order to determine the time when the pre-CGT assets
became post-CGT. They must then value the affected assets as at the date of the
change.
6.9 Under the current law, public entities (public companies,
publicly traded unit trusts and mutual insurance organisations) can face
considerable difficulties determining whether there has been a change in the
underlying interests in the assets of the public entity. This is particularly
the case where the public entity has large numbers of shareholders or unit
holders where shares or units are constantly being traded.
Explanation
of the amendments
6.10 The amendments will restructure Division 20 of
Part IIIA of the Act to provide clear provisions to deal with public entities
and non public entities. Section 160ZZS has been moved into new Subdivision B
which is one of seven new Subdivisions in Division 20. Subdivision B will
generally deal with non public entities only. Division A defines terms which are
used by both public and non public entities. All of the remaining subdivisions
in Division 20 apply only to public entities. [Item 2 and
7]
6.11 The seven new Subdivisions of Division 20
are:
• Subdivision A - Preliminary;
• Subdivision B -
Provisions applying to taxpayers other than public
entities;
• Subdivision C - Provisions applying to public
entities;
• Subdivision D - Abnormal
trading;
• Subdivision E - How holdings of shares or units of less
than 1% in certain public entities may be treated;
• Subdivision F
- How interposed superannuation funds, approved deposit funds, special companies
and government bodies may be treated; and
• Subdivision G -
Determination of underlying interests if mutual insurance organisation with more
than 50 members ceases to be such an organisation but continues to be a public
entity.
Section 160ZZS
6.12 The amendments remove
public entities from the application of section 160ZZS and create a new
Subdivision C in Division 20 which applies to public entities [item 7 - new
Subdivision C]. However, if Subdivision C does not apply to the public
entity, then the entity is still subject to section 160ZZS [item 3 - new
subsection 160ZZS(1AA)].
6.13 The amendments do not affect the way
the current rules in section 160ZZS apply to non-public entities. As part of the
reorganisation of the Division, however, a number of current provisions have
been repealed and replaced by new provisions.
6.14 Subsections 160ZZS
(2), (2A) and (3) have been repealed by the amendments. Equivalent provisions,
however, are now found in new Subdivision A, and will apply to both public
entities as well as non-public entities. [Item 2, 4, 5 and 6 - new
subsections 160ZZRR(1) and (4) and new section 160ZZRU]
Minor
changes in terms used
6.15 As part of the reorganisation of
Division 20, the term 'body politic' has been replaced by the term 'government
body'. This change is intended to remove any doubt as to the meaning of 'body
politic'. [Item 2 - new subsections 160ZZRR(1) and
(4)]
Section 160ZZT
6.16 160ZZT has been moved
to new Division 20A of Part IIIA of the Act titled 'Special provisions relating
to disposals of certain pre-20 September 1985 assets'. This change does not
affect, in any way, the operation of the section. [Item 8]
New
testing rule for public entities
Key definitions used in this
part of the explanation
6.17 The term 'public entity'
means:
• a public company; or
• a mutual insurance
organisation; or
• a publicly traded unit trust. [Item 2,
'public entity'- new subsection 160ZZRR(1)]
6.18 The term 'public
company' means:
• a listed public company; or
• a
company (other than a listed public company) all the shares in which are
beneficially owned by any one or more of the following:
- listed public
companies;
- a mutual insurance organisations;
- a publicly traded
unit trusts; or
• a 100% subsidiary of such a company. [Item 2,
'public company'- new subsection 160ZZRR(1)]
6.19 The term '100%
subsidiary' means:
6.20 A company (the company) will be a 100% subsidiary
of another company (the holding company) where the company is directly or
indirectly owned by the holding company.
6.21 The company will be
directly owned by the holding company if all the shares in the company are
beneficially owned by the holding company (eg. all the shares in the company are
owned by ABC).
6.22 The company will be indirectly owned by the holding
company if:
• all the shares in the company are beneficially owned
by one or more 100% subsidiaries of the holding company (eg. all the shares in
the company are owned by a company which is wholly owned by ABC); or
• all the shares in the company are beneficially owned by the
holding company and one or more 100% subsidiaries of the holding company (eg.
half of the shares in the company are owned by ABC and the other half by a
company which is a 100% subsidiary of ABC). 6.23 A company will not be a 100%
subsidiary of a holding company if a person is in a position to affect rights
(now or in the future) in relation to the holding company or the 100%
subsidiary. [Item 2, - new subsection 160ZZRRA, Item 2,- new section
160ZZRRB]
6.24 The term 'mutual insurance organisation'
means:
• a mutual insurance company within the meaning of section
121AB of the Act; or
• a mutual affiliate company within the
meaning of section 121AC of the Act. [Item 2, 'mutual insurance
organisation'- new subsection 160ZZRR(1)]
6.25 The term 'publicly
traded unit trust' means a unit trust the units in which:
• are
listed for quotation in the official list of an approved stock exchange; or
• are ordinarily available for subscription or purchase by the
public. [Item 2, 'publicly traded unit trust'- new subsection
160ZZRR(1)]
New testing rules
6.26 The new rules
proposed by these amendments will require public entities to test for changes in
the majority underlying interests in assets held by natural persons between the
'base time' and the 'test time'. Both of these terms are discussed in detail
below. [item 2, 'base time' new subsection 160ZZRR(1), 'test time' - new
subsection 160ZZPR(1) & subsection 160ZZRR(3).]
6.27 The new
testing rules in new Subdivisions E and F are design to assist public companies
and publicly traded unit trusts complete their tests for underlying interests by
allowing them to treat certain interposed entities who hold interests in their
assets as natural persons, without the need to determine the actual identity of
the individuals holding the interests through that entity. The rules in
Subdivision G may be used by all public entities required to test for changes in
majority underlying interests in their assets.
6.28 The new testing rules
only apply to public entities. [Item 7 - new subsection 160ZZSA (1) in new
Subdivision C]
What is a public entity
6.29 The
new testing rules will only apply to 'public entities' as defined in new
subsection 160ZZRR(1) [item 2 - 'public entity'- new subsection 160ZZRR].
Non public entities will remain subject to the current law.
6.30 A
public entity is public company, a mutual insurance organisation or a publicly
traded unit trust. Each of these terms is specifically defined in the
amendments. [Item 2 - 'public company' 'mutual insurance organisation'
'publicly traded unit trust' new subsection 160ZZRR]
When will
the new rules apply to a public entity?
6.31 The new testing
rules will only apply to a public entity in relation to an asset if, at the test
time:
• the asset was acquired on or before 19 September
1985;
• the public entity was the owner of the asset at the test
time; and
• the asset has not been taken under subsection 160ZZS(1)
or new Subdivision C to have been acquired by the entity after 19 September 198
5. [Item 7 - new subsection 160ZZSA (l)]
6.32 A public entity will
not be required to test whether there has been a change in the underlying
interests in assets which have been disposed of prior to 20 January
1997.
Application to new public entities
6.33 If an
entity becomes a public entity after 20 January 1997 - it will be required to
test for changes in underlying interests in any assets it acquired on or before
19 September 1985 which it owns at the test time, unless the asset or assets
have already been taken to have been acquired after 19 September 1985 because of
an earlier application of subsection 160ZZS(1) prior to becoming a public
entity. [Item 7 - new subsection 160ZZSA(1)]
No need to test
after change in majority underlying interest
6.34 A public entity
does not have to make any further determinations under these amendments after
there has been a change in underlying interest in all of its assets acquired on
or before 19 September 1985. [Item 7 - new subsection
160ZZSA(1)]
When must public entities test for changes in majority
underlying Interests ?
The first
test
6.35 Public entities are required to test for changes in
majority underlying interests in their assets as at the last moment of 20
January 1997. [Item 2, 'test time'- new subsection 160ZZRR(1) & (3); item
7 - new subsection 160ZZSA (2)]
5 yearly
tests
6.36 Subsequent tests must be done on the last moment of a
day that is 5 years (or multiples of that time) after 20 January 1997. [Item
2, 'test time' - new subsection 160ZZRR(1) & (3); item 7 - new subsection
160ZZSA(2)]
6.37 If the date so calculated is a Saturday, Sunday or
public or bank holiday in the place where the records of owner
ship are
kept, the test must be completed as at the last moment of the next day which is
a "business day". [Item 2, 'business day' 'test time'- new subsection
160ZZRR(1); new subsection 160ZZRR(3)]
Abnormal
trading
6.38 If the public entity is a public company or a
publicly traded unit trust it will also be required to test for changes in
majority underlying interests if after 20 January 1997 there is an abnormal
trade in the shares or units of the trust [item 2, 'test time'- new
subsection 160ZZRR(1) & (3); item 7 - new subsection 160ZZSA (2).] What
constitutes an abnormal trade is discussed below.
6.39 In addition. a
company which is a public company, or a 100% subsidiary of a public company all
the shares of which are beneficially owned by a listed public company or
publicly listed trust will be required to test for changes in the underlying
interests in its assets if there is an abnormal trade in the shares of the
listed public company or the publicly traded unit trust.
6.40 For the
purposes of these amendments, the last moment of a day is based on the last
moment of the day using legal time in the place were the public entities records
of ownership are kept. [Item 2, 'test time' new subsections 160ZZRR(1) &
(3)]
How does a public entity test whether changes have
occurred in tile majority underlying interests of pre-CGT assets of the
entity
Key definitions used in this part of the
explanation
6.41 The term 'majority underlying interests' means
more than one half of:
• the beneficial interests held by natural
persons in the asset; and
• the beneficial interests held by
natural persons in any income that may be derived from the asset; regardless of
whether those interests are held directly or through one or more interposed
companies, partnerships or trusts. [Item 2, 'majority underlying interests'-
new subsection 160ZZRR(1)]
6.42 The term 'base time' means the last
moment of any day chosen by the public entity in the period from 1 July 1985 to
30 June 1986 (inclusive) that gives a reasonable approximation of ownership as
at the last moment of 19 September 1985. If no day is chosen, public entities
must use the last moment of 19 September 1985 as their base time. [Item 2,
'base time'- new subsection 160ZZRR(1) & (3)]
Determination
as to change in majority underlying interests
6.43 Public
entities are required to determine, by an examination of their records, whether
majority underlying interests in a pre-CGT asset at the test time were held by
natural persons who held majority underlying interests in the asset at the base
time. [Item 7 - new subsection 160ZZSA (2)]
6.44 There are special
tracing rules explained later which assist public entities determine whether
changes have occurred in the majority underlying interests in the assets of the
entity, particularly where there are one or more other entities interposed
between the public entity and the ultimate beneficial owner of the underlying
interests in the public entity. [Item 7 - new Subdivisions E, F &
G]
Interests whose holders cannot be
identified
6.45 If, at the base time, the public entity cannot
identify the natural persons who hold underlying interests in an asset, those
interests will be taken to be held by different natural persons at the test time
for the purposes of making a determination. [Item 7 - new subsection 160ZZSA
(3)]
Testing must be completed within a certain period after
the test time
6.46 The public entity must, unless the
Commissioner extends the period, make its determination as to whether there has
been a change in majority underlying assets within the longer of the following
periods: [item 7 - new subsection 160ZZSA (2); and item 2, 'prescribed
period' new subsection 160ZZRR(1)]:
• 6 months beginning from
the day after the test time; or
• 3 months beginning from the day
after the day on which this Act receives the Royal Assent.
What are
the consequences of not testing as required ?
6.47 Public
entities will be required to test for changes in majority underlying interests
in the pre-CGT assets of the entity at 20 January 1997, at 5 yearly intervals
(eg. 20 January 2002) after that date and at each abnormal trade. Public
entities have been given a 6 month period after such dates in order to complete
the test. In certain circumstances, this 6 month period is or may be extended.
[Item 7 - new subsection 160ZZSA (2) and item 2, 'test time' and 'prescribed'
period - new subsection 160ZZRR(1)]
6.48 If a public entity fails to
test in respect of 20 January 1997 by the end of the 6 month period, all pre-CGT
assets of the entity will be taken to have been acquired by the entity on 20
September 198 5 [item 7 - new subsection 160ZZSB(2).] If a public entity
fails to test in respect of any subsequent test time by the end of
the 6 month period, each pre-CGT asset of the entity will be taken to
have been acquired by the entity on the last test time that the entity passed
the test in respect of the asset. For example if the entity failed
the test in respect of the test time, 20 January 2002 and there has been no
abnormal trades since the entity passed the 20 January 1997 test, the asset will
be taken to have been acquired on 20 January 1997 [item 7 - new subsection
160ZZSB(4).]
Public entities that became public entities after
20 January 199 7
6.49 A public entity that becomes a public
entity after 20 January 1997 will be required to test in respect of each
subsequent abnormal trade and 5 yearly intervals and will have the same time to
complete the test as other public entities (eg. 6 months). The 5 yearly
intervals commence from 20 January 1997 but the public entity is only required
to test in respect of those intervals which occur after they became a public
entity. [Item 7 - new subsection 160ZZSA (2) and item 2, 'test time' and
'prescribed period' - new subsection 160ZZRR(1)]
6.50 If an
entity which became a public entity after 20 January 1997 fails to test as
required in respect of the first time it is required to test (eg. 20
January 2002 - assuming there were no prior abnormal trades), all pre CGT assets
of the entity will be taken to have been acquired by the entity on the
date it became a public entity [item 7 - new subsection 160ZZSB(3).] For
each subsequent test time, a failure to test as required will have the same
consequences as for those public entities that were public entities on 20
January 1997 (ie. each pre-CGT asset of the entity will be taken to have been
acquired by the entity on the last test time that the entity passed the test in
respect of the asset) [item 7 - new subsection 160ZZSB
(4).]
The asset is taken to have been acquired for its market
value
6.51 A public entity fails a test in respect of a
particular test time where:
• within 6 months after the test time
(in certain circumstances this period is or may be extended), the entity makes a
determination showing whether there has been a change in the majority underlying
interests in a pre-CGT asset of the entity; and
• the
determination shows that there has been a change in the majority underlying
interest in the asset. [Item 2, 'test time' and 'prescribed period'- new
subsection 160ZZRR(1)]
6.52 A determination showing a change in
majority underlying in the interests of the public entity at a
particular test time may be treated as NOT showing such a change if the
Commissioner is satisfied or considers it reasonable to assume that there has
not been a change in the majority underlying interests in the public entity's
assets. This could occur, for example, if the public company could not fully
trace through its shares, but can otherwise demonstrate there has not been a
change in majority underlying interests in the assets of the company. [Item 7
- new subsections 160ZZSA (2), 160ZZSC(2) and 160ZZSD(2)]
What
are the consequences of failing the test ?
6.53 A public entity
fails a test in respect of a particular test time where:
• within
6 months after the test time (in certain circumstances this period is or may be
extended);
• the entity makes a determination showing whether
there has been a change in the majority underlying interests in a pre-CGT asset
of the entity;
• the determination shows that there has been a
change in the majority underlying interests in the asset; and
• the Commissioner has not indicated that he or she is satisfied
or considers it reasonable to assume that there has not been a change in the
majority underlying interests in the asset. This could occur, for example, if
the public company could not fully trace through its shares, but can otherwise
demonstrate there has not been a change in majority underlying interests in the
assets of the company. [Item 7 - new subsections 160ZZSA(2), 160ZZSC(2) and
160ZZSD(2) and item 2, 'test time' and 'prescribed period'- new subsection
160ZZRR(1)]
The asset is taken to have been acquired on the
earliest date that continuity of majority underlying ownership cannot be
demonstrated
6.54 If in respect of a particular test time, a
public entity fails a test for whether there has been a change in the majority
underlying interests in a pre-CGT asset of the entity, the asset is taken to
have been acquired on:
• if the test time is the first test time
for the entity, the earliest date in respect of which the entity was required to
test under a ruling given by the Commissioner that was made available to the
public but cannot demonstrate that there was no change in the majority
underlying interests in the asset; or
• if there is no such date or
the test time is a subsequent test time for the entity, the particular test time
in respect of which the entity failed. [Item 7 - new subsections 160ZZSC(3)
and (4) and paragraph 160ZZSD(1)(a)]
The asset is taken to have
been acquired for its market value
655 The asset is taken to have
been acquired for its market value on the day it is taken to have been acquired
by the public entity. [Item 7 - new subsections 160ZZSC(1)(b) and
160ZZSD(1)(b)]
Abnormal
trading
Background
6.56 Abnormal trading can be
indicative of a change in majority underlying interests in the assets of an
entity.
6.57 Accordingly, the amendments require public companies and
publicly traded unit trusts to test for changes in majority underlying interests
in the assets of the company or trust in respect of every abnormal trading in
the shares of the company or units in the trust. In addition, a company which is
a public company, or a 100% subsidiary of a public company all the shares of
which are beneficially owned by a listed public company or publicly listed trust
will be required to test for changes in the underlying interests in its assets
if there is abnormal trading in the shares of the listed public company or the
publicly traded unit trust. [Item 2, 'test time'- new subsection 160ZZRR;
item 7 - new section 160ZZSA]
6.58 The requirement to test in respect
of abnormal trades does not apply to mutual insurance organisations because the
prospect of 'abnormal trading' in mutual insurance organisations is remote due
to the circumstance that the members of the organisation are also the
insured.
What is abnormal trading ?
6.59 The key
definition in the term 'abnormal trading' is the term 'trading' The term trading
means an issue, redemption, transfer of shares in a public company or units in a
publicly traded unit trust or any other dealing in the shares or units. [Item
7 - new subsection 160ZZSE(2)]
6.60 Specifically excluded from this
definition, however, are dealings in the shares in a public company or units in
a publicly traded trust that do not change the proportions in which natural
persons hold underlying interests in the assets of the company or trust. For
example, a bonus issue which did not change the proportions individuals hold
underlying interests will not be an abnormal trading. As such, the public entity
will not be required to examine its records to make a determination as to
whether there has been a change in the majority underlying interests in its
assets. [Item 7 - new subsection 160ZZSE(3)]
6.61 There are two
ways that trading in the shares or units of a public company or publicly traded
unit trust can be taken to be abnormal trading. [Item 7 - new sections
160ZZSF to 160ZZSI in new Subdivision D of Division 20]
The
first method
6.62 The first method is a general factual test
where a number of factors must be weighed to determine whether the trading is,
on balance, abnormal. [Item 7 -new subsection 160ZZSF(1)]
6.63 All
relevant factors (including the three specific factors specified below) must be
taken into account when determining if a trading is abnormal. The specific
factors are:
• the timing of the trading when compared to normal
trading of shares in the company or units in the trust;
• the
number of shares or units traded by comparison to the normal number of shares or
units traded (eg. voluminous trading in shares or units may indicate the
possibility of a significant change in the underlying interests in the assets of
the company or trust); and
• any connection between the trading in
shares or units and any other trading (eg. two or more lots of trading may be
linked and may indicate a meaningful change in the underlying interests in the
assets of the company or trust). [Item 7 -new subsection
160ZZSF(1)]
The second method
6.64 The second
method deems abnormal trading to have occurred in the three sets of
circumstances, as explained below. [Item 7 - new sections 160ZZSG, 160ZZSH
and 160ZZSI]
Trading of 5% or more in one
transaction
6.65 There is abnormal trading if 5% or more of the
shares in a public company or units in a publicly traded unit trust are traded
in one transaction [item 7 - new section 160ZZSG]. The size of such a
transaction is enough to indicate that there may have been a significant change
in the underlying interests in the assets of the company or
trust.
Suspected acquisition or merger
6.66 There is
abnormal trading in the shares of a public company or units of a publicly traded
unit trust if the trading is part of a proposed acquisition or merger of the
company or trust. However, the trading will only be abnormal if the company or
trustee knows or reasonably suspects this to be the case. The abnormal trading
will be taken to occur at the time of the trading. [Item 7 - new section
160ZZSH]
More than 20% change in a 60 day
period
6.67 There is abnormal trading in the shares of a public
company or units of a publicly traded unit trust if more than 20% of the shares
in the company or units in the trust are traded within a 60 day period. As
discussed previously, trading in the shares of a company or units of a trust can
be the issue, redemption or transfer of shares or units. If there is a turnover
of more than 20% of the shares in a public company or units in a publicly traded
unit trust because of one or more of these events, then there is abnormal
trading. [Item 7 - new section 160ZZSI]
6.68 The abnormal trading
is deemed to occur at the end of the 60 day period. [Item 7 - new subsection
160ZZSI(2)]
The new tracing rules
The new tracing
rules are only available to public entities
6.69 The new tracing
rules in new Subdivision E may only be used by public companies and publicly
traded unit trusts. [Item 7 - new subsection
160ZZSK]
Tracing concession - less than 1% share or
unitholdings - the notional
holder
Overview
6.70 The rules in this
Subdivision make it easier for a public company (head company) or publicly
traded unit trust (head trust) to determine, at the base and test time, the
holders of majority underlying interests in its assets. [Item 7 - new section
160ZZSJI
6.71 Broadly, all holdings of less than 1% in the head
company or head trust are treated as if they were held by a single notional
natural person (the notional holder). This means that the company or trust does
not have to trace through to the actual natural persons who beneficially hold
underlying interests in the assets of the company or trust that are taken to be
held by the notional holder. [Item 7 - new subsection
160ZZSM(2)]
6.72 Similar rules apply if another public company or
publicly traded unit trust is interposed between the head company or head trust
and those persons. All holdings of less than 1% in the interposed company or
interposed trust are treated as if they were held by a different single notional
natural person. This means that the head company or head trust does not have to
trace through the interposed company or interposed trust to the actual natural
persons who beneficially hold underlying interests in the assets of the head
company or head trust that are taken to be held by the notional holder in the
interposed company or trust. [Item 7 - new section
160ZZSM(3)]
6.73 A public company or publicly traded unit trust is
not compelled to use the notional holder rules in Subdivision E. [Item 7 -
new subsection 160ZZSM(1)]
Public company or publicly traded
unit trust must have 'share or unit holdings of less than 1%'
6.74 A public company or publicly traded unit trust must have less
than 1% share or unitholdings before the notional holder rules can be applied.
[Item 7 - new section 160ZZSK]
6.75 In Subdivision E, the public
company which is making the determination as to whether there has been a change
in the majority underlying interests in its assets is called the head company.
If a publicly listed unit trust is making the determination, it will be called
the head trust. [Item 7 - new section 160ZZSK]
Notional
holder of head company or head trust taken to own all share or unitholdings of
less than 1%
6.76 If the notional holder rule is used by the head
company or head trust to help it make its determination showing whether there
has been a change in the majority underlying interests in its assets, a single
notional natural person (the notional holder) [item 7 - new subsection
160ZZSM(2)] is taken to be the ultimate beneficial owner of:
6.77 In
the case of a head company, all shares of the head company in aggregate
that:
• have rights to less than 1% of any distributions of capital
(capital shareholding of less than 1%); and
• have rights to
less than 1% of dividends payable (dividend shareholding of less than
1%).
6.78 In the case of a head trust, all units of the head trust in
aggregate that:
• have rights to less than 1% of any distributions
of capital (capital unitholding of less than 1%); and
• have
rights to less than 1% of any distributions of income (income unitholding of
less than 1%).
6.79 The notional holder is taken to have the right to
the dividends or capital attached to the shares in the head company, or in the
case of units in a publicly listed unit trust, the right to income and capital
attached to the units in the head trust. [Item 7 - new subsection
160ZZSM(2)]
6.80 The entity is a natural person for the purposes of
the test. [Item 7 - new subsection 160ZZSM(2)]
6.81 To avoid
doubt, persons who have the rights to dividends or k capital in the head
company or income or capital in the head trust when interposed entities are
traced through are taken not to have the rights. [Item 7 - new subsections
160ZZSM(4) and (5)]
6.82 The two main outcomes of the notional holder
rule are:
• a public company or publicly traded unit trust will
not be required to trace through interposed entities to the ultimate beneficial
owner if the registered holder of the public company's shares or the units in
the trust holds shares or units that have less than 1% of the ownership rights;
and
• transactions between registered holders (both continuing and
new) that do not result in a holding of 1% or more are effectively ignored.
6.83 The notional holder is treated as a continuing
shareholder.
Share or unitholdings of less than 1%
defined
6.84 Each of the rights to dividends or income and rights
to capital are treated separately when defining share or unitholdings of less
than 1%.
6.85 A shareholding of less than 1% is one where all the shares
held by a registered holder carry between them less than 1 % of the particular
ownership right. Similarly, a unitholding of less than 1% is one where all the
units held by the registered holder carry between them less than 1% of the
particular ownership right. Any shares that are part of a substantial
shareholding are specifically excluded from a shareholding of less than 1%.
[Item 7 -new sections 160ZZSN and 160ZZSO]
6.86 The corporations law
requires disclosure of substantial shareholdings to similarly prevent the
disguising of substantial beneficial ownership as part of its acquisitions and
takeovers code. Those rules will be used to define substantial shareholding,
[Item 7 - new section 160ZZSP]
6.87 The definition is applied at the
test time.
Shares that are part of a substantial
shareholding
6.88 The corporations law contains rules that
require persons beneficially owning a substantial shareholding in a company to
disclose that matter to the company. In the common situation where shares are
held by nominees or other registered holders without any beneficial interest in
the shares, these rules ensure a public company has knowledge of its beneficial
owners.
6.89 A person has a substantial shareholding when he or she is
entitled to not less than 5% of the voting shares in the company. Entitlement is
a fundamental concept of the corporations law. Broadly, a person is entitled to
shares of a company if he or she has a relevant interest in the shares or
associates of the person have a relevant interest in the shares. Relevant
interest in shares broadly equates to beneficial ownership of shares as set
out in the income tax law. [Item 2, 'relevant interest'- new subsection
160ZZRR(1)]
6.90 A person who reaches the 5% threshold is required to
give notice within two days to the company of that substantial shareholding
under section 709 of the corporations law. Any variation, up or down, of 1% or
more must also be notified (section 710) as must a change in entitlement that
causes a person to stop being a substantial shareholder (section
711).
6.91 The notices are required to disclose the person with the
substantial shareholding, the associates and the particulars of the relevant
shares (including the registered holder).
6.92 For the purposes of the
notional shareholder rule, shares become part of a substantial shareholding
when:
• an initial substantial shareholder notice identifies the
shares as part of a substantial shareholding; or
• a subsequent
notice identifies the shares as part of a substantial shareholding which has
varied;
whichever happens first. [Items 2 and 7 - new subsection
160ZZSR(1); 'part of a substantial shareholding'- new subsection
160ZZRR(1)]
6.93 Conversely, shares stop being part of a substantial
shareholding when:
• a subsequent notice discloses the shares as
no longer being part of a substantial shareholding because the shareholding has
decreased; or
• a notice discloses that a person has ceased to be
a substantial shareholder and the shares were part of that former substantial
shareholding;
whichever happens first. [Items 2 and 7 - new subsection
160ZZSR(2); 'part of a substantial shareholding' - new subsection
160ZZRR(1)]
Consequence of notional
holder
6.94 The notional holder is taken to be the beneficial
owner of shares or units carrying the respective ownership rights at each time
the public company or publicly traded unit trust is required to make a
determination showing whether there has been a change in the majority underlying
interests in its assets. The notional holder will be a continuing holder who can
be taken into account when a public company or publicly traded unit trust is
required to make a determination about the majority underlying interests in its
assets.
6.95 For example, XYZ Ltd has only ever had one class of share.
On 19 September 1985, because of the various shareholdings of less than 1%, XYZ
Ltd's notional holder is taken to beneficially own 46% of the public company's
shares under new section 160ZZSM(2). Also, beneficial owner B holds 20% of the
public company's shares. During 1998 there is abnormal trading in XYZ Ltd's
shares. Immediately after the abnormal trading the notional shareholder is taken
to beneficially own 36% while B still owns 20%. There is no change in the
majority underlying interests in XYZ Ltd's assets for the purposes of new
subsection 160ZZSA(2) because majority underlying interests XYZ Ltd's assets,
between B and the notional shareholder (66% then 56%), has been
maintained.
Notional shareholder taken to own minimum
shareholding
6.96 A notional holder's holding could increase from
the base time to the test time. Such an increase is indicative of a change in
beneficial ownership of shares or units. This is because the increase will have
most likely resulted from a disposal by a large beneficial owner of shares or
units outside of the notional holder pool to a number of new share or
unitholders each holding less than 1%.
6.97 Consequently, for each of the
ownership rights the notional holder will be taken to have rights no greater
than those rights it had at the base time. [Item 7 - new subsection 160ZZSM
(6)]
Notional holder rule not to apply if public company or
publicly traded unit trust would not otherwise have the same holding of majority
underlying interests
6.98 The notional holder rule as it applies
to both a head company and an interposed entity will not apply in relation to a
test time if, at that time, the Commissioner considers it reasonable to assume
that the majority underlying interests in the assets of the entity would have
changed, but for the operation of the notional holder rules set out in this
Subdivision. [Item 7 - new section 160ZZSQ]
6.99 As discussed
previously, changes of beneficial ownership of holdings of less than 1% are
effectively ignored. There will be circumstances where such changes if taken
into account would mean there would be a change in majority underlying interests
held by natural persons between the base time and the test
time.
6.100 Matters the Commissioner will take into account
include:
• the size of the notional holder
holdings;
• the period between the base time and the test time;
and
• changes of underlying interests outside the notional holder
holding.
Notional holder of interposed entity taken to own all
share or unitholdings of less than 1%
6.101 The notional holder
rule will apply to a public company or publicly traded unit trust (interposed
entity) that is interposed between the head company or head trust and the
ultimate beneficial owner of shares in the head company or units in the head
trust if there are share or unitholdings of less than 1% in the interposed
entity. [Item 7 - new subsection 160ZZSM(3)]
6.102 The interposed
entity rule will operate for the purposes of determining whether there has been
a change in the majority underlying interests in the assets of the head company
or head trust. The interposed entity must be interposed between the head company
or trust and at least one natural person for each of the ownership rights held
indirectly, namely:
• right to receive any income or dividends
payable; and
• right to any distributions of
capital.
6.103 The test for changes in majority underlying interests are
applied to the head company or head trust on the basis that the notional holder
rules apply to the interposed entity, That is, a single notional natural person
(notional holder) is taken to be the ultimate beneficial owner
of.
6.104 In the case of an interposed company, all shares of the
interposed company in aggregate that:
• have rights to less than 1%
of any distributions of capital (capital shareholding of less than 1%);
and
• have rights to less than 1% of dividends payable
(dividend shareholding of less than 1%).
6.105 In the case of an
interposed trust, all units of the interposed trust in aggregate
that:
• have rights to less than 1% of any distributions of capital
(capital unitholding of less than 1%); and
• have rights to
less than 1% of distributions of income (income unitholding of less than
1%).
6.106 The notional holder is taken to have the right to the
dividends or capital attached to the shares in the interposed company, or in the
case of units in a publicly listed unit trust, the right to income and capital
attached to the units in the interposed trust. [Item 7 - new subsection
160ZZSM(3)]
6.107 For example, the head company XYZ Ltd has a
shareholder, ABC Ltd, a public company. Both companies have one class of share.
ABC Ltd holds 60% of XYZ Ltd. At a test time for XYZ Ltd, because of its less
than 1% shareholdings, ABC Ltd as an interposed company has a notional holder
with 40% of the underlying interests in XYZ Ltd's assets. For the purposes of
XYZ Ltd making a determination to show whether there has been a change in
majority underlying interests in its assets, ABC Ltd's notional holder would be
taken to beneficially own shares with 24% (40% of 60%) of the underlying
interests in the assets of XYZ Ltd.
6.108 The entity is a natural person
for the purposes of the test. [Item 7 - new subsection
160ZZSM(3)]
6.109 In circumstances where the interposed entity holds
shares or units other than in its own right, such as a nominee, the notional
holder rule would have no effect.
6.110 The interposed entity notional
holder is a separate entity from the head company or head trust notional holder.
[Item 7 - new subsection 160ZZSM(3)]
6.111 The notional holder
rules for the interposed company apply in the same way as for the head company.
Accordingly:
• the interposed entity notional holder is taken to be
a natural person;
• the ultimate beneficial owners are taken not to
have the particular rights taken to be held by the notional
holder;
• share or unitholdings of less than 1% for each ownership
right are defined in the same way including the substantial shareholder
exclusions;
• the notional holder rule will not apply if the
Commissioner considers it reasonable to assume that the majority underlying
interests in the assets of the entity would have changed, but for the operation
of the notional holder rules set out in this Subdivision. [Item 7 -new
subsections 160ZZSM(3) & (5); new sections 160ZZSN to
160ZZSQ]
Treatment of interposed complying superannuation
funds, complying approved deposit funds, special companies and government
bodies
Key definitions used in this part of the
explanation
6.112 The term 'complying superannuation fund' means
a complying superannuation fund within the meaning of section 45 of the
Superannuation Industry (Supervision) Act 1993. [Item 2, 'complying
superannuation fund'- new subsection 160ZZRR(1)]
6.113 The term
'complying approved deposit fund' means a complying approved deposit fund within
the meaning of section 47 of the Superannuation Industry (Supervision) Act 1993.
[Item 2, 'complying approved deposit fund' - new subsection
160ZZRR(1)]
6.114 The term 'foreign superannuation fund' means a
foreign superannuation fund as defines in subsection 6(1) of the
Act.
• Broadly, a 'foreign superannuation fund' is a provident,
benefit, superannuation or retirement fund:
• that was established
in a country outside Australia;
• that was established, and is
maintained and applied, for the sole purpose of providing superannuation
benefits for persons other than persons who are, or would ordinarily be or
become, residents of Australia or residents of a Territory;
and
• the central management and control of which is carried on
outside Australia by persons none of whom is a resident of Australia or a
resident of a Territory, not being a fund for which an amount has been set
aside, or to which an amount has been paid, by a taxpayer that is an amount that
has been allowed or is allowable as a deduction, or in respect of which a rebate
of tax has been allowed or is allowable, under any provision of this
Act.
6.115 The term 'special company' means:
• a company
that is, by the terms of its constituent document, prohibited from making any
distribution, whether in money, property or otherwise, to its members;
or
• a mutual insurance organisation. [Item 2, 'special company'
new subsection 160ZZRR(1)]
6.116 The term 'government body'
means:
• the Commonwealth, a State or a Territory;
or
• a municipal corporation or other local government body;
or
• a foreign state. [Item 2, 'government body - new subsection
160ZZRR(1)]
Overview
6.117 New Subdivision
F provides for special rules to help public companies and publicly listed
unit trusts identify the individuals who hold underlying interests in their
assets, when the interests are held through an interposed entity which is a
complying superannuation fund, complying approved deposit fund, foreign
superannuation fund, special company or government body.
6.118 A public
company or publicly traded unit trust, when testing the underlying interests in
its assets, will not have to trace through complying superannuation funds,
approved deposit funds, foreign superannuation funds, special companies or
government bodies, that are interposed between it and the persons who are the
ultimate beneficial owners of the company or trust. [Item 7 - new Subdivision
F]
6.119 Use of this concession is optional to the public company or
publicly traded unit trust. If the public company or publicly traded unit trust
wishes to do so, it may fully trace through the interposed fund, special company
to the individual beneficial owners. [Item 7 - new subsection
160ZZSS(1)]
Circumstances in which the concession is
available
6.120 The concession will be available
if:
• the fund, special company or government body is interposed
between the company or trust and at least one natural person who holds
indirectly:
- the right to receive any income payable; or
- the
right to any distributions of capital [item 7 - new paragraphs 160ZZSS(1)(a)
and (b)]; and
• in the case of a superannuation fund, the fund
must either be a complying superannuation fund or a foreign superannuation fund
at the test time [item 7 - new paragraph
160ZZSS(1)(c).]
• in the case of an approved deposit fund, the
fund must be a complying approved deposit fund at the test time [item 7 - new
paragraph 160ZZSS(1)(d).]
Where the interposed fund or special
company has more than 50 members or where the interposed entity is a government
body
6.121 If the interposed fund or special company has more
than 50 members at the base time or test time, then the test for changes in
majority underlying assets is applied at that time as if the fund or special
company is a single natural person who holds all of the rights held by the fund
or company. [Item 7 - new subsection 160ZZSS(2)]
6.122 An
interposed government body is also taken to hold the right to the income or
distributions of capital of the company or trust as if it were a single natural
person with those rights, regardless of the size of the membership (if any) of
the body. [Item 7 - new subsections 160ZZSS(2) and
(5)]
Where the interposed fund or special company has 50
members or less
6.123 If the interposed fund or special company
has 50 or less members, each of the members will be treated as a natural person
with an equal fixed proportion of the right to income or distributions of
capital of the public company or publicly traded unit trust. [Item 7 - new
subsection 160ZZSS(3)]
Actual natural persons taken not to have
rights to income or capital
6.124 To avoid doubt the persons who
have the actual rights to income or capital are taken not to have those rights
for the purposes of this concession [item 7 - new subsection 160ZZSS(4).]
The exception is where the rule on less than 50 members give those persons
such rights [item 7 - new subsections 160ZZSS(3) and
(4).]
Government body always treated as natural
person
6.125 If the public company or publicly traded unit trust
chooses to fully trace the individuals who hold the interests in its assets
through a government body, the government body will always be treated as being
an individual. The public company or publicly traded unit trust will not be
required to trace further though a government body. [Item 2 - subsection
160ZZRR(4)]
Tracing concession - treatment of former mutual
insurance organisations
Overview
6.126 The
new tracing concession for companies and trusts that were mutual organisations
applies to public companies and publicly traded unit trusts that were mutual
insurance organisations as at the base time and had more than 50 members at the
time of demutualisation. [Item 7 - new subsection 160ZZST(1) contained in new
Subdivision G of Division 20]
6.127 No concession is provided for
companies and trusts that were mutual insurance organisations with 50 or less
members at the time of demutualisation.
6.128 The concession provides
that when testing the underlying interests in its assets, companies and trusts
to which the concession applies may consider the natural persons who
were:
• immediately before demutualisation, members of the company
or trust; and
• who immediately after demutualisation held an
underlying interest in an asset of the company or trust or an underlying
interest, through the company or trust, in an asset of another public
entity;
as the same natural persons who held the underlying interests at
the base time. [Item 7 - new subsection 160ZZST(2)]
6.129 The
natural persons are treated as holding the underlying interests as at the base
time in the same proportion that they held the underlying interests immediately
after the demutualisation.
6.130 Any changes in the underlying interests
after demutualisation will be treated in accordance with normal principles (ie.
a comparison of the underlying interests as at the base time and test time is
required).
6.131 Use of the concession by public entities is optional.
[Item 7 - new subsection 160ZZST(1)]
CHAPTER 7 - CAPITAL
GAINS TAX - DISPOSALS OF SMALL BUSINESS
ASSETS
Overview
7.1 Part 1 of Schedule 5 of
the Bill will insert new Division 17A into Part IIIA. of the Income
Tax Assessment Act 1936 (the Act). The Division provides capital gains tax
(CGT) roll-over relief for the disposal and acquisition of active assets by
small businesses.
Summary of the amendments
Purpose
of the amendments
7.2 New Division 17A will provide
CGT roll-over relief where a small business taxpayer disposes of some or all of
its active assets and acquires replacement active assets. That is, roll-over
relief will be provided not only where a single asset is disposed of but also
where an entire small business is disposed of by a taxpayer and another business
is acquired.
Date of effect
7.3 The amendments will
apply to disposals of assets on or after 1 July 1997. [Item 5 of Part
3]
Background to the legislation
7.4 Currently, the CGT
provisions apply where an asset acquired after 19 September 1985 is disposed of
A capital gain arises in respect of the disposal where the proceeds from
disposal exceed the cost base or indexed cost base of the asset. The capital
gain (net of capital losses) is required to be included as assessable income of
the taxpayer in respect of the disposal year of income.
7.5 The tax
liability relating to a capital gain reduces the amount of capital available to
acquire replacement assets. Division 17A, the design details of which were
announced by the Treasurer in the 1996-97 Budget and in his press release of 3
December 1996, will ensure that a lack of capital does not constrain the growth
and development of small business.
7.6 The amendments will, in certain
circumstances, allow a small business taxpayer to elect to defer the CGT
liability relating to a capital gain made on the disposal of an active asset.
Upon making the election, the capital gain is not to be included in the
taxpayer's assessable income in, respect of the disposal year of income. The
provisions will instead require the capital gain (net of any capital losses) to
be applied in reduction of the cost bases of newly acquired replacement active
assets.
Explanation of the amendments
Criteria for
roll-over relief
7.7 A roll-over asset is an asset disposed of by a
taxpayer whose assets' (including assets of entities connected with the
taxpayer) net value does not exceed $5 million. [New subsection 160ZZPL(7); new
section 160ZZPP]
7.8 Further, the following conditions are required to be
met in relation to a roll-over asset of a taxpayer [new subsection
160ZZPQ(1)]:
(a) a capital gain would otherwise accrue to the taxpayer as
a result of the disposal (notional capital gain) (see under 'gross rollover
amount' in paragraph 7.38 below for further discussion);
(b) the asset
was an active asset at the disposal test time;
(c) if the asset was not
an active asset at the disposal test time, it was an active asset immediately
before the business (in respect of which the asset was used) ceased to be
carried on not more than twelve months before the disposal test
time;
(d) the asset was an active asset during more than one half of the
period in which it was owned by the taxpayer; and
(e) the asset had not
been the subject of roll-over under this Division within five years before the
disposal test time;
7.9 Finally, a taxpayer will be required to make an
election in writing for the Division to apply. The election must be made on or
before the date of lodgement of the taxpayer's return for year of income in
which the disposal of a roll-over asset occurred.
Maximum net value
of assets of a taxpayer and related persons
7.10 The roll-over
relief will only apply where the threshold criteria listed in section 160ZZPP
are satisfied. These criteria must be satisfied at the disposal test time
[new paragraph 160ZZPL(7)(b)]. The disposal test time is the time
immediately before the disposal of the relevant roll-over asset [new section
160ZZPK].
7.11 The first criterion is that the net value of a
taxpayer's assets (see paragraph 7.16 below) must not exceed $5 million
[new subsection 160ZZPP(2)]. Secondly, the sum of the net values
of the assets of:
(a) the taxpayer;
(b) any entities connected
with the taxpayer (for meaning of 'connected' see paragraphs 7.18 -7.25 below);
and
(c) where the taxpayer and/or an associate of the taxpayer is a
partner in a partnership not connected to the taxpayer, their share of the net
value of the assets of the partnership,
must not exceed $5 million
[new subsection 160ZZPP(4).]
7.12 Both criteria must be satisfied
at the disposal test time in order for roll-over relief to be available under
the new Division 17A. For example, Division 17A will not apply where the net
value of a taxpayer's assets is $6 million even though the sum of the net value
of the assets under the second criterion is $4 million.
7.13 An
additional criterion applying only where the asset disposed of is an asset of a
partnership is that the net value of the partnership's assets must not exceed $5
million [new subsection 160ZZPP(3).] The effect of this and the second
criteria is that only a partner's (including an associate's) direct interest in
the partnership will be taken into account unless the taxpayer is either
connected with the partnership or the asset disposed of is a partnership
asset.
Net value
7.14 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 [new subsection
160ZZPP(5).] Specifically excluded, however is a liability that relates to
an asset excluded for the purposes of the $5 million threshold by paragraphs
160ZZPL(1)(a) to (d). For example, a loan incurred by an individual taxpayer
(hot acting as trustee) for the purpose of acquiring a personal asset is
excluded. This would be so even if the loan was secured against an asset of the
taxpayer's business.
Entity
7.15 An entity for the
purposes of this Division means an individual, partnership, company or trust
[new section 160ZZPK].
Asset
7.16 An 'asset' in
relation to an entity is defined in new subsection 160ZZPL(1) to mean an
asset as defined in section 160A in Part IIIA 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 those owned by the
taxpayer that are being used solely for the personal use and enjoyment of the
taxpayer or associates. In other words, assets that are intended to be used but
not actually used as personal assets are not excluded from the definition of
'asset'. 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. The exclusion will prevent personal assets of
individual taxpayers from being included for the purposes of the $5 million
threshold.
7.17 In addition, the assets of an entity will not include
shares, units or other interests (except investments which constitute debt) in
another entity connected with the first entity [new subsection 160ZZM(2).]
Where two entities are connected, the net assets of the entities (including
a controlling entity's investment in another entity) will be aggregated in
determining whether the threshold test under section 160ZZPK is satisfied. If
the entities are connected because an entity controls the other entity, the
value of the controlling entity's investment in the other entity will be
reflected in the net value of the other entity. Since the net value of the
assets of both entities is required to be aggregated for threshold purposes, the
value of the controlling entity's investment is excluded to prevent double
counting. There is, however, no need to exclude any debt investments the
controlling entity may have in the other entity since upon aggregation, the net
value of a debt investment of the controlling entity will be nullified by the
value of the debt reflected as a liability of the other
entity.
Entity connected with taxpayer
7.18 The
determination of whether an entity is connected with a taxpayer is outlined in
new section 160ZZPN. This provision is designed to ensure all of the
business interests of a taxpayer are taken into account in determining whether
the taxpayer is in fact a small business. 7.19 An entity is connected with a
taxpayer if:
• the taxpayer controls the entity;
• the taxpayer is controlled by the entity;
the taxpayer
and the entity are each controlled by the same entity. [New subsection
160ZZPN(1)]
7.20 An entity ('first entity') is deemed to control
another entity in the following circumstances [new subsection
160ZZPN(2)]:
(a) where the first entity and/or its associates
beneficially own, or have the right to acquire the beneficial ownership of,
interests in the other entity that carry the right to receive at least 50% of
any distribution of income or capital made by the other entity;
(b) where
the first entity and/or its associates beneficially own, or have the right to
acquire the ownership of, shares in a company that carry the right to exercise
at least 50% of the voting rights in the entity;
(c) where the other
entity is a discretionary trust, the first entity is the trustee of the trust or
an entity which has influence over the exercise of the power of the trustee or
trustees to make distributions of income or capital. This will be the case
unless all of the following criteria are satisfied:
(i) the discretionary
trust is the taxpayer (ie the entity disposing of a roll-over
asset);
(ii) a beneficiary of the discretionary trust is deemed to
control the trust because of the operation of a provision of section 160ZZPN;
and
(iii) the trustee or an entity which has influence over the exercise
of the power of the trustee and the beneficiary are not associates (see
paragraph 7.22 for further discussion). [New subsection
160ZZPN(3)]
7.21 The first entity is also deemed to control another
entity where the first entity and/or its associates beneficially own or have the
right to acquire between 40% and 50% of the income, capital or voting rights of
the other entity. The first entity is also deemed to control a company where the
entity and/or its associates beneficially own, or have the right to acquire the
ownership of, shares in the company that carry the right to exercise between 40%
and 50% of the voting rights in the company. The deeming rules discussed in this
paragraph will not apply, however, if the first entity satisfies the
Commissioner that the other entity is controlled by a person or persons other
than the first entity and/or its associates. [New subsection
160ZZPN(4)]
7.22 In the case of a discretionary trust, each of its
objects is deemed to be entitled to acquire an interest in the capital or income
of the trust. The amount of the entitlement is deemed to be the maximum amount
of income or capital of the trust which the trustee could distribute to the
beneficiary under the trust deed [new subsection 160ZZPN(5)]. Where the
beneficiary is deemed to be entitled to acquire an interest in at least 40% of
the capital or income of the trust, subsection 160ZZPN(2) and (4) could apply to
deem the beneficiary to control the trust. As mentioned earlier, a trustee of a
discretionary trust (or an entity which has influence over the exercise of the
power of the trustee or trustees to make, distributions of income or capital) is
deemed not to control the trust where all the conditions set out in paragraph
7.20(c) are satisfied [new paragraph 160ZZPN(2)(c)]. To illustrate, a
beneficiary being deemed to be entitled to, say, 60% of the income of the trust
by the operation of subsection 160ZZPN(5) will be deemed by paragraph
160ZZPN(2)(a) to also control the trust. However, where the conditions outlined
in paragraph 7.20(c) are satisfied, the trustee (or the entity with influence
over the trustee's power to make distributions) will not be deemed to control
the trust.
7.23 Control includes direct and indirect control. For
example, where a taxpayer controls a company which in turns controls a trust,
the taxpayer will be treated as controlling that trust. [New subsection
160ZZPN(6)]
7.24 To avoid exceedingly complex tracing requirements,
however, where there is an interposed public entity between two entities, the
entity ('first entity') deemed to control the public entity is taken not to
control any other entity directly or indirectly controlled by the public entity.
An exception to this rule is where the other entity is taken to be controlled by
the first entity directly, or where control is indirect, there is no public
entity interposed between the first entity and the other entity [new
subsection 160ZZPN(7).] To illustrate, if an entity (E1) is deemed to
control a public entity (E2) which in turn controls another entity (E3), E1 will
not be deemed to control E3 merely because of the operation of new subsection
160ZZPN(6). However, E1 will be deemed to control E3 if E1 controls E3 directly
(say because E1 beneficially owns shares that carry a right to 50% of the voting
rights in E3).
7.25 Broadly, a public entity is defined in section
160ZZPK as a company, mutual insurance organisation or unit trust whose shares
or units are publicly traded.
Associates
7.26 For
the purposes of the measure, an associate of a taxpayer is an entity that acts
in accordance with the directions of the taxpayer or could be reasonably
expected to do so [new subsection 160ZZPM(1).] In addition, an
associate is an entity which acts in concert with the taxpayer or could be
reasonably expected to do so. In relation to partnerships, no partner is taken
to be an associate merely because of the 'in concert' rule [new subsection
160ZZPM(2).] In relation to a trust, the trust is taken to be an associate
of a taxpayer if a trustee of the trust acts in accordance with the directions
of the taxpayer or could be reasonably expected to do so [new section
160ZZPK].
7.27 Where a taxpayer is an individual, an associate of the
taxpayer includes the spouse of the taxpayer or a child of the taxpayer under
eighteen years of age [new paragraph 160ZZPM(1)(a).]
Active
assets
7.28 Roll-over relief is only available for the disposal
of an active asset. An active asset is one which, at a particular point in time,
is used by the taxpayer in carrying on a business. Some examples would include
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. [New
subsection 160ZZPL(3)]
7.29 It is specifically provided that active
assets do not include shares in companies 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 [new subsection
160ZZPL(4).] However, an asset which is a replacement asset (discussed
below) will not be precluded from being an active asset by virtue of paragraph
160ZZPL(4)(c) if the asset is used predominantly to derive rent on a temporary
basis [new subsection 160ZZPL(5A)]. An example would be where the owner
of a taxi licence who operates a taxi business decides to lease the licence for
a short period in order to take a holiday. As long as the asset is held ready
for use by the taxpayer in the carrying on of a business, it will continue to be
an active asset as long as the period in which the asset is predominantly used
to derive rent is only temporary.
7.30 Whether a period of rental use
qualifies as temporary depends on the individual circumstances of the taxpayer.
If the period of rental use turns out to be longer than expected, so that it
cannot be concluded that the rental period is temporary, the replacement asset
will be taken to have ceased to be an active asset when the asset was first used
to predominantly derive rent. Accordingly, section 160ZZPX will deem a capital
gain to accrue to the taxpayer at that time.
7.31 In addition, the
exclusion in subsection 160ZZPL(4) 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. For example, a taxpayer may have created and developed a valuable trade
name which it licensed out to others for royalty income. The trade name is not
precluded from being an active asset upon its disposal. Whether the trade name
is an active asset, however, depends on whether the asset is used, or held ready
for use, by the taxpayer in carrying on a business or whether the asset is an
intangible asset which is inherently connected with the business.
7.32
Active assets also do not include financial instruments such as loans, debenture
stock, futures contracts, forward contracts, currency swap contracts and
promissory notes.
Replacement assets
7.33 A taxpayer who
has one or more roll-over assets in a year of income can nominate one or more
replacement assets. A replacement asset for a year of income has to be one that
is:
(a) an active asset; and
(b) acquired by the taxpayer within
the period beginning one year before and ending two years after the last
disposal of a roll-over asset in the year of income. [New subsection
160ZZPT(1)]
7.34 A replacement asset does not include an asset whose
disposal would not be covered by the CGT provisions due to the exclusions in
section 160L. Examples of this would be trading stock and, in relation to a non
resident, assets which are not taxable Australian assets as defined in section
160T. A replacement asset will also not include an asset to be used solely to
produce eligible exempt income. This is because the capital gain on the disposal
of that asset is not subject to CGT (subsection 160Z(6)). [New section
160ZZPK]
7.35 Finally, a provision of Part IIIA may deem that an
asset has been disposed of. Paragraph 160ZZOA(1)(d) is an example of such a
provision. A taxpayer cannot nominate that asset as a replacement asset. In
other words, a taxpayer cannot nominate as a replacement asset an asset which
was disposed of or deemed to have been disposed of, and immediately reacquired.
[New subsection 160ZZPT(2)]
7.36 A taxpayer may dispose of a
roll-over asset and purchase an asset which is to be used as an active asset so
long as the asset becomes an active asset by the end of two years from the
disposal of the roll-over asset" [new subsection 160ZZPL(6).] This will
allow the taxpayer a period of time to commence using the asset actively in the
business.
7.37 If there is a net roll-over amount (see paragraphs 7.40
and 7.42) in respect of a year of income and the taxpayer does not nominate any
replacement assets for that year, the net roll-over amount will be a capita gain
for that year of income. [New subsection
160ZZPT(5)]
Calculation of roll-over amount
Gross
roll-over amounts
7.38 Where a capital gain (referred to as the
notional capital gain) would but for these amendments have accrued to a taxpayer
on the disposal of a roll-over asset, and the asset was not goodwill, then the
taxpayer has a gross non-goodwill roll-over amount equal to the notional capital
gain [new subsection 160ZZPQ(3).] If the roll-over asset is goodwill, the
taxpayer has a gross goodwill roll-over amount equal to the amount of a
capital gain that would have been taken to have accrued to the taxpayer in
respect of the disposal but for this Division. That is, the amount of the
capital gain is calculated without taking into account the 50% reduction of the
accrued capital gain under section 160ZZR of the Act [new subsection
160ZZPQ(4); item 2 of Part 1]. This distinction between non-goodwill and
goodwill roll-over amounts is necessary because a non-goodwill roll-over amount
cannot be used to reduce the cost base of a goodwill replacement asset [new
subsection 160ZZPV(3).]
7.39 New subsection 160ZZPQ(2)
prevents the other CGT rules within Part IIIA of the Act from applying to
the capital gain on the disposal of a non-goodwill or goodwill roll-over asset.
In addition, if a taxpayer makes an election for roll over relief under these
measures in relation to the disposal of goodwill, section 160ZZR does not apply
to reduce by half an amount of capital gain that accrued to the taxpayer in
respect of the disposal of goodwill [item 2 of Part 1.]
Net
roll-over amounts
7.40 A gross non-goodwill roll-over amount (or
if there is more than one gross non-goodwill roll-over amount in respect of a
year of income, the sum of the gross non-goodwill roll-over amounts) must first
be offset against current year capital losses [determined under paragraph
160Z(1)(b)] and then against net capital losses [determined under subsection
160ZC(4)] in respect of an earlier year of income [new subsection
160ZZPR(2).] Items 3 and 4 of Part 2 inserts notes to subsection 160Z(1) and
subsection 160ZC(4) to highlight the fact that a capital loss or a net capital
loss calculated under these provisions are subject to reduction under the new
Division 17A. Any amount of the gross non-goodwill roll-over amount left after
the losses have been offset is referred to as a net non-goodwill roll-over
amount [new subsections 160ZZPR(4) and (5).]
7.41 Prior year net
capital losses must be offset in the order that they are incurred [new
subsection 160ZZPR(3).] However, a net capital loss in respect of a year of
income before 1995-96 ('earlier NCL') need not be offset because the earlier NCL
is reflected in the amount of a net capital loss in respect of the 1995 96 year
of income to the extent that the earlier NCL had not been previously recouped.
The Government's announcement in the 1996-97 Budget to change the law relating
to prior year net capital losses will mean that a net capital loss in respect of
the 1996-97 year of income onwards will not reflect a net capital loss of a
prior year of income.
7.42 New subsection 160ZZPS applies in a
similar manner to gross goodwill roll-over amounts. For example, a gross
goodwill roll-over amount (or if there is more than one gross goodwill roll-over
amount in respect of a year of income, the sum of the gross goodwill roll-over
amounts) must first be offset against current year capital losses of the
taxpayer, and then against net capital losses of the taxpayer in respect of an
earlier year of income. However, losses must always be offset against
non-goodwill roll-over amounts first. In other words, capital losses and net
capital losses may be offset against a gross goodwill roll-over amount only to
the extent the losses have not previously been offset against a gross non
goodwill roll-over amount new subsection 160ZZPS(2). Any amount of the
gross goodwill roll-over amount remaining after the losses have been offset is
referred to as a net goodwill roll-over amount [new subsections 160ZZPS(4)
and (5).]
Application of net roll-over amounts
7.43 A
taxpayer who has a net goodwill or non-goodwill roll-over amount may nominate
replacement assets to which this amount is to be allocated. The right to
allocate the roll-over amount to a particular asset is subject to a specific
rule relating to goodwill (see paragraph 7.46 below). The maximum net roll-over
amount that may be allocated to each nominated replacement asset is equal to the
cost base of the replacement asset [new paragraphs 160ZZPU(2)(a) and (3)(a);
new paragraphs 160ZZPV(2) (a) and (3) (a); new paragraphs 160ZZPW(3) (a), (4)
(a), (5) (a) and (6) (a)].
7.44 Where a taxpayer has a net goodwill
or non-goodwill roll-over amount and does not nominate any replacement asset, a
capital gain equal to the net goodwill or non-goodwill roll-over amount will
accrue to the taxpayer in the year of disposal of the roll-over asset or assets.
[New subsection 160ZZPT(5)]
7.45 If the taxpayer nominates a
non-depreciable replacement asset the cost base of the replacement asset will be
taken to be reduced at the time the replacement asset is acquired by the amount
of a net roll-over amount allocated to the asset. If there is more than one
replacement asset, the roll-over amount can be allocated to the cost bases in
whichever way the taxpayer determines is appropriate subject to the rules
discussed below. [New subsections 160ZZPU(2) and paragraphs 160ZZPU(3)(a) and
(b); new paragraphs 160ZZPV(2) (a) and (b) and (3)(a) and (b); new subsections
160ZZPW(3)(a) and (b), (4)(a) and (b), (5)(a) and (b), (6)(a) and
(b)]
7.46 A taxpayer cannot nominate goodwill as a replacement asset
in respect of a net non-goodwill roll-over amount [new subsection 160ZZPT(3)]
In other words, a taxpayer can only allocate a net goodwill roll-over amount
to a goodwill replacement asset. This is to prevent what would have been a
capital gain in respect of a non-goodwill roll-over asset from being taxed
concessionally under section 160ZZR of the Act when the goodwill replacement
asset is eventually disposed of.
7.47 A taxpayer may, however, nominate
an asset other than goodwill as a replacement asset in respect of a net goodwill
roll-over amount. Accordingly, in the event that there is an amount of a net
goodwill roll-over amount remaining after all the cost bases of nominated
goodwill replacement assets are reduced to nil, the sum of the remaining net
goodwill roll-over amount and any net non goodwill roll-over amount ('residual
net roll-over amount' - new subsection 160ZZPW(1)) may be allocated to
non-goodwill replacement assets. [New paragraph 160ZZPW(4)(c); new
subsections 160ZZPW(5) and (6)]
7.48 If there is a net roll-over
amount (goodwill or non-goodwill) remaining after the net roll-over amount has
been allocated to the maximum extent possible to all nominated replacement
assets, this amount is taken to be a capital gain that accrued to the taxpayer
in the year of income to which the net roll-over amount relates. [New
paragraphs 160ZZPU(3)(c), 160ZZPV(3)(d) and
160ZZPW(6)(d)]
Depreciable assets
7.49 A special
rule applies in relation to the application of a net roll over amount where a
taxpayer nominates a depreciable asset as a replacement asset. In these
circumstances, so much of a net non-goodwill roll-over amount or a residual net
roll-over amount (defined in new subsection 160ZZPW(1) and referred to in
paragraph 7.47 above) as the taxpayer determines ('the reduction amount') may be
allocated to the depreciable asset. However, the amount allocated to a
depreciable asset may not exceed the cost base of the asset at the time of
acquisition.
7.50 Unlike other nominated replacement assets, the cost
base of a nominated depreciable asset will not be reduced by the reduction
amount. Nevertheless, the reduction amount will accrue to the taxpayer as a
capital gain when the depreciable asset is eventually disposed of [paragraphs
160ZZPV(2) (c) and (3) (c), paragraphs 160ZZPW(5) (c), and (6) (c)].
Accordingly, if the depreciable asset is subsequently rolled over under Division
17A, the reduction amount will be taken into account in calculating the gross
roll-over amount in relation to that subsequent roll over.
7.51 A
depreciable asset is one whose cost is allowable as a deduction to the taxpayer
over a period of time, usually over several years of income [new section
160ZZPK]. A typical example is an asset whose cost is allowable under
subsection 54(1). Another example is a unit of industrial property whose cost is
deductible under subsection 124M(1).
Consequences of a change of
status of replacement asset
7.52 Where a replacement
asset:
(a) ceases to be an active asset;
(b) becomes an asset
whose disposal would not be affected by the CGT provisions in Part IIIA of the
Act because of section 160L; or
(c) becomes an asset used by the taxpayer
solely for the purpose of producing eligible exempt income referred to in
subsection 160Z(6);
a capital gain will accrue to the taxpayer in the
year of the change [new subsection 160ZZPX(1)]. The capital gain will be
equal to any net roll-over amount (the adjustment amount) previously allocated
to the asset under the new Division 17A.
7.53 If the replacement asset is
not a depreciable asset, the adjustment amount will be taken to increase the
cost base of the replacement asset at the time of change. Accordingly,
indexation of the adjustment account for the purposes of calculating the asset's
indexed cost base will occur from the time of change. [New subsection
160ZZPX(3)]
Consequences of certain disposals of replacement
asset
Roll-over under another Division of Part IIIA other than
section 160X
7.54 Where a nominated replacement asset is rolled over
('other roll over') by the operation of a CGT provision that is not a provision
within Division 17A, or section 160X (relating to assets of a deceased person -
see below), any net roll-over amount previously allocated to the asset under
this measure will accrue to the taxpayer as a capital gain in the year of income
in which the other roll-over occurred. [New subsections 160ZZPY(1) and
(2)]
7.55 If the replacement asset is not a depreciable asset, the
adjustment amount will be taken to increase the cost base of the replacement
asset at the time of roll-over under other provisions for the purposes of
ascertaining whether a capital gain or capital loss in respect of the asset
accrued to a person other than the taxpayer.
7.56 For example, the
relevant cost base of a replacement asset rolled over to an entity ('the
transferee') under section 160ZZO will be increased by the adjustment amount at
the time of roll-over for the purposes of working out whether a capital gain or
a capital loss accrued to the transferee in the event of a disposal of the asset
by the transferee.
Roll-over upon death
7.57 Where a
nominated replacement asset forms part of the estate of a deceased person and is
passed to the legal personal representative ('LPR') of the deceased person, the
actions of the deceased person will be taken to have been the actions of the LPR
for the purposes of Division 17A. However, this rule will only apply if section
160ZZPX (relating to the change of status of a replacement asset) had never
applied to the deceased taxpayer in relation to the replacement asset [new
subsection 160ZZPZ(1)] The consequences of a change in status of the
replacement asset will, however, apply to the LPR as if the LPR was the taxpayer
should any of the triggering events occur after the asset is passed to the LPR
(eg asset ceases to be an active asset).
7.58 Similarly, where the
nominated replacement asset forms part of the estate of a deceased person and is
passed to the beneficiary of the deceased person, the actions of the deceased
person or the LPR will be taken to have been the actions of the beneficiary for
the purposes of Division 17A. Again, this rule will only apply if section
160ZZPX had never applied to the deceased taxpayer or the LPR in relation to the
replacement asset [new subsection 160ZZPZ(2).] However, the consequences
of section 160ZZPX will apply to the beneficiary as if the beneficiary was the
taxpayer, should any of the triggering events occur after the asset is passed to
the beneficiary.
Consequential amendments
7.59 Part 2
will make amendments to provisions of the Act that are consequential upon
the amendments relating to providing to small business taxpayers, roll-over
relief on disposals of active assets. The consequential amendments are referred
to in paragraph 7.40 above.
Miscellaneous
7.60 Section 170
of the Act will not prevent the amendment of an assessment at any time to give
effect to the provisions of Division 17A.
CHAPTER 8 - FORGIVENESS
OF COMMERCIAL DEBTS
Summary of the
amendments
Purpose of the amendments
8.1 The amendments
in Schedule 6 are technical in nature and will ensure that the provisions
relating to the forgiveness of commercial debts operate as intended. They are
contained in the Income Tax Assessment Act 1936 (the Act) as proposed to
be amended by the Taxation Laws Amendment Bill (No. 2)
1996.
Date of effect
8.2 The amendments are to have
effect from 27 June 1996.
Explanation of the
amendments
Taxation debts
8.3 New subsection
(4A) being inserted in new section 245-25 will make it clear
that taxation debts due to the Commonwealth are not commercial debts. That will
prevent the debt forgiveness measures from applying to a taxation debt due to
the Commonwealth in the event that the debt is reduced or eliminated, eg by way
of an amendment or withdrawal of an assessment. The amendment will apply to
debts arising not only under the Act but also under other Commonwealth taxation
laws eg Fringe Benefits Tax Assessment Act 1986 or the Sales Tax
Assessment Act 1992. [Item 1 to 3]
Notional value of
foreign debts'
8.4 In valuing a debt, the basic rule is to assume
the debtor was solvent when the debt was incurred and that the debtor's capacity
to pay has not changed. Ordinarily, that means the debt is valued by reference
to its arm's length terms.
8.5 New subsection 245-55(4) contains a
special rule which provides for the purposes of valuing a forgiven debt that the
assumption of initial debtor solvency does not apply where the debtor and the
creditor were not dealing at arm's length in relation to a debt and the debt is
not a money lending debt. The reason is that for capital gains tax (CGT)
purposes, subsection. 160ZH(9) would treat the creditor in such circumstances as
having given market value consideration for the debt when it was acquired as an
asset of the creditor. A similar valuation rule therefore applies to the debtor
for debt forgiveness purposes in that circumstance.
8.6. However, the
special rule ought not apply to a foreign debt - that is, where the creditor is
a non-resident and the debt is not a taxable Australian asset of the creditor
for CGT purposes - because CGT applies only to Australian residents and taxable
Australian assets of non-residents.
There are no reasons, therefore, to
depart from ordinary debt valuation rules for those kinds of assets.
8.7 Accordingly, new subsection 245-55(4) is being amended so
that the special rule would apply in the circumstances described (ie where the
debtor and creditor of a non money lending debt were not at arm's length) only
where the creditor was a resident at the time of forgiveness or where the
forgiveness of the debt constituted the disposal by the creditor of a taxable
Australian asset (under section 160T of the Act). [Item
4]
Consideration in respect of forgiveness of 'foreign
debts'
8.8 For reasons similar to the ones underlying new
subsection 245 55(4), new subsection 245-65(2) treats a debtor as having
paid consideration equal to the market value of the debt for the purposes of
working out the gross forgiven amount of a non moneylending debt. That is,
consideration in respect of a debt is valued in a manner consistent with the way
consideration would be valued from the perspective of the creditor under
s160ZD(2) for CGT purposes.
8.9 However, new subsection
245-65(2A) will prevent the deeming rule from applying to the debtor
where the creditor was a non-resident at the time of forgiveness except where
the forgiveness of the debt constituted the disposal by the creditor of a
taxable Australian asset (under section 160T of the Act). In those
circumstances, the actual value of any consideration given by the debtor in
respect of forgiveness (rather than the market value of the debt) is
taken into account in working out the gross forgiven amount. [Items 5 and
6]
Debtors who are jointly and severally
liable
8.10 The debt forgiveness provisions potentially could
apply more than once in respect of a single debt in circumstances where there is
more than one debtor and the debtors are jointly and/or severally liable for the
debt. In these circumstances, each debtor would have a debt as defined in
proposed section 24515 because there is an enforceable obligation on each debtor
to pay the whole amount of the debt. Therefore, a forgiveness of the debt could
result in a forgiven amount equal to the whole amount of the debt for each of
the debtors.
8.11 Accordingly, new subsection 245-75(3) is being
inserted to deal with joint debts which are not partnership debts. (Partnership
debts are dealt with in Subdivision 245-F of Schedule 2C). The new provision
will require a gross forgiven amount to be apportioned between the debtors in
respect of whom the debt was a commercial debt ('commercial debtors') on the
basis of the number of commercial debtors who are jointly and for severally
liable for the particular debt. [Items 7 to 9]
Table o
deductible expenditure
8.12 To correct an oversight, the table of
deductible expenditure contained in new subsection 245-140(1) will
be amended to include expenditure incurred on research and development under
section 73B of the Act and capital expenditure incurred in establishing
horticultural plants under sections 124ZZF and 124ZZG, and subsection 124ZZM(2)
(Division 10F of Part III of the Act). [Items 10 and
11]
Cost bases of assets
8.13 New subsection
245-190(3) stipulates that the maximum amount by which the cost bases of
each nominated asset may be reduced is the amount that would have been the
reduced cost base of the asset calculated as if the asset had been disposed of
on either of the following days:
(a) the first day of the forgiveness
year of income; or
(b) if the specified described event occurred after
the beginning of the forgiveness year of income - the day on which the event
occurred.
8.14 Section 160ZK of the Act, however, requires any balancing
adjustment arising from the disposal of an asset to be taken into account in
working out its reduced cost base. Without knowing the consideration in respect
of disposal, it would not be possible to determine the amount of any balancing
adjustment arising from a notional disposal. However, new subsection
245-190(3) does not stipulate the amount to be treated as consideration in
respect of a notional disposal of an asset.
8.15 Accordingly, new
subsection 245-190(3) will be amended so that the reduced cost base of a
nominated asset is calculated as if the asset had been disposed of at its market
value. [Item 12]
Company
groups
8.16 Subdivision 245-G of Schedule 2C applies to
apportion a net forgiven amount of a debtor company among companies under common
ownership as the debtor company at the time a debt is forgiven and on the last
day of the immediately preceding year of income before forgiveness. In
circumstances outlined in new subsection 245-225(3), however, a special
rule applies to treat a previously commonly owned company that was not under
common ownership with the debtor company at those times as though it were
grouped with the debtor company for purposes of the
apportionment.
8.17 The special rule applies where the other company and
the debtor company were under common control immediately before and after they
ceased to be under common ownership, and at the time when the debt was forgiven.
It is doubtful whether the rule, as it stands, would include in the relevant
company group a subsidiary of a widely held debtor company because, even though
the debtor company would control the subsidiary, the common control test is
expressed by reference to a taxpayer who is the controller of both companies. It
can be argued that, because the debtor company is widely held, no shareholder
would qualify as a controller of the company so that the subsidiary could not be
said to be under common control with the debtor company according to the common
control test as presently expressed. By the same argument, the rule would appear
not to apply in the case of a widely held parent company of a debtor company
even though the parent company would control the debtor company.
8.18 The
special rule is meant to prevent previously commonly owned companies which
remain effectively under the control of the relevant group from avoiding the
debt forgiveness rules by ceasing technically to be under 'common ownership'
(ie. 100% common ownership) before a group company is forgiven its
debts.
8.19 Accordingly, new paragraph 245-225(3)(d) will ensure
that the special rule applies to a company which at the relevant times, is
either under common control with the debtor company or controls or is controlled
by the debtor company. [Item 13]
Company's deductible
revenue losses
8.20 Broadly, section 80G of the Act allows a
resident company which incurs a revenue loss incurred in a year of income to
transfer the loss to another resident company in the same group of companies.
Where a loss is transferred in the year in which it was incurred by the
transferor company ('current year loss'), paragraph 80G(6)(f) has the
effect of deeming the transferee company to have incurred the loss in the
preceding year of income.
8.21 New section 245-230 (the company
grouping provisions) apportion a debt forgiveness amount to companies that
constitute a group of related companies on the basis of each company's
undeducted prior revenue losses, ie. losses incurred in a year of income before
the forgiveness year of income that have not been deducted [new paragraph
245-110(b)].
8.22 The technical effect of these provisions
would be that a loss incurred by a debtor company in the forgiveness year of
income that is transferred under section 80G to another group company will be
treated as an undeducted prior revenue loss of that group company for the
purposes of apportioning a debt forgiveness amount of the debtor company. That
is inconsistent with the principle that losses incurred in the forgiveness year
of income are not to be affected by the measures.
8.23 A new
definition of 'deductible revenue losses' is being inserted in new subsection
245-230(4) to prevent a loss incurred by a debtor company in respect of the
forgiveness year of income that is transferred to a group company from
qualifying as a deductible revenue loss of the group company (by virtue of
paragraph 80G(6)(f) of the Act) for the purposes of apportioning a net forgiven
amount of the debtor company. [Item 14]
CHAPTER 9 - TAX FILE
NUMBERS
Purpose of the amendment
9.1 The amendment
to the Superannuation Industry (Supervision) Act 1993 in Schedule 7
increases the period in which eligible superannuation entities must request
the tax file numbers of new beneficiaries of the entity (if they do not already
have them) from 7 days to 30 days.
Date of effect
9.2 The
amendment will apply from the 60th day after Royal Assent to Taxation Laws
Amendment Bill (No. 2) 1996.
Background to the
amendment
9.3 Schedule 4 of Taxation Laws Amendment Bill (No. 2) 1996
(the Bill) extends the use of tax file numbers in the superannuation
industry.
9.4 Proposed new section 299G in Schedule 4 of the Bill
requires eligible superannuation entities to seek the tax file number of a
person who becomes a beneficiary after the commencement of the section, before
the 'required time', unless the entity already has the tax file
number.
9.5 Subsection (2) of that section specifies the 'required time'
as the end of the 7th day after the day on which the person becomes a
beneficiary of the eligible superannuation entity.
9.6 The term 'eligible
superannuation entity' is defined by proposed new section 299W in Schedule 4 of
the Bill to mean a regulated superannuation fund or approved deposit
fund.
9.7 Proposed new sections 299G and 299W are proposed to be inserted
into the Superannuation Industry (Supervision) Act 1993 by item 15 of
Schedule 4 of the Bill. In accordance with subclause 2(4) of the Bill, the
sections commence on the 60th day after Royal Assent to the
Bill.
Explanation of the amendment
9.8 The amendment
changes the reference to '7th' in proposed new subsection 299G(2) of the
Superannuation Industry (Supervision) Act 1993 to '30th' so as to allow
eligible superannuation entities 30 days (instead of the proposed 7 days) in
which to seek the tax file number of new beneficiaries (if they do not already
have the tax file number).
CHAPTER 10 - EQUITY INVESTMENTS IN SMALL
- MEDIUM ENTERPRISES
Overview
10.1 The amendments
contained in Schedule 8 of the Bill clarify the operation of the
provisions relating to equity investments in small and medium enterprises (SMEs)
which are set out in Item 14 of Schedule 1 to the Taxation Laws Amendment Bill
(No. 3) 1996.
Summary of the amendments
Purpose of the
amendments
10.2 The amendments will clarify the operation of the SME
provisions by modifying the requirement in sections 128TH and 128TJ that a
company making an investment in an SME must be engaged in a business of lending
money or must acquire SME shares in connection with such a business, by allowing
as an alternative, the requirement that where the company making an investment
in an SME is a subsidiary company within a wholly owned company group, the
parent company or parent companies of the subsidiary company must be engaged in
the business of lending money.
Date of effect
10.3 The
amendments apply to eligible equity investments made on or after 1 July 1996.
[Item 6]
Background to the legislation
10.4 Part 5
of Schedule 1 of the Taxation Laws Amendment Bill (No. 3) 1996
introduced a new Division 11B of Part III of the Income Tax Assessment Act
1936 ("the Act") to change the tax treatment of certain equity investments
in small and medium enterprises (SMEs) where the investment is held by a lending
institution. Any profit or loss from the eligible equity investments will now be
taxed under Part IIIA, the capital gains tax provisions, rather than on revenue
account.
10.5 There are certain criteria which must be met before these
investments can receive this concessional tax treatment. One of the criteria
requires that the taxpayer making the investment in the SME must be engaged in
the business of money lending. If a lending institution wishes to use a
subsidiary company to make these investments, it may not come within the terms
of Division 11B where the subsidiary company (the investor in the SME) is not in
a business of lending money. The case law suggests that these investments may be
taxed on capital account but there remains some
uncertainty.
Explanation of the amendments
10.6 The
amendments will modify the requirement in sections 128TH and 128TJ that a
company making an investment in an SME must be engaged in a business of lending
money or must acquire SME shares in connection with such a business, by allowing
as an alternative, the requirement that where the company making an investment
in an SME is a subsidiary company within a wholly owned company group, the
parent company or parent companies of the subsidiary company must be engaged in
the business of lending money. [Items 1 to 4]
10.7 The ultimate
owner of the group does not have to be engaged in a business of lending money if
it does not invest directly in SMEs. However, any company holding shares
directly in a subsidiary company which wishes to access the tax concession must
be engaged in a business of money lending.
10.8 The amendments also set
out the meaning of 'subsidiary' and 'direct ownership group' for the purposes of
Division 11B. New subsection 128TL(1) sets out three types of wholly
owned company group relationships which constitute a parent/subsidiary
relationship for this Division. The parent/subsidiary relationships are in
similar terms to those already used in the Act. [Item 5]