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Amendments to the capital gains tax (CGT)



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NO. 74

TREASURER

EMBARGO 7.30pm 15 August 1989

PRESS RELEASE

STATEMENT BY THE TREASURER, THE HON P.J. KEATING, MP

AMENDMENTS TO THE CAPITAL GAINS TAX (CGT)

As announced in the Budget, the Government has decided to make a number of amendments to the capital gains tax (CGT). These amendments do not encompass changes in the broad design of the CGT. Rather they reflect some fine tuning of the CGT

provisions that the Government considers necessary after having monitored the functioning of the tax over its initial four years of operation.

DEEMED DISPOSALS OP ASSETS - LEASES. OPTIONS AND RESTRICTIVE COVENANTS ETC .

The date of commencement of the CGT as it applies to certain transactions is to be amended to 23 May 1986 (in lieu of 20 September 1985).

In my statement of 19 September 1985 I indicated that the CGT would apply to real gains made on assets acquired on or after 20 September 1985. However, in a number of specific circumstances, although the underlying asset may have been

acquired before 20 September 1985, a transaction in relation to an underlying asset is deemed by the CGT provisions to involve the disposal of a separate asset acquired immediately before the disposal takes place. As a result, the CGT applies to the transaction. Circumstances where this occurs

include the grant of a lease, the grant of an option and the grant of a right to use or exploit art asset, or an agreement to forfeit or surrender a right (eg a restrictive covenant).

Taxpayers may not have anticipated on the basis of my statement of 19 September 1985 that the CGT would operate in this way. Therefore, the Government has decided to amend the law to apply the CGT only from 23 May 1986 (ie the date the CGT legislation was introduced into Parliament) for

transactions in relation to 'underlying assets* acquired before 20 September 1985, where the transaction itself is deemed by the. CGT provisions to involve the disposal of a

separate asset acquired immediately before the disposal takes place.

As a result of this, decision the following transactions will be excluded from the application of the C GJ:

(i) the grant of a lease on or after 20 September 1985 and before 23 May 1986 over property that was before 20 September 1985; I COMMONWEALTH

w w ® U B R A R Y

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(ii) the grant of an option on or after 20 September 1985 and before 23 May 1986 which binds the grantor to dispose of an asset acquired before 20 September 1985;

(iii) the grant of an option on or after 20 September 1985 and before 23 May 1986 which binds the grantor to acquire an asset; and

(iv) an act, transaction or event that occurred on or after 20 September 1985 and before 23 May 1986 in relation to an asset, or which affects an asset, that was acquired before 20 September 1985. Effectively, this will limit

the application of subsection 160M(7) so that a restrictive covenant, exclusive trade tie or ' sign-ron' agreement, etc, entered into between 19 September 1985 and 23 May 1986 will not fall within the provision.

SECURITIES LENDING ARRANGEMENTS

Taxpayers engaging in certain securities lending arrangements are to be allowed rollover relief from capital gains tax. This relief will apply to eligible securities lending . arrangements entered into after the date on which the

amending legislation is introduced. The rollover will apply automatically, so there will be no need to make an election.

Securities lending arrangements are typically entered into where a seller of securities does not have available enough securities to complete the sale to the buyer. To cover the sale, the seller obtains from a third person (the 'lender')

the securities needed to complete the sale. After completion of the sale, the seller returns replacement securities to the lender, who is also paid a fee for the use of the securities. Both before and after the transaction the lender holds the same number and type of securities. The

arrangements have the essential characteristics of loan transactions because the lender receives back the equivalent of what was lent.

At present the capital gains tax provisions treat the lender as having first disposed of the original securities and then as having acquired the replacement securities. This is the case even if the lender's investment* portfolio has not ultimately changed.

The effect of extending rollover relief to securities lending arrangements will be as follows:

. if the original securities were acquired by the lender before 20 September 1985, the replacement securities wi*ll also be taken to have been acquired by the lender before that date; and

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. if the original securities were acquired by the lender after 19 September 1985, the replacement securities will assume the cost base, indexed cost base or reduced cost base (as the case may be) of the original

securities at the time of the loan for the purpose of calculating any capital gain or capital loss on a later disposal of the replacement securities.

Securities eligible for the rollover will be:

. shares, bonds, debentures, convertible notes, rights or options issued by a company the shares of which are listed for quotation on the official list of a stock exchange in Australia or elsewhere;

. units, bonds, debentures, convertible notes, rights or options issued by a unit trust the units of which are listed for quotation on the official list of a stock exchange in Australia or elsewhere, or are ordinarily

available for subscription or purchase by the public; and \

. bonds, debentures or similar securities which are issued by a government (or government authority) in Australia or elsewhere.

A condition for allowing rollover relief will* be that the replacement securities are either precisely the same securities as those originally lent or securities identical to those originally lent. For example, if 100 ordinary shares in company A are lent, 100 ordinary shares in company A, conferring identical rights and imposing identical obligations, will have to be returned for rollover relief to

apply. Relief will not be available if non-identical securities, such as 100 preference shares in company A or 100 debentures of company A, are returned to the lender.

At present, securities lending transactions may attract tax under the general income provisions of the law (for example section 25 or section 26BB). The proposed amendments will also ensure that eligible securities lending transactions do

not give rise to assessable income under these provisions. The exemption will not apply to the*fee payable to the lender for the use of the original securities.

The amendments will, if necessary, include anti-avoidance measures. "

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APPLICATION OF CGT TO UNITS IN UNIT TRUSTS AND SHARES - ADJUSTMENT TO COST BASE RESULTING FROM TAX FREE DISTRIBUTIONS

Under the present provisions, when calculating a capital gain on the disposal of a unit or share held for more than 12 months, the indexed cost base is taken to have been reduced by any tax free distribution at the time the distribution was mad e . Where the distribution occurs within 12 months of a

unit's or share's acquisition, the reduction takes place by reference to the unindexed cost base of the unit or share - the amount so determined then forms the basis for the indexed cost base of the unit or share.

The current treatment may inappropriately deny some indexation benefits to taxpayers. Amounts that continue to comprise the cost base of a unit or share do not receive the benefit of indexation up to the point of the last tax free distribution received in the first 12 months of ownership.

The Government has therefore decided to amend the Income Tax Assessment Act so that where units and shares are ultimately held for more than 12.months, the reduction in the cost base resulting from any tax free distributions take place by

reference to the indexed cost base of the unit or share at that time.

The amended provision will apply in respect of tax free distributions on or after 16 August 1989.

TREATMENT OF CONVERTIBLE NOTES .

The CGT provisions are to be amended to ensure that where shares acquired as a result of the conversion of a convertible note are disposed of, the CGT provisions only apply to gains and losses which arise after conversion.

The amendment will eliminate the possibility of double taxation (and the possibility of double losses) on convertible notes which had arisen from the amendments to the taxation of traditional securities introduced on

10 May 1989. As the law now stands, there is the possibility of taxing gains accruing between the acquisition of a convertible note and its conversion *twice, once as income and once as a capital gain. Similarly, if a loss arises, the

loss may be allowable under both the income and the CGT provisions of the law. The new amendment will eliminate these possible outcomes'by ensuring that the shares acquired as a result of the conversion have a cost base for CGT purposes based on the market value of the convertible note at the time of conversion. Only gains or losses accruing after

the conversion of the convertible note will then be subject to the CGT provisions.

The amendment will apply in respect of gains on shares, that were acquired on conversion of convertible notes, disposed of after 10 May 1989, and in respect of losses as a result of disposals of such shares on or after 16 August 1989.

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BUSINESS REORGANISATIONS

Strata Title Conversions

The Government has decided that rollover relief - that is, deferral of tax on accrued capital gains or the retention of the tax-free status of an asset - is to be provided where there is a conversion to strata title from another type of

ownership arrangement for individual ownership of home units and apartments. ·

A conversion to strata title involves a change in the form of legal title to the unit or apartment rather than an effective change to the rights of the individual owners over that . asset. As such, it satisfies the well established criteria

for rollover relief ie that there is no change in the underlying ownership of the asset concerned. Specifically, rollover relief is to apply where:

. persons who formerly held units under the previous ownership scheme are, immediately after the conversion, the only holders of strata title units in the building; and

. the unit owners hold the same, or substantially the same, rights to occupy the units after the conversion as they did before. ■

This amendment will apply to strata title conversions entered into on or after 20 September 1985; the rollover relief will be available at the election of taxpayers.

Conversions of Incorporated Associations to Companies

When an incorporated association (such as a co-operative) is converted to a company, individual members of the incorporated association will also qualify for rollover relief on their share ownership in the new company.

Under the income tax legislation, an incorporated association is generally treated as a company and its members are treated as shareholders. Where a particular law that permits the conversion of an incorporated association to a company deems each to be the same legal entity, for CGT purposes there is no disposal of the assets of the former association or the

acquisition of its assets by the new company. However, the conversion produces inappropriate CGT consequences for the members. The difficulty arises because members hold shares in the new company, whereas no such shareholding previously

existed in the incorporated association. Presently, the members are not entitled to rollover relief because these transactions do not represent an exchange of shares.

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In these circumstances, there is no change in the nature of the underlying ownership of an asset by a particular taxpayer since the interests in the incorporated association and the shares in the new company are essentially the same thing. The criteria for rollover relief are therefore satisfied.

Rollover relief will be allowed where the following conditions are satisfied:

. the conversion is from an incorporated association to a company which, following the conversion, is treated as the same legal entity;

. shares in the new company are issued to former members of the association in substitution for their interests in the association;

. the on^y consideration for disposal of interests in the former association is shares in the new company;

. the market value of the shares in the new company,

immediately after they are issued, is not less than the market value of the interests in the former association,

. immediately after the conversion, shares in the new company are held by members in the same proportions as their interests were held in the former association;

. the taxpayer is a resident of Australia or shares in the new company are taxable Australian assets; and

. the taxpayer elects that the rollover relief is to apply.

Amendments to implement this rollover relief will apply for conversions undertaken on or after 20 September 1985.

The effect of the rollovers for strata title conversions and conversions of incorporated associations to companies will be

. for interests originally acquired before 20 September 1985, the new assets will also be taken to have been acquired by the taxpayer before that date; and

. for interests originally acquired on or after 20 September 1985, the new assets will assume the cost base, indexed cost base or reduced cost base attributable to the taxpayer's original interest at the time of the conversion, for the purpose of determining any taxable capital gain or allowable capital loss on a

future disposal of the asset.

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Transfer of a Non-Taxable Australian Asset to a Non-Resident Group Company

The CGT is to be amended to preserve the pre-20 September 1985 status of an asset in determining the application of the anti-avoidance provision - section 160ZZT - where a non-taxable Australian asset is transferred to a non-resident group company.

Under the present CGT provisions, difficulties may arise in a case where a resident taxpayer restructures certain offshore holdings. Rollover relief is not available for the transfer of a non-taxable Australian asset to a non-resident company. Thus, pre-20 September 1985 shares in a non-resident company

(ie non-taxable Australian asset) transferred by a resident company to another non-resident group company, will become post-20 September 1985 shares in the hands of the transferee non-resident company. Whilst this transfer does not give

rise to any CGT liability, the subsequent disposal by the resident company of its shares in the transferee group company may trigger the anti-avoidance provisions of section 160ZZT, which in turn may induce a CGT liability. Section 160ZZT provides, amongst other things, that a CGT

liability may arise on the disposal of pre-20 September 1985 shares in a private company where 75 per cent or more of that company's assets are acquired on or after 20 September 1985.

In these circumstances, the restructuring has not resulted in a beneficial change in the ownership of the pre-20 September 1985 assets, since ownership is retained within the company group. Therefore, no CGT liability should

be triggered. Since the difficulty arises because of the operation of section 160ZZT, the Government has decided to modify the operation of this provision. The amendment will provide that where there is a disposal of a pre-20 September

1985 non-taxable Australian asset by a resident company to a non-resident group company (ie group company within the terms of section 160ZZO), the asset will be taken to be a pre-20 September 1985 asset in determining the application of

section 160ZZT.

The amendment will apply in respect of assets transferred after 15 August 1989.

PRINCIPAL RESIDENCE EXEMPTION fPRF^

The Government has decided to amend the principal residence exemption (PRE) provisions. The amendments broadly relate to the availability of the PRE where taxpayers construct dwellings on vacant land, the impact of a taxpayer's death on

the principal residence status of their property and the treatment of beneficiaries of trust estates.

These amendments are in accordance with the established policy of providing an exemption for a principal residence and address situations where the law could otherwise have operated harshly. The amendments generally will be backdated

to apply to properties acquired on or after 20 September 1985

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Erection of Dwelling on Vacant Land

Where a taxpayer erects a dwelling on vacant land, in order to attract the full exemption from CGT (on both the house and land from the time of acquisition), the taxpayer is required to reside in that dwelling for at least 12 months. The Government has decided this period should be reduced to

3 months. This change recognises that the current 12 month requirement is, in some circumstances, unduly onerous, and that the objectives of imposing a residency requirement are satisfactorily met where that requirement is reduced to 3 months. ·

The exemption for the construction period where a taxpayer erects a dwelling only applies where that dwelling is built on vacant land acquired on or after 20 September 1985. ,

Taxpayers who construct a dwelling may inappropriately be excluded from*the PRE where dwellings are constructed on land acquired before 20 September 1985, where an established dwelling is demolished' and replaced with a new home or where

a taxpayer acquires and completes a partly constructed dwelling. To overcome these inequities, the provisions are to be extended to situations where taxpayers erect a dwelling

on land acquired before 20 September 1985, or construct a new dwelling following the demolition of an existing dwelling or complete a partially constructed dwelling.

Consequences of Death '

Under the present CGT provisions, no PRE is available where a taxpayer dies prior to the completion of a new dwelling and only a partial exemption is available if the taxpayer dies within the minimum residency period, now to be 3 months. The

Government has decided that the PRE should be available in situations where a taxpayer dies during the period after the commencement of construction of a dwelling on his/her land . but prior to fulfilling the 3 month residency requirement.

Similarly, the Government has decided that the PRE should be available in situations where a taxpayer dies during a temporary period of absence (of less than four years) from their principal residence. At present, a dwelling will

retain tax exempt status as a principal residence where the taxpayer is temporarily absent provided the taxpayer returns to reside in that dwelling within four years. Where the taxpayer dies during a period of absence, this requirement is not met and a beneficiary may inherit a dwelling with only a

partial PRE. The Government considers this outcome unduly harsh and that the law should apply on the assumption that the taxpayer would have returned to the residence within four years had death not occurred.

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Beneficiaries of Trust Estates

The current CGT provisions do not allow a PRE for homes owned by a trustee and occupied by a beneficiary. This provision was motivated by avoidance considerations. However, the Government has now decided that, in some circumstances, the

restriction is not appropriate. Therefore, the PRE will become available in limited cases where a home is occupied by beneficiaries of certain trust estates for periods where the title of the home remains vested in the trustee.

First, a PRE is to apply on the sale of a deceased person’s home for any period, since the date of death, during which the dwelling has been the principal residence of a person who holds a life tenancy under the terms of the deceased's will.

Second, a PREewill apply for a period where a home is occupied as the sole or principal residence by a beneficiary under a legal disability and the home is sold before title passes to that beneficiary.

Third, where, in the administration of a deceased estate, the trustee acquires a home to be occupied by a beneficiary in accordance with the terms of the will of the deceased person, that dwelling will be eligible for the PRE while occupied by

the beneficiary. .

Fourth, a PRE will be available to the trustee of a person who is legally incapable of handling his or her affairs, for the period that the home is occupied as the principal residence of that person. This situation could arise either where title to the home passed from the person to the trustee

or where the home was purchased by the trustee in the course of administering that person's estate.

Consistent with the above, the CGT will be amended so that the trustee of the estate of a person under a legal disability will be provided the same treatment under the CGT as the trustee of a deceased estate.

Other Amendments

The Government is to amend the operation of the provisions relating to a disposal of a deceased person's former home within 12 months where the dwelling had not been used solely as the deceased's principal residence. Under the current

provision, the PRE available in the period from the time of death to the date of disposal is determined in proportion to the period of ownership in which the deceased had used the property as a principal residence. As a result, where a beneficiary uses the dwelling as a principal residence for a proportionately greater period than had the deceased, the beneficiary may be denied a proportion of the PRE relating to

a period where the. home was occupied as a principal

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residence. The Government has decided to amend the provisions that apply in these circumstances so that the whole of the period of use of a dwelling as a principal residence by a beneficiary can be taken into account in

determining the PRE to be available. This amendment will only apply where it provides a greater PRE to the taxpayer.

The Government has decided to make two further amendments which will affect the availability of the PRE for taxpayers who inherit homes. *

The first of these amendments will apply where a taxpayer is in a 'chain of beneficiaries', that is, where he or she inherited the home from a deceased person who in turn had inherited the home from another deceased person (and so on). Because CGT liabilities do not arise on death, the amendments will apply to an unbroken chain of beneficiaries back to the

point at whicfh the home was first acquired on or after 20 September 1985.

The difficulty at present is that the availability of the PRE is solely determined by reference to use of the home as the principal residence of the person disposing of the home and the person from whom the home was inherited. However, where

an asset acquired on or after 20 September 1985 passes through one or more deceased estates, accrued CGT liabilities are effectively 'passed-on' because the cost base of the

asset to the beneficiary is its indexed cost base (rather than market value) to the deceased person.

The availability of the PRE for the sale of a home should therefore refer to the use of the home as the principal residence of the person who first acquired the home on or after 20 September 1985 and of all subsequent beneficiaries

who owned the home prior to sale.

The amendments will apply where their effect is to reduce a taxable capital gain realised after 19 September 1985 and before today, but they will not apply in respect of that period where their effect would be to increase a taxable capital gain or to reduce an allowable capital loss. However, for homes disposed of after today, the amendments will apply in all cases.

The second amendment relates to the availability of the PRE to surviving joint tenants. Technically, the current CGT provisions which extend the PRE otherwise available to a deceased person to disposals of homes by beneficiaries apply only where a home passes to the beneficiary under the will of

the deceased or under a law relating to intestacy. The provisions do not, therefore, apply to a surviving joint tenant who previously owned the home jointly with the deceased, who obtains title automatically. No policy reasons exist to deny the availability of the PRE to beneficiaries who acquire an interest in a home under the law relating to

joint tenancies. The PRE provisions are "therefore to be amended so that they also apply in that situation.

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The Government also proposes to allow a discretion for"the Commissioner of Taxation to accept late elections from taxpayers (including beneficiaries/trustees) for the temporary absence exemption.

ANTI-AVOIDANCE AMENDMENTS

Acquisition of Assets where there is no Corresponding Disposal for CGT Purposes

For CGT purposes some transactions do not tjive rise to a disposal by one party (eg, the issue of shares by a company) and hence no CGT liability arises to that party. Also there are CGT provisions which deem the purchasers of an asset in a

non-arm's length transaction to have paid market value for the asset.

These market value provisions apply only where the purchaser has acquired t*he asset from another person.

A technical argument has been raised that where the asset is not acquired from another person and the transaction does not give rise to a disposal by the first party then the CGT legislation may operate to create an avoidance opportunity.

If the consideration paid for the acquisition of the asset exceeds the market value, there is no mechanism to reduce the purchaser's cost base. Effectively, the purchaser may obtain

a reduced CGT liability (or an increased capital loss) on the subsequent disposal of the asset which is unmatched by CGT in the hand of the party first 'disposing' of the asset.

In the same situation, opportunities for avoidance also arise in respect of the calculation of the indexation factor.

The indexation factor is calculated by dividing the CPI index number for the quarter of the year in which the asset was disposed of, by the CPI index number for the quarter of the

year in which the liability to pay or give consideration for the asset arose, or costs or expenditure on the asset were incurred. Where there is no corresponding disposal for CGT purposes, indexation may operate inappropriately by being calculated from the time the liability was incurred although

the payment is not actually made until a later date.

The Government has decided to amend the CGT provisions so that for the acquisition of an asset where there is no corresponding disposal for CGT purposes:

(a) the consideration for the acquisition will be the lesser of the actual consideration paid or the market value of the asset acquired; and

(b) indexation of the cost base will be calculated by reference to the time at which amounts are paid rather than when liabilities to pay are incurred.

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These changes will apply to the calculation of gains or losses on assets disposed of after 15 August 1989 and will affect such assets as shares, units in a unit trust and options to acquire shares. The changes will not affect disposals of assets where the vendor is not subject to CGT because, for example, the assets were acquired before

20 September 1985. .

Disposal Proceeds e

Under the existing CGT provisions, where a taxpayer has disposed of an asset to another person, market value of the asset is able to be substituted in certain situations for the consideration received in respect of the disposal, for '

example, where there was no consideration or where the consideration was less than market value and the parties to the transacticyi were not dealing at arm’s length.

.In some cases, however, there is a disposal of an asset but no corresponding acquisition such as on the cancellation of a share. Because, in these situations, the disposal is not to another person, the market value of the asset is not able to be substituted as the disposal proceeds even where the asset was worth more than the amount received.

The Government has decided to amend the law, so that for the disposal of an asset after 15 August 1989, market value of the asset will be substituted for actual disposal proceeds

where the disposal is not to another person and the same circumstances otherwise apply as in the current law where disposal is to another person.

Rights or Options to Acquire Shares

Rights or options to acquire shares in a company issued for no consideration by the company to its shareholders or convertible noteholders are subject to specific treatment under the CGT legislation.

These rules will be amended so that they also apply to the issue of rights or options for no consideration by a wholly owned subsidiary company, to shareholders or convertible noteholders of the parent company. The rights or options will be deemed to have been acquired at the time the

shareholder or noteholder acquired the asset which gave rise to the issue of the rights or options. Accordingly, where the shares or notes in the parent company were acquired before 20 September 1985, the rights or options in relation

to the subsidiary company will also be taken to have been acquired before that time so that a subsequent sale of the rights or options will not give rise to CGT.

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Where the rights or options are exercised, the acquisition cost of the share will include the exercise price of the right or option. A transitional arrangement, however, will apply to ensure that if the rights or options are taken to have been acquired before 20 September 1985, the acquisition cost of the share will include the market value of the right or option at the date of exercise plus the exercise price.

These changes will apply to rights or options issued after 15 August 1989. ^

Disposal of Shares or Interest in an Entity

The CGT legislation includes provisions designed to prevent avoidance of the tax where, instead of an entity disposing of an asset that it acquired on or after 20 September 1985, the beneficial owners dispose of their interests in the entity which were acguired before 20 September 1985. These

provisions apply where the value of the underlying property acquired by the entity after 19 September 1985 is not less than 75 per cent of the net worth of the entity.

The provisions can be avoided as they only apply to private companies and private trusts (as defined) and do not apply if the company or trust loses that status prior to disposal of the interests (eg by becoming a public company or a publicly

traded unit trust).

For these purposes a private company is a company the shares in which are not listed for quotation on a stock exchange. A private trust estate is a trust other than a unit trust the units in which are listed for quotation on a stock exchange or are ordinarily available for subscription or purchase by

the public.

The Government has decided to amend the relevant provisions so that a reference to a private company or private trust also includes a reference to a company or a unit trust which, within a period of 5 years (commencing after 19 September

1985) before the disposal of the relevant shares or interests, had been a private company or a private trust estate.

Transfer of Capital Losses

A resident company in a group with 100 per cent common ownership is able to transfer a capital loss to another resident company in the group with a capital gain.

It is possible to generate multiple capital losses or reduced capital gains where a capital loss is transferred in a group of companies and interests held directly or indirectly, in the transferee company are subsequently disposed of for a consideration which also reflects the loss on the asset.

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Furthermore, under the company group loss transfer provisions, in circumstances where the cost base of the assets held by a company is higher than the cost base of the company itself, capital losses in excess of the group's

investment in the company may be generated by the company and transferred to other companies in the group.

The Government has decided to amend the existing capital loss transfer provisions so that capital losses will no longer be transferable to the extent that they excfeed the cost base of 'actual interests' in the company transferring the loss that were acquired by members of the company group after

19 September 1985. 'Actual interests' refers to the real investment made by the group - if company A invests $100 in its subsidiary B which in turn invests $100 in its subsidiary C, the real investment in C was effectively made by A. The r^eal investment in C is therefore the $100

originally invested by A through B, and then passed on by B to C. In essence, the real investment made by the group will be the amount that can be traced through the interposed entities as having effectively been invested by the ultimate holding company for the group.

The provisions will also be amended to reduce the cost base of all interests (ie. shares or loans) held either directly or indirectly by other companies in the group in the company transferring the loss that were acquired after

19 September 1985. Broadly, the indexed cost base or reduced cost base of a particular interest will be reduced to reflect the consequential reduction in its value following the transfer of the loss.

The amendments will apply in respect of interests disposed of and losses transferred after 15 August 1989.

Rollover Relief

Transfer of asset to whollv-owned company

Rollover relief is available for reorganisations where an individual, partnership or trust estate transfers an asset to a wholly-owned company, the consideration for which consists only of shares in, or securities of, the company.

The Government has decided to amend the law in these circumstances by requiring that, for an asset transferred after 15 August 1989, the consideration for the disposal of the asset is to consist only of shares in the company and the

assumption of any liabilities attributable to the asset (such liabilities being less than the market value and also for assets subject to CGT, the cost base or the indexed cost base, as appropriate, of the asset). It will also be a

requirement that the market value of the shares received equals the net market value of the transferred asset. This change will mean that the availability of rollover relief will not provide an opportunity to transfer value from assets

subject to CGT to assets not subject to CGT.

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The cost bases of .the shares received will be the cost bases of the asset transferred and they will be reduced by any liability assumed in respect of the asset.

Transfer of assets between companies in the same group

Rollover relief is available for the transfer of assets between companies in a group with 100 per cent common ownership.

Opportunities for avoidance exist with the availability for such a rollover because the consideration required for the transfer is not specified in the law and there is no requirement that the consideration received have the same cost base as the transferred asset. This produces the effect

that an asset with accrued capital gains may be effectively disposed of ,by a group without accruing a capital gains tax liability if the shares in the company to which the asset was transferred, are subsequently disposed of.

The Government has decided that rollover relief between companies in the same group will be limited to cases where the consideration given in respect of the transfer of an asset consists solely of shares in the transferee company and the assumption of any liabilities (being less than the market value and also for assets subject to CGT, the cost base or

the indexed cost base, as appropriate, of the asset) attributable to the asset. The market value of the shares will need to equal the net market value of the transferred asset.

Where the transferred asset was acquired before 20 September 1985, the shares will also be taken to have been acquired before that time. This means that a subsequent disposal of the shares would not give rise to a CGT

liability. Where the transferred asset was acquired on or after 20 September 1985, the asset’s cost base, indexed cost base and reduced cost base (less any liability assumed) would be transferred to the shares.

In a case where the issuing of shares to the transferor company is prohibited by law (eg where a subsidiary company is prohibited under company law from holding shares in it's parent), consideration for the transfer in the form of

securities of the transferee company will be acceptable. The same rules as regard CGT status, cost base and market value of shares will apply to securities.

Rollover relief would also be available where a subsidiary within a wholly owned group distributes an asset in specie to it's parent. In these cases, the cost bases of the shares subject to CGT in the subsidiary will be proportionately

reduced by the cost base of the asset transferred if the asset was acquired on or after 20 September 1985 or by the market value of the asset if it was acquired before that time (less any liability assumed). Consistent with the existing

treatment of returns of capital on shares, if the indexed cost base (or cost base, if appropriate) of the shares is less than the reduction amount, then the excess will be deemed to be a capital gain.

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In the absence of a remedial measure, these new rollover rules, which will provide that shares with a market value and cost base equal to that of the transferred asset be given in return for the asset, could be used to duplicate losses within the company group. The avoidance opportunities

arising from these changes would be significant and potentially costly to the revenue. Therefore, it is considered necessary to remove the possibility for avoidance by preventing the rollover of a loss asset within a company group, ie no rollover will be allowed if the asset was

acquired on or after 20 September 1985 and*the market value of the asset at the time of rollover is less than the reduced cost base of the asset.

The changes relating to rollover relief will apply to - transfers of property after 15 August 1989.

CANBERRA ACT 1989

CONTACT OFFICERS: JIM McMILLAN: 75-1194 (W) 58-4079 (H) SANDRA PEACOCK: 75-1931 (W) 57-3279 (H)