House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer. the Hon. P.J. Keating, M.P.)

NOTES ON CLAUSES

INCOME TAX ASSESSMENT AMENDMENT CAPITAL GAINS) BILL 1986

Clause 1: Short title, etc.

Sub-clause (1) of this clause provides for the amending Act to be cited as the Income Tax Assessment Amendment (Capital Gains) Act 1986.

Sub-clause (2) facilitates references to the Income Tax Assessment Act 1936 which is the Act being amended by this Bill. The Income Tax Assessment Act 1936 is referred to in the Bill as "the Principal Act".

Clause 2: Commencement

Under clause 2, the amending Act is to come into operation on the day on which it receives the Royal Assent. But for this clause the amending Act would, by reason of sub-section 5(1A) of the Acts Interpretation Act 1901, come into operation on the twenty-eighth day after the date of Assent.

Clause 3: Interpretation

Sub-clause 3(a) proposes to insert in sub-section 6(1) of the Principal Act a definition of the term "return of income". This phrase is defined to mean a return of income or of profits or gains of a capital nature or of both income and such profits or gains. Consistent with the broad scheme of the Bill that capital gains made upon the realisation of assets are to be included in assessable income, this definition makes clear that a return of income lodged by a taxpayer is to include any profits or gains of a capital nature which accrued during the year of income.

Sub-clause 3(b) proposes to extend the definition of the term "taxpayer" in sub-section 6(1) of the Principal Act to include persons who derive profits or gains of a capital nature. This again reflects the scheme of the Bill to include profits and gains of a capital nature in the assessable income of a taxpayer.

Clause 4: Cost of certain shares

Section 6BA of the Principal Act provides, broadly, that where it is necessary to calculate the profit or loss on a sale of shares following a bonus share issue, the bonus shares are to be treated as having no independent cost and the cost of the original shares in respect of which the bonus issue is made is to be spread over the original shares and the bonus shares.

Clause 4 proposes to amend section 6BA of the principal Act by substituting a new paragraph (3)(b) for the existing paragraph. The new paragraph will extend the operation of section 6BA to the determination of the cost of acquisition of original shares and non-taxable bonus shares for the purposes of new Part IIIA. As provided in the existing sub-section (3), the amount or value of the consideration paid in respect of the acquisition of the original shares in respect of which the bonus issue is made is to be apportioned over the original shares and the bonus shares in such proportions as the Commissioner of Taxation considers appropriate.

Clause 5: Money credited, reinvested, etc., to be deemed to be derived

Section 19 of the Principal Act deems income to have been derived by a person although it is not actually paid but is reinvested, accumulated, capitalised, carried to any reserve, sinking fund or insurance fund however designated, or otherwise dealt with on that person's behalf or as he or she directs.

Clause 5 proposes to extend the operation of section 19 by inserting after the word "Income" the phrase "or money". Section 19 will therefore operate to deem any sum of money representing a capital gain to have been derived by a person where it is dealt with in the ways outlined in the section.

Clause 6: Exemptions

Clause 6 proposes the amendment of paragraph 23(q) of the Principal Act which, in broad terms, exempts from tax foreign-source income derived by residents of Australia where the income is taxed in the country where it is derived.

The amendment proposed in paragraph (a) of clause 6 will extend the operation of paragraph 23(q) to exempt from tax profits and gains of a capital nature derived by a resident from sources out of Australia and Papua New Guinea if those profits or gains are not exempt from tax in the country where they are derived.

Existing paragraph 23(q) contains the proviso that it does not apply to exempt any foreign-source income unless the Commissioner of Taxation is satisfied that, where there is a liability for tax in the country where the income is derived, the tax has been paid or will be paid or, in any case where the outgoings incurred in producing income exceed the income, the tax would have been paid in the country in which it was derived if the income had exceeded the outgoings.

Paragraph (b) of clause 6 will amend the proviso to paragraph 23(q) to extend its operation to foreign-source profits or gains of a capital nature.

Clause 7: Interpretation

The amendment to be effected by clause 7 of the Bill will operate to extend the exemption presently available under Division 1A of Part III of the Principal Act for residents of Norfolk Island and the Territory of Cocos (Keeling) Islands in respect of income derived from sources in either of those two Territories or from sources outside Australia.

This clause will insert a new sub-section - sub-section (4) - in section 24B of the Principal Act. Sub-section 24B(4) will ensure that the exemption from tax presently provided by Division 1A extends to profits or gains of a capital nature derived by Territory residents, Territory companies and Territory trusts from Territory sources or sources outside Australia.

Clause 8: Assessable income to include certain profits

Section 25A of the Principal Act includes in the assessable income of a taxpayer profit arising from the sale of property acquired for the purpose of profit-making by sale, or from the carrying on or carrying out of any profit-making undertaking or scheme.

Clause 8 will amend section 25A, by inserting a new sub-section (1A) by which section 25A will not apply in respect of the sale of property acquired on or after 20 September 1985. Amounts to be included in assessable income in respect of the sale of property acquired on or after 20 September 1985 will be determined under the new Part IIIA to be inserted by clause 19 of this Bill.

Clause 9: Shares and rights acquired under scheme for the acquisition of shares by employees

This clause will amend section 26AAC of the Principal Act to introduce an alternative basis for the inclusion in a taxpayer's assessable income of any benefit associated with the acquisition of shares or of rights to acquire shares under an employee share acquisition scheme.

At present, the assessable benefit in respect of shares, representing the excess of the value of the shares at the date of acquisition over the consideration paid for the shares (including any consideration given for rights to acquire the shares), is included in assessable income in the year of acquisition. Where shares are subject to conditions or restrictions on disposal, however, the date of acquisition is taken to be the date on which the conditions or restrictions cease to apply. In respect of rights to acquire shares, the assessable benefit is included in assessable income of the year of disposal of the rights or the year in which shares were acquired as a result of exercising the rights - the benefit being measured as the excess of the amount received on disposal or of the value of the shares when acquired, as the case may be, over the consideration paid for the rights plus, in the latter case, any consideration paid for the shares on exercise of the rights.

Under the proposed alternative basis of application of section 26AAC, the employee taxpayer will be able to elect to have included in assessable income of the year of issue the excess of the value of the share or right at the date of its issue over the consideration paid. The value at that date will be taken to be the cost of the share or right for capital gains tax purposes.

Paragraph (a) of clause 9 will insert in section 26AAC new sub-sections (8A), (8B), (8C) and (8D). Sub-section (8A) will permit a taxpayer to elect, in respect of a right (whether or not issued subject to conditions) issued after 19 September 1985 under an employee share acquisition scheme, that the provisions of new sub-section (8C) (see notes on that sub-section) are to apply in relation to that right.

New sub-section (8B) specifies that an election under sub-section (8A) is to be made in writing to the Commissioner of Taxation (paragraph (a)). The election must be lodged with the Commissioner on or before the date of lodgment of the taxpayer's return of income for the year in which the right was acquired or before such later date as the Commissioner may allow (paragraph (b)).

The consequences of the making of an election under sub-section (8A) are specified in new sub-section (8C). Paragraph (8C)(a) will operate to include in the assessable income of the taxpayer of the year of income in which a right is issued to a taxpayer an amount equal to the excess of the value of the right at the time of issue over the consideration paid or payable by the taxpayer for the right.

In determining the value of the right at the time of issue, any conditions or restrictions attaching to the right by reason of it being acquired under an employee share acquisition scheme are to be disregarded (see notes on new sub-section (18) which is being inserted by paragraph (f) of this clause).

Paragraph (8C)(b) will ensure that no provision of section 26AAC other than paragraph (8C)(a) will operate to include an amount in a taxpayer's assessable income in respect of a right that is the subject of an election under sub-section 26AAC(8A). Similarly, paragraph (8C)(c) will ensure that existing sub-section 26AAC(5) - which would otherwise apply to include in the taxpayer's assessable income the value of any benefit arising from the acquisition of a share as a result of the exercise or operation of a right - does not apply in respect of a share acquired by the exercise or operation of a right that is the subject of an election under sub-section 26AAC(8A).

An election under sub-section 26AAC(8A) may be made in respect of a share right notwithstanding that the right or its issue may be subject to certain conditions or restrictions. Sub-section (8D) caters for situations where a sub-section 26AAC(8A) election has been made (paragraph (a)) and an amount has been, or but for sub-section 26AAC(8D) would be, included in assessable income under paragraph 26AAC(8C)(a) (paragraph (b)), but the benefit cannot be realised because the taxpayer has, by virtue of those conditions or restrictions, been divested of the right (paragraph (c)).

In such a situation, sub-section 26AAC(8D) will override paragraph 26AAC(8C)(a) and exclude the amount otherwise included in assessable income by that paragraph. New sub-section 26AAC(19) (see notes on paragraph (f) of this clause) will empower the Commissioner to amend an assessment for the purpose of giving effect to sub-section 26AAC(8D) in order to reduce the taxpayer's liability.

By paragraph (b) of clause 9, it is proposed to insert new sub-section (11A) in section 26AAC of the Principal Act to restrict the operation of existing sub-section 26AAC(11). Presently sub-section 26AAC(11) provides that where there is a disposal of a right to acquire a share and an amount would, but for the sub-section, be included in the assessable income of a taxpayer under section 26AAC and an amount would also be included in the assessable income of the taxpayer or of an associate of the taxpayer under another section of the Principal Act, the amount included by virtue of section 26AAC is to be reduced by the amount included under the other section.

As the capital gains tax provisions to be inserted by clause 19 are to apply to a disposal of an asset, broadly, only after all other provisions of the Principal Act have been applied, section 26AAC(11) is not to apply where the disposition is one to which the capital gains provisions apply. The effect of new sub-section 26AAC(11A) is that where there is a disposal of a right to acquire a share, to which both section 26AAC and the capital gains provisions may have application, section 26AAC is to take precedence.

Paragraphs (c) and (d) of clause 9 propose to insert new sub-sections (12A) and (13A) in section 26AAC of the Principal Act so that sub-sections 26AAC(12) and (13) do not apply where the new capital gains provisions apply in respect of a disposal of a share in a company.

Sub-sections 26AAC(12) and (13) apply, in broad terms, where in respect of the acquisition of a share an amount is included in the assessable income of a taxpayer or a trust estate by virtue of section 26AAC and as a result of the disposal of that share an amount would, but for the sub-sections, also be included in assessable income by virtue of another section of the Principal Act. Under these conditions, sub-sections 26AAC(12) and (13) require the amount included in assessable income in respect of the disposal to be reduced by the amount included under section 26AAC.

Because section 160ZYI of new Part IIIA (proposed to be inserted by clause 19) will, for the purposes of the capital gains provisions, treat the acquisition cost of a share to which section 26AAC applies as being the market value of the share at the time of acquisition, the amount included by virtue of section 26AAC will effectively be excluded from the calculation of any capital gains that may accrue on a subsequent disposition of the share.

New sub-sections 26AAC(15A), (15B) and (15C), proposed to be inserted in section 26AAC of the Principal Act by paragraph (e) of clause 9, will have a similar effect in relation to shares acquired under an employee share acquisition scheme as new sub-sections 26AAC(8A), (8B), (8C) and (8D) have in relation to share rights acquired under such a scheme.

Sub-section (15A) will enable a taxpayer to elect, in respect of a share issued after 19 September 1985 under an employee share acquisition scheme, that sub-section 26AAC(15) is not to apply in relation to the share. Sub-section 26AAC(15) applies where a share is subject to conditions or restrictions (being conditions or restrictions applicable only to shares acquired under an employee share acquisition scheme) and deems the time of acquisition of the share to be the earliest of the time that restrictions on disposal cease, the time that the taxpayer ceases to be liable to be divested of ownership and the time immediately before disposal of the share.

The effect of an election under sub-section 26AAC(15A) will be that shares subject to conditions or restrictions are taxed on the same basis as other shares acquired under an employee share acquisition scheme - that is, the assessable income of the taxpayer of the year of income in which the share was issued will include the excess of the value of the share at the time of issue less any consideration paid for the share and, where relevant, any consideration paid for a right to acquire the share. The value of the share at the time of issue will be taken as the cost base for capital gains purposes (see notes on Division 9 of Part IIIA being inserted in the Principal Act by clause 19).

New sub-section (15B) specifies that an election under sub-section 26AAC(15A) is to be made in writing to the Commissioner of Taxation (paragraph (a)) and is to be lodged with the Commissioner on or before the date of lodgment of the taxpayer's return of income for the year in which the share was issued or by such later date as the Commissioner allows (paragraph (b)).

New sub-section (15C) has the same effect in relation to shares as new sub-section 26AAC(8D) has in relation to share rights. The operation of sub-section (8D) is explained in earlier notes.

Paragraph (f) of clause 9 proposes the insertion in section 26AAC of the Principal Act of new sub-sections (18) and (19). By virtue of sub-section (18), any conditions or restrictions that apply only to shares or share rights acquired under an employee share acquisition scheme are to be disregarded in determining, for the purposes of section 26AAC, the value of a share or the value of a right to acquire a share. That is the value of a share or right is not to be discounted because of conditions or restrictions attached to it or its issue.

Sub-section (19) provides authority for the Commissioner of Taxation to amend an assessment to give effect to new sub-section (8D) or (15C) to exclude from a taxpayer's assessable income any amount that may otherwise have been included in consequence of an election under sub-section 26AAC(8A) (in the case of a right) or sub-section 26AAC(15A) (in the case of a share), in circumstances where no benefit arises because the taxpayer is divested of ownership of the right or share.

Clause 10: Deductions not allowable in certain circumstances

The provisions of Subdivision A of Division 3 of Part III of the Principal Act operate to allow as deductions from the assessable income of a taxpayer certain items of expenditure incurred in producing that assessable income. For example, losses and outgoings incurred in gaining or producing assessable income are deductible if they are not of a capital, private or domestic nature. As a consequence of the proposed insertion, by clause 19, of provisions relating to the taxation of capital gains, net capital gains accrued to a taxpayer will be included in the assessable income of the taxpayer. Deductions that are allowable for the purposes of determining capital gains will be taken into account in determining capital gains (or losses) under those provisions. Accordingly, clause 10 proposes to insert in Subdivision A of Division 3 of Part III a new section - section 51AAA - which will operate to deny a deduction that would otherwise be allowed under that Division where the deduction would only be allowable because a net capital gain has been included in a taxpayer's assessable income.

Clause 11: Loss on property acquired for profit-making

Section 52 of the Principal Act authorises the allowance of a deduction in appropriate circumstances for a loss incurred by a taxpayer on the sale of property or from carrying on or carrying out any undertaking or scheme. In general terms, a deduction is not allowable under section 52 unless any profit which might have been derived from the particular sale or undertaking would have been included in the taxpayer's assessable income.

In view of the amendment proposed by clause 8 of this Bill so that section 25A will not apply in respect of the sale of property acquired on or after 20 September 1985, clause 11 proposes to correspondingly amend section 52 by the insertion of a new sub-section (1A). This amendment will mean that section 52 is not to apply to allow a deduction for a loss incurred in respect of the sale of property acquired on or after 20 September 1985. The allowance of losses in respect of the sale of property acquired on or after 20 September 1985 will be determined under proposed new Part IIIA (to be inserted by clause 19).

Clause 12, 13, and 14 : Limitation on deductions for interest on money borrowed to finance rental property investments

Introductory Note

Clauses 12, 13 and 14 propose amendments to Subdivision G of Division 3 of Part III of the Principal Act. Subdivision G, is to be inserted by the Taxation Laws Amendment Bill 1986, and imposes a limit on the aggregate annual deductions for interest on money borrowed to finance rental investments made after 17 July 1985. In consequence of the insertion of provisions relating to capital gains by clause 19, under which excess rental property loan interest of a taxpayer will be able to be offset against realised capital gains on relevant rental properties. it is necessary to amend Subdivision G so that, where excess rental property loan interest has been offset against capital gains, the amount to be carried forward (or transferred to a group company) will be reduced appropriately.

Clause 12: Carry forward of excess rental property loan interest

By clause 12, section 82KZE of the Principal Act is to be repealed and substituted by a new section 82KZE. This section will ensure that where the rental property loan interest of a taxpayer in relation to a year of income exceeds the sum of:

•

any deduction allowable under section 51 of the Principal Act in the year of income in respect of the rental property loan interest; and

•

any amount by which the taxpayer's capital gains in respect of prescribed rental property assets (as defined in section 160ZA of proposed Part IIIA to be inserted by clause 19) has been reduced by virtue of sub-section 160ZA(1),

the excess will be treated for the purposes of section 51, Subdivision G and the proposed new Part IIIA, as having been incurred by the taxpayer at the beginning of the next year of income.

Clause 13: Transfer of excess rental property loan interest within company group

Section 82KZF allows a group company to transfer for deduction to one or more other companies in a 100 per cent wholly owned company group all or part of any excess rental property loan interest that it is unable to deduct immediately itself through the operation of section 82KZD.

Paragraph (a) of clause 13 will substitute new paragraph (a) in sub-section 82KZF(1) which sets out the conditions and consequences of transferring loan interest. New paragraph 82KZF(1)(a) sets up the condition that section 82KZD has applied to a resident company (the "transferor") and there is excess rental property loan interest that may be transferred. The amount of the excess is to be determined by taking into account both any deduction allowable under section 51 of the Principal Act in respect of the rental property loan interest (sub paragraph (a) (i)) and any amount by which the taxpayer's capital gains in respect of relevant rental property has been reduced (sub-paragraph (a)(ii)).

Paragraph (b) of clause 13 also amends section 82KZF to the effect that the amount of excess rental property loan interest to which a notice under the section relates is deemed, for the purposes of the new Part IIIA, as well as section 51 and Subdivision G of Division 3 of Part III, to be rental property loan interest incurred by the transferee and not by the transferor.

Sub section 82KZF(3) limits the amount of rental property loan interest a transferee company can take on transfer in a year of income to the amount which balances its rental property account. That is, a company cannot accept deductions for more rental property loan interest than it can set-off in the year of income. That limitation applies by making the transfer notice under consideration of no effect to the extent that the sum of the amount specified in the notice and the amounts specified in any other notices transferring excess loan interest to the transferee from the particular transferor or any other transferor exceeds the amount by which the transferee's rental property income exceeds the sum of the transferee's eligible rental property deductions and rental property loan interest of the year of income.

Paragraph (c) of clause 13 will amend sub section 82KZF(3) so that, in determining the amount of deductible rental property loan interest that a transferee company is able to take, reference is made to any capital gains that accrue to the transferee in respect of the disposal of prescribed rental property (as defined in section 160ZA of proposed Part IIIA) as well as the transferee's rental property income in the year of income.

Clause 14: Special provision relating to partnerships

Clause 14 proposes to replace section 82KZG of the Principal Act that is being inserted by the Taxation Laws Amendment Bill 1986. Section 82KZG would modify the "carry forward" rule in section 82KZE in relation to excess rental property loan interest so as not to apply in respect of partnerships. Instead each partner in a partnership would be dealt with individually by being treated for the purposes of section 51 and Subdivision G as having personally incurred his or her portion of the excess interest in the year of income, in gaining or producing assessable income.

The substitute section 82KZG introduced by this clause operates where the rental property loan interest of the partnership in a year of income exceeds the sum of -

(1)

the amount of the deduction allowable to the partnership under section 51 of the Principal Act in relation to the year in respect of the rental property loan interest; and

(2)

the amount by which the partnership's capital gains in respect of the disposal of prescribed rental property assets (as defined in section 160ZA of proposed Part IIIA) during the year is reduced by virtue of sub-section 160ZA(1).

In those circumstances each partner, for the purposes of section 51, Subdivision G of Division 3 of Part III and Part IIIA will be deemed to have incurred, in gaining or producing his or her assessable income, rental property loan interest equal to his or her portion of the excess. This amount will be taken to have been incurred by the partner at the beginning of the year of income or, if the year is the transitional year - that is, the 1985-86 income year - when the negative gearing measures first came into effect, in that year but immediately after the commencement date of those measures.

Clause 15: Exemption of income attributable to superannuation policies and certain annuities

Clause 15 proposes to amend section 112A of the Principal Act which exempts from tax such proportion of the investment income of a life assurance company as is attributable to superannuation policies and certain specified life assurance policies in relation to annuities.

Clause 15 will insert a new sub-section (1A) which will provide a similar exemption in relation to capital gains accrued to a life assurance company.

Clause 16: Interpretation

Division 9C of Part III of the Principal Act has the purpose of countering tax avoidance arrangements which seek to exploit the tax-exempt status of certain bodies. In broad terms, income diverted to such tax-exempt bodies from persons who would otherwise be taxable on that income, is subject to tax at the maximum personal rate of tax - presently 60%.

Clause 16 proposes to insert in the definition of "relevant exempting provision" in sub-section 121F(1) of Division 9C, a reference to a new sub-section 160Z(8) which is to be inserted by clause 19. Sub-section 160Z(8) will operate generally to exempt those bodies currently exempt from income tax from tax on any capital gains. The amendment will ensure that the tax-exempt status of bodies to which proposed sub-section 160Z(8) refers is not exploited by diverting to them capital gains that would otherwise be derived by taxable persons or bodies.

Clause 17: Capital gains to be disregarded

Division 16 of Part III of the Principal Act establishes the income tax averaging system applicable to primary producers. The insertion of new section 149A in Division 16 proposed by clause 17 will mean that the amount of a net capital gain that accrued to a primary producer in a year of income - to which a different form of "averaging" is to apply - will be excluded from the calculation of the primary producer's average income for the purposes of the averaging provisions and in the calculation of the primary producer's entitlement to an average rebate or liability to complementary tax.

By proposed sub-section 149(1) references in Division 16 to the assessable income or taxable income of a taxpayer of any year of income are to be read as references to the respective amounts (if any) that would have been the assessable income or taxable income of the taxpayer of that year of income had a net capital gain (after taking into account any net capital loss incurred) not been included in the taxpayer's assessable income by virtue of the operation of section 160ZO (to be inserted by clause 19).

New sub-section 149A(2) correspondingly excludes any net capital gain from the assessable income or net income of a trust estate for the purposes of the calculation of the trust's average income or the trustee's entitlement to an average rebate or liability to pay complementary tax.

Clause 18: Rebates for dependants

This clause will amend sub-section 159J(6) of the Principal Act. Subject to specified conditions including a separate net income test, section 159J authorises a rebate of tax to a taxpayer who contributes to the maintenance of certain dependants. Clause 18 will insert a new paragraph - paragraph (aa) - in the definition of "separate net income" in sub-section 159J(6) to include in the separate net income of a dependant any net capital gains that are included in the dependant's assessable income by virtue of the operation of the proposed Part IIIA.

Clause 19: Capital gains and capital losses

Clause 19 proposes the insertion of a new Part - "PART IIIA - CAPITAL GAINS AND CAPITAL LOSSES" - in the Principal Act. The new Part provides for the determination of capital gains and capital losses on the disposal of assets acquired on or after 20 September 1985. A broad description of the new measures and their main features is given earlier in this memorandum, and a detailed explanation of each proposed section of the Part follows.

DIVISION 1 - INTERPRETATION

Division 1 of Part IIIA contains a number of definitions and interpretational provisions to facilitate drafting of the operative provisions of the new Part.

Section 160A : Assets to which Part applies

Part IIIA seeks, in broad terms, to impose a tax on capital gains realised on the disposal of "assets". Proposed new section 160A defines the term "asset" for the purposes of the new Part. "Asset" is defined broadly to mean any form of property and includes -

•

an option, a debt, a chose in action, any other right, goodwill and any other form of incorporeal property (paragraph (a));

•

currency of a foreign country (paragraph (b)); and

•

any form of property created or constructed, or otherwise coming to be owned without being acquired (paragraph (c)).

It can be seen that assets both of a tangible and intangible nature are included within the definition - for example, land, buildings, shares, share rights and options, securities, industrial property, plant and equipment, an interest in a trust estate or a unit in a unit trust.

However, the definition of asset specifically excludes motor vehicles of a kind mentioned in paragraph 82AF(2)(a) of the Principal Act. Thus motor vehicles (including four wheel drive vehicles) that are motor cars, station wagons, panel vans, utility trucks, motor cycles or similar vehicles or any other road vehicles designed to carry loads of less than one tonne or fewer than nine passengers are specifically excluded from the operation of new Part IIIA. Accordingly, capital gains or losses that arise on the disposal of such vehicles will not be taken into account in calculating a taxpayer's capital gains tax liability.

Section 160B : Personal-use assets

Section 160B contains definitions of the terms "personal-use asset", "listed personal-use asset" and "non-listed personal-use asset" for the purposes of special rules to apply to such assets. These rules are designed, firstly, to avoid the difficulties that would be involved for taxpayers and the Taxation Office in recording and assessing a multitude of small value transactions and, secondly, to deny a deduction for losses on most types of personal-use property that otherwise lead, in effect, to a tax subsidy for certain personal-use expenditures.

Broadly, the rules provide for an exemption for a non-listed personal-use asset whose disposal value is $5,000 or less, and that no deduction is allowable for realised capital losses on personal-use assets with the exception of losses on listed personal-use assets. Losses on listed personal-use assets are to be deductible only against realised capital gains on other listed personal-use assets (see notes on Divisions 3 and 4 of Part IIIA).

Personal-use assets are broadly defined in sub-section 160B(1) as assets owned by a taxpayer and used or kept primarily for the personal use or enjoyment of the taxpayer or associates of the taxpayer. The definition extends to options and debts in respect of such assets.

Paragraph (a) of the definition includes an asset (other than land, or a building that is deemed to be a separate asset from land by virtue of section 160P) which is owned by a taxpayer and used or kept primarily for the personal-use or enjoyment of the taxpayer, of an associate (also a defined term including, for example, family members) or associates of the taxpayer or of the taxpayer and any one or more of the associates of the taxpayer. Personal-use assets include such items as clothing, white goods, furniture, sporting equipment, caravans, boats, etc., which generally tend to depreciate in value rather than appreciate.

Two classes of assets which might not otherwise be regarded as personal-use assets are included by paragraphs (b) and (c) of the definition. By paragraph (b) a debt owed to the taxpayer is included in the definition if either of the conditions set out in sub-paragraphs (i) and (ii) is met. Sub-paragraph (i) requires that the debt be owed to the taxpayer in respect of an asset which was formerly a personal-use asset of the taxpayer. Alternatively, sub-paragraph (ii) specifies that the debt came to be owed otherwise than in the course of the gaining or producing of income by the taxpayer or in the carrying on of a business by the taxpayer. In short the sub-paragraph applies to debts of a private or domestic nature.

Paragraph (c) further extends the definition of personal-use asset to include an option or right of the taxpayer to acquire an asset that would, if acquired, be a personal-use asset.

Sub-section 160B(2) specifies those personal-use assets which are to be treated as "listed" personal-use assets for the purposes of the special rules that apply to quarantine capital gains and losses on the disposal of such assets (see notes on section 160ZQ). Broadly a listed personal-use asset is a personal-use asset as specified in paragraphs (a), (b) or (c) of the sub-section that is acquired for a consideration exceeding $100 and is within certain categories.

Paragraph (a) lists the various categories of personal-use assets which are to be treated as listed personal-use assets. Sub-paragraph (a)(i) refers to a print, etching, drawing, painting, sculpture or other similar work of art. Sub-paragraph (a)(ii) refers to jewellery and would include such items as rings, watches, chains, etc. By sub-paragraph (a)(iii) the definition includes a rare folio, rare manuscript or rare book. Rare in this context has its ordinary meaning, i.e., unusual, uncommon or few in number. Sub-paragraph (a)(iv) introduces the category of postage stamps or first day covers. A coin or medallion as specified under sub-paragraph (a)(v) includes a numismatic collection and a medal or decoration (but see notes on sub-section 160L(6) regarding medals awarded for valour or brave conduct).

Sub-paragraph (a)(vi) refers to antiques. Antiques are generally regarded as aged objects of artistic and historical significance. By sub-paragraph (a)(vii) a listed personal-use asset also includes an interest in any of the kinds of assets specified in paragraph (a).

Paragraphs (b) and (c) extend to associated debts and options the scope of listed personal-use assets. Paragraph (b) refers to debts owed to the taxpayer in respect of assets listed in paragraph (a) (see also notes on paragraph 160B(1)(b)) and section 160ZF). By paragraph (c) the definition is also to include an option or a right of the taxpayer to acquire any of the specified assets.

Sub-section 160B(3) facilitates drafting by defining the term "non-listed personal-use asset" to mean a personal-use asset other than a listed personal-use asset.

Sub-section 160B(4) is an anti-avoidance measure which should be read in conjunction with sub-sections 160ZE(1) and 160ZG(1) which provide, broadly, that each non-listed personal-use asset disposed of for, or costing less than, $5,000 is to be deemed to have been disposed of for, or to have a cost base of, $5,000.

The purpose of sub-section 160B(4) is to prevent a taxpayer from exploiting the $5,000 threshold by disposing of what is essentially a set of articles by several separate disposals of parts of the set, e.g., pieces of a set of precious silverware. To achieve its purpose the section effectively treats each such disposal as a part disposal of the set rather than as a disposal of a whole asset.

Paragraphs (a) and (b) set out the circumstances for the application of sub-section 160B(4). Paragraph (a) requires a taxpayer to have owned two or more articles being non-listed personal-use assets that would not ordinarily be disposed of otherwise than by one transaction as a set of articles, e.g., a set of silverware. Paragraph (b) requires the taxpayer to have disposed of the articles by two or more transactions. It does not matter for this purpose whether the articles were disposed of to the same person or different persons.

Sub-section 160B(5) limits the operation of sub-section 160B(4) so that it will not apply where a set of articles is disposed of by more than one transaction, instead of by a single transaction, if this occurs solely for a reason or reasons unrelated to the operation of Part IIIA of the Act.

Section 170 of the Principal Act sets limitations on the power of the Commissioner of Taxation to amend an assessment. By sub-section 160B(6), the Commissioner of Taxation will not be prevented by section 170 from re-opening an income tax assessment where subsequent disposals of parts of a set of articles reveal the need for amendment in order to give effect to sub-section 160B(4).

Section 160C : Taxpayer

Proposed sub-section 160C(1) is a drafting measure that will generally facilitate references to the "taxpayer" in relation to the disposal of an asset for the purposes of new Part IIIA as being references to the person who owned the asset immediately prior to its disposal.

Sub-section 160C(1) specifies that a reference in new Part IIIA to a taxpayer in relation to an asset that has been disposed of; in relation to a capital gain or listed personal-use asset gain that accrued; or in relation to a capital loss or listed personal-use asset loss that was incurred in respect of such an asset, is to be read as a reference to the person who owned the asset immediately before the disposal took place. An exception is where the owner is broadly, a trustee or a trustee in bankruptcy and the disposal resulted from an act that is, by the operation of section 160V(1) or section 160W, deemed to be the act of a person - respectively the beneficiary absolutely entitled or the bankrupt - other than the person who owned the asset immediately before the disposal took place. In the latter case a reference to a "taxpayer" for the purposes of the new Part is a reference to that other person (see notes on the operation of sub-section 160V(1) and section 160W).

Sub-section 160C(2) specifies that the person who for the purposes of the new Part, is to be taken as the "taxpayer" in relation to an asset that has been acquired, is the person who owned the asset immediately after the acquisition took place.

Section 160D : Money or other property applied for benefit of taxpayer

New sub-section 160D specifies the circumstances in which a taxpayer is to be deemed to have received or to be entitled to receive money or other property for the purposes of the new Part. This sub-section is relevant, for example, to the operation of section 160ZD which stipulates what is to be taken into account in determining what consideration has been given or received in respect of a disposal of an asset.

By paragraph 160D(1)(a), a taxpayer will be taken to have received money or other property if the money or other property has been applied for the benefit, or in accordance with the directions, of the taxpayer. By paragraph 160D(1)(b) a taxpayer will be treated as entitled to receive money or other property if the taxpayer is entitled to have the money or other property applied for his or her benefit, or in accordance with his or her directions.

Sub-section 160D(2) stipulates that, without limiting the generality of the expression, the reference in sub-section (1) to the application of money or other property for the benefit of a taxpayer is to include a reference to the application of money or other property in the discharge in whole or in part, of a debt due by the taxpayer.

Proposed sub-section 160D(3) ensures that nothing in sub-sections 160D(1) and (2) is to imply any writing down of the scope of section 19 of the Principal Act. Section 19 is a general rule to the effect that income or money is deemed to have been derived by a person where it is dealt with as directed by that person although not actually received by the person.

Section 160E : Associated persons

New section 160E defines the term "associate of a taxpayer" for the purposes of the new Part. The definition specifies who is to be treated as an associate of a taxpayer who is a natural person, a company, a trustee of a trust estate or by extension, a partnership. Broadly, the term refers to those persons who by reason of business or family connections might appropriately be regarded as being associated with a particular person. The definition is relevant for example, for the purposes of determining whether an asset is a "personal-use" asset of a person in proposed section 160B. "Associate" is defined so as to mean:

(a)

in relation to a taxpayer other than a trustee or partnership -

•

a relative of the taxpayer;

•

a partner of the taxpayer;

•

a spouse or child of a partner of the taxpayer;

•

a trustee of a trust estate where the taxpayer or a person who is, by reason of this definition, an associate of the taxpayer benefits or is capable of benefiting under the trust either directly or through any interposed companies, partnerships or trusts;

•

a company that is effectively controlled (either individually or collectively) by the taxpayer or by persons who are, by reason of this definition, associates of the taxpayer - including any companies that are so controlled;

and, in addition, where the taxpayer is a company -

•

a person who, either alone or together with persons who are, in the terms of this definition, associates of that person, is able effectively to control the taxpayer company; and

•

persons who are, in the terms of this definition, associates of a person who controls the taxpayer company;

(b)

in relation to a taxpayer in the capacity of a trustee -

•

any person who benefits or is capable of benefiting under the trust estate either directly or through any interposed companies, partnerships or trusts;

•

persons who are, in the terms of this definition, associates of a person who benefits or is capable of benefiting under the trust;

(c)

in relation to a taxpayer being a partnership -

•

a partner in the partnership;

•

persons who are, in the terms of this definition, associates of a partner in the partnership.

It should be noted that, by sub-section 160K(2), references in this Part, and in provisions other than in this Part but having effect for the purposes of this Part, to a spouse of a person will, generally, include a reference to a de facto spouse (as defined). Thus, for example, a reference in the definition of "associate" in section 160E to a relative of a taxpayer will, because relative is defined in sub-section 6(1) of the Principal Act to include a spouse of a person, also include a reference to a de facto spouse of the taxpayer.

Section 160F : Associated trust estates

New section 160F specifies those circumstances in which trust estates will be taken to be associated with each other for the purposes of the new Part. For example, for the purposes of Division 19 of Part IIIA relating to the exemption of one-fifth of the gain attributable to goodwill, it will be relevant to ascertain whether associated trusts carry on businesses that, broadly stated, are connected (see notes on section 160ZZR).

By sub-section 160F(1), a trust estate of which a person is a beneficiary, including where the beneficiary's interest is subject to a contingency, will be deemed to be associated with another trust estate if that person also benefits, or is capable of benefiting from, the other trust estate.

Sub-section 160F(2) is to the effect that where two or more trust estates are associated with another trust estate by virtue of the application of sub-section 160F(1) and/or another application of sub-section 160F(2), those trust estates are also deemed to be associated with each other.

Section 160G : Related companies

Section 160G prescribes the conditions under which a company will be treated as being related to another company for the purposes of the new Part. The concept of related companies is relevant, for example, to the operation of section 160ZZR of Division 19 in determining whether the exemption of one-fifth of a capital gain that accrued on the disposal of the goodwill of a business is applicable.

Sub-section 160G(1) specifies two tests, the satisfaction of either of which will cause a company to be taken to be related to another company. These tests are that one of the companies was a subsidiary of the other (paragraph (a)) or each of the companies was a subsidiary of the same parent (paragraph (b)).

Sub-section 160G(2) specifies the circumstances in which a company (the "subsidiary company") is to be taken to be a subsidiary of another company (referred to as the "holding company"). This will be the case if one of the tests set out in paragraph (a) and the test set out in paragraph (b) are satisfied. Under sub-paragraph (2)(a)(i) this relationship is established if all the shares in the subsidiary are beneficially owned by the holding company. Sub-paragraph (2)(a)(ii) establishes the relationship if all the shares in the subsidiary company are beneficially owned by a company that is, or by two or more companies each of which is, a subsidiary of the holding company. By sub-paragraph (2)(a)(iii) the necessary relationship will also exist if all the shares in the subsidiary company are owned by the holding company and by a company that is, or two or more companies each of which is, a subsidiary of the holding company.

Where any of these tests is satisfied, paragraph (2)(b) imposes the further requirement that no person be in a position to affect rights of the holding company or of another subsidiary of the holding company in relation to the particular subsidiary company.

Sub-section 160G(3) extends the operation of sub-sections (1) and (2) by establishing a qualifying group relationship between companies which are part of a wholly-owned chain of subsidiaries of a holding company. Thus, in a corporate structure under which all of the shares in the subsidiary are owned by one or more wholly-owned companies that are interposed between a holding company and the end subsidiary company, the qualifying group relationship will exist between each of those companies.

Sub-section 160G(4) elaborates on the operation of paragraph (2)(b), by specifying the circumstances in which a person is to be regarded as being in a position to affect the rights of one company in relation to another company. A person will be in that position if he or she has a right, power, or option (whether by a provision in the constituent document of either of the companies or by virtue of any agreement or otherwise) to acquire any of the rights of the first company in relation to its subsidiary or to prevent that company from exercising rights in relation to the subsidiary for its own benefit or receiving any benefits accruing from those rights.

Sub-section 160G(5) defines the term "agreement" used in sub-section (4) to mean an agreement, arrangement or understanding, whether formal or informal, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings.

Section 160H : Resident trust estates, partnerships and unit trusts

Proposed section 160H sets out the tests according to which a trust estate, partnership or unit trust is to be regarded for the purposes of Part IIIA as a resident trust estate, resident partnership or resident unit trust. The distinction between resident and non-resident trust estates, partnerships and unit trusts is relevant in relation to the application provisions set out in Division 2 of this Part. Under those provisions, the Part will apply to assets wherever situated that were owned by a resident, and to taxable Australian assets owned by non-residents.

By sub-section (1) a trust estate will be regarded as a resident trust estate in relation to a year of income if, at any time during the year of income, a trustee of that trust estate was a resident of Australia or the central management and control of the trust estate was in Australia.

Sub-section (2) of proposed section 160H prescribes the tests according to which a partnership will be taken to be a resident partnership for the purposes of new Part IIIA. A partnership is to be regarded as a resident partnership in relation to a year of income if, at any time during the year of income, a partner in the partnership was a resident or the central management and control of the business, or principal business, of the partnership was in Australia.

The tests according to which a unit trust is to be taken to be a resident unit trust are set out in sub-section (3) of proposed section 160H. A unit trust is to be regarded as a resident unit trust in relation to a year of income if, at any time during the year of income, the following conditions were satisfied:

•

either any property of the unit trust was situated in Australia (sub-paragraph (a)(i)) or the trustee carried on business in Australia (sub-paragraph (a) (ii)); and

•

either the central management and control of the unit trust was in Australia (sub-paragraph (b)(i)) or persons who held more than 50% of the beneficial interests in the income or property of the unit trust were residents (sub-paragraph (b)(ii)).

Section 160J : Asset passing to personal representative or beneficiary

New section 160J clarifies the meaning of a reference in new Part IIIA to the passing of an asset that formed part of the estate of a deceased person to the legal personal representative of the deceased person or to a beneficiary. This is particularly relevant to the operation of section 160X which deals with the application of the capital gains provisions to deceased estates (see notes on that section).

By paragraph (a) of section 160J, a reference to the passing of an asset of a deceased estate to the legal personal representative of the deceased person is a reference to the asset coming into the ownership of a person as the executor of the will, or as the administrator of the estate, of the deceased person.

A reference to an asset passing to a beneficiary in a deceased estate is, by paragraph (b) of section 160J, a reference to an asset coming into the ownership of a person as a beneficiary -

•

under the deceased's will or under that will as varied by a court order (sub-paragraph (b)(i)); or

•

by operation of law as a result of the intestacy of the deceased person or by such operation as varied by an order of a court (sub-paragraph (b)(ii)).

This will be the case whether the asset was transmitted directly to the beneficiary or transferred to the beneficiary by the executor of the will or by administrator of the estate.

Section 160K : Other interpretative provisions

Sub-section 160K(1) defines for the purposes of Part IIIA certain terms used throughout the Part -

"building" is defined to include a structure.

"land" is defined to include -

•

a legal or equitable estate or interest in land (paragraph (a)) or a right, power or privilege over, or in connection with, land (paragraph (b)) - without limiting their generality, these paragraphs would embrace a lease of land or any other direct interest in or over land, or rights to exploit, or to explore for, natural resources;

•

a legal or equitable estate or interest in a stratum unit (as defined) (paragraph (c)); or

•

a share in a company that owns land on which a building is erected, being a share that entitles the holder to occupy a flat or home unit contained in the building (paragraph (d)).

"relevant exempting provision" means those provisions in the Principal Act which exempt the income of various authorities, institutions, organisations, associations and funds namely paragraphs (d), (e), (ea), (eb), (ec), (f), (g), (h), (i), (j), (jaa), (ja) and (x) of section 23 and sections 23F, 23FA and 23FB, as well as any provision in another Act which provides that a particular person or body or the income of a particular person or body is not subject to taxation under any law of the Commonwealth. The definition is relevant for determining those persons who because of their income tax exempt status will also not be subject to tax on capital gains.

"stratum unit", which is relevant for the purposes of paragraph (c) of the definition of "land", means a unit on a unit plan registered under an appropriate statute providing for the registration of titles of a kind known as unit titles or strata titles. The definition covers a part of a building containing a dwelling (e.g., a flat or home unit) and a part of a parcel of land on which the dwelling is constructed.

"transfer" is defined to include conveyance.

"will" is defined to include a codicil.

Sub-section 160K(2) enlarges, for the purposes of Part IIIA, the scope of the term "spouse of a person" where used in Part IIIA (other than in section 160ZZM which deals with the transfer of assets between spouses upon breakdown of marriage) or in any other provision of the Principal Act other than Part IlIA in so far as that provision has effect for the operation of the Part. The definition has particular relevance to the definition of "associated persons" referred to earlier in these notes. The spouse of a person is defined in paragraph (a) to include a de facto spouse but to exclude a legally married spouse who is living separately and apart from that person on a permanent basis.

"De facto spouse" is defined by paragraph 160K(2)(b), to mean a person who is living with the relevant person as the husband or wife of that person on a bona fide domestic basis although not legally married to that person.

Sub-sections 160K(3) and (4) are interpretative provisions relevant to the operation of sub-sections 160ZD(1) and 160ZH(4) which, as explained in the notes on those sub-sections, specify what amounts constitute consideration for a disposal of an asset (sub-section 160ZD(1)) and consideration for the acquisition of an asset (sub-section 160ZH(4)).

New sub-section 160K(3) specifies that a reference in Part IIIA to a person being entitled to receive money or property other than money includes a reference to a person being entitled to receive money or property other than money either immediately or at a future date and, in the case of money, either in a lump sum or by instalments.

By sub-section 160K(4) a reference in the new Part to a person being required to pay money or give property other than money is a reference to a person being required to pay money or give property other than money either immediately or at a future date and, in the case of money, either in a lump sum or by instalments.

Sub-section 160K(5) will apply where an amount of money or the value of property for the purposes of determining capital gains or losses is in a foreign currency. In these circumstances, the cost base of an asset or the consideration in respect of the disposal of an asset, will be converted into the equivalent amount in Australian currency determined at the time when the costs were incurred or the disposal took place.

Sub-section 160K(6) specifies that where a taxpayer is deemed for the purposes of the new Part to have paid or given any consideration in respect of the acquisition of an asset, the taxpayer is also deemed, unless the contrary intention appears, to have paid or given that consideration at the time when the taxpayer acquired the asset. For example, in certain circumstances a taxpayer will be deemed, by sub-section 160ZH(9), to have paid or given as consideration in respect of the acquisition of an asset an amount equal to the market value of the asset at the time of acquisition. Sub-section 160K(6) will operate to deem that consideration to have been paid at the time when the asset was acquired by the taxpayer.

Sub-section 160K(7) will make it clear that, where a provision of new Part IIIA refers to a person who did not pay or give any consideration in respect of the acquisition or an asset, the person is not to be taken not to be a person to whom that provision applies. Sub-section 160K(7) is to have that effect notwithstanding that sub-section 160ZH(9) deems a person who acquired an asset from another person and did not pay or give any consideration in respect of the acquisition of the asset to have paid or given an amount of consideration equal to the market value of the asset at the time of acquisition.

Sub-section 160K(8) operates in a similar way to sub-section 160K(7) in relation to sub-section 160ZD(2). Where a taxpayer does not receive any consideration in respect of the disposal of an asset, sub-section 160ZD(2) deems the taxpayer to have received as consideration in respect of the disposal an amount equal to the market value of the asset at the time of disposal. Sub-section 160K(8) ensures that for the purposes of any other relevant provision of the new Part the person is not to be taken by reason of the operation of sub-section 160ZD(2), not to be a person who did not receive any consideration in respect of the disposal of the asset.

Sub-section 160K(9) makes it clear that where a provision of new Part IIIA specifies that the Part is not to apply in respect of the disposal of an asset, it does not have the effect of excluding the application of the Part in relation to the person who acquired the asset as a result of the disposal.

Sub-section 160K(10) provides that in this Part, unless a contrary intention appears, a reference to a trustee of a trust estate also includes a reference to the trustee of a unit trust.

DIVISION 2 - APPLICATION

Division 2 of Part IIIA will set out the general rules governing the application of the new Part in respect of disposals of assets, including as to what will constitute a disposal and an acquisition of an asset, the treatment of composite assets, part disposals of assets and the treatment of deceased estates.

A detailed explanation of the provisions of Division 2 follows.

Section 160L : Part applies in respect of disposals of assets

Proposed section 160L sets out the circumstances in which a disposal of an asset will be a disposal to which the new Part IIIA will apply.

Sub-sections 160L(1) and (2) specify that, broadly, the Part is to apply to the disposals of assets wherever situated acquired on or after 20 September 1985 by resident persons and resident trust estates, and to the disposals of taxable Australian assets acquired on or after 20 September 1985 by non-resident persons and non-resident trust estates.

By virtue of sub-section 160L(1), which has effect subject to the remaining provisions of section 160L, Part IIIA is to apply to every disposal on or after 20 September 1985 of an asset - whether situated in Australia or elsewhere - which immediately before the disposal was owned by an Australian resident or by a person in the capacity of a trustee of a resident trust estate or of a resident unit trust (terms defined in section 160H) if the asset was acquired by that person on or after 20 September 1985. This corresponds with the general position under the Principal Act that residents of Australia are subject to income tax on worldwide income.

By sub-section 160L(2), and subject to other provisions of section 160L, Part IIIA is also to apply to every disposal on or after 20 September 1985 of a taxable Australian asset (a term defined in section 160T) which was owned immediately before the disposal by a person who was not a resident of Australia or by a trustee of a trust estate or of a unit trust that was not a resident trust estate or a resident unit trust respectively, where the asset was acquired by that person on or after 20 September 1985. This also corresponds, generally, with the position under the Principal Act that non-residents of Australia are subject to income tax on income from sources in Australia.

Sub-section 160L(3) to 160L(7) specifies certain disposals of assets to which Part IIIA will not apply.

Sub-section 160L(3) is to the effect that Part IIIA is not to apply to the disposal of an asset by a taxpayer, not being an asset referred to in sub-section (4) or (5) - see notes on those sub-sections - if -

•

immediately before its disposal the asset constituted trading stock of the taxpayer, with the consequence that the proceeds of the disposal would be subject to tax as income (paragraph 160L(3)(a));

•

as a result of the disposal an amount has been or will be included in the assessable income of the taxpayer of any year of income by virtue of section 26AAA of the Principal Act. Section 26AAA operates to include in assessable income of a taxpayer any profit arising from the sale by the taxpayer of property purchased and subsequently sold within 12 months of the date of purchase (paragraph 160L(3)(b)); or

•

as a result of the disposal an amount has been or will be, or but for section 23H of the Principal Act would have been or would be, included in the assessable income of the taxpayer by virtue of section 26AG of the Principal Act (paragraph 160L(3)(c)). Section 26AG operates to include in assessable income of a taxpayer amounts to which that section applies in relation to the taxpayer in respect of the use or disposal of a film copyright, capital expenditure on which has qualified for a concessional deduction as capital investment in Australian films. Section 23H provides for an exemption of a specified part of such receipts.

Sub-section 160L(4) applies where the asset was owned by a taxpayer in the capacity of a trustee of a trust estate and to which a beneficiary was absolutely entitled at the time of the disposal. In those circumstances new Part IIIA will not apply if -

•

the asset, immediately before its disposal, constituted trading stock of the trustee (paragraph 160L(4)(a));

•

as a result of the disposal an amount has been or will be included in the assessable income of the beneficiary or the net income of the trust estate, of any year of income by virtue of section 26AAA of the Principal Act (paragraph 160L(4)(b)); or

•

as a result of the disposal an amount has been or will be, or but for section 23H of the Principal Act would have been or would be, included in the assessable income of the beneficiary, or the net income of the trust estate, of any year of income by virtue of section 26AG of the Principal Act (paragraph 160L(4)(c)).

By similar provisions in sub-section 160L(5), the new Part is not to apply in respect of a disposal of an asset of a partnership if -

•

the asset constituted trading stock of the partnership immediately before its disposal (paragraph 160L(5)(a));

•

as a result of the disposal an amount has been or will be included in the net income of the partnership or in the assessable income of a partner in the partnership, or taken into account in ascertaining the amount of a partnership loss, of any year of income by virtue of section 26AAA of the Principal Act (paragraph 160L(5)(b)); or

•

as a result of the disposal an amount has been or will be, or but for section 23H of the Principal Act would have been or would be, included in the net income of the partnership, or in the assessable income of a partner in the partnership, or taken into account in ascertaining the amount of the partnership loss, of any year of income by virtue of section 26AG of the Principal Act (paragraph 160L(5)(c)).

Sub-section 160L(6) specifies that the new Part is not to apply to disposals of decorations awarded for valour or brave conduct where the taxpayer did not acquire the decoration for valuable consideration. In effect, the Part will not apply to a disposal by the person to whom the decoration was awarded, or by a person to whom the decoration was gifted or bequeathed.

Paragraph 23(pa) of the Principal Act exempts from tax income derived from the sale, transfer or assignment by a bona fide prospector of his or her rights to mine in Australia for gold and certain prescribed metals. Sub-section 160L(7) specifies that the new Part will not apply in respect of a capital gain on a disposal being a sale, transfer or assignment of rights to mine where paragraph 23(pa) applies in relation to the sale, transfer or assignment.

Section 160M : What constitutes a disposal or acquisition

Section 160M sets out the rules governing what will constitute a disposal and an acquisition of an asset for the purposes of Part IIIA.

In broad terms, there will be a disposal of an asset and an acquisition of an asset where there is a change in the ownership of the asset.

Sub-section 160M(1) enunciates this general rule, which is subject to the other provisions of the new Part. Where a change has occurred in the ownership of an asset, the change is deemed to have effected a disposal of the asset by the person who owned it immediately prior to the change and an acquisition of the asset by the person who owned it immediately after the change.

Sub-section 160M(2) elaborates on the general rule set out in sub-section (1), making it clear that a reference in sub-section (1) to a change in the ownership of an asset means a change that has occurred in any way, including, but not limited to, changes as a result of:

(a)

the execution of an instrument;

(b)

the entering into of a transaction;

(c)

the transmission of the asset by operation of law;

(d)

the delivery of the asset;

(e)

the doing of any other act or thing; and

(f)

the occurrence of any event.

Without limiting the generality of sub-section (2), new sub-section 160M(3) sets out four circumstances where a change shall be taken to have occurred in the ownership of an asset. These are -

•

by declaration of trust in relation to the asset under which the beneficiary is absolutely entitled to the asset as against the trustee (paragraph (a)). In these circumstances there will be a disposal of the asset by the transferor and an acquisition of the asset by the beneficiary. Although the trustee is the legal owner of the asset, where a beneficiary is absolutely entitled to the asset as against the trustee the new Part applies as if the asset were vested in the beneficiary (see notes on new sub-section 160V(1)).

•

in the case of an asset being a debt, a chose in action or any other right, or an interest or right in or over property - by the cancellation, release, discharge, satisfaction, surrender, forfeiture, expiry or abandonment, at law or in equity of the asset (paragraph (b)). Thus for example, there will be a disposal of a share right or share option by the holder where the right or option expires unexercised.

•

in the case of an asset being a share in or debenture of a company - by the redemption in whole or in part, or the cancellation, of the share or debenture (paragraph (c));

•

subject to sub-section 160M(4), by a transaction in relation to the asset under which the use and enjoyment of the asset was or is obtained by a person for a period at the end of which the title to the asset will or may pass to that person (paragraph (d)). An example of a transaction to which paragraph 160M(3)(d) applies would be the entry into a hire purchase contract.

Sub-section 160M(4) adds a proviso to the operation of paragraph 160M(3)(d), to the effect that if the period for which a person referred to in that paragraph had the use and enjoyment of an asset terminates without the title in the asset passing to that person, no change of ownership will be taken to have occurred. The sub-section also qualifies section 170 of the Principal Act so as not to prevent the amendment of an assessment at any time for the purpose of giving it effect.

Sub-section (5) deals with three situations in which, for the purposes of Part IIIA, assets are to be taken to have been acquired.

By paragraph 160M(5)(a), an issue or allotment of shares in a company constitutes the acquisition of those shares by the person to whom they were issued or allotted. However, the issue or allotment will not constitute a disposal of the shares by the company for the purposes of the new Part.

Paragraphs 160M(5)(b) and (c) deem the creation or construction of an asset by or for a person to constitute the acquisition of the asset by that person.

Sub-section 160M(6) applies to a disposal of an asset that did not exist (either by itself or as part of another asset) before the disposal, but is created by the disposal. The sub-section makes clear that such circumstances constitute a disposal of the asset for the purposes of this Part. Sub-section (6) would apply, for example, to deem there to be a disposal of an asset by a person granting a lease, or giving an option to another person to buy an asset at a future date. The lease or option is an asset created by such a transaction. For the purposes of determining the cost base, indexed cost base and reduced cost base to the grantor of the asset comprising the lease or option under sub-sections 160ZH(1), (2) and (3), (see notes on that section) the grantor will be deemed by sub-section 160M(6) not to have paid or given any consideration or incurred any costs in respect of the acquisition (i.e. creation) of the asset nor to have incurred any expenditure in enhancing the value of, or establishing or preserving title to the asset. However, the cost base, indexed cost base or reduced cost base of the asset may include the amount of any incidental costs to the taxpayer on the disposal of the asset (see notes on sub-section 160ZH(7)).

Sub-section 160M(7) also applies, subject to the other provisions of Part IIIA, in situations where there is a disposal of an asset created by the disposal. It will deem a disposal of an asset to have occurred where a taxpayer receives or becomes entitled to receive an amount of money or other consideration for the forfeiture or surrender of a right or for refraining from exercising the right or receives consideration for the use or exploitation of an asset. The sub-section provides that the act, transaction or event which results in the taxpayer receiving the consideration will constitute the disposal by the taxpayer of an asset created by the disposal for the purposes of Part IIIA. Examples of the acts, transactions or events affected by this provision include that of an amateur sportsman who receives a payment on becoming a professional, the receipt of consideration for entering into exclusive trade tie agreements or restrictive covenants, or in connection with the variation, cancellation or breach of business contracts or agency agreements.

Paragraph (c) is to the effect that the money or other consideration constitutes the consideration in respect of the disposal. For the purposes of determining the cost base, indexed cost base and reduced cost base to the person of the asset under sub-sections 160ZH(1), (2) and (3) (see notes on that section), paragraph 160M(7)(d) deems the person not to have paid or given any consideration in respect of the acquisition of the asset nor to have incurred any costs or expenditure in respect of the asset. However, the amount of any incidental costs to the taxpayer of the disposal of the asset may be included in the cost base, indexed cost base or reduced cost base of the asset as appropriate.

Sub-sections 160M(8), (9), (10) and (11) apply in cases where a resident taxpayer, resident trust estate, resident unit trust, or resident partnership ceases to be a resident of Australia. As indicated in the notes on section 160L, resident taxpayers will be liable to tax on capital gains on the disposal of assets wherever situated, while non-residents will be liable to tax on capital gains on the disposal of taxable Australian assets only. These sub-sections are necessary to ensure that tax on gains on assets other than taxable Australian assets that accrued while the owner was a resident of Australia cannot be avoided by the owner acquiring non-resident status. Sub-sections (12), (13), (14) and (15) will apply to ensure that gains that accrued on such assets while the owner was not a resident of Australia will not become liable to Australian tax, when the owner acquires resident status.

In broad terms, these sub-sections will deem there to have been a disposal of all the assets owned by the taxpayer (sub-section (8)), resident trust estate (sub-section (9)), resident unit trust (sub-section (10)) and resident partnership (sub-section (11)) (other than taxable Australian assets, or assets acquired before 20 September 1985 to which Part IIIA does not apply) at the time when the taxpayer, trust estate, unit trust, or partnership ceased to be resident (referred to in the sub-sections as the "relevant time").

Accordingly, where a resident taxpayer ceases to be a resident of Australia on or after 20 September 1985, paragraph 160M(8)(a) will deem every asset owned by the taxpayer immediately before the relevant time - other than taxable Australian assets (as defined in section 160T), assets acquired by the taxpayer before 20 September 1985 and assets to which sub-sections (9), (10) or (11) applies - to have been disposed of at the time when the taxpayer ceases to be resident. Paragraph 160M(8)(b) applies so that every asset deemed to have been disposed of by the operation of paragraph 160M(8)(a) is deemed to have been disposed of for a consideration equal to the market value of the asset at the relevant time.

Sub-sections 160M(9), (10) and (11) apply in a corresponding manner to sub-section (8) where a resident trust estate, a resident unit trust or a resident partnership respectively ceases to be so resident on or after 20 September 1985.

Sub-sections 160M (12), (13), (14) and (15) apply in cases where a non-resident taxpayer, a non-resident trust estate, a non-resident unit trust or a non-resident partnership become resident of Australia. Broadly, in those circumstances, these sub-sections apply to deem every asset owned by the non-resident taxpayer, non-resident trust estate, non-resident unit trust or the non-resident partnership (other than taxable Australian assets or assets acquired before 20 September 1985) to have been acquired by the taxpayer, trust estate, unit trust or partnership at the time of becoming resident (referred to in the sub-sections as the "relevant time").

Accordingly, where a non-resident taxpayer becomes an Australian resident on or after 20 September 1985, sub-section 160M(12) deems every asset owned by the taxpayer immediately before residency was obtained - other than taxable Australian assets, assets acquired by the taxpayer before 20 September 1985 and assets to which sub-section 160M(13), (14) or (15) applies - to have been acquired by the taxpayer for a consideration equal to the market value of the asset at the time when the taxpayer became a resident.

Sub-sections (13), (14) and (15) apply in a corresponding manner where a non-resident trust estate, a non-resident unit trust or a non-resident partnership respectively becomes a resident of Australia on or after 20 September 1985.

Section 160N : Assets lost or destroyed

For the purposes of Part IIIA, but subject to the other provisions of the Part, the complete loss or destruction of an asset will, by paragraph 160N(a), constitute the disposal of that asset. Similarly, where an asset is partially lost or destroyed that partial loss or destruction will, by paragraph 160N(b), constitute the disposal of that part of the asset. Under the section a disposal will be deemed to have occurred whether or not the owner of the asset receives compensation for the loss or destruction of the asset.

Section 160P : Composite assets

Section 160P sets out the rules applicable to assets which may be broadly categorised as composite assets. Primarily the provisions of section 160P relate to:

•

the treatment of land and buildings where land is purchased before 20 September 1985 and a building is constructed on it after that date;

•

capital improvements made on or after 20 September 1985 to an asset acquired before that date; and

•

the treatment of assets for capital gains purposes where the assets are regarded as separate assets for the purposes of the Act other than new Part IIIA.

Where land on which a building is erected was acquired before 20 September 1985, the building is demolished and a new building is, on or after 20 September 1985, erected on the land, sub-section 160P(1) treats the new building for the purposes of Part IIIA to be an asset separate from the land. The effect of this provision is to treat the new building as an asset acquired after 20 September 1985, the disposal of which will be subject to the provisions of the new Part, while the land itself, having been acquired before 20 September 1985, will not be subject to the new Part.

Where land is acquired before 20 September 1985 and after the acquisition of the land a building which would be taken to have been acquired on or after 20 September 1985 is erected, the building is deemed by sub-section 160P(2) to be an asset separate from the land. On any subsequent disposal, the building (but not the land) will be subject to the provisions of the new Part.

Sub-section 160P(3) requires an acquisition on or after 20 September 1985 of land adjacent to land acquired by the taxpayer before 20 September 1985 also to be treated as an asset, subject to the new Part, separate from the land originally acquired which will not be subject to the new Part.

Sub-section 160P(4) makes it clear that where a building or other improvement of a capital nature made to land is treated for the purposes of another provision of the Principal Act as an asset separate from the land, the building or other improvement will also be deemed for the purposes of the new Part to be an asset separate from the land. Thus, where capital expenditure on a building attracts allowances deductible under a provision of the Act other than Part IIIA, the building and the land on which it is constructed will be treated as separate assets for the purposes of Part IIIA.

Sub-section 160P(5) specifies that where an asset forming part of a building is treated for the purposes of the Act other than Part IIIA as an asset separate from the building, the asset is, for the purposes of the new Part, to be a separate asset from the building. The effect of sub-sections (4) and (5) is that for the purposes of this Part depreciable assets will be treated as separate assets for capital gains purposes from the land on which they are constructed or the building of which they form part. Thus all assets of this kind will be subject to tax on capital gains if acquired on or after 20 September 1985.

The provisions of sub-section 160P(6) apply to capital Improvements made on or after 20 September 1985 to an asset acquired prior to 20 September 1985. The sub-section treats the improvement as an asset separate from the asset to which the improvement was made if, subject to section 160Q, the indexed cost base to the taxpayer of the improvement would exceed $50,000 and the amount of the indexed cost base of the improvement exceeds 5% of the consideration in respect of the disposal of the asset to which the improvement was made. Section 160Q provides for the indexation of the indexed cost base limit of $50,000, and is referred to later in these notes.

Sub-section 160P(7) applies where an asset which is deemed to comprise two or more separate assets is disposed of and stipulates that the consideration in respect of the disposal is to be apportioned between the separate assets.

Subject to the provisions of section 160P, outlined above, land and any building or other improvement to the land will be deemed for the purposes of the new Part to be a single asset by virtue of sub-section 160P(8).

Section 160Q : Indexation of indexed cost base limit

Sub-section 160Q(1) sets out the basis of indexation to be followed in determining the statutory limit applicable each year that must be exceeded before the indexed cost base to a taxpayer of capital improvements to an asset require the improvements to be treated as a separate asset for the purposes of sub-section 160P(6). To ascertain the statutory amount for the 1986-87 year of income, the base amount of $50,000 is to be multiplied by a factor ascertained in accordance with sub-section 160Q(3). For each subsequent income year, the statutory amount for the previous income year as calculated in accordance with sub-section 160Q(1), or the amount that would have been the previous year's amount but for the operation of sub-section 160Q(2), is to be multiplied by the indexation factor for that subsequent year as determined under sub-section 160Q(3).

Sub-section 160Q(2) specifies that, if the amount calculated for a particular year of income in accordance with sub-section 160Q(1) does not exceed $50,000, then that sub-section does not have effect. Instead, in relation to that year of income, the indexed cost base limit will be $50,000.

Sub-section 160Q(3) prescribes the method of determining the indexation factor referred to in sub-section 160Q(1). The factor is, in effect, to be the number ascertained by dividing the sum of the All Groups Consumer Price Index number (as defined in paragraph 160Q(10)(b)) for each quarter of the twelve months ended 31 March immediately preceding the commencement of the relevant year of income by the sum of the corresponding numbers for each quarter of the twelve months ending on the immediately preceding 31 March.

Under sub-section 160Q(4) an index number first published for the quarter of any year is to be used in the calculation in sub-section 160Q(3). Any index number published in substitution for a previously published index number is to be disregarded for the purposes of the section.

Sub-section 160Q(5) requires that, if at any time the Australian statistician changes the reference base for the All Groups Consumer Price Index number, the indexation factor calculated after that time is to be determined by reference only to index numbers published in terms of the new base.

Sub-section 160Q(6) specifies a basis for rounding to three decimal places the factor calculated in accordance with sub-section 160Q(3).

Sub-section 160Q(7) requires the Treasurer to have published in the Gazette before the start of the income year commencing 1 July 1986 and each subsequent income year the factor calculated in accordance with sub-section 160Q(3) and the indexed cost base limit for that income year.

Sub-sections 160Q(8) and (9) require the rounding to the nearest whole dollar of an amount determined by application of the indexation factor that contains a fraction of a dollar. This would ordinarily be the indexed cost base limit applicable for an income year.

Sub-section 160Q(10) clarifies the meaning of certain phrases in section 160Q. By paragraph 160Q(10)(a), a reference to a relevant year of income is a reference to the year of income in which the asset to which the improvement referred to in paragraph 160P(6)(b) was disposed of, being the year of income commencing on 1 July 1986 or a subsequent year of income. Paragraph 160Q(10) (b) defines "index number" in relation to a quarter as the All Groups Consumer Price Index number, being the weighted average of the 8 capital cities published by the Australian Statistician in respect of that quarter.

Section 160R : Part disposals

Section 160R ensures that this Part may apply in relation to the disposal of part of an asset. For example, where a taxpayer sells 5 acres of a 10 acre block of land, there will be a part disposal of the original holding of 10 acres. Where there is a disposal of part of an asset the cost base, indexed cost base and reduced cost base of the asset are to be apportioned (see notes on section 160ZI).

Section 160S : Transfers by way of security, etc.

Sub-section 160S(1) specifies that the transfer by way of security of an asset or of an interest or right in or over an asset or the transfer of a subsisting interest or right by way of security in or over an asset is not to constitute the acquisition or disposal of an asset. This sub-section also applies where a re-transfer or redemption of the security takes place.

By way of further clarification of the application of Part IIIA, paragraph 160S(2)(a) specifies that the new Part applies to treat assets as having been acquired free of any interest or right by way of security subsisting at the time of acquisition and as having been disposed of free of any such interest or right subsisting at the time of disposal.

In circumstances where an asset is acquired by a person subject to any such interest or right, paragraph 160S(2)(b) treats the full amount of the liability assumed by the person acquiring the asset as forming part of the consideration for the acquisition of the asset by that person. The full amount of the liability assumed is also to be included in the amount of consideration received by the person disposing of the asset.

Section 160T : Disposal of taxable Australian assets

As mentioned earlier in these notes, sub-section 160L(2) extends the scope of Part IIIA to non-resident persons or persons in the capacity of trustees of a non-resident trust estate or unit trust upon disposal by them of taxable Australian assets acquired on or after 20 September 1985.

Section 160T details those circumstances in which the disposal of an asset is deemed, for the purposes of Part IIIA, to have been the disposal of a taxable Australian asset. These are -

•

where the asset comprised land or a building (as defined in sub-section 160K(1)) situated in Australia (paragraph (a));

•

where the asset has at any time been used by the taxpayer in conducting a trade or business wholly or partly at or through a permanent establishment in Australia (paragraph (b));

•

where the asset comprised a share or an interest in a share in a company and during the year of income of the company in which the disposal took place the company was a resident of Australia and a private company (paragraph (c));

•

where the asset comprised a share or an interest in a share in a company; and

(a)

during the year of income of the company in which the disposal occurred the company was a resident of Australia and was not a private company;

(b)

at any time during so much of the period of five years immediately preceding the disposal as occurred on or after 20 September 1985 the taxpayer or associates of the taxpayer (as defined in section 160E) were the beneficial owners of not less than 10% of the issued share capital of the company. Note that calculating the percentage of share capital held by the taxpayer or associates, share capital which carries no right to participate beyond a specified amount in a distribution of either profits or capital is to be disregarded (paragraph (d));

•

where an asset comprised an interest in a resident partnership or a resident trust estate (as defined in section 160H) (paragraphs (e) and (f));

•

where the asset comprised a unit of a unit trust; and

(a)

during the year of income of the unit trust in which the disposal occurred the unit trust was a resident of Australia (as defined in section 160H); and

(b)

at any time during so much of the period of five years immediately prior to the disposal as occurred on or after 20 September 1985 the taxpayer or associates of the taxpayer (see notes on section 160E) were the beneficial owners of not less than 10% of the issued units of the unit trust (paragraph (g)); or

•

the asset comprised an option or a right to acquire any of the assets referred to above (paragraph (h)).

Section 160U : Time of disposal and acquisition

The provisions of section 160U specify the rules governing the ascertainment of the time of acquisition or disposal of an asset for the purposes of Part IIIA.

Sub-section 160U(2) has the effect that where a time of acquisition or disposal determined in accordance with a sub-section of section 160U differs from a time ascertained in accordance with a subsequent sub-section of this section, the time as determined under the subsequent sub-section shall be taken to be the relevant time.

Sub-section 160U(3) specifies that where an asset is acquired or disposed of under a contract, the date on which the contract is made is the time of acquisition or disposal. This will mean that the new Part will not apply to an asset acquired under a legally binding contract made prior to 20 September 1985.

Where an asset is not acquired or disposed of under a contract, sub-section 160U(4) specifies the time of acquisition or disposal of the asset to be the time when the change in the ownership of the asset which constituted or gave rise to the acquisition or disposal occurred.

Sub-section 160U(5) provides that the date of acquisition of an asset which is constructed by a person is the date upon which that person commenced to construct the asset. This provision does not apply where that person constructs an asset for another person pursuant to a contract, when the time of acquisition of the asset will be the date on which the contract is made in accordance with sub-section 160U(3).

Sub-section 160U(6) applies in relation to the creation of assets. If the asset did not exist (either by itself or as part of another asset) before the disposal, paragraph 160U(61(a) treats the asset as having been acquired immediately before the asset was disposed of. Thus in the case of the grant of an option which is deemed by the operation of sub-section 160M(6) to constitute the creation and disposal of an asset, paragraph 160U(6)(a) requires that the option be taken to have been acquired by the grantor immediately before the disposal. In any other case, the date of acquisition of an asset created by a person will be taken to be the day of commencement of work on, or of work that resulted in, the creation of the asset by virtue of paragraph 160U(6)(b).

Sub-section 160U(6) does not apply where an asset is created by a person pursuant to a contract for another person. In those circumstances, the date of acquisition of the asset will be determined in accordance with sub-section 160U(3).

Where a taxpayer acquires or disposes of an asset as a result of a transaction where passage of title is postponed as referred to in paragraph 160M(3)(d), e.g., a hire purchase contract, sub-section 160U(7) deems the time of acquisition or disposal of the asset to be the time when the person acquiring the asset first obtained the use and enjoyment of it.

Sub-section 160U(8) specifies that, where the disposal of an asset occurs as a result of the exercise of a power of compulsory acquisition, the time of disposal is the time at which the earliest of the following events occurs -

•

an amount or an asset by way of compensation for the acquisition of the asset is received;

•

the person acquiring the asset became the owner of the asset;

•

the person acquiring the asset entered on the asset under powers conferred by the law which relates to that acquisition; or

•

the person acquiring the asset took possession of the asset pursuant to powers conferred by the law governing the acquisition.

Where an asset is taken to have been disposed of due to the loss or destruction of the asset in whole or in part by virtue of the operation of section 160N, sub-section 160U(9) deems the time of disposal to be -

•

if an amount or amounts, or an asset or assets, is or are received in respect of the loss or destruction - at the time when the first amount or asset is received (paragraph 160U(9)(a)); or

•

in any other case - at the time when the loss was discovered or destruction occurred (paragraph 160U(9)(b)).

Section 160V : Disposals by bare trustees and persons enforcing securities

Sub-section 160V(1) applies where an asset is held by a trustee for a person who has an absolute entitlement to the asset which may be exercised against the trustee. The sub-section deems Part IIIA to apply to such an asset on the basis that the asset is vested in the person who has the absolute entitlement and is not vested in the trustee. The sub-section also deems any acts of the trustee in relation to the asset to be the acts of the person who has the absolute entitlement.

In effect, in relation to an asset which is subject to this sub-section, Part IIIA will apply as if the asset was owned by the person who has an absolute entitlement to the asset and without regard to the actual legal ownership of the asset by the trustee.

Sub-section 160V (2) applies where an asset is legally owned by a person but another person is entitled to either the asset by way of a security, or to the benefit of a charge or encumbrance on the asset. The sub-section applies to the acts of either that other person or a person appointed to give effect to the security, or appointed to enforce or give effect to the change or encumbrance. Where such a person does any act to give effect to the security, or to enforce or give effect to the change or encumbrance, that act is deemed by this sub-section to be the act of the legal owner of the asset for the purposes of Part IIIA. For example, if the holder of the security sells the asset, the asset is considered to have been sold by the legal owner and not by the security holder.

Section 160W : Effect of bankruptcy, etc.

This section applies where an asset becomes vested in a trustee or liquidator due to the insolvency of a person or company. By virtue of the section, Part IIIA will apply to the asset as if the asset had continued to be vested in the insolvent person or company. The section applies in the following situations, viz., where:

•

as a result of the bankruptcy of a person the asset is vested in the Official Trustee in Bankruptcy or a registered trustee (paragraph (a));

•

the asset is vested in a trustee under a deed of assignment or deed of arrangement made by a person under Part X of the Bankruptcy Act 1966 (sub-paragraph (b)(i));

•

the asset is vested in a trustee by virtue either of a composition or scheme of arrangement approved under Part IV of that Act, or a composition accepted under Part X of that Act, (sub-paragraph (b)(ii)); or

•

the asset is vested in the liquidator of a company under section 374 of the Companies Act 1981 (or the corresponding law of a State or Territory) (paragraph (c)).

The section will also apply where, under the law of a foreign country, the asset is vested in the holder of a similar office to a trustee or liquidator referred to above.

The effect of this section is that the asset is still considered to be owned by the insolvent person or company, notwithstanding that the asset is vested in a trustee or liquidator. Accordingly, no disposal takes place on the vesting of the asset in the trustee or liquidator but a disposal of the asset by the trustee or liquidator is considered to be a disposal by the insolvent person or company.

Section 160X : Death not to constitute disposal

Section 160X contains provisions which relate to the treatment of deceased estates for the purposes of new Part IIIA.

The general effect of the provisions of section 160X is that the death of an owner of an asset will not generally constitute the disposal of an asset and any liability to tax on capital gains will not arise until the relevant assets are disposed of by the legal personal representative or the beneficiary as the case may be.

Sub-section 160X(1) specifies that the operation of the provisions of this section is subject to section 160Y which applies where a beneficiary in a deceased estate is exempt from tax on income and capital gains.

Sub-section 160X(2) states the general principle that the death of a person is not to be taken to result in the disposal of any assets held by that person.

Paragraph 160X(3)(a) means that the transfer of an asset that formed part of a deceased estate from the legal personal representative of the deceased to a beneficiary in the estate will not constitute a disposal for the purposes of Part IIIA. The expressions "passing to the legal personal representative of the deceased person" and "passing to a beneficiary in a deceased estate" as used in paragraph 160X(3)(a) and elsewhere in section 160X are explained in section 160J.

Where the beneficiary referred to in paragraph 160X(3)(a) subsequently disposes of the asset acquired from the estate, however, Part IIIA will apply in respect of the disposal. By paragraph 160X(3)(b) the cost base, indexed cost base or reduced cost base to the beneficiary of the asset is to include any amount that would have been included in the cost base, indexed cost base or reduced cost base of the asset to the legal personal representative had the asset been disposed of at the time it was passed to the beneficiary.

As a transitional measure, sub-section 160X(4) applies, where a person died before 20 September 1985, to the effect that the legal personal representative or a beneficiary in the estate of the deceased person is deemed to have acquired before 20 September 1985 any asset that formed part of the deceased estate notwithstanding the fact that the asset may have been transmitted or transferred to the legal personal representative or beneficiary after that date. As a result, Part IIIA will not apply on a disposal of such an asset by the representative or beneficiary.

Sub-section 160X(5) contains provisions which modify the operation of Part IIIA in relation to assets that form part of the estate of a person who died on or after 20 September 1985.

Where the deceased acquired an asset before 20 September 1985, the legal personal representative or the beneficiary will be deemed to have acquired that asset on the date of death for a consideration equal to the market value of the asset at that date (paragraph (5)(a)). The effect is to exclude from the amount of net capital gain that may accrue on a subsequent disposal, any gain accruing up to the date of death.

Paragraph 160X(5)(b) relates to assets acquired by the deceased on or after 20 September 1985. Such assets are taken to be acquired by the beneficiary or legal personal representative to whom they pass at the date of death. Sub-paragraph 160X(5)(b)(i) applies for the purpose of determining whether a capital gain accrued to a legal personal representative or beneficiary who disposes of such an asset, and treats the beneficiary or the legal personal representative as having acquired the asset for a consideration equal to the amount that would have been the indexed cost base to the deceased had the asset been disposed of immediately prior to his or her death.

For the purpose of ascertaining whether or not a capital loss has been incurred by a legal personal representative or beneficiary where such an asset is disposed of sub-paragraph 160X(5)(b)(ii) similarly treats the asset as having been acquired for a consideration equal to the amount that would have been the reduced cost base of the asset to the deceased person if he or she had disposed of the asset immediately prior to death.

By sub-paragraph 160X(5)(b)(iii) an asset that was a personal-use asset of the deceased person will also be taken to be a personal-use asset of the legal personal representative or beneficiary to whom it passes as the case may be.

Sub-section 160X(6) operates to preclude indexation of the cost base of an asset to the legal personal representative or beneficiary where the asset is disposed of by the legal personal representative or the beneficiary within 12 months of the date of acquisition of the asset by the deceased.

Section 160Y : Asset bequeathed to tax-exempt person

Section 160Y applies where an asset passes in the administration of the estate of a deceased person to a tax-exempt person or body. For the purposes of Part IIIA, the asset is taken to have been disposed of by the deceased person, and acquired by the tax-exempt beneficiary, immediately before the death of the person for a consideration equal to the market value of the asset at the date of death.

Sub-section 160Y(1) defines a person to be a tax-exempt person for the purposes of the section if a relevant exempting provision as defined in section 160K (see notes on that section) applies to the person in relation to the year of income. Sub-section 160Y(2) specifies that where a person died after 20 September 1985 and an asset acquired after that date by the deceased passes to a beneficiary who is a tax-exempt person, section 160X is not to apply to the asset, but sub-section (2) and (3) of section 160Y are to have effect.

Sub-section (3) will deem, for the purposes of Part IIIA, the asset to have been disposed of by the deceased person, and acquired by the beneficiary, immediately before the death of the person for consideration equal to the market value of the asset at the date of death.

If a tax-exempt beneficiary disposes of an asset acquired from the legal personal representative of the deceased estate and at the time of disposal is no longer tax-exempt within the definition in sub-section 160Y(1), sub-section 160Y(4) applies so that the cost base, indexed cost base or reduced cost base includes any amount that would ordinarily have been included by virtue of paragraph 160X(3) (b) i.e., if section 160Y had not applied. That is, there is to be included any amount that would have been included in the cost base, indexed cost base or reduced cost base of the asset if the legal personal representative had incurred expenditure in respect of the asset between the date of death and the time it was passed to the beneficiary.

DIVISION 3 - DETERMINATION 0F CAPITAL GAINS AND CAPITAL LOSSES

Division 3 is the operative Division of this Part. It lays down the rules for the determination of a capital gain or a capital loss and for calculating the amount of a net capital gain or a net capital loss to a taxpayer in respect of a year of income.

As a general rule a capital gain is the excess of the consideration in respect of the disposal of an asset over the asset's indexed cost base (see notes on proposed section 160ZH) that is, as adjusted for inflation by reference to the Consumer Price Index. An asset disposed of within 12 months of acquisition that is not subject to section 26AAA will be liable to tax on the capital gain if it is disposed of for more than the unindexed cost base.

A capital loss is to be calculated by reference to the unindexed cost base after taking into account losses allowed or allowable for income tax purposes (referred to as the "reduced cost base" - see also notes on section 160ZH). The Division also contains rules relating to the disposal of a non-listed personal-use asset and provides statutory exemptions for certain forms of capital receipts.

Section 160Z : Capital gains and capital losses

Sub-section 160Z(1), which is subject to proposed Part IIIA of the Principal Act, defines the terms "capital gain" and "capital loss" in relation to the disposal of an asset other than a personal-use asset. A net capital gain ascertained in accordance with section 160ZC which accrues to a taxpayer in a year of income is included in the assessable income of the taxpayer for that year while a net capital loss determined under section 160ZC is allowable as a deduction to a taxpayer against a capital gain (see notes on that section and on section 160ZO).

Paragraph (1)(a) applies where a taxpayer disposes of an asset and the consideration in respect of the disposal (a defined term - see notes on section 160ZD) exceeds the indexed cost base of the asset to the taxpayer. A capital gain equal to the excess of the consideration over the indexed cost base (a term defined in section 160ZH) is taken to have accrued to the taxpayer. By way of example assume that taxpayer C acquired an asset for $10,000 and sold it two years later for $15,000. If the Consumer Price Index in the year of acquisition was 100 and in the year of disposal 110, C's capital gain on the disposal of the asset would be calculated as follows:

($15,000 - ($10,000 * (110)/(100)) = $4,000


.

A capital loss on the disposal of an asset other than a personal-use asset is determined in accordance with paragraph (b). Where the reduced cost base (also a term defined in section 160ZH) to a taxpayer of an asset exceeds the consideration for the disposal, a capital loss equal to the excess of the reduced cost base over the consideration will have been incurred by the taxpayer during the year of income.

Sub-section 160Z(2), which is subject to sub-section (3), sets out the conditions for the determination of the amount of capital gain on the disposal of a non-listed personal-use asset. In terms of sub-section (2), where -

•

a non-listed personal-use asset has been disposed of during the year of income (paragraph (a); and

•

the consideration in respect of the disposal exceeds the indexed cost base to the taxpayer of the asset (paragraph (b)).

a capital gain equal to the excess is deemed to have accrued to the taxpayer during the year of income.

Sub-section 160Z(3) applies where an asset referred to in sub-sections (1) and (2) is disposed of within 12 months after the date of acquisition by a taxpayer. It requires that references in sub-sections 160Z(1) and (2) to the indexed cost base to the taxpayer of an asset be read as a reference to the cost base to the taxpayer of the relevant asset. The sub-section gives effect to the intention that a capital gain on the disposal of the asset within 12 months of acquisition which is outside the scope of section 26AAA be calculated by reference to the cost base of the asset unindexed (referred to as the "cost base" - see notes on section 160ZH).

Sub-section 160Z(4) makes it clear that for the purpose of determining whether or not the indexed cost base is to be used in calculating the amount of a capital gain in respect of the disposal of an asset references in sub-section 160Z(3) to the day on which an asset was acquired by a taxpayer are - if the asset formed part of the estate of a deceased taxpayer and passed to the taxpayer as the legal personal representative of the deceased person or as a beneficiary in the estate of the deceased - to be read as a reference to the day on which the asset was acquired by the deceased person.

Sub-section 160Z(5) will apply when, for the purposes of Division 14 in relation to the disposal of part of a unit of industrial property, a taxpayer is deemed at the time of the part disposal to have disposed of and immediately reacquired the part of the unit not disposed of. The sub-section provides that in these circumstances, references in sub-section (3) to the day on which an asset was acquired by a taxpayer shall, if the asset was deemed to have been so disposed of and acquired by virtue of the relevant provisions of Division 14 - sub-paragraph 160ZZD(4)(a)(i) or (5)(a)(i) (including the sub-paragraph concerned as it applies by virtue of sub-section 160ZZD(6)) - be read as a reference to the original day of acquisition of the asset by the taxpayer and not the day on which it was deemed to have been acquired.

Sub-section 160Z(6) gives effect to a general rule that any capital gain which accrued to a taxpayer in a year of income arising from the disposal of an asset which was used by the taxpayer solely for the purpose of producing exempt income is not to be brought to tax under Part IIIA.

Sub-section 160Z(7) operates to preclude a deduction for a capital loss on the disposal of a personal-use asset. However, it does not preclude a listed personal-use asset loss from being determined in accordance with section 160ZQ (see notes on that section).

Sub-section 160Z(8) operates to remove from the scope of Part IIIA a capital gain accruing to a taxpayer during a year of income if the taxpayer is a person whose income of the year of income is exempt from tax by virtue of a relevant exempting provision (as defined in section 160K).

Sub-section 160Z(9) is complementary to sub-section (8) and specifies the circumstances in which a capital loss is not to be taken to have been incurred by a taxpayer during a year of income. The circumstances are where:

•

the taxpayer is a person whose income of the year of income is exempt from tax by virtue of a relevant exempting provision (paragraph (a));

•

in the case of a taxpayer being a company, Subdivision B of Division 2A of Part III (Calculation of Taxable Income where Disqualifying Event Occurs) applies in relation to the company in relation to the year of income (paragraph (b));

•

the relevant disposal related to an asset that was used in any year of income by the taxpayer solely for the purpose of producing exempt income (paragraph (c); or

•

the relevant disposal was due to the expiry, surrender, forfeiture or assignment of a lease or sub-lease (other than a lease or sub-lease granted in perpetuity or for a period of not less than 99 years) that was not used by the lessee or sub-lessee wholly or principally for gaining or producing assessable income (see notes on Division 5) (paragraph (d)).

Section 160ZA : Reductions of capital gains in certain circumstances

Section 160ZA contains provisions which allow for the reduction, in certain circumstances, of a capital gain accruing to a taxpayer. Sub-section 160ZA(1) requires a reduction of an accrued capital gain where that gain is incurred in respect of the disposal of rental properties to which the proposed negative gearing measures in relation to rental property investments apply and there is an amount of excess rental property loan interest. (Those measures are contained in the Taxation Laws Amendment Bill 1986).

Sub-section 160ZA(1) applies so that where a capital gain is deemed to have accrued to a taxpayer during a year of income in respect of the disposal of a prescribed asset (as defined in sub-section 160ZA(2)) and an amount of excess rental property loan interest was incurred by the taxpayer in respect of the year of income, the amount of the relevant capital gain is to be reduced by so much of the amount of excess rental property loan interest as does not exceed the amount of the capital gain.

"Prescribed asset" in relation to a taxpayer in relation to a year of income is defined in paragraph 160ZA(2)(a) to mean -

•

an interest in land that was used by the taxpayer at any time for rent-producing purposes (sub-paragraph (a)(i));

•

a share in a company that is a rental property company (sub-paragraph (a)(ii));

•

an interest in a partnership that is a rental property partnership (sub-paragraph (a)(iii)); and

•

an interest in a trust estate that is a rental property trust estate (sub-paragraph (a)(iv)).

Sub-sub-paragraph (A) of each of sub-paragraphs (ii), (iii) and (iv) allows the paragraph to apply to a disposal of a relevant interest if the company, partnership or trust estate, as the case requires, was a rental property company, etc., in the year of income in which the disposal occurs. Sub-sub-paragraph (B) of each of those sub-paragraphs allows the paragraph to apply if the company, etc., was a rental property company, etc., in an earlier year when the taxpayer - at some time in that year - held the interest referred to in the relevant sub-paragraph.

The effect of paragraph 160ZA(2)(b) is that a taxpayer will be taken to have incurred an amount of excess rental property loan interest where an amount of rental property interest has been denied as a deduction under section 51 by the operation of section 82KZD - proposed to be inserted by the Taxation Laws Amendment Bill 1986.

The expressions used in sub-sections (1) and (2) have the same meaning as in Subdivision G of Division 3 of Part III which will be inserted by the Taxation Laws Amendment Bill 1986. This is provided in sub-section 160ZA(3).

A capital gain is also to be reduced in the circumstances outlined in sub-section 160ZA(4).

Broadly stated, where an amount of a capital gain that has accrued to a taxpayer in respect of the disposal of an asset and an amount included in respect of the disposal by virtue of the operation of another provision of the Principal Act (e.g., section 25) relate to the same profit or gain, sub-section 160ZA(4) operates to provide for the reduction of the capital gain. The capital gain is to be reduced by so much of the difference between the "notional" and "actual" amounts (referred to in paragraphs (4)(b) and (c)) as does not exceed the amount of the capital gain.

The "actual amount" is the amount that has been or will be included in the assessable income of the taxpayer otherwise than under Part IIIA in respect of any year of income as a result of the disposal of the asset. The "notional amount" is the amount that would have been so included in the assessable income if the consideration received in respect of the disposal had been reduced by an amount equal to the capital gain.

Sub-section 160ZA(4) will apply, for example, to a taxpayer who disposes of land and building where the profit on disposal is included under section 25 of the Principal Act. If the consideration in respect of the disposal were reduced by the amount of the capital gain (as required by paragraph (4)(c)), generally the amount that would be included in assessable income of the taxpayer under section 25 would also be reduced by the amount of the capital gain. Accordingly, the "notional amount" would be less than the "actual amount" by the amount of the capital gain, resulting in the capital gain being reduced to nil. Therefore, the same amount of profit is not taxed more than once.

In the case of the disposal of depreciable property sub-section 59(2) of the Principal Act operates to include, in assessable income by way of a balancing adjustment, the excess of the consideration received over the depreciable value to the extent of the sum of the deductions allowed in respect of the depreciation of the property. A capital gain will accrue on the disposal of depreciable property where the consideration received exceeds the indexed cost base of the asset. Where depreciable property is disposed of for an amount exceeding its indexed cost base, the amount that is included in assessable income under sub-section 59(2) (the "actual amount") will equal the amount that would have been included if the consideration had been reduced by the amount of the gain (the "notional amount"). Section 160ZA(4) will therefore not operate to reduce the amount of the gain.

Section 160ZB : Exemption of certain gains and losses

Section 160ZB confers statutory exemption from capital gains tax on specific forms of capital receipts which might otherwise be included in a taxpayer's assessable income under proposed Part IIIA. Correspondingly, where the exemption extends to a capital receipt within the scope of the section a deduction for a capital loss of a corresponding kind will not be available to a taxpayer.

Sub-section 160ZB(1) refers to compensation or damages awarded for any wrong or injury suffered by a taxpayer to his or her person or in his or her vocation. Under the sub-section such a wrong or injury, or proceeding instituted or other act done or transaction entered into by the taxpayer in respect of such wrong or injury will not be taken to have resulted in the taxpayer having incurred a capital loss. Within this category are damages for personal injuries or for libel, slander or defamation, and insurance monies under personal accident policies.

Sub-section 160ZB(2) exempts windfall gains received by a taxpayer from winnings from betting (including pool betting), a lottery or any other form of gambling or a game with prizes but does not extend to consideration received by a taxpayer from a subsequent disposal of an asset acquired in those circumstances e.g., the proceeds of sale of a home (not being a principal private residence) won in an act union. In that case the taxpayer would be taken to have acquired the home at its market value, and a capital gain would accrue if it was disposed of for more than its indexed cost base.

Sub-section 160ZB(3) is complementary to sub-section (2) and operates to deny a capital loss to a taxpayer as a result of any act done or transaction entered into by the taxpayer by way of betting (including pool betting) or participating in a lottery or other form of gambling or a game with prizes. Its purpose is to deny capital losses for expenditure on unsuccessful wagers, lottery tickets, etc.

Section 160ZC : Net capital gains and net capital losses

Section 160ZC contains rules for determining whether a net capital gain accrued to, or a net capital loss was incurred by a taxpayer, in respect of a year of income. Under proposed section 160ZO a net capital gain is included in a taxpayer's assessable income, while a net capital loss may be offset against capital gains.

Where a capital gain or gains accrued to a taxpayer in a year of income, a net capital gain will be deemed by sub-section (1) to have accrued to the taxpayer in either of two cases. First, paragraph (a) cites the situation where a taxpayer did not incur a capital loss during the year of income and did not have a net capital loss in respect of the year immediately preceding the year of income.

Paragraph (b) refers alternatively to the situation where a taxpayer incurred a capital loss or capital losses during a year of income or incurred a net capital loss in respect of the immediately preceding year of income. In such a case a net capital gain will be taken to accrue to the taxpayer in the year of income if the capital gain or the sum of the capital gains exceeded -

•

if the taxpayer incurred a capital loss or capital losses during the year of income hut did not incur a net capital loss in respect of the immediately preceding year of income - that capital loss or the sum of those capital losses (sub-paragraph (b)(i));

•

if the taxpayer did not incur a capital loss during the year of income but incurred a net capital loss in respect of the immediately preceding year of income - that net capital loss (sub-paragraph (b)(ii)); or

•

if the taxpayer incurred a capital loss or capital losses during the year of income and incurred a net capital loss in respect of the immediately preceding year of income - the sum of that capital loss or those capital losses and that net capital loss (sub-paragraph (b)(iii)).

Sub-section 160ZC(2), in conjunction with sub-section (1), determines the amount of net capital gain that is to be taken to have accrued to a taxpayer in respect of a year of income. The net capital gain that is taken to have accrued to a taxpayer in a year of income is the amount equal to -

•

in a case to which paragraph (1)(a) applies - the capital gain or the sum of the capital gains referred to in sub-section (1) (paragraph (2)(a)); or

•

in a case to which paragraph (1)(b) applies - the excess referred to in that paragraph (paragraph (2)(b)).

Sub-section 160ZC(3) is similar to sub-section (1) and sets out the circumstances where a net capital loss is to be taken to have been incurred by a taxpayer in a year of income. Paragraphs (a) and (b) contain the conditions to be met in order for the sub-section to apply.

Paragraph (a) applies where no capital gain accrued to a taxpayer during a year of income and deems a net capital loss to have been incurred if a capital loss or capital losses were incurred during the year of income or a net capital loss was incurred in respect of the immediately preceding year of income.

Paragraph (b) applies to determine whether a net capital loss has been incurred by a taxpayer during a year of income if a capital gain or capital gains accrued to the taxpayer during the year of income. A net capital loss will be taken to have been incurred -

•

if the taxpayer incurred a capital loss or capital losses during the year of income but did not incur a net capital loss in respect of the immediately preceding year of income - that capital loss or the sum of those capital losses (sub-paragraph (b)(i);

•

if the taxpayer did not incur a capital loss during the year of income but incurred a net capital loss in respect of the immediately preceding year of income - the amount of that net capital loss (sub-paragraph (b)(ii)); or

•

if the taxpayer incurred a capital loss or capital losses during the year of income and incurred a net capital loss in the immediately preceding year of income - the sum of that capital loss or those capital losses and that net capital loss (sub-paragraph (b)(iii)),

exceeded the capital gain or the sum of the capital gains that accrued to the taxpayer during the year of income.

Sub-section 160ZC(4) in conjunction with sub-section (3), determines the amount of net capital loss to have been incurred by a taxpayer during a year of income in situations where the conditions in paragraph (3)(a) or (3)(b) apply.

By virtue of paragraph (4)(a) the amount of net capital loss in a case to which paragraph (3)(a) applies is deemed to be an amount equal to -

•

if the taxpayer incurred a capital loss or capital losses during the year of income but did not incur a net capital loss in respect of the immediately preceding year of income - that capital loss or the sum of those capital losses (sub-paragraph (a)(i)) ;

•

if the taxpayer did not incur a capital loss during the year of income but incurred a net capital loss in respect of the immediately preceding year of income - that net capital loss (sub-paragraph (a)(ii)); or

•

if the taxpayer incurred a capital loss or capital losses during the year of income and incurred a net capital loss in respect of the immediately preceding year of income - the sum of that capital loss or those capital losses and that net capital loss (sub-paragraph (a)(iii)).

Paragraph (4)(b) addresses the situation where paragraph (3)(b) applies. The amount of net capital loss that is deemed to have been incurred by a taxpayer in that case is the excess referred to in paragraph 160ZC(3)(b).

Sub-section 160ZC(5) is a safeguarding measure related to the operation of sections 80A and 80DA of the Principal Act. In broad terms the sub-section operates to prevent a capital loss that was incurred by a taxpayer company in a year of income from being taken into account in certain cases in ascertaining whether or not a capital gain accrued to a taxpayer, or whether the taxpayer incurred a net capital loss in the next succeeding year of income. These are cases where if the net capital loss had been a loss incurred by the taxpayer within the meaning of the general loss provisions of section 80, the loss would not have been allowable in determining a deduction for carry-forward losses by reason of the operation of section 80A or 80DA.

Briefly, section 80A, which is subject to section 80E, places restrictions on the allowance to a company of a deduction for a past year loss by requiring that shares carrying more than 50 per cent of all voting, dividend and capital rights be beneficially owned at all times during the subsequent (recoupment) year by the same person or by persons who individually or collectively held shares carrying similar rights during the loss year. Section 80DA prevents a company from claiming a deduction for a past year loss where the continuity of ownership test in section 80A is satisfied but the benefits from the allowance of a deduction would be conferred, wholly or mainly, on persons who were not shareholders in the company during the year or years in which the losses were incurred.

Section 160ZD : Consideration in respect of disposal

Section 160ZD, subject to Part IIIA, is proposed as a general provision governing the meaning of the expression "consideration in respect of a disposal" of an asset. Generally, a capital gain is to be ascertained by reference to the cost (indexed tor inflation) of an asset. The consideration will be taken to be what is paid for the asset unless special circumstances apply to affect the amount (if any) paid.

Under sub-section 160ZD(1) the expression "consideration in respect of the disposal" of an asset means:

•

if the taxpayer has received or is entitled to receive an amount or amounts of money as a result of or in respect of the disposal - that amount or the sum of those amounts (paragraph (a));

•

if the taxpayer has received or is entitled to receive property other than money as a result of or in respect of the disposal - the market value of the property at the time of the disposal (paragraph (b)); or

•

if the taxpayer has received or is entitled to receive both an amount or amounts of money and property other than money as a result of or in respect of the disposal - the sum of that amount or those amounts of money and the market value of the property at the time of the disposal (paragraph (c)).

Sub-section 160ZD(2) sets out the exceptions to the general rule in sub-section (1) and deems the consideration in respect of the disposal of an asset to be the market value of the asset at the time of disposal. The general rule in sub-section (1) will be substituted for in this way where the taxpayer has disposed of an asset to another person and -

•

there is no consideration in respect of the disposal (paragraph (a));

•

the whole or a part of the consideration received by a taxpayer in respect of the disposal cannot be valued (paragraph (b)); or

•

the consideration received by the taxpayer in respect of the disposal would, but for this paragraph, be greater or less than the market value of the asset at the time of the disposal and the taxpayer and the other person were not dealing with each other at arm's length in connection with the disposal of the asset (paragraph (c)).

Sub-section 160ZD(3) overrides the operation of paragraph 160ZD(2)(a) where another provision of this Part deems no consideration to have been received in respect of the disposal.

Sub-section 160ZD(4) operates where any consideration paid or given in respect of a transaction relates in part to the disposal of a particular asset and allows so much of the consideration to be allocated to the asset as is reasonably attributable to the disposal of the asset. This facilitates the determination of any gain or loss made on the disposal of the asset.

Sub-section 160ZD(5) is a safeguarding measure designed to prevent a taxpayer from obtaining the benefit of what is in essence a loss on the disposal of a personal-use asset (including a listed personal-use asset) by having the asset held by a company, a partnership or trust and disposing of the shares in the company or a related company (a term defined in section 160G) or an interest in the partnership or the trust for a smaller capital gain or a greater capital loss than would otherwise have been the case. In short, the tax position of a taxpayer is to be restored to what it would have been had it not been for the decline in the value of the underlying personal-use asset. In terms of sub-section (5), where:

•

the market value of a personal-use asset that is owned by a company or is the property of a partnership or of a trust has fallen (paragraph (a));

•

a disposal takes place of the shares in the company or a related company (a defined term) or, of an interest in the partnership or in the trust (paragraph (b)); and

•

the amount that, under the preceding provisions of section 160ZD, would be the consideration in respect of the disposal is less than the amount (referred to as the "notional amount") that, but for the decrease, would, under those provisions, be that consideration (paragraph (c)),

the consideration in respect of the disposal will be deemed to be the notional amount.

Section 160ZE : Consideration in respect of disposal of non-listed personal-use assets

Section 160ZE contains rules to simplify the administration of the capital gains tax by exempting gains on the disposal of non-listed personal-use assets where the consideration in respect of the disposal is less than $5,000. This section should be read in con junction with the notes on section 160ZG regarding the statutory $5,000 cost base to apply to a non-Iisted personal-use asset .

Sub-section 160ZE(1), which is subject to sub-section (2), deems the consideration received in respect of the disposal of a non-listed personal-use asset to be $5,000 if the consideration for the disposal is less that $5,000.

The broad effect of sub-section 160ZE(2) is to prevent a taxpayer from taking advantage of the $5,000 threshold for the disposal of an asset by disposing of parts of an asset separately for amounts of less that $5,000 when the asset would ordinarily be disposed of as a whole for more than $5,000. Where an asset that formed part of a non-listed personal-use asset (the "original asset") is disposed of the consideration in respect of the disposal of the relevant asset is deemed to be the greater of:

•

the amount that would, but for this section, be the consideration in respect of the disposal (paragraph (a));

•

the amount that bears to $5,000, the same proportion as the amount that would, but for section 160ZG, (see notes on that section) be the indexed cost base to the taxpayer of the relevant asset bears to the amount that would, but for that section, have been the indexed cost base to the taxpayer of the original asset if the whole of the original asset had been disposed of at the time of disposal of the relevant asset (paragraph (b)).

Section 160ZF : Adjustment where consideration not received

Section 160ZF addresses the situation where the whole or part of the consideration in respect of the disposal of an asset has not been received and is not likely to be received by a taxpayer.

Sub-section 160ZF(1) which is subject to sub-section (3), is the operative provision which applies where the whole or a part of the consideration in respect of the disposal of an asset has not been, and is not likely to be, received by a taxpayer. Where this is the case this Part (other than sub-section 160ZD(2)) applies as if there were no consideration in respect of the disposal or the consideration in respect of the disposal did not include that part of the consideration, as the case may be, and the debt that arose in relation to or by reason of the disposal is deemed not to be an asset to which this Part applies.

In these circumstances, sub-section (4) will allow for the amendment of the assessment for the year of income in which the disposal occurred, to provide for an adjustment to the capital gain or capital loss as originally determined, based on the result that would have been achieved if no consideration were received or if the consideration received were the amount finally received.

Sub-section 160ZF(2) limits the operation of sub-section (1) in circumstances where the non-receipt or the likely non-receipt of the whole or part of the consideration is attributable to an act or thing done or omitted to be done by the taxpayer or an associate (a term defined in section 160E) of the taxpayer or where the taxpayer has not taken all reasonable steps to secure payment of the consideration or the unpaid part of the consideration. Sub-section (2) is thus confined to circumstances where a taxpayer has not exhausted avenues available to him or her to secure recovery of the amount outstanding.

Sub-section 160ZF(3) applies where the Commissioner of Taxation has made an assessment for the purposes of which sub-section (1) has applied and the consideration or part of the consideration in respect of the disposal of an asset is subsequently received by a taxpayer. It allows sub-section (1) to be treated as not to have been applicable or not to have applied in relation to that part of the consideration.

Sub-section 160ZF(4) referred to earlier, authorises the re-opening of an assessment at any time, without the limitations usually applying to the making of amended assessments under section 170 of the Principal Act, to increase or decrease liability where this is necessary for the purpose of giving effect to section 160ZF.

Section 160ZG : Cost base etc., of non-listed personal-use assets

Section 160ZG contains rules for the phasing-in of the threshold for non-listed personal-use assets where the consideration in respect of the disposal is $5,000 or more, by reference to either the actual indexed cost base or a deemed minimum indexed cost base of $5,000, whichever is the greater. The section also contains safeguarding measures to prevent the exploitation of the statutory $5,000 base by disposing of an asset in separate pieces where the asset would ordinarily be disposed of as a whole.

Sub-section 160ZG(1), which is subject to sub-section (2), deems the indexed cost base to a taxpayer of a non-listed personal-use asset to be $5000 if the actual indexed cost base is less than that amount. Examples of how this $5000 minimum applies in calculating a gain on the disposal of a non-listed personal-use asset are as below:

Sub-section 160ZG(2) is a safeguarding measure which operates to pro-rate the $5000 minimum indexed cost base where a taxpayer disposes of an asset (referred to as the "relevant asset") that formed part of another non-listed personal-use asset (referred to as the "original asset"). Where this occurs sub-section (1) does not apply and the indexed cost base to the taxpayer of the relevant asset is deemed to be the greater of:

•

the actual indexed cost base to the taxpayer of the relevant asset (paragraph (a)); or

•

the amount that bears to $5000 the same proportion as the amount ascertained under paragraph 160ZG(2)(a) bears to the amount that would, but for this section, have been the indexed cost base to the taxpayer of the original asset if the whole of the original asset had been disposed of at the time of disposal of the relevant asset (paragraph (b)).

Sub-sections 160ZG(3) and (4) operate in a similar manner to sub-sections (1) and (2) to attribute a $5000 minimum cost base (rather than an indexed cost base) or part thereof to a non-listed personal-use asset which is disposed of within 12 months of acquisition and is otherwise outside the scope of section 26AAA of the Principal Act.

Section 160ZH : Cost base, etc.

Proposed new sub-sections 160ZH(1) and (2) specify what will constitute the cost base and indexed cost base to a taxpayer of an asset for tax on capital gains purposes. By virtue of sub-section 160ZH(1) the cost base is the sum of -

•

the amount of any consideration in respect of the acquisition of the asset (paragraph (a)) - the meaning of the phrase "consideration in respect of the acquisition of the asset" is effectively defined by sub-section 160ZH(4);

•

the incidental costs to the taxpayer of the acquisition (paragraph (b)) - this phrase is defined in sub-section 160ZH(5) to include certain specified items of expenditure;

•

the amount of any expenditure of a capital nature incurred by a taxpayer to the extent only to which it was incurred for the purpose of enhancing the value of the asset and is reflected in the state or nature of the asset at the time of disposal (paragraph (c));

•

the amount of any expenditure of a capital nature incurred by the taxpayer to the extent to which it was incurred in establishing, preserving or defending the taxpayer's title to, or a right over the asset (paragraph (d)) - under this paragraph, legal costs incurred in establishing title to an asset which had been inherited by the taxpayer would fall within the cost base of the asset; and

•

the amount of the incidental costs to the taxpayer of the disposal of the asset, as defined in sub-section (7) (paragraph (e)).

An example of the type of expenditure which may be included in the cost base to a taxpayer of an asset under paragraph (c) would be expenditure incurred on the extension of a building. Generally, expenditure on rates, interest and repairs will not fall within the cost base of the asset as these items of expenditure may be classed as expenses of a revenue nature and not of a capital nature.

Note that expenditure incurred in enhancing the value of the asset must be reflected in the state or nature of the asset at the time of disposal. For example, if a carport is erected adjacent to an income-producing property but at a later stage is dismantled and a garage erected, the expenditure incurred in erecting the carport would be disregarded in calculating the cost base of the property as it is no longer reflected in the state or nature of the asset.

Similarly, paragraph (c) is designed to exclude from the cost base any expenditure incurred for the purpose of enhancing the value of the asset by way of improvements which have wasted away prior to disposal.

Sub-section 160ZH(2) defines, for the purposes of new Part IIIA, the "indexed cost base" to a taxpayer of an asset. Briefly, the indexed cost base is the sum of the indexed amounts of the consideration, costs and expenditure specified as constituting the cost base in sub-section 160ZH(1).

The reference to the "indexed amount" is a reference to the amount which is ascertained by applying to the various amounts the indexation factor determined in accordance with the provisions of sub-sections 160ZJ(4) and (5). The operation of these sub-sections is discussed in detail later in these notes.

Sub-section 160ZH(3) defines, for the purposes of new Part IIIA, the "reduced cost base" to a taxpayer of an asset. Briefly, the reduced cost base is the sum of the reduced amounts of the consideration, costs and expenditure specified as constituting the cost base in sub-section 160ZH(1). Sub-section 160ZH(3) describes the components of the reduced cost base of an asset. They are:

(a)

the reduced amount (see below) of any consideration paid to acquire the asset;

(b)

the reduced amount of the incidental costs of acquisition;

(c)

the reduced amount of any expenditure of a capital nature which improved the value of the asset;

(d)

the reduced amount of any expenditure of a capital nature which secures the taxpayer's ownership of the asset; and

(e)

the reduced amount of the incidental costs to the taxpayer of the disposal of the asset.

The "reduced amount" in each of the categories above is explained in section 160ZK which, briefly, states that the reduced amount is the amount of the consideration, costs or expenditure, less any part thereof which has been, or will be, allowed as a deduction for income tax purposes.

Sub-section 160ZH(4) clarifies and extends the meaning of the expression "consideration in respect of the acquisition of an asset" for the purposes of the new Part. By virtue of paragraph 160ZH(4)(a), where a taxpayer has paid an amount of money or is required to pay an amount of money in respect of the acquisition, the consideration in respect of the acquisition of the asset is that amount or the sum of those amounts. An example of a requirement to pay an amount of money in respect of the acquisition of an asset would be where a share is acquired partly paid up and calls on that share are subsequently paid. The sum of the amounts paid on initial acquisition of the share and on the calls would be consideration in respect of the acquisition of the share.

In cases where a taxpayer has given property other than money or is required to give property other than money in respect of the acquisition of an asset, paragraph 160ZH(4)(b) declares that the consideration in respect of the acquisition is the market value of the property, or the sum of the market values of each item of property given. Finally, where a taxpayer has given or is required to give an amount or amounts of money and property other than money in respect of the acquisition, paragraph 160ZH(4)(c) states that the consideration in respect of the acquisition is the sum of those amounts and the market value of the property or the sum of the market value of each item of property given.

Sub-section 160ZH(5) clarifies, subject to sub-section (6) the meaning of the expression "incidental costs to a taxpayer of the acquisition of an asset" used in sub-sections (1), (2) and (3). Such costs are:

•

fees, commission or remuneration for the professional services of a surveyor, valuer, auctioneer, accountant, broker, agent, consultant or legal adviser;

•

costs of transfer, including stamp duty or similar duty;

•

costs of advertising to find a seller; or

•

costs in relation to the making of any valuation or apportionment under or for the purposes of this Part.

However, the incidental costs will not include any expenditure by way of fees, commission or remuneration paid for professional advice concerning the operation of this Act or of any law relating to taxation.

By sub-section 160ZH(6), any of the incidental costs which would have been allowed as deductions in any year of income are not to form part of the cost base of an asset.

Sub-sections 160ZH(7) and (8) define the incidental costs to a taxpayer of the disposal of an asset for the purposes of sub-sections 160ZH(1), (2) and (3). Sub-sections 160ZH(7) and (8) are expressed in substantially the same terms as sub-sections 160ZH(5) and (6) except that they refer to the costs of disposal rather than the costs of acquisition.

Sub-section 160ZH(9) operates as a safeguarding provision by deeming a taxpayer in certain circumstances to have paid or given consideration in respect of the acquisition of an asset an amount equal to the market value of the asset at the time of acquisition. This provision operates where a taxpayer acquired the asset from another person and did not pay or give any consideration in respect of the acquisition of the asset (paragraph (a)), the whole or any part of the consideration given by a taxpayer in respect of the acquisition of the asset cannot be valued (paragraph (b)) or, under paragraph (c), the consideration paid or given by a taxpayer in respect of the acquisition would be greater or less than the market value of the asset at the time of acquisition, and the taxpayer and the other person were not dealing with each other at arm's length.

Sub-section 160ZH(10) states that sub-section 160ZH(9) does not apply where another provision of Part IIIA deems no consideration to have been paid or given in respect of the acquisition.

Sub-section 160ZH(11) operates to exclude from the cost base or indexed cost base to a taxpayer of an asset the amount of consideration in respect of the acquisition of an asset, and the amount of any other expenditure, in respect of which the taxpayer has been recouped or is entitled to be recouped by any person.

Sub-section 160ZH(12) deals with situations where there is no change in the beneficial ownership of assets which are subject to any of the following events -

•

two or more assets are merged;

•

an asset is divided into two or more smaller assets;

•

an asset is wholly changed into an asset of a different nature; or

•

an asset is changed in part into an asset of a different nature.

If any of the value of the asset after the change (referred to as the "relevant asset") is attributable to an asset as it previously existed (referred to as the original asset) then sub-sections 160ZH(13) and (14) will apply.

Sub-section 160ZH(13) allows the cost base, indexed cost base or reduced cost base of the relevant asset at the time of its disposal to include, to the extent reasonable, the cost base, indexed cost base or reduced cost base of the original asset. This amount is calculated as Part IIIA would have applied if there had been a disposal of the original asset at the time when the particular event as mentioned in sub-section 160ZH(12) occurred. An example of the operation of this sub-section would be where a block of flats was owned by a taxpayer on one title and the taxpayer subsequently obtains strata titles in respect of each flat . The indexed cost base (or cost base, or reduced cost base, as the case may be) of each flat would then be a proportionate share of the indexed cost base of the original asset at the time when the original asset was divided.

Where an original asset continues in existence after the occurrence of one of the events mentioned in sub-section 160ZH(12) and is later sold, sub-section 160ZH(14) will apply. The cost base, indexed cost base or reduced cost base of the original asset will be calculated as if that event had not occurred. The amount so calculated is then to be reduced by any amount which has been transferred by sub-section 160ZH(13) to the relevant asset (where the relevant asset has been sold) or the amount which would have been transferred to the relevant asset if it had been sold immediately prior to the sale of the original asset. An example is where a taxpayer owns a house and adjacent land on the same title. If the taxpayer subsequently obtains a separate title to some of the adjacent land, the cost base (or indexed cost base, or reduced cost base, as the case may be) of the house and the land on which it is situated will be reduced by the proportionate amount of that cost base attributed to the adjacent land for which the separate title was obtained.

Section 160ZI : Apportionment of cost base upon disposal of part of asset

As explained earlier in these notes, section 160R specifies that references in Part IIIA to the disposal of an asset include references to a disposal of part of an asset.

New sub-section 160ZI(1) provides for an apportionment of each amount constituting the cost base, indexed cost base or reduced cost base to a taxpayer of an asset in circumstances where there is such a disposal of part of the asset.

The relevant proportion of the amount constituting the cost base, indexed cost base or reduced cost base to a taxpayer which is to be attributed to the property disposed of is specified in paragraph 160ZI(1)(a). The relevant proportion is that which the amount of consideration in respect of the disposal bears to the sum of the amount of that consideration and the market value of the property retained. The remainder of the cost base is to be attributed to the property that is not disposed of (paragraph (b)).

This basis of apportionment of the amount attributable to the asset does not apply where the amount is in fact wholly attributable either to the property disposed of or to the property that is retained (sub-section 160Z1(2)).

Section 160ZJ : Indexation of amounts for purposes of indexed cost base

Section 160ZJ provides for the indexation of those amounts to be included in the indexed cost base to a taxpayer of an asset.

For the purposes of new section 160ZJ, sub-section (1) defines "index number" in relation to a quarter as the All Groups Consumer Price Index number, being the weighted average of the 8 capital cities, published by the Australian Statistician in respect of that quarter.

Sub-section (2) provides that if the Australian Statistician has published or publishes before or after the commencement of the Part an index number in respect of a quarter in substitution for an index number previously published, the publication of the later index number is to be disregarded, subject to sub-section (3).

Sub-section (3) will apply if the Australian Statistician changes the reference base for the Consumer Price Index. For the purposes of the application of section 160ZJ only the index numbers published in terms of the new reference base will be taken into account after the change takes place.

Sub-sections (4) and (5) contain the operative provisions of section 160ZJ.

Sub-section (4) declares that the references in sub-section 160ZH(2) to the indexed amounts of the consideration, costs or expenditure are references to the amounts of consideration, costs and expenditure multiplied by the factor determined in accordance with the provisions of sub-sections 160ZJ(5) and (6).

This factor is the number (calculated to 3 decimal places) ascertained by dividing the index number in respect of the quarter of the year in which the asset was disposed of by the index number in respect of the quarter of the year in which the liability to pay or give the consideration arose or the costs or expenditure were incurred.

Sub-section 160ZJ(6) provides that the indexation factor is to be rounded to the nearest third decimal place.

Section 160ZK : Reduction of amounts for purposes of reduced cost base

Sub-section 160ZK(1) gives an explanation of the terms "reduced amount of any consideration", "reduced amount of incidental costs" and "reduced amount of any expenditure". When these reduced amounts are mentioned the amount concerned is to be calculated by adding together two amounts, these being -

(a)

the consideration, costs or expenditure as reduced by any part of the consideration, costs or expenditure which has been allowed or is allowable or would but for section 61 of the Principal Act (where an asset on which depreciation is allowable is used only partly for the purpose of producing assessable income) be allowable as a deduction in any year; and

(b)

any amount attributable to consideration, costs or expenditure that was allowed or is allowable as a deduction, which, by virtue of another section of the Principal Act, is to be added back into the assessable income upon disposal of the asset.

Sub-section 160ZK(2) provides that a reference in paragraph (1)(b) to an amount that is included in the assessable income of the taxpayer also includes a reference to an amount that is deemed by virtue of sub-section 60(1A) of the Principal Act to be included for the purposes of sub-section 60(1).

Section 160ZL : Return of capital on shares

Sub-section 160ZL(1) states that the section will apply for the purposes of Part IIIA where a company pays an amount that is not a dividend to a taxpayer in respect of shares in the company, and the payment is not in respect of the disposal of the shares. For example, a partial return of capital.

Sub-section 160ZL(2) applies, subject to sub-section (4) where the indexed cost base to the taxpayer of the shares (if the shares had been disposed of at the time of that payment) would have exceeded the amount of that payment and deems the taxpayer to have disposed of the shares at that time for a consideration equal to the amount of their indexed cost base. The taxpayer is then deemed to have immediately re-acquired the shares. In determining whether a capital gain has accrued to the taxpayer on the subsequent disposal of those shares, the consideration on the re-acquisition of the shares is deemed by paragraph (a) to be the amount by which the indexed cost base of the shares exceeded the amount of the payment made in respect of the shares. Paragraph (b) applies to determine whether a capital loss is incurred by the taxpayer on the subsequent disposal of those shares. The consideration on the re-acquisition of the shares is deemed, for these purposes, to be either:

•

the amount by which what would have been the reduced cost base to the taxpayer in respect of the shares if they had been disposed of at the time of the payment exceeded the amount of the payment (sub-paragraph (b)(i)); or

•

nil, where what would have been the reduced cost base to the taxpayer in respect of the shares as above did not exceed the amount of the payment (sub-paragraph (b)(ii)).

Sub-section 160ZL(3) applies where the indexed cost base to the taxpayer of the shares would not have exceeded the amount of the payment. The sub-section deems the taxpayer to have disposed of the shares for a consideration equal to that indexed cost base and to have immediately re-acquired the shares for a nil consideration (paragraph (a)). Where the amount of the payment exceeds the amount of the indexed cost base, a capital gain equal to the excess is deemed to accrue to the taxpayer at the time of the payment (paragraph (b)).

Sub-section 160ZL(4) applies to a payment made within 12 months after the shares were acquired by the taxpayer, and affects the operation of sub-sections (2) and (3) by deeming references to the "indexed cost base" to be references to the cost base.

Section 160ZM : Return of capital on investment in trust

Section 160ZM applies where the trustee of a trust pays an amount to a taxpayer that is not assessable income of the taxpayer in respect of an interest or units in the trust, otherwise than as proceeds of disposal of the interest or unit.

The section is expressed in substantially the same terms as section 160ZL except that section 160ZL applies to shares in a company. Otherwise, the operation of the two sections is identical and the notes on section 160ZL may be referred to in relation to the operation of section 160ZM.

Section 160ZN : Application to joint owners

Section 160ZN applies where an asset is owned by persons as joint tenants.

Paragraph 160ZN(1)(a) states that, in this situation, Part IIIA will apply as if the asset was owned by those persons as tenants-in-common in equal shares.

Paragraphs (b), (c) and (d) apply where one of the joint tenants dies. By paragraph (b), the interest in the asset of the deceased person will be deemed to be acquired by the surviving joint tenant or tenants at the date of that person's death.

In determining whether a capital gain has accrued to a survivor where the interest acquired on the death of that person is disposed of, the interest is deemed by sub-paragraph (c)(i) to have been acquired by the survivor for a consideration equal to the amount that would have been the indexed cost base to the deceased person under Part IIIA of the interest in the asset if he or she had disposed of it immediately before death.

In determining whether a capital loss is incurred by a survivor on the disposal of an interest in an asset acquired on the death of a joint tenant, that interest is deemed to have been acquired for a consideration equal to the amount that would have been the reduced cost base to the deceased under Part IIIA of the interest in the asset if it had been disposed of by the deceased immediately before death (sub-paragraph (c)(ii)).

However, in determining whether a capital gain has accrued under sub-paragraph (c)(i) where the interest acquired is sold by the survivor within twelve months of the date of acquisition of the interest by the deceased person, the capital gain is calculated by reference to the cost base rather than the indexed cost base of the deceased person (paragraph (d)).

Sub-section 160ZN(2) specifies that unless a contrary intention appears, where an asset is owned by two or more persons in the capacity of trustees of the one trust estate, Part IIIA applies as if those persons were a single person.

DIVISION 4 - TREATMENT OF GAINS AND LOSSES

Section 160ZO : Treatment of net capital gains and net capital losses

Sub-section 160ZO(1) requires a net capital gain realised by a taxpayer in any year to be included in the taxpayer's assessable income of that year. Section 160ZC determines whether there is a net capital gain in relation to the taxpayer in a year of income (see earlier notes on that section).

Sub-section 160ZO(2) permits a net capital loss incurred by a taxpayer in respect of a year of income to be taken into account in accordance with section 160ZC but not otherwise to be allowable as a deduction under the Principal Act. Section 160ZC deals with the computation of net capital gains and net capital losses and allows a capital loss incurred in the year of income or carried forward from a previous year of income to be offset against a capital gain realised in the year of income. Any net capital loss unabsorbed is carried forward, without limit as to time, until offset against capital gains.

Section 160ZP : Transfer of net capital losses within company group

Section 160ZP adopts the principles of the company group loss transfer provisions of section 80G of the Principal Act to allow a group company to transfer to one or more other companies in the group all or part of a net capital loss incurred.

Sub-section (1) of new section 160ZP specifies two tests, either of which must be satisfied if, in relation to a year of income, a loss is to be transferable between two companies. These tests are that, throughout the year of income, one of the companies was a subsidiary of the other company (paragraph (a)) or each of the companies was a subsidiary of the same parent (paragraph (b)).

The relevant test must be satisfied during the whole of the year of income or, if either or both of the companies was not or were not in existence for part of the year it must be satisfied during that part of the year in which both companies were in existence. For these purposes, by virtue of sub-section (6), a company is to be treated as coming into existence during a year if it was incorporated during the year. The provisions will not extend to an existing company that is acquired or disposed of by the company group concerned during the year.

Where a company has adopted a substituted accounting period for income tax purposes, the "common ownership" test must be met throughout the whole of the period covering that accounting period and, if it is not identical, the corresponding year of income of the related company.

Sub-section 160ZP(2) specifies the circumstances in which a company is to be taken to be a subsidiary of another company (termed the "holding company") for the purposes of section 160ZP during the whole or a part of a year of income (the "relevant period") as required to satisfy sub-section (1). Under sub-paragraph (2)(a)(i) this relationship is established if all the shares in the subsidiary company were beneficially owned by the holding company at all times during the relevant period. Sub-paragraph (a)(ii) establishes the relationship if all the shares in the subsidiary company were beneficially owned during the relevant period by a company that is, or by two or more companies each of which is, a subsidiary of the holding company. By sub-paragraph (a)(iii) the necessary relationship will also exist if all the shares in the subsidiary company were owned during the relevant period by the holding company and by a company that is, or two or more companies each of which is, a subsidiary of the holding company.

Paragraph (2)(b) imposes the further requirement that during the relevant period no person was in a position, or would become in a position after the relevant period, to affect rights of the holding company, or of another subsidiary of the holding company in relation to the particular subsidiary company. This is a safeguard against the possibility of any collateral arrangement being used to circumvent the intended operation of the provisions.

Sub-section 160ZP(3) extends the operation of sub-sections (1) and (2) by establishing a qualifying group relationship between companies which are part of a wholly-owned chain of subsidiaries of a holding company. Thus, in a corporate structure under which all of the shares in a subsidiary are owned by one or more wholly-owned companies that are interposed between a holding company and the end subsidiary company, a qualifying group relationship will be found between each of those companies.

Sub-section 160ZP(4) qualifies sub-section (2). It specifies for the purposes of paragraph (2)(b) the circumstances in which a person is to be regarded as being in a position at a particular time to affect the rights of one company in relation to another company. A person will be in that position if he or she has at the particular time a right, power, or option (whether by virtue of any provision in the constituent document of either of the companies, or by virtue of any agreement or otherwise) to acquire any of the rights of the first company in its subsidiary or to prevent that company from exercising rights in the subsidiary for its own benefit.

An agreement referred to in sub-section 160ZP(4) is defined by sub-section 160ZP(5) to include an agreement, arrangement or understanding whether formal or informal, whether express or implied and whether or not enforceable, or intended to be enforceable.

The practical effect of sub-section 160ZP(6), when taken together with sub-section (1), is that a company which was not a group company for the whole of the year of income will only be regarded as such if it was a company that was incorporated during the year and was, in practical effect, wholly owned for the remainder of the year by another group company. Where either an existing group company is disposed of, in whole or in part, during a year, or a company which was not previously a group company is wholly acquired during a year, neither of those companies can be a group company for loss transfer purposes in relation to that particular year of income. However, where a company is acquired during a year of income, that company would be a group company for these purposes in subsequent years if the specified 100 per cent common ownership rule continues to be met.

Sub-section 160ZP(7) is the operative provision of section 160ZP. It sets out the basis on which a resident company that has incurred a net capital loss for the purposes of section 160ZC in the year of income may transfer the loss (or a part of the loss) to another resident company with which it has the necessary group relationship. The deduction for a loss so transferred will be deemed, for the purposes of Part IIIA, to be a loss incurred by the gain company during the gain year, and the net capital loss of the loss company in respect of the loss year shall be reduced by the amount so transferred.

Paragraph (7)(a) requires a resident company (the "loss company") to have incurred a net capital loss for the purposes of section 160ZC in respect of a year of income (the "loss year").

Paragraph (7)(b) specifies characteristics of the company (the "gain company") to which the loss incurred by a loss company may be transferred where the companies are group companies in relation to each other. The gain company must be a resident company that has, or but for the operation of section 160ZP would have, a net capital gain in respect of a year of income (the "gain year").

Paragraph (7)(c) will require the loss company and the gain company to furnish to the Commissioner of Taxation, in relation to a net capital loss that is to be transferred, a notice specifying -

•

that so much of all or of a specified part of the net capital loss as has not been taken into account in determining whether a net capital gain accrued or a net capital loss was incurred by the loss company in the year of income following the loss year, is to be treated as a loss incurred by the gain company during the gain year (sub-paragraph (i)); and

•

the year of income in which the net capital loss was incurred by the loss company (sub-paragraph (ii)).

The notice to be given to the Commissioner for this purpose is to be in writing, signed by the public officers of both companies, and furnished on or before the date of lodgment of the relevant return of income of the gain company for the gain year, or within such further time as the Commissioner allows.

Paragraph (7)(d) requires the loss company and the gain company to be group companies in relation to the loss year, where the loss year is the same year of income as the gain year.

Paragraph (7)(e) is comparable to paragraph (d) but addresses the situation where a loss company proposes to transfer the right to a net capital loss to a gain company in a gain year subsequent to the loss year in which the net capital loss was incurred by the loss company. Paragraph (e) requires the loss company to be a group company in relation to the gain company for each of the loss year, the gain year and any intervening year.

Sub-section 160ZP(8) will specify how much of a net capital loss may be transferred by a loss company to a gain company in a year of income. A gain company is not able to accept so much of a net capital loss as exceeds the net capital gain that accrued to the gain company in respect of the gain year (calculated before the operation of this section in relation to the loss company concerned). This limitation applies by making the transfer notice under paragraph 160ZP(7)(c) of no effect to the extent that the sum of the amount specified in the notice and amounts specified in any earlier notices transferring net capital losses to the gain company by any company, exceeds the net capital gain that accrued, or but for this section would have accrued, to the gain company in the gain year.

Sub-section 160ZP(9) is relevant to the determination, for the purposes of paragraph (7)(c), of the amount of a net capital loss available for transfer in a year of income. Where the provisions of Subdivision B of Division 2A of Part Ill of the Principal Act (the current year loss provisions) apply to the loss company in relation to the loss year, no part of a net capital loss incurred by that company in respect of that year will be available for transfer to another company.

Where a loss company has given to the Commissioner a notice or notices in accordance with paragraph (7)(c) in relation to a part of a net capital loss incurred by the loss company, sub-section 160ZP(10) will preclude the company from giving a further notice in relation to that loss to the extent to which it purports to transfer to a gain company the right to a part of the net capital loss of the loss company exceeding the balance of the loss remaining after deducting amounts specified in the earlier notice or notices.

It may be that, in company group situations to which proposed section 160ZP is to apply, a payment might be made by the gain company to the loss company in consideration for the loss company transferring its right to a net capital loss to the gain company. Sub-section 160ZP(11) will ensure that where such a payment is received by the loss company, the payment will not be regarded as income of the loss company for the purposes of the Principal Act.

Sub-section 160ZP(12) addresses the position of the gain company in such circumstances and will correspondingly operate to ensure that a deduction is not allowable to a gain company in respect of any payment that the company makes to a loss company as consideration for the benefit of the right to the net capital loss.

Section 160ZQ : Treatment of gains and losses in respect of listed personal-use assets

Section 160ZQ sets out the basis for determining gains and losses in respect of listed personal-use assets (as defined in section 160B - see earlier notes on that section).

Sub-section 160ZQ(1) declares, subject to sub-section (2), that a listed personal-use asset gain will be deemed to have accrued to a taxpayer where the consideration received on the disposal by the taxpayer of a listed personal-use asset exceeds the indexed cost base of the asset. The amount of the gain is equal to that excess (paragraph (1)(a)). A listed personal-use asset loss occurs if the reduced cost base of the asset exceeds the consideration received. The amount of the loss is equal to the excess (paragraph (1)(b)).

Where the disposal is made within 12 months of the acquisition of the asset the reference in sub-section 160ZQ(1) to the indexed cost base is, by sub-section 160ZQ(2), taken to mean the cost base of the asset. The meanings of the terms indexed cost base, cost base and reduced cost base are set out in section 160ZH and explained in the notes on that section.

Sub-section 160ZQ(3) applies to a taxpayer who has acquired an asset either as the legal personal representative of a deceased person or as a beneficiary in a deceased estate. In these cases the date of acquisition referred to in sub-section 160ZQ(2) (for the purposes of determining whether the indexed cost base or cost base of an asset should be used) is the date on which the asset was acquired by the deceased person.

Sub-section 160ZQ(4) applies where by reason of sub-section 160ZD(5), the amount deemed to be the consideration in respect of a disposal of an asset has been increased. Sub-section 160ZD(5) applies where a taxpayer disposes of shares in a company or related company, or an interest in a partnership or trust estate, and because a reduction has occurred in the market value of a personal-use asset owned by the company, partnership or trust estate, the amount of the consideration received in respect of the disposal is less than it would otherwise be. But for the operation of sub-section 160ZD(5), the taxpayer would in effect be allowed a deduction for a loss on the personal-use asset.

Where the consideration has been increased by virtue of sub-section 160ZD(5) (paragraph (a)) and the amount of the increase is attributable in whole or in part to a fall in the market value of a listed personal-use asset (paragraph (b)) and, as a result, the increase has affected the calculation of the taxpayer's capital gain or capital loss (paragraph (c)) the taxpayer is to be deemed to have incurred a listed personal-use asset loss (available for offset against listed personal-use asset gains) equal to so much of the amount by which the consideration in respect of the disposal was increased as was attributable to the decrease in the market value of the listed personal-use asset.

By sub-section 160ZQ(5) a net listed personal use asset loss will be taken, for the purposes of section 160ZQ, to have been incurred by a taxpayer during the year -

(i)

where there is no listed personal-use asset gain in the year and the taxpayer incurred a listed personal-use asset loss or losses during the year or a net listed personal-use asset loss was incurred in the previous year (paragraph (a)); and

(ii)

where a listed personal-use asset gain or gains accrued during the year but that gain, or the sum of those gains, was less than the sum of any listed personal-use asset loss or losses incurred during the year of income and any net listed personal-use asset loss incurred in the previous year (paragraph (b)).

Sub-section 160ZQ(6) sets out the basis of calculation of the amount which comprises the net listed personal-use asset loss incurred by a taxpayer in a year of income. In a case to which paragraph 160ZQ(5)(a) applies (i.e., where no listed personal-use asset gain accrued to the taxpayer in the year of income), the amount of the net listed personal-use asset loss is:

(i)

if the taxpayer has a listed personal-use asset loss or losses for the year of income and no net listed personal-use asset loss from the previous year, that loss (or the sum of those losses) will be the net listed personal-use asset loss (sub-paragraph (a)(i));

(ii)

if the taxpayer has no listed personal-use asset loss during the year of income but had a net listed personal-use asset loss in the previous year, then that net loss is the net listed personal-use asset loss (sub-paragraph (a)(ii)); and

(iii)

if a taxpayer has a listed personal-use asset loss or losses for the year of income and a net listed personal-use asset loss in the previous year, then the sum of those losses is the net listed personal-use asset loss (sub-paragraph (a)(iii)).

Paragraph (b) of section 160ZQ(6) provides that, where paragraph 160ZQ(5)(b) applies (i.e., where there is a listed personal-use asset gain or gains which accrue to a taxpayer in a year of income), the net listed personal-use asset loss in the year of income will be the excess of the sum of any listed personal-use asset loss or losses incurred in that year and any net listed personal-use asset loss incurred in the previous year over the sum of listed personal-use asset gain or gains.

Where a listed personal-use asset gain or gains accrued in a year of income and there is no listed personal-use asset loss in the year of income and no net listed personal-use asset loss in the previous year of income, sub-section 160ZQ(7) deems a capital gain to have accrued to the taxpayer in the year of income to the extent of the listed personal-use asset gain or gains.

Where a listed personal-use asset gain or gains accrued to a taxpayer in a year of income and during the year either a listed personal-use asset loss or losses were incurred or a net listed personal-use asset loss was incurred in the previous year, the extent to which a capital gain would accrue to the taxpayer is to be determined in accordance with sub-section 160ZQ(8). A capital gain will be taken to have accrued to the taxpayer to the extent that the listed personal-use asset gain (or the sum of such gains) is in excess of -

(i)

the listed personal-use asset loss or losses, incurred during the year of income where there is no net listed personal-use asset loss in the previous year (sub-paragraph (c)(i));

(ii)

the net listed personal-use asset loss incurred in the previous year, where there were no listed personal-use asset losses in the year of income (sub-paragraph (c)(ii)); or

(iii)

in any other case, the sum of the listed personal-use asset loss or losses incurred in the year of income and the net listed personal-use asset loss incurred in the previous year (sub-paragraph (c)(iii)).

DIVISION 5 - LEASES

Division 5 modifies certain of the normal capital gains rules as regards leases. Apart from the situations covered by the Division, the normal rules applicable to the acquisition and disposal of assets will apply to leases.

Section 160ZR : Interpretation

Section 160ZR is a drafting measure. The effect of the section is that Division 5 will apply to a sub-lease, a sub-lessor or a sub-lessee in the same manner as it applies to a lease, a lessor or lessee.

Section 160ZS : Grant of lease to constitute disposal

Proposed section 160ZS is to apply in situations where a lease of any property is granted.

Sub-section 160ZS(1) makes it clear that, for the purpose of the proposed tax on capital gains, the granting of a lease of property is not to be taken as a disposal of part of the property that is leased.

It also makes clear, for those purposes, that where a lessor grants a lease, the lessor is to be taken to have disposed of an asset (the lease) that he or she created and the lessee is to be taken to have acquired the lease for a consideration of the premium paid by the lessee for the lease.

Sub-section 160ZS(2) sets out special rules for the calculation of the lessor's cost base of the lease that he or she has granted and it makes clear that these rules are to apply instead of those set out in section 160ZH. By virtue of sub-section 160ZS(2) the lessor's cost base of the lease is to include only the expenditure incurred by him or her in respect of the grant of the lease.

Sub-section 160ZS(2) will also have the effect that the lessor's indexed cost base and reduced cost base of the lease will be calculated using the cost base calculated in accordance with the sub-section.

Section 160ZT : Payments for variation of lease

Section 160ZT is to apply in circumstances where a lessor or lessee incurs expenditure in obtaining the consent of the other party to a lease, to the variation or waiver of any of the terms of the lease. Where it is the lessor who incurs such expenditure, paragraph (1)(a) of the sub-section operates to deem the lessor to have incurred a capital loss equal to the amount of the expenditure. By paragraph (1)(b), in calculating the lessee's cost base, indexed cost base or reduced cost base of the lease the amount of the consideration paid by the lessee for the grant of the lease is to be reduced by the amount received by the lessee for consenting to the variation or waiver.

Sub-section 160ZT(2) applies in the reverse situation to that in sub-section (1), that is, where it is the lessee who incurs the expenditure in obtaining the consent of the lessor to the variation or waiver of any of the terms of the lease. Paragraph (2)(a) provides that in such circumstances the expenditure is to be taken to be expenditure of a capital nature incurred for the purpose of enhancing the value of the lease. The effect of this paragraph, when read with section 160ZH is that the expenditure will form part of the lessee's cost base, indexed cost base and reduced cost base of the lease.

Paragraph 160ZT(2)(b) will have the effect that the amount received by the lessor for consenting to the variation or waiver of the terms of the lease will be taken to be consideration received by the lessor for the disposal of an asset, that asset being his or her right of consent to the variation or waiver of the lease.

Section 160ZU : Renewal or extension of lease

Section 160ZU will have the effect that the renewal or extension of a lease will be treated as the grant of a fresh lease by the lessor immediately after the time when the lease that is being renewed or extended would have expired.

Section 160ZV : Consideration for disposal

Section 160ZV is to apply in circumstances where a lessor pays the lessee for improvements of a capital nature that the lessee has made to the property that was leased. In such circumstances, sub-section 160ZV(1) will have the effect that when the lease expires or is forfeited or surrendered by the lessee - such expiry, forfeiture or surrender is by section 160M to be taken as a disposal by the lessee of the lease - the lessee is to be taken to have received as consideration for the disposal of the lease the amount that was paid by the lessor for the improvements.

By sub-section 160ZV(2) the amount paid by the lessor for the improvements will in effect, when the sub-section is read with paragraphs 160ZH(1)(c), (2)(c) or (3)(c), be taken to be expenditure incurred by the lessor in enhancing the value of the property that was leased. The amount will thus form part of the cost base, indexed cost base or reduced cost base of the lessor of the property that was leased.

Section 160ZW : Acquisition by lessee of reversionary interest of lessor

Section 160ZW is to apply where a lessee acquires the reversionary interest of the lessor in land that the lessee has leased. Land is defined in sub-section 160K(1) (see notes on that sub-section).

Sub-section 160ZW(1) formally provides that where a lessee of land acquires the reversionary interest of the lessor in the land sub-section 160ZW(2) or 160ZW(3) is to apply in determining the date on which the merged asset was acquired by the former lessee and the consideration that he or she gave for the merged asset.

Where a lessee of land, the lease of which was granted in perpetuity or for a period of 99 years or more, acquires the reversionary interest in the land, sub-section 160ZW(2), will operate to deem the (former) lessee to have acquired the merged asset at the time when the lease was granted or assigned to him or her. One effect of this sub-section will be that if the ex-lessee was granted or assigned the lease before 20 September 1985, he or she will be taken to have acquired the merged asset before 20 September 1985 and consequently not to be liable for tax under the capital gains provisions on any real capital gain on a subsequent disposal of the asset.

Another effect will be that the premium that the former lessee paid for the grant or assignment of the lease of the land - which sub-section 160ZW(2) provides is to be taken together with the amount paid for the acquisition of the reversionary interest as being the consideration paid for the merged asset - will be indexed from the date when the liability to pay the premium arose.

Sub-section 160ZW(3) applies where a lessee of land under a lease that was not granted in perpetuity or for a period of 99 years or more, acquires the lessor's reversionary interest in the land. In such a case if the lease was granted or assigned to the lessee before 20 September 1985, the former lessee will by paragraph 160ZW(3)(a) be deemed to have acquired the asset at the time when, in effect, he or she acquired the lessor's reversionary interest in the land and to have paid as consideration for the asset an amount equal to the market value of the asset at that time.

Where a lessee who was granted or assigned a lease of land (other than a lease that was granted in perpetuity or for a period of 99 years or more) on or after 20 September 1985, acquires the lessor's reversionary interest in the land, he or she will, by paragraph 160ZW(3)(b), be deemed to have acquired the asset at the time, in effect, when the reversionary interest was acquired. Paragraph 160ZW(3)(b) also applies to deem the former lessee to have paid as consideration for the asset the premium paid for the grant or assignment of the lease plus the amount paid to acquire the reversionary interest.

DIVISION 6 - TRUSTS OTHER THAN UNIT TRUSTS

Division 6 meets situations relating to trusts, other than unit trusts, that require particular measures. Apart from the situations to be covered by the Division, the normal capital gains rules applicable to the disposal of assets will apply to trusts (including unit trusts). Thus, the transfer of assets acquired on or after 20 September 1985 by a trust will constitute a disposal of those assets by the transferor to the trustee. Consequently the transferor may derive a capital gain or incur a capital loss in respect of the disposal.

Where a trustee disposes of a trust asset, the capital gains rules applicable to other taxpayers will also apply to the trustee. The rules relating to the taxation of income derived by trusts will also have their normal application. Thus any real capital gain realised by the trust will be taxed analogously with the current tax treatment accorded to income earned by trusts. Broadly, this will mean that, where there is a beneficiary presently entitled to the capital gain and not under a legal disability, the gain will be taxed to the beneficiary. Where there is no such beneficiary presently entitled it will be taxed to the trustee.

Section 160ZX : Person becoming entitled to beneficial ownership of trust asset

Section 160ZX refers to situations where a beneficiary is absolutely entitled to a trust asset as against the trustee or where the trustee transfers trust property to a beneficiary in satisfaction of the beneficiary's interest in the corpus of the trust.

By sub-section 160ZX(1), where an asset is held by a trustee other than as trustee of a unit trust or of a deceased estate, and a beneficiary under the trust becomes absolutely entitled to the asset as against the trustee, the trustee will be deemed to have disposed of the asset to the beneficiary at the time when the beneficiary became absolutely entitled to the asset. This provision is complementary to sub-section 160V(1) which requires the beneficiary to be treated as the owner of the asset in such cases, and any acts of the trustee to be taken to be the acts of the beneficiary (see notes on that section).

Sub-section 160ZX(2) brings sub-sections (3), (4) and (5) into operation respectively where a trustee of a trust estate, other than a unit trust or a deceased estate, is deemed to have disposed of an asset to a beneficiary in the circumstances outlined in sub-section 160ZX(1) or the trustee transfers an asset to a beneficiary in satisfaction of the interest or part of the interest of the beneficiary in the corpus.

If the trustee disposes or is deemed to dispose of an asset to a beneficiary in either of the circumstances outlined in sub-section 160ZX(2), the trustee is by virtue of sub-section 160ZX(3) deemed to have disposed of the asset to the beneficiary for a consideration equal to the market value of the asset at the time of the disposal.

Sub-section 160ZX(4) prescribes the consequences to a beneficiary of a trustee disposing of or being deemed to have disposed of, an asset of a trust to the beneficiary.

If the trustee is deemed to have disposed of the asset in the circumstances of paragraph 160ZX(2)(a) (that is, where the beneficiary becomes absolutely entitled to a trust asset), the beneficiary is also deemed to have disposed of his or her interest in the corpus of the trust estate to the extent to which it was constituted by the asset to which the beneficiary became absolutely entitled, for a consideration equal to the market value of the asset at the time of its disposal. Similarly, where the trustee disposes of a trust asset in satisfaction of a beneficiary's interest or part interest in the corpus of the trust estate, the beneficiary will be treated as having disposed of his or her interest or part interest for a consideration equal to the market value of the asset.

If the beneficiary did not pay or give any consideration in respect of the acquisition of the interest or part interest in the corpus, and the beneficiary did not acquire the interest from a former beneficiary, sub-section 160ZX(5) requires the indexed cost base of the interest to the beneficiary to be determined as an amount equal to the market value of the asset at the time of its disposal. Accordingly, the interaction between sub-sections 160ZX(4) and (5), will mean that a beneficiary in the circumstances specified in sub-section 160ZX(5), will have disposed of his or her interest for an amount equal to the market value of the asset received, with the indexed cost base of the beneficiary's interest being disposed of also equal to that amount. Therefore, no capital gain or loss will arise to the beneficiary as a result of the transaction.

Section 160ZY : Dealing with right to receive income from trust

Section 160ZY overrules the operation of sub-section 160ZH(9) where a person acquires a right to receive income from a trust estate other than a unit trust or deceased estate and neither pays nor gives any consideration in respect of the acquisition of the right nor acquires the right by way of assignment from another person who previously owned the right. But for section 160ZY, sub-section 160ZH(9) would deem the consideration for the right to be an amount equal to the market value of the right at the time of its acquisition. Instead, the acquisition cost of the right to receive income from the trust estate in the specified circumstances will be taken to be a nil amount.

Section 160ZYA : Transfer of asset in satisfaction of right to receive income from trust

By section 160ZYA, where a beneficiary has a right to receive income from a trust estate, other than a unit trust or a deceased estate, and the trustee disposes of an asset of the trust estate to the beneficiary in full or partial satisfaction of the right, the asset is to be taken to have been disposed of by the trustee for a consideration equal to its market value (paragraph (a)). The beneficiary will also be considered to have disposed of the right, or part of it, at the time when the asset was so disposed of for a consideration equal to the market value of the asset at that time (paragraph (b)). This means that a capital gain or a capital loss may arise to either or both the trustee and the beneficiary, depending upon the acquisition cost of the asset to the trustee, or the cost to the beneficiary of the right to receive income from the trust.

Section 160ZYB : Dealing with interest in corpus of trust estate

Where a beneficiary acquires without consideration an interest in the corpus of a trust estate, other than a unit trust or a deceased estate, and did not acquire the interest by way of assignment from another person who previously owned the interest, sub-section 160ZYB(1) brings the operative provisions of the section into force if the interest is wholly or partially disposed of by the beneficiary during a year of income.

Sub-section 160ZYB(2) contains rules for determining the amount of the capital gain to be taken to have been derived by the beneficiary. If the beneficiary is the only person having an interest in the corpus of the trust estate and disposes of the whole of that interest, by paragraph (a) the capital gain to the beneficiary will be the amount by which the consideration for the disposal of the interest in the corpus exceeds the amount (if any) remaining after deducting the total liabilities of the trust from the amount ascertained in accordance with the formula

A+B


where -

A is the sum of -

(a)

the market values at the time of the disposal of the interest in corpus of those assets (other than money) included in the corpus of the trust that were acquired by the trust estate before 20 September 1985; and

(b)

the amounts, if the trustee had disposed of the remaining assets of the trust estate (other than money) (that is, those assets acquired on or after 20 September 1985) at that time, that would be the indexed cost bases to the trustee of those remaining assets; and

B is the sum of the amounts of any money included in corpus.

The amount of the capital gain will thus represent accrued and not previously realised gains on such assets of the trust estate as were acquired on or after 20 September 1985.

Paragraph (b) deals with cases where there are two or more persons having an interest in the corpus of the trust estate and the disposal relates to the whole of one beneficiary's interest. A capital gain will arise to the beneficiary during the year of income where the consideration received exceeds the proportion of the amount calculated in accordance with paragraph (a) pro rata to the share of the interest of the beneficiary in the total of the corpus.

Paragraph (c) applies where the disposal relates to only part of the beneficiary's interest in the corpus of the trust estate. The capital gain derived by the beneficiary during the year of income will be the amount by which the consideration received exceeds that proportion of the amount calculated in accordance with, whichever of paragraphs (a) or (b) applies, as is equal to the proportion of the interest disposed of.

By sub-section 160ZYB(3), if the interest or part interest is disposed of within 12 months of its acquisition by the beneficiary, the reference in paragraph 160ZYB(2)(a) to the indexed cost base is to be construed as the cost base. This is consistent with other provisions in Part IIIA concerning disposals of assets within 12 months of their acquisition. In those situations, inflation adjustments are not to be made to the cost base of the asset.

Similarly to sub-section 160ZYB(2), sub-section (4) outlines the situations in which a beneficiary disposing of an interest in corpus may be deemed to have incurred a capital loss during the year of income. If the beneficiary is the only person having an interest in the corpus of the trust estate and the disposal relates to the whole of that interest, paragraph (a) stipulates that a capital loss is incurred by the beneficiary during the year of income if the consideration in respect of the disposal is less than the amount (if any) remaining after deducting the total liabilities of the trust from the amount ascertained in accordance with the formula

A+B


where -

A is the sum of -

(a)

the market values, at the time of the disposal of the interest, of those assets (other than money) of the trust that were acquired by the trust estate before 20 September 1985; and

(b)

the amounts, if the trustee had disposed of the remaining assets of the trust estate (other than money) (that is, those assets acquired on or after 20 September 1985) at that time, that would be the reduced cost bases to the trustee of those remaining assets; and

B is the sum of the amounts of any money included in corpus.

The amount of the capital loss is equal to this excess. It represents unrealised losses on the assets of the trust estate that were acquired on or after 20 September 1985.

Paragraph (b) covers cases where there are two or more persons having an interest in the corpus of the trust estate and the disposal relates to the whole of a beneficiary's interest. The capital loss incurred by the beneficiary during the year of income, is taken to be equal to the difference between the consideration received and the proportion of the amount calculated in accordance with paragraph (a) pro rata to the share of the interest of the beneficiary in the total of the corpus.

Paragraph (c) applies where the disposal relates to only part of the beneficiary's interest in the corpus of the trust estate. The capital loss incurred by the beneficiary during the year of income will be taken as equal to the difference between the consideration received and the proportion of the amount calculated in accordance with paragraph (a) or paragraph (b), whichever applies, as is equal to the proportion of the interest disposed of.

By sub-section 160ZYB(5), the section does not apply where the beneficiary disposed of the interest or part of the interest in the circumstances outlined in sub-section 160ZX(4) (see notes on that sub-section)

DIVISION 7 - BONUS UNITS IN UNIT TRUSTS

Division 7 has application where a unit trust (not being a corporate unit trust or public trading trust within the meaning of Divisions 6B and 6C of Part III of the Principal Act) makes a bonus issue of units to unitholders.

Section 160ZYC : Application

Section 160ZYC sets out the requirements for the Division to apply. These are -

•

that a taxpayer holds units (referred to as 'original units') in a unit trust (paragraph (a));

•

that an amount ('relevant amount') is payable to the taxpayer by the trustee of the unit trust in respect of the original units (paragraph (b));

•

other units in the unit trust ('bonus units') are issued to the taxpayer (paragraph (c));

•

that the unit trust is not a corporate unit trust (within the meaning of sub-section 102J(1) of the Principal Act) or a public trading trust (within the meaning of section 102R of the Principal Act) in relation to the year of income in which the bonus units are issued (paragraph (d)); and

•

the relevant amount is applied wholly or partially by the trustee of the unit trust in payment or part payment of the money payable by the taxpayer in respect of the bonus units or the liability of the trustee to pay the relevant amount is otherwise satisfied in whole or in part by the issue of the bonus units (paragraph (e)).

Section 160ZYD : Time of acquisition of certain bonus units

Section 160ZYD deems the bonus units to have been acquired when the taxpayer acquired the original units if no part of the relevant amount was included in the taxpayer's assessable income in any year of income under the Principal Act. This means that where the relevant amount is not included in the taxpayer's assessable income and the original units were acquired before 20 September 1985, the bonus units will also be taken to have been acquired before 20 September 1985. Accordingly, the proposed tax on capital gains would not apply to any subsequent disposal by that taxpayer of such bonus units.

Section 160ZYE : Consideration in respect of acquisition

Section 160ZYE determines the consideration that a taxpayer is taken to have paid in respect of the acquisition of bonus units.

For bonus units to which section 160ZYD applies (that is, no part of the relevant amount is included in the taxpayer's assessable income), sub-section 160ZYE(1) requires the amount paid by the taxpayer for the original units to be deemed for the purposes of Part IIIA to have been paid by the taxpayer as consideration for the acquisition of the original units and of the bonus units. This amount is to be spread between the original and bonus units in such proportions as is reasonable in the circumstances.

Sub-section 160ZYE(2) operates where some or all of the relevant amount (as defined) was included in the assessable income under another provision of the Principal Act and treats the taxpayer as having paid as consideration in respect of the acquisition of the bonus units an amount equal to the amount so included in the taxpayer's assessable income. The consideration is also taken to have been paid at the time when the bonus units were issued to the taxpayer.

DIVISION 8 - BONUS SHARES

Division 8 sets out special rules for the purposes of the provisions relating to capital gains, as regards the date on which certain bonus shares are to be deemed to be acquired, the amount of consideration that is deemed to have been paid for the bonus shares and the original shares (i.e., the shares that gave entitlement to the bonus shares) and the date on which the consideration is to be taken as being paid.

Apart from the situations covered by this Division, the normal rules applicable to the disposal of assets will apply to the disposal of the original shares and bonus shares.

One important effect of the rules set out in the Division is that any real capital gain made on bonus shares to which the Division applies, by the shareholder to whom they were issued, will not be subject to tax on capital gains if the original shares were acquired before 20 September 1985.

Section 160ZYF : Application

Section 160ZYF when read in conjunction with section 6BA of the Principal Act (as amended by clause 4) specifies the basic conditions under which Division 8 is to apply. These are that -

•

an amount (in these notes referred to as a "dividend") is payable to a shareholder by a company in respect of shares, (referred to as the "original shares") that the shareholder holds in the company;

•

the company issues bonus shares to the shareholder; and

•

the amount of the dividend is satisfied in whole or in part as payment or part payment of the bonus shares or that the liability of the company to make the payment to the shareholder is otherwise satisfied in whole or part by the issue of the bonus shares.

The dividend referred to can include a tax-free amount that is not a dividend for income tax purposes because of it being declared out of funds in a share premium account.

Where these criteria are satisfied, the special provisions of Division 8 are to apply for the purposes of determining the date on which the bonus shares are to be deemed to be acquired, the amount of the consideration that is deemed to have been paid by the shareholder for the original shares and the bonus shares, and the date on which the consideration that is taken to have been given for the bonus shares was paid.

Section 160ZYG : Time of acquisition of bonus shares

Section 160ZYG means that bonus shares to which this Division applies are deemed to have been acquired by the shareholder at the time when the shareholder acquired the shares which gave entitlement to the bonus shares (the original shares). Accordingly where the original shares were acquired before 20 September 1985, the bonus shares will also be taken to be acquired before that date.

Section 160ZYH : Consideration in respect of acquisition

Sub-section 160ZYH(1) will determine the consideration that the shareholder is to be deemed to have paid to acquire the original shares and the bonus shares for the purposes of the provisions relating to capital gains. Sub-section 160ZYH(1) provides that the consideration that is to be deemed to have been paid for the original shares or bonus shares is that which would be taken to be the cost of the shares in question, if it were necessary to determine the profit or loss on the sale of the shares for purposes of the ordinary provisions of the income tax law.

In circumstances where it is necessary to determine the profit or loss on such shares for income tax purposes, section 6BA of the Principal Act, (as amended by clause 4) operates in determining the amount of the consideration that is deemed to have been given for the shares.

The practical effect of sub-section 160ZYH(1) (when read in conjunction with amended section 6BA) is that the cost of the original shares, including any amount actually paid by the shareholder (e.g., on allotment, by way of a premium or for a call) in respect of the original shares, is to be treated as the cost of the original shares and the bonus shares together. The cost of each of those bonus shares is ascertained by spreading the full cost of the original shares over the original and associated bonus shares and adding to the amount so ascertained in respect of each bonus share any amount actually paid by the taxpayer in respect of each bonus share. (q) to

Sub-sections 160ZYH(2), (3) and (4) set out the time at which the amount of the consideration, that is by sub-section 160ZYH(1) taken to have been paid for the original shares and bonus shares, is to be deemed to have been paid. Sub-section 160ZYH(2) is to apply in circumstances where section 6BA of the Principal Act (as amended by clause 4) does not apply to exclude the dividend that is satisfied by the issue of the bonus shares from being treated in any way as a cost of acquiring the bonus shares.

In such circumstances the dividend, if it effectively bears tax (or any part of it that effectively bears tax), will be taken by sub-section 160ZYH(1) as being consideration given for the bonus shares and sub-section 160ZYH(2) will operate to deem that consideration to have been paid on the date that the bonus issue was made to the shareholder.

Sub-section 160ZYH(3) will operate in circumstances where sub-section 6BA(3) of the Principal Act, as amended by clause 4, applies. Amended sub-section 6BA(3) effectively provides that amounts paid or payable by the taxpayer in respect of the original shares, including their purchase price or any application, allotment or call moneys paid or payable by the taxpayer on the shares, are to be taken to be paid or payable in respect of the total number of original and bonus shares in such proportions as the Commissioner of Taxation considers appropriate. There are, of course, varying practical situations in which the relevant costs will need to be apportioned.

In such circumstances the part of the consideration that was paid by the shareholder for the original shares that is to be taken by sub-section 160ZYH(1), when read with section 6BA as amended, as being consideration that was paid for bonus shares is to be deemed to have been paid when the shareholder made the payment or payments in respect of the original shares.

Sub-section 160ZYH(4) covers the situations where consideration is paid in respect of bonus shares and neither sub-section 160ZYH(2) or (3) apply in respect of that consideration. In such circumstances the payment is, by sub-section 160ZYH(4), to be taken to have been paid when the payment was made.

DIVISION 9 - EMPLOYEES' SHARES

Division 9 covers those situations where section 26AAC of the Principal Act has applied to a taxpayer. Section 26AAC provides for the inclusion in a taxpayer's assessable income, of benefits associated with the acquisition of shares, or of rights to acquire shares, under an employee share acquisition scheme.

Section 160ZYI : Consideration for acquisition of share by employees

Section 160ZYI applies where an amount has been included in the assessable income of a taxpayer under section 26AAC of the Principal Act as a result of the acquisition by the taxpayer of shares in a company. In these circumstances the taxpayer will be deemed for the purposes of Part IIIA to have acquired the shares for an amount equal to the market value of the shares when the shares were acquired. The time of acquisition will, generally, be the time the shares were acquired. However, if sub-section 26AAC(15) of the Principal Act applies, it will be the time when, for the purposes of section 26AAC the taxpayer is deemed to have acquired the shares. Sub-section 26AAC(15) applies where a share acquired under an employee share acquisition scheme is subject to conditions or restrictions. It deems the time of acquisition of the share to be the earliest of the time that restrictions on disposal cease, the time that the taxpayer ceases to be liable to be divested of ownership and the time immediately before disposal of the share.

Section 160ZYJ : Consideration for acquisition of share rights by employees

Section 160ZYJ applies where, by virtue of the operation of sub-section 26AAC(8C) (to be inserted by clause 9 -see earlier notes on that clause), an amount is included in the assessable income of a taxpayer as a result of the acquisition by the taxpayer under an employee share acquisition scheme of a right (including an option or convertible note) to acquire shares in a company. In these circumstances, the taxpayer is deemed for the purposes of Part IIIA to have acquired the right for an amount equal to the market value of the right when it was acquired.

DIVISION 10 - RIGHTS TO ACQUIRE SHARES

Division 10 applies where a company issues rights to acquire shares or to acquire options to acquire shares in the company to existing shareholders or convertible note holders. Generally, the date of acquisition of such rights will be taken to be the date on which the taxpayer acquired the original shares or convertible notes. However, where the rights are exercised, the shares or options acquired as a result will be taken to have been acquired at the time of exercise. The Division also specifies the rules for determining the acquisition cost of the shares or options acquired. The Division also applies to taxpayers who purchase rights from the shareholders or convertible note holders to whom the rights were issued.

Section 160ZYK : Application

By section 160ZYK, the operative provisions of Division 10 are to apply where a person holds shares in a company (referred to as the "original shares"), the company issues rights to acquire shares in the company or rights to acquire an option to acquire shares in the company, and the shareholder did not pay or give any consideration in respect of the acquisition of the rights.

Section 160ZYL : Exercise of rights not to constitute disposal

Section 160ZYL declares that the exercise of rights is not to be taken to be a disposal of the rights. This means that upon the exercise of rights there will not be any liability to pay tax on any capital gain which may have accrued in the value of the rights between the time when they were issued or purchased and when they were exercised.

Section 160ZYM : Time of acquisition of rights

By section 160ZYM, the rights issued to a shareholder will be deemed, for the purposes of Part IIIA, to have been acquired by that shareholder at the same time as he or she acquired the original shares in the company in respect of which the rights were issued. In the case of a person who purchased rights from a shareholder the general timing rules set out in section 160U apply (see notes on that section).

Section 160ZYN : Shareholder not to be deemed to have paid or given consideration for rights

Where a shareholder has been issued rights to acquire shares or rights to acquire options to acquire shares, and the shareholder has not paid or given any consideration in respect of the acquisition of those rights, section 160ZYN provides that the shareholder is not to be deemed to have paid or given any consideration for the rights. This provision overrides sub-section 160ZH(9) which would otherwise deem the shareholder to have paid as consideration the market value of the right (see notes on that section).

Section 160ZYO : Exercise of rights

Section 160ZYO sets out the rules for determining the acquisition date and cost of the shares or option acquired as a result of the exercise of rights.

Sub-section 160ZYO(1) specifies that the time at which the new shares or the option is taken to have been acquired will be the time when the rights were exercised. This applies to the shareholder who was originally issued the rights as well as to any person who acquired the rights from that shareholder.

Subject to sub-section 160ZYO(4), where the shareholder exercises the rights, the consideration for acquiring the new shares or the option will be deemed, for the purposes of Part IIIA, by virtue of sub-section 160ZYO(2), to be the amount paid in order to exercise the rights.

Sub-section 160ZYO(3) applies, also subject to sub-section (4), where a person purchases the rights following disposal of those rights by a shareholder who was issued with them and the purchaser exercises the rights. In these circumstances, the purchaser is to be deemed for the purposes of Part IIIA to have paid or given as consideration for acquiring the new shares or the option, the sum of the amount paid for the acquisition of the rights plus the amount paid in respect of their exercise.

Sub-section 160ZYO(4) overrides sub-sections 160ZYO(2) and (3) where rights which were acquired or deemed to have been acquired before 20 September 1985 are exercised. This would occur where a shareholder acquired his or her original shareholding in the company before 20 September 1985 or where another person purchased rights before 20 September 1985. In these two situations the cost of acquisition of the new shares or the option is to be the market value of the rights at the time of their exercise (thus freeing from tax any gain that had accrued in the value of the rights up to the date of their exercise) plus any amount paid in the exercise of those rights.

Section 160ZYP : Division to be subject to Division 9

By section 160ZYP this Division is subject to Division 9 of Part IIIA. In a situation where section 26AAC applies to shares or rights to shares in a company acquired under an employee share acquisition scheme, the provisions of Division 9 will take precedence (see earlier notes on that Division).

Section 160ZYQ : Application of Division to holders of convertible notes

Section 160ZYQ will extend the operation of Division 10 to holders of convertible notes (within the meaning of Division 3A of Part III of the Principal Act) where rights are issued to convertible note holders in the same circumstances as rights are issued to shareholders. Section 160ZYQ provides that Division 10 is to apply as if the reference in paragraph 160ZYK(a) to a person who holds shares in a company were a reference to a person who holds convertible notes, and the references to shareholders and original shares were references to the convertible note holder and the convertible notes held by that person.

DIVISION 11 - COMPANY-ISSUED OPTIONS TO SHAREHOLDERS TO ACQUIRE UNISSUED SHARES 4

Division 11 applies to a company-issued option to acquire shares in the company, in the same way as Division 10 applies to rights issued by a company. The Division sets out the rules for determining the acquisition cost and time of acquisition of the option and of shares acquired on exercise of that option.

Section 160ZYR : Application

By section 160ZYR, the operative provisions of Division 11 are to apply where a person holds shares in a company (referred to as the "original shares"), the company issues to the shareholder an option to acquire other shares ("new shares") in the company and the shareholder did not pay or give any consideration in respect of the acquisition of the option.

Section 160ZYS : Exercise of option not to constitute disposal

Section 160ZYS declares that the exercise of the option will not be taken to be a disposal of the option. This means that upon the exercise of the option there will not be any liability to pay tax on any capital gain which may have accrued in the value of the option between the time when it was issued or purchased and the time when it was exercised.

Section 160ZYT : Time of acquisition of option

Section 160ZYT has the effect of deeming any option to acquire shares that is issued to a shareholder to have been acquired by the shareholder at the same time as he or she acquired the original shares in the company. In the case of a person who purchased an option from a shareholder the general timing rules set out in section 160U apply (see notes on that section).

Section 160ZYU : Shareholder not to be deemed to have paid or given consideration for option

Where a shareholder has been issued an option to acquire shares in a company, and the shareholder has not paid or given any consideration in respect of the acquisition of that option, section 160ZYU provides that the shareholder shall not be deemed to have paid or given any consideration for the option. This provision overrides sub-section 160ZH(9) which would otherwise deem the shareholder to have paid as consideration the market value of the option.

Section 160ZYV : Exercise of option

Section 160ZYV sets out the rules for determining the acquisition date and cost of shares acquired as a result of the exercise of an option.

Sub-section 160ZYV(1) provides that the time at which the new shares are to be taken, for the purposes of Part IIIA, to have been acquired, will be the time when the option was exercised. This applies to the shareholder who was issued the option, as well as to any person who acquired the option from such a shareholder.

Subject to sub-section 160ZYV(4), where the shareholder exercises the option the consideration for acquiring the new shares will, by virtue of sub-section 160ZYV(2), be deemed, for the purposes of Part IIIA, to be the amount paid in order to exercise the option.

Sub-section 160ZYV(3) applies, also subject to sub-section (4), where a person purchases an option following a disposal of the option by the shareholder who was issued the option and that person exercises the option. In these circumstances, the person is to be deemed, for the purposes of Part IIIA, to have paid or given as consideration for acquiring the new shares, the sum of the amount paid for the acquisition of the option plus the amount paid in respect of its exercise.

Sub-section 160ZYV(4) overrides sub-sections 160ZYV(2) and (3) where an option which was acquired or deemed to have been acquired before 20 September 1985 is exercised on or after 20 September 1985. This would occur where a shareholder acquired his or her original shareholding in the company before 20 September 1985 or where another person purchased an option before 20 September 1985. In these two situations the cost of acquisition of the new shares is to be the market value of the option at the time of its exercise, so freeing from tax any gain that accrued on the value of the option up to the date of exercise, plus any amount paid in the exercise of the option.

Section 160ZYW : Division to be subject to Division 9

By section 160ZYW this Division is made subject to Division 9. In a situation where section 26AAC applies to shares or rights to acquire shares in a company under an employee share acquisition scheme the provisions of Division 9 will take precedence (see earlier notes on that Division).

Section 160ZYX : Application of Division to holders of convertible notes

Section 160ZYX will extend the operation of Division 11 to holders of convertible notes within the meaning of Division 3A of Part III of the Principal Act, where options are issued to convertible note holders in the same circumstances as options are issued to shareholders. Section 160ZYX is to the effect that Division 11 is to apply as if the reference in paragraph 160ZYR(a) to a person who holds shares in a company were a reference to a person who holds convertible notes issued by the company, and references to the shareholder and to the original shares were references to the convertible note holder and the convertible notes held by that person.

DIVISION 12 - CONVERTIBLE NOTES

Division 12 specifies the treatment of convertible notes in new Part IIIA. It provides that the conversion of a convertible note will not of itself result in a tax liability on capital gains. Rather, any liability for tax will be determined on a subsequent disposal of the shares acquired as a result of the conversion. Division 12 also sets out the rules for determining the time and cost of acquisition of the shares acquired on conversion.

Section 160ZYY : Definition

The purpose of proposed section 160ZYY is to attribute the same meaning to 'convertible note' for the purposes of the tax on capital gains as it has for income tax purposes in Division 3A of Part III of the Principal Act. Broadly, a convertible note is a note issued by a company which may be exchanged for shares in the company.

Section 160ZYZ : Conversion of note not to constitute disposal

Proposed section 160ZYZ ensures that the conversion of the convertible note will not be deemed to be a disposal of the convertible note within the meaning of proposed section 160M. Any gain made or loss incurred will only be subject to the tax on capital gains provisions when the shares for which the convertible note was exchanged are subsequently disposed of.

Section 160ZZ : Time of acquisition of shares

Proposed section 160ZZ prescribes specified criteria for the determination for the purposes of Part IIIA of the date of acquisition by a taxpayer of shares acquired by the taxpayer upon conversion of a convertible note. Pursuant to paragraph (a) if the convertible note was acquired before 20 September 1985 and no consideration was paid or given in respect of the conversion, the shares are to be deemed to have been acquired before 20 September 1985. Hence, in the above situation, if the shares are subsequently disposed of by the taxpayer, he or she will not be subject to tax on any capital gain realised, nor entitled to deduct any capital loss incurred, on the disposal.

However, if the convertible note was acquired before 20 September 1985 and consideration was paid or given in respect of the conversion on or after that date, the shares are to be deemed to have been acquired at the time of conversion pursuant to sub-paragraph (b)(i). If the convertible note was acquired on or after 20 September 1985, shares acquired on conversion are to be deemed by sub-paragraph (b)(ii) to have been acquired at the time of conversion.

Section 160ZZA : Consideration in respect of acquisition

Proposed section 160ZZA establishes the method of calculation of the cost of shares acquired by the conversion of a convertible note. If the convertible note was acquired before 20 September 1985 and consideration was paid in respect of the conversion, paragraph 160ZZA(a) will have the effect that the cost of acquisition of the shares will be calculated as the sum of the market value of the convertible note at conversion plus the amount paid in respect of conversion. Because Part IIIA will not apply to shares acquired as a result of a conversion of a convertible note acquired before 20 September 1985 where no consideration was paid or given in respect of the conversion (by virtue of paragraph 160ZZA(a)), there is no need to set out the acquisition cost of such shares.

Proposed paragraph 160ZZA(b) establishes the method of calculation of the acquisition cost of shares acquired by the conversion of a convertible note which was acquired on or after 20 September 1985. Sub-paragraph (b)(i) deals with the situation where no consideration is paid or given in respect of the conversion. In that situation, the acquisition cost of the shares is taken to be an amount equal to the amount or value of the consideration paid or given by the taxpayer in respect of the acquisition of the convertible note. If consideration was paid or given in respect of the conversion, the cost of acquisition of the shares, pursuant to sub-paragraph (b)(ii), is the sum of the amount of consideration for the conversion and the amount of the consideration paid or given to acquire the convertible note.

Section 160ZZB : Division is subject to Division 9

By section 160ZZB, Division 12 is also made subject to Division 9. In a situation where section 26AAC applies to shares or rights to acquire shares in a company under an employee share acquisition scheme, the provisions of Division 9 will take precedence.

DIVISION 13 - OPTIONS GENERALLY

Division 13 sets out rules for the treatment of options, where those options are not already dealt with in either Division 10 (rights to acquire shares) or Division 11 (options to acquire shares). Generally the grant of an option will be treated as the creation and disposal of the option, which may result in a capital gain. When an option is exercised, however, the grant of the option and the transaction entered into as a result of the exercise will be treated as a single transaction.

Section 160ZZC : Options

Sub-section 160ZZC(1) limits the scope of section 160ZZC so as not to apply to options to which either Division 10 (rights to acquire shares) or Division 11 (company-issued options to acquire shares) applies.

By sub-section 160ZZC(2) Division 13 is made subject to other provisions of Part IIIA relating to options which are classified as personal-use assets.

Sub-section 160ZZC(3), subject to the later provisions in the section which treat the grant of an option as part of a larger transaction, deems the grant of an option to be a disposal, by the grantor of an asset (i.e., the option) owned by the grantor immediately before the disposal. Accordingly a capital gain may accrue in respect of the disposal.

In some cases, the grantor of an option may not at the time of granting it own the property in respect of the disposal of which the option is granted. The property in respect of which the option is granted may in fact never come to be owned or acquired by the grantor because the option expires, or is cancelled, released or abandoned. Similarly, the option may bind the grantor to acquire property which, because the option expires or is cancelled, released or abandoned, is not acquired. Nevertheless, in these cases, sub-section 160ZZC(4) requires the grant of such an option to be treated as the disposal of an asset (the option) by the grantor for the purposes of sub-section (3).

By sub-section 160ZZC(5), a renewal or extension of an option is to be treated as the grant of a fresh option immediately after the time when the first option would otherwise have expired.

Sub-section 160ZZC(6) limits the amount of the cost base which may be offset against the consideration received for the grant of the option. The cost base (and, as a result, the indexed cost base and reduced cost base) is limited to the amount of expenditure incurred in respect of the grant of the option. This is the situation notwithstanding section 160ZH, which generally provides the basis for the calculation of the cost base, indexed cost base and reduced cost base of an asset.

The exercise of an option is not to be taken as a disposal of the option, and the grant of an option which is exercised and the transaction entered into as a result of that exercise are treated for the purposes of sub-sections 160ZZC(7) and (8) as being a single transaction.

Where a grantor is required to dispose of a subject asset as a result of the exercise of an option, the consideration received for the option is to form part of the consideration received by the grantor on the disposal of the asset (paragraph 160ZZC(7)(a)). Where the grantor is required to acquire an asset in order to honour the option agreement, the consideration received for the option is to be deducted from the consideration paid or given by the grantor to acquire the asset (paragraph 160ZZC(7)(b)).

Sub-section (8) governs the treatment of the consideration paid for the option by the person who acquired it, where the option is exercised. If the option binds the grantor to dispose of an asset, the consideration paid for the option is treated as part of the consideration paid or given by the person who exercised the option in respect of the acquisition of the asset (paragraph 160ZZC(8)(a)). If the option binds the grantor to acquire an asset, the consideration for the option forms part of the incidental costs of the disposal of the asset by the person who exercised the option (paragraph 160ZZC(8)(b)).

Sub-section 160ZZC(9) applies where an option, binding the grantor to dispose of the asset, was granted before 20 September 1985, but was exercised by the grantee after that date. In this situation, paragraph 160ZZC(8)(a) does not apply and instead the market value of the option, at the time when exercised, forms part of the consideration paid or given for the acquisition of the asset by the person exercising the option.

Sub-section 160ZZC(10) permits an assessment to be amended at any time in order to allow an option which is subsequently exercised to be treated as part of an overall transaction for disposal of the relevant asset. The Commissioner will be able to amend an earlier assessment to exclude any capital gain that may have accrued on the granting of the option. The transactions for granting and exercising the option will then be treated as a single transaction in the year of exercise.

Sub-section 160ZZC(11) recognises that a single option may impose dual obligations, that is, to acquire and dispose of an asset. In such a situation, two separate options will be taken to exist and one half of the consideration paid will be attributed to each.

Paragraph 160ZZC (12)(a) deals with the forfeiture of money paid as a deposit on a prospective purchase or other transaction, which is cancelled or abandoned. In such circumstances, the deposit is to be treated as consideration in respect of the grant of an option that bound the grantor to dispose of an asset and which was not exercised. The sub-section ensures that money forfeited by a party to a prospective sale is treated as a capital gain in the hands of the person who received the benefit of the deposit. By paragraph (b), any expenditure in connection with the prospective purchase or transaction incurred by the person who keeps the forfeited deposit will be deemed to be expenditure incurred by that person in respect of the grant of the option.

DIVISION 14 - INDUSTRIAL PROPERTY

This Division prescribes the rules for determining capital gains in relation to an asset that is a unit of industrial property within the meaning of Division 10B of Part III of the Principal Act (broadly, a patent, copyright or design). For assets, other than units of industrial property, a part disposal will for the purposes of this Part result in a capital gain or a capital loss of an amount calculated by comparing the disposal proceeds with the appropriate cost base of the part of the asset that is disposed of. However, for a unit of industrial property a part disposal of the asset will result in the indexed cost base (or cost base, if appropriate) being reduced by the disposal proceeds in the same way as the residual value is reduced for the purposes of Division 10B and it will not be until the total proceeds from all such part disposals exceed the indexed cost base will there be a capital gain. A capital loss will not be taken to be incurred in respect of disposals of units of industrial property to which this Division relates, since, such losses are already allowed under the provisions of Division 10B of Part III.

Section 160ZZD : Industrial property

Division 14, by the operation of section 160ZZD applies to an asset which is a unit of industrial property. A unit of industrial property has the same meaning as it has for income tax purposes in Division 10B of Part III of the Principal Act. Within that Division, a unit of industrial property means, generally, rights possessed by a person as the grantee or proprietor of a patent for an invention granted in Australia, the owner of a copyright subsisting in Australia, the owner of a design registered in Australia or a licensee under such a patent, copyright or design.

Sub-section 160ZZD(2) provides that the grant of a licence in respect of a unit of industrial property which constitutes a disposal of part of the asset for the purposes of Division 10B of Part III of the Principal Act will also constitute a disposal by the grantor for the purposes of the tax on capital gains. The grantee is also deemed to have acquired an asset, being the licence.

By sub-section 160ZZD(3), where a taxpayer disposes of part of a unit of industrial property (including a part disposal by virtue of sub-section (2)) during the year of income, the operative provisions of the section - sub-sections 160ZZD(4), (5) and (6) - will apply to that part disposal.

Sub-section 160ZZD(4) outlines the bases for determining whether a capital gain has been derived where the disposal takes place more than 12 months after the asset was acquired by the taxpayer.

Sub-paragraph (a)(i) declares that section 160ZZD (rather than the other provisions of Part IIIA) applies to the disposal, and establishes the tax effects of a disposal where the consideration in respect of the disposal is less than the taxpayer's indexed cost base in respect of the asset. In these circumstances, the taxpayer is deemed to dispose of the asset and to immediately re-acquire the part of the asset which was not disposed of. The consideration for the re-acquisition of the part of the asset will be deemed to be an amount equal to the excess of the indexed cost base over the consideration in respect of the first-mentioned disposal.

Sub-paragraph (a)(ii) applies where the consideration in respect of the disposal is not less than the taxpayer's indexed cost base. In this case, the amount of that indexed cost base is to be deemed to be nil and, if the consideration in respect of the disposal exceeds that indexed cost base, a capital gain equal to the excess will be deemed to have been derived by the taxpayer during the year of income.

Paragraph (b) will apply if, as a result of a previous application or applications of this section, the taxpayer's indexed cost base in respect of the asset is nil. If this is the case, the amount of the capital gain that accrued to the taxpayer in respect of the disposal during the year of income is to be equal to the amount of the consideration. Where this paragraph applies, paragraph (a) will not apply.

Sub-section 160ZZD(5) varies the above bases where the disposal takes place within 12 months of the acquisition of the asset by the taxpayer. In this case the calculations will follow the bases set out in sub-section (4) except that references to the cost base to the taxpayer in respect of the asset are substituted for references to the indexed cost base.

Sub-section 160ZZD(6) is to the effect that sub-sections (3), (4) and (5) are to apply to an asset comprising a licence in respect of a unit of industrial property to which this section applies in the same manner as they apply to the unit itself.

DIVISION 15 - PROSPECTING AND MINING RIGHTS

Division 15 contains measures, adopting, for purposes of Part IIIA the special income tax arrangements applicable to a taxpayer carrying on prescribed mining operations within the meaning of Division 10 of Part III or prescribed petroleum operations within the meaning of Division 10AA of Part III of the Principal Act. In line with the current provisions of the income tax law, assets (that is to say "property") corresponding to the capital expenditure categories which attract income tax deductions and balancing adjustments on disposal will be treated as separate assets for capital gains tax purposes. Assets corresponding to capital expenditures not so treated as separate assets will fall to be included in the cost base of the prospecting permit or mining right.

Where the holder of an exploration permit who makes a mineral or oil discovery obtains a production licence in place of the exploration permit there will not be deemed to have been a disposal of the exploration permit and acquisition of the production licence. Rather, the exploration permit will be deemed to have merged into the production licence, the merged asset being taken to have been acquired at the time when the exploration permit was acquired.

The Division deals with full or partial disposals of rights, for cash or other consideration, and with disposals of rights to receive income from mining operations.

Section 160ZZE : Disposal of prospecting or mining right

Section 160ZZE provides for the treatment as separate assets, in the case of a taxpayer carrying on prescribed mining operations or prescribed petroleum operations, of assets corresponding to capital expenditure categories which, being subject to income tax deductions and balancing adjustments on disposal, are treated separately for purposes of the income tax law. The section achieves this by reference to the existing provisions of the income tax law. The relevant provisions effectively require an allocation of the consideration in respect of a disposal, to the different assets disposed of, as well as a determination of the deductions that have been allowed or are allowable, so that balancing adjustments may be made.

Section 160ZZE applies where a taxpayer -

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who carries on or has carried on prescribed mining operations within the meaning of Division 10 of Part III;

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who carries on or has carried on prescribed petroleum operations within the meaning of Division 10AA of that Part; or

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has incurred expenditure to which Division 10AAA of that Part relating to the transport of certain minerals applies,

disposes of an asset in respect of which, or in respect of the acquisition of which, the taxpayer incurred expenditure of a capital nature to which any of those Divisions applies (paragraph (a)) and the disposal has effect for the purposes of a provision of this Act other than Part IIIA as the disposal of several separate assets (paragraph (b)).

Where the requirements in paragraphs (a) and (b) are satisfied, section 160ZZE deems the disposal to constitute a disposal of those separate assets and provides for the consideration in respect of the disposal to be apportioned in the same manner as it is apportioned for the purposes of this Act other than Part IIIA.

Section 160ZZF : Conversion of prospecting right to mining right

Section 160ZZF will have the effect, that a transition from the prospecting or exploration stage to the mining or production stage will not constitute a realisation of an asset, nor will the transition affect the original date of acquisition of the right.

Sub-section 160ZZF(1) defines the terms "mining right" and "prospecting right" for the purposes of the section.

"mining right" means an authority, licence, permit or right under a law of the Commonwealth, of a State or of a Territory to mine minerals in a particular area, or a lease of land under such a law by virtue of which the lessee is entitled to mine minerals on the land, and includes an interest in such an authority, licence, permit, right or lease.

"prospecting right" means an authority, licence, permit or right under a law of the Commonwealth, of a State or of a Territory to prospect or explore for minerals in a particular area, or a lease of land under such a law by virtue of which the lessee is entitled to prospect or explore for minerals on the land, and includes an interest in such an authority, licence, permit, right or lease.

Sub-section 160ZZF(2), which is the operative part of this section, will have the effect that where a mining right is granted to a taxpayer who has discovered minerals as a result of prospecting or exploration carried out by the taxpayer under the authority of a prospecting right, the prospecting right is to be deemed to have merged with the mining right. Further, the taxpayer will be deemed to have acquired the asset constituted by the merger of the prospecting right and the mining right at the time when the prospecting right was acquired by the taxpayer, and to have paid as consideration for the acquisition of that asset the sum of any amount paid by the taxpayer for the acquisition of the prospecting right and any amount paid by the taxpayer for the acquisition of the mining right. Consequently, no capital gain or capital loss will arise in consequence of the merger.

Section 160ZZG : Disposal of right to receive income from mining operations

Section 160ZZG applies where a person who owns or owned an interest in a mining or prospecting right grants or assigns to another person the right to receive any part of future income from operations carried on pursuant to the right. The scope of the section would extend to and include arrangements generally described as "farm-in/farm-out" arrangements. In broad terms the disposal of a right to future income will not be taken as the disposal of part of the prospecting or mining right, but will be treated as the disposal of an asset (the right to future income) created by the person immediately before the disposal, without that person having given any consideration in respect of its acquisition.

DIVISION 16 - INSURANCE AND SUPERANNUATION

This Division deals with disposals of rights under insurance policies and to the receipt of superannuation benefits. The Division provides for the exemption from the tax on capital gains, of gains made on the disposal of rights under a life assurance policy or rights to receive payment from superannuation funds or approved deposit funds. However, the exemption will not be available to a person who is not the original beneficial owner or a member of the fund and who acquired the right for valuable consideration.

Section 160ZZH : Policies of insurance

Policies of life assurance are excluded by sub-section 160ZZH(1) from the kinds of insurance policies which are dealt with in the section.

Sub-section 160ZZH(2), provides that Part IIIA will not apply in respect of the disposal of, or of an interest in, the rights of an insurer under a policy of insurance.

Sub-section 160ZZH(3) brings within the scope of Part IIIA the disposal of, or of an interest in, rights of an insured under a policy of insurance in certain circumstances. Part IIIA will apply to the disposal of such rights where the policy is against the risk of loss or destruction of, or damage to, property only if the rights relate to an asset in respect of the disposal of which Part IIIA would apply or would have applied. Thus, for example, Part IIIA will not apply in the case of a disposal of rights of an insured under a policy of insurance relating to a motor vehicle of a kind which by section 160A is not an asset to which the Part applies (see notes on that section).

Section 160ZZI : Policies of life assurance

By sub-section 160ZZI(1), the term "policy of life assurance" in section 160ZZI means a policy of assurance on the life of a person and includes an instrument under which an annuity is payable.

The effect of sub-section 160ZZ1(2) is that the capital gains provisions will not apply to a disposal of, or interests in, rights under a life assurance policy. However, sub-section 160ZZ1(3) makes an exception of cases where the rights are disposed of by a person who was not the original beneficial owner of the policy and obtained the rights under the policy in exchange for money or other consideration.

Sub-section 160ZZI(4) means that rights under a life assurance policy will be considered to be disposed of when any act, transaction or event occurs which has the result of bringing about any of the following consequences -

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a payout of the policy;

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a transfer of an asset to the policy owner in accordance with the policy; or

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the payment of the surrender value of the policy.

The effect of the section as a whole is that any life assurance policy which terminates by virtue of such an event so that no further claim could be made under the policy will not come within Part IIIA, if the person who effects the termination was the original beneficial owner of the policy. Any policy of life assurance purchased by a person who was not the original beneficial owner will be subject to the provisions of Part IIIA on the disposal of the policy.

Section 160ZZJ : Superannuation and approved deposit funds

The operation of Part IIIA is excluded by virtue of this section where a member of a fund receives a payment from a superannuation fund or an approved deposit fund (as defined).

By virtue of sub-section 160ZZJ(1), but subject to sub-section (3), Part IIIA does not apply to -

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the disposal of a right (or part of a right) to an allowance, annuity or capital payment payable out of a superannuation fund or approved deposit fund (paragraph (a)); or

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the disposal by a person, other than a trustee of the fund, of the whole or a part of a right to an asset of a superannuation fund or approved deposit fund (paragraph (b)).

The disposal of the right (or part) to the amount or property occurs where an act, transaction or event results in a payment being made or an asset being transferred to the person from the relevant fund (sub-section 160ZZJ(2)).

By virtue of sub-section 160ZZJ(3), a disposal of the right to the amount or property by a person who acquired that right for an amount of money or other consideration, other than as a member of the superannuation fund or approved deposit fund, will not be subject to the exclusion of the operation of Part IIIA under sub-section 160ZZJ(1). The effect of this sub-section is to permit the capital gains provisions to apply where a person, not being a member of the superannuation fund or approved deposit fund, purchased the rights to the superannuation payment.

Sub-section 160ZZJ(4) defines certain terms used throughout the section -

"approved deposit fund" has the same meaning as in Subdivision AA of Division 2 of Part III of the Principal Act; and

"superannuation fund" means either:

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a superannuation fund within the meaning of Division 9B of Part III, (paragraph (a)); or

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a scheme for the payment of benefits upon retirement or death constituted by or under a law of the Commonwealth or of a State or Territory (paragraph (b)).

DIVISION 17 - MISCELLANEOUS ROLL-OVER RELIEF

Division 17 sets out the legislative conditions that have to be met before a deferral of tax liability on a capital gain (referred to as a "roll-over") is granted to a taxpayer. The postponement of tax on a roll-over will generally be at a taxpayer's option rather than being mandatory. An asset acquired before 20 September 1985 that, if it had been acquired on or after that date, would have qualified for "roll-over" relief will carry over its capital-gains-tax-exempt status to the replacement asset (a defined term) or in the hands of a transferee. In those circumstances, capital gains tax will not apply when the asset is subsequently disposed of. The circumstances in which a disposal of an asset may qualify for roll-over are:

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certain involuntary asset disposals, namely compensation for the compulsory acquisition of an asset or for stolen, lost, destroyed or damaged property, provided the asset is repaired, restored or replaced within a stipulated period;

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asset transfers effected pursuant to an order of, or a maintenance agreement sanctioned by, a court under the Family Law Act 1975 or a corresponding law of a foreign country;

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where an individual, partnership or trust transfers property to a company solely in exchange for stock or securities of the same company and, immediately after the transfer, holds beneficially 100 per cent of the shares in the company or, in the case of a partnership, the partners beneficially own the shares in the company in the same proportions as their interests in the partnership immediately before the disposal;

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asset transfers between companies in the same group, where, broadly, the companies share 100 per cent common ownership, including situations where assets are transferred from a wholly-owned subsidiary company being liquidated to its parent company; and

•

where as a result of a reorganisation of the capital of a company (including share splits and share consolidations), a shareholder surrenders all of his or her shares of a particular class in exchange for other shares of the same company.

Section 160ZZK : Involuntary Disposal

Section 160ZZK deals with situations where there is an involuntary disposal of an asset. Generally, an "involuntary disposal" is one where money or property (see also notes on section 160ZZL) is received by way of compensation, including insurance proceeds, for the compulsory acquisition of an asset, or for loss, destruction or damage to an asset. The purpose of a roll-over in this context is to defer a liability to tax on capital gains until the replacement asset is disposed of. The granting of a roll-over is subject to a number of requirements.

Sub-section 160ZZK(1) sets out the conditions necessary for the operation of the section. The first condition, contained in paragraph (a), requires a taxpayer to have disposed of an asset or part of an asset (referred to as the "original asset") by reason of an act, transaction or event as a result of which the taxpayer has received an amount of money (referred to as the "relevant amount"). Sub-paragraph (a)(i) requires that the money be received by way of compensation for the compulsory acquisition (a term defined in sub-section 160ZZK(2)) of the asset or for the loss or destruction of, or damage to, the asset. Alternatively, the taxpayer will have received money under a policy of insurance against the risk of loss or destruction of, or damage to, the asset (sub-paragraph (a)(ii)).

Paragraph (b) requires that the taxpayer acquire a replacement asset (a term defined in sub-section 160ZZK(7)) or incur expenditure of a capital nature in repairing or restoring the original asset, as the case may be, within a stipulated period. This period commences not earlier than one year before the disposal of the asset took place and ends not later than one year after the end of the year of income in which the disposal took place. This allows taxpayers between one and two years after the time of disposal to acquire a replacement asset or repair or restore the original asset. The period may be extended where the Commissioner of Taxation is satisfied that special circumstances exist.

Paragraph (c) deals with the question of what roll-over relief is to be given where the owner of the subject asset was neither a resident of Australia (sub-paragraph (c)(i)) nor a trustee of a resident unit trust or trust estate (sub-paragraph (c)(ii)). In those cases Part IIIA will only apply to disposals of taxable Australian assets, and a roll-over will accordingly be permitted only if the original asset and the replacement asset are taxable Australian assets. Paragraph (d) provides for the manner and timing of an election to have the roll-over rules apply.

Unless the period is extended by the Commissioner, the election is to be made in writing on or before the date of lodgment of the return of income for the year in which the disposal took place.

Sub-section 160ZZK(2) defines "compulsory acquisition" for the purposes of sub-paragraph (1)(a)(i). It means a compulsory acquisition of an asset by the Commonwealth, a State or a Territory or an authority of the Commonwealth, of a State or of a Territory. This excludes from the scope of the roll-over provisions shares compulsorily acquired in a company takeover situation.

Sub-section 160ZZK(3) is a formal drafting measure which provides that the application of the provisions of proposed Part IIIA, other than this section, is subject to this section.

Sub-section 160ZZK(4) operates to preserve the exemption applying to assets acquired before 20 September 1985 by deeming the replacement asset, or the original asset as repaired or restored, as the case may be, to have been acquired before that date.

Sub-section 160ZZK(5) is a safeguarding measure designed to prevent abuse of the exemption from capital gains tax extended to a replacement asset under sub-section (4). In short, a replacement asset will not be taken to be a pre-20 September 1985 asset if the consideration in respect of the acquisition of a replacement asset exceeds the market value of the original asset immediately before its disposal by more than 20 per cent.

Once a valid election is made by a taxpayer, sub-section 160ZZK(6) sets out the basis for allowing roll-over relief in relation to all or part of a capital gain (referred to as the "notional capital gain") which, but for this section, would have accrued to the taxpayer as a result of the involuntary disposal. The consequences of a roll-over in this situation turn on whether the whole or part of the compensation moneys, etc., is put towards a replacement asset or in repairing or restoring the original asset.

Paragraph (a) addresses the situation where the compensation or insurance moneys (the "relevant amount") does not exceed the consideration that was paid or given by a taxpayer in acquiring a replacement asset or for expenditure towards the repair or restoration of the original asset. Broadly, where the whole of the relevant amount has been so applied by the taxpayer, the consideration or the expenditure, as the case may be, is reduced by the amount of the notional capital gain. This means that the cost base, indexed cost base or reduced cost base to the taxpayer of the whole or part of the replacement asset or the repaired asset will be reduced by the amount of the notional capital gain on the involuntary disposal.

Paragraph (b) sets out the consequences where the relevant amount exceeds the consideration paid or the expenditure incurred. If the notional capital gain on the disposal is greater than the excess of the relevant amount over the consideration or expenditure:

•

a capital gain equal to the excess will accrue to the taxpayer in the year of income in which the disposal took place (sub-sub-paragraph (b)(i)(A)); and

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the consideration paid or given in respect of the acquisition of a replacement asset or the expenditure incurred for the repair or restoration of the original asset will be reduced by the amount by which the notional gain is greater than the excess (sub-sub-paragraph (b)(i)(B)).

If the excess is equal to or more than the notional capital gain, a capital gain equal to the notional capital gain will accrue to the taxpayer in the year of income in which the disposal took place (sub-paragraph (b)(ii)).

Sub-section 160ZZK(7) effectively defines the term "replacement asset" as used in this section. An asset will be regarded as a "replacement asset" if it satisfies tests under paragraphs (a) and (b) of the sub-section.

Paragraph (a) contains two tests either of which needs to be satisfied. Under sub-paragraph (a)(i) an asset will be a replacement asset if it is used for a reasonable time after acquisition in the same or a similar business to that carried on by the taxpayer immediately before the disposal took place. Sub-paragraph (a)(ii) alternatively requires that the new asset be, for a reasonable time after its acquisition, used for the same or a similar purpose to that for which the taxpayer used the former property.

Paragraph (b) makes it clear for the purposes of the tests in paragraph (a) that an asset will be taken to have been used in a particular business or for a particular purpose immediately before its disposal if, immediately before its disposal, it was being installed for use, or was installed ready for use, in that business or for that purpose.

Section 160ZZL : Asset received as a result of involuntary disposal

Section 160ZZL is similar to section 160ZZK. It sets out the conditions necessary to permit a roll-over where another asset (referred to as a "replacement asset") is received rather than money by way of compensation as a result of an involuntary disposal of an original asset.

Paragraphs (a), (b) and (d) of sub-section 160ZZL(1) contain similar conditions as those in sub-section 160ZZK(1). However, paragraph (c) imposes the additional requirement that if the original asset was acquired on or after 20 September 1985, the market value of the replacement asset at the time of acquisition by the taxpayer must exceed the indexed cost base to the taxpayer of the original asset.

Sub-section 160ZZL(2) is a formal drafting measure making clear that the application of the other provisions of Part IIIA, in respect of the disposal, is subject to this section.

Sub-section 160ZZL(3) parallels the operation of sub-section 160ZZK(4) in extending to an asset replacing a pre-20 September 1985 asset the pre-20 September 1985 status of the asset it replaces.

Sub-section 160ZZL (4) effectively maintains the tax position of a taxpayer who has elected to roll-over a capital gains tax liability, by deeming a disposal of the original asset not to have taken place and the consideration in respect of the acquisition of the replacement asset to be an amount equal to the indexed cost base to the taxpayer of the original asset.

Sub-section 160ZZL (5) defines the term "compulsory acquisition". It has an identical meaning as in sub-section 160ZZK(2), i.e., compulsory acquisition by the Commonwealth, a State or Territory or by one of their authorities respectively.

Sub-section 160ZZL(6) modifies the operation of paragraph (1)(c) and sub-section (4) in the event that a taxpayer disposes of the replacement asset within 12 months after the original asset was acquired. It requires that a reference to the indexed cost base to a taxpayer of the asset is to be taken as a reference to the cost base of the asset. This is consistent with other provisions of Part IIIA which preclude indexation in relation to assets disposed of within 12 months.

Section 160ZZM : Transfer of asset between spouses upon breakdown of marriage

Section 160ZZM affords roll-over relief to asset transfers between spouses upon the breakdown of their marriage where the transfer is effected pursuant to an order of, or a maintenance agreement approved by, a court under the Family Law Act 1975 or under a corresponding law of a foreign country. Also, any capital-gains-tax-exempt status of an asset acquired in these circumstances will be retained in the hands of the transferee. This means that no capital gains tax will be payable on the subsequent disposal of an asset which a spouse acquires in those circumstances if the original asset was acquired by the former spouse before 20 September 1985.

Sub-section 160ZZM(1) is the operative provision for this section and sets out the conditions and consequences relevant to such asset transfers. Paragraphs (1)(a) and (b) set out two alternative conditions necessary for the operation of this sub-section to override the provisions of Part IIIA other than section 160ZZM:

•

first, an asset is disposed of to a spouse pursuant to an order of a court under the Family Law Act 1975 or under a corresponding law of a foreign country (paragraph (a));

•

alternatively, by paragraph (b), an asset transfer takes place under a maintenance agreement approved by a court under section 87 of the Family Law Act 1975 or a corresponding agreement approved by, or otherwise sanctioned by, a court under a corresponding law of a foreign country.

Where either of those conditions is met, paragraph (c) deems an asset acquired by a taxpayer before 20 September 1985 to have been acquired by the recipient spouse before that date.

Paragraph (d) deals with assets acquired by a taxpayer on or after 20 September 1985. Under sub-paragraph (d)(i) a recipient spouse will be taken to have paid as consideration for the acquisition of the asset an amount equal to:

•

for the purpose of ascertaining whether a capital gain accrued to the spouse on a subsequent disposal of the asset - the amount that would have been the indexed cost base to the taxpayer of the asset for the purposes of Part IIIA if it had applied to the disposal of the asset by the taxpayer to the spouse (sub-sub-paragraph (d)(i)(A)); or

•

for the purpose of ascertaining whether the spouse incurred a capital loss in the event of a subsequent disposal of the asset - the amount that would have been the reduced cost base to the taxpayer if Part IIIA had applied to the disposal of the asset by the taxpayer to the spouse (sub-sub-paragraph (d)(i)(B)).

By sub-paragraph (d)(ii) a personal-use asset retains its character in the hands of a recipient spouse.

Sub-section 160ZZM(2) modifies the operation of paragraph (1)(d) where an asset is disposed of by a recipient spouse within 12 months after the day on which the asset was acquired by the taxpayer. It requires that a reference to the indexed cost base to the taxpayer of the asset be taken as a reference to the cost base.

Sub-section 160ZZM(3) defines "spouse" in this context to include a former spouse of the taxpayer.

Section 160ZZN : Transfer of asset to wholly-owned company

Section 160ZZN, in broad terms, permits a roll-over in circumstances where a change occurs in the legal ownership of assets but not in their underlying ownership. It contains measures to provide roll-over relief where an individual, partnership or trust transfers an asset (other than a personal-use asset) to a company solely in exchange for stock or securities of the company and immediately after the transfer beneficially owns 100 per cent of the shares in the company or, in the case of a partnership, the partners beneficially own shares in the company in the same proportion as their interests in the partnership immediately before the disposal. Further, where an asset acquired before 20 September 1985 is transferred in circumstances, where, if it had been acquired on or after that date, it would have qualified for a roll-over, it will retain its capital-gains-tax-exempt status in the hands of the transferee company.

By sub-section 160ZZN(1) the term "asset" in this context does not include a personal-use asset.

Sub-section 160ZZN(2) specifies the conditions to be met and the consequences of an election for roll-over in relation to an asset transfer to a wholly-owned company. The operation of the sub-section first requires one of the following events to occur:

•

a resident taxpayer (other than a company or a taxpayer in the capacity of a trustee) disposes of an asset to a company that is a resident of Australia (sub-paragraph (a)(i));

•

a non-resident taxpayer (other than a company or a taxpayer in the capacity of a trustee) disposes of a taxable Australian asset (a term defined in section 160T) to a resident company (sub-paragraph (a)(ii)); or

•

a taxpayer (other than a company or a taxpayer in the capacity of a trustee) disposes of a taxable Australian asset to a company that is not a resident of Australia (sub-paragraph (a)(iii)).

Under paragraph (b) the consideration in respect of the disposal must consist only of shares in or securities of the company.

Paragraph (c) adds the requirement that the taxpayer must immediately after the disposal be the beneficial owner of all the shares in the company while, under paragraph (d), the taxpayer is to elect for sub-section (2) to apply.

Where the above conditions are satisfied, paragraphs (e) and (f) govern the consequences. Paragraph (e) applies where the asset was acquired by the taxpayer before 20 September 1985 and deems the asset to have been acquired by the company before that date.

Paragraph (f) applies where the asset was acquired by the taxpayer on or after 20 September 1985. Sub-paragraph (f)(i) provides that for the purposes of ascertaining whether a capital gain accrued to the company on a subsequent disposal of the asset by the company, the company will be deemed to have paid as consideration in respect of the acquisition of the asset, an amount equal to the amount that would have been the indexed cost base to the taxpayer of the asset if Part IIIA had applied to the disposal of the asset by the taxpayer to the company. For the purposes of ascertaining whether a capital loss was incurred on the subsequent disposal of the asset by the company, the company will be deemed by sub-paragraph (f)(ii) to have acquired the asset for a consideration equal to the reduced cost base to the taxpayer of the asset also calculated as if the disposal of the asset by the taxpayer to the company had been a disposal to which Part IIIA applied.

Sub-section 160ZZN(3) modifies the operation of paragraph (1)(f) if the asset is disposed of by the company within 12 months after the day on which the asset was acquired by the taxpayer. In this case, a reference to the indexed cost base of the asset is to be taken as a reference to the cost base of the asset.

Sub-section 160ZZN(4) applies where an asset held by a taxpayer in the capacity of a trustee is disposed of to a company in circumstances that parallel those to which sub-section (2) applies.

The operation of sub-section (4) is otherwise identical to that of sub-section (2) except that paragraph (4)(c) adds the condition that immediately after the disposal the taxpayer owns all the shares in the company and holds those shares upon the same trust as the taxpayer held the asset disposed of.

Where the conditions for the application of sub-section (4) are satisfied and the asset being transferred by the taxpayer in the capacity of a trustee was acquired by the taxpayer before 20 September 1985, the company is deemed, by virtue of paragraph (e), to have acquired the asset before that date. Accordingly, a subsequent disposal of that asset by the company will not be within the scope of the Part IIIA.

Paragraph (f) correspondingly deals with a case where the asset concerned was acquired by the taxpayer in the capacity of a trustee on or after 20 September 1985. Sub-paragraph (f)(i) applies for the purposes of ascertaining whether a capital gain accrued to the company on a subsequent disposal of the asset by the company, and treats the company as having paid as consideration in respect of the acquisition of the asset an amount equal to the indexed cost base to the taxpayer of the asset calculated as if Part IIIA had applied to the disposal of the asset by the taxpayer to the company.

Similarly, for the purposes of ascertaining whether a capital loss was incurred in the event that the company disposes of the asset, the company is deemed by sub-paragraph (f)(ii) to have acquired the asset for a consideration equal to the reduced cost base to the taxpayer of the asset determined as if the disposal of the asset by the taxpayer to the company had been a disposal to which Part IIIA applied.

Again, sub-section (5) modifies the operation of paragraph (1)(f) in the event that the asset is disposed of by the company within 12 months after the day on which the asset was acquired by the trustee taxpayer. It requires that a reference to the indexed cost base to the taxpayer of the asset be taken as a reference to the cost base of the asset.

Sub-section 160ZZN(6) addresses the situation where a partnership decides to incorporate. It limits the scope of a roll-over to a partnership (notwithstanding that one or more of the partners is a company) to where:

•

at least one of the partners is a natural person (paragraph (a)); and

•

immediately after the disposal the persons who were partners in the partnership beneficially owned the shares in the company in the same proportions as their respective partnership interests immediately before the disposal (paragraph (b)).

Sub-section 160ZZN(7) applies where the new shares or securities that constituted the consideration for a disposal by a taxpayer to a company of an asset relate to an asset to which either sub-sections (2) or (4) applies. Where the asset being transferred was acquired by the taxpayer before 20 September 1985, the taxpayer is deemed by virtue of paragraph (a) to have acquired the shares or securities before that date. Accordingly a subsequent disposal of the shares or securities by the taxpayer will be exempt from capital gains tax.

Paragraph (b) sets out the capital gains tax consequences of transferring an asset that was acquired by a taxpayer on or after 20 September 1985. For the purposes of ascertaining whether a capital gain accrued to the taxpayer on a subsequent disposal of the shares or securities by the taxpayer, the taxpayer will be deemed, by sub-paragraph (b)(i), to have paid as consideration in respect of the acquisition of the shares or securities an amount equal to the indexed cost base to the taxpayer of the asset calculated as if Part IIIA had applied to the disposal of the asset by the taxpayer to the company. Similarly, for the purposes of ascertaining whether a capital loss was incurred on a subsequent disposal by the taxpayer of the shares or securities, the taxpayer is deemed to have acquired the shares or securities for a consideration equal to what would have been the reduced cost base to the taxpayer of the relevant asset if the disposal of the asset by the taxpayer to the company had been a disposal to which Part IIIA applies (sub-paragraph (b)(ii)).

Sub-section (8) modifies the operation of paragraph (7)(b) in cases where the shares or securities are disposed of by the taxpayer within 12 months after the day on which the asset was acquired by the taxpayer. In this event, a reference to the indexed cost base of the asset is to be taken to be a reference to the cost base of the asset.

Sub-section 160ZZN(9) is a safeguarding measure designed to prevent the use of a tax-exempt company as a vehicle to free from tax capital gains which might otherwise be assessable. It precludes the roll-over provisions of section 160ZZN from having any application where the income of the company is exempt from tax under a relevant exempting provision (see definition in section 160K).

Section 160ZZO : Transfer of asset between companies in the same group

Section 160ZZO permits a roll-over for asset transfers between companies in the same group, provided the companies share 100 per cent common ownership. For the purposes of determining a company group relationship the section adopts the principles in section 80G of the Principal Act.

Sub-section 160ZZO(1) sets out the conditions for and declares the consequences of a valid election made under this section.

Paragraph (a) refers to specific situations, namely:

•

a company (referred to as the "transferor") that is a resident of Australia disposes of an asset to another company (referred to as the "transferee") that is also a resident of Australia (sub-paragraph (a)(i));

•

a company (again referred to as the "transferor") that is not a resident of Australia disposes of a taxable Australian asset to another company (referred to as the "transferee") that is a resident of Australia, (sub-paragraph (a)(ii)); or

•

a company (also referred to as the "transferor") disposes of a taxable Australian asset to another company (the "transferee") that is not a resident of Australia (sub-paragraph (a)(iii)).

By paragraph (b), the transferee must be a group company in relation to the transferor in relation to the year of income in which the disposal took place. Under paragraph (c) the transferee is not to be a person whose income of the year of income in which the disposal took place is exempt from tax by virtue of a relevant exempting provision (as defined).

Finally, paragraph (d) requires the lodgment, with the usual provisions as to the timing and manner of its lodgment, of an election by the transferor and transferee companies that section 160ZZO is to apply to the disposal.

On the basis that the above conditions are met, paragraph (e) sets out the consequence of transferring an asset that was acquired by the transferor before 20 September 1985, i.e., that transferee is to be taken as having acquired it before that date.

Paragraph (f) refers to assets acquired by the transferor on or after 20 September 1985. Sub-paragraph (f)(i) means that, for the purposes of ascertaining whether a capital gain accrued to the transferee on a subsequent disposal of the asset by the transferee, the transferee is taken to have paid as consideration in respect of the acquisition of the asset an amount equal to the indexed cost base to the transferor of the asset calculated as if Part IIIA had applied to the disposal of the asset by the transferor to the transferee.

Similarly, for the purposes of ascertaining whether a capital loss was incurred when the transferee disposes of the asset, the transferee is to be deemed, by sub-paragraph (f)(ii), to have acquired the asset for a consideration equal to the reduced cost base to the transferor of the asset determined as if the disposal of the asset by the transferor to the transferee had been a disposal to which Part IIIA applied.

Sub-section 160ZZO(2) modifies the operation of paragraph (1)(f) where the asset is disposed of by the transferee within 12 months after the day on which the asset was acquired by the transferor. It requires that a reference to the indexed cost base of the asset be taken to be a reference to the cost base of the asset.

Sub-section 160ZZO(3) adopts the principles of the company group loss transfer provisions of section 80G of the Principal Act to allow a group company to transfer, to one or more other companies in the group, all or part of a net capital loss incurred.

Sub-section (3) specifies two tests, either of which must be satisfied if, in relation to a year of income, a loss is to be transferable between two companies. These tests are that, throughout the year of income, one of the companies was a subsidiary of the other company (paragraph (a)) or each of the companies was a subsidiary of the same parent (paragraph (b)). The relevant test must be satisfied during the whole of the year of income or, if either or both of the companies was not or were not in existence for part of the year, it must be satisfied during that part of the year in which both companies were in existence.

For these purposes, by virtue of sub-section (8), a company is to be treated as coming into existence during the year if it was incorporated during the year. The provisions will not extend to an existing company that is acquired or disposed of by the company group concerned during the year.

Where a company has adopted a substituted accounting period for income tax purposes, the "common ownership" test must be met throughout the whole of the period covering that accounting period and, if it is not identical, the corresponding year of income of the related company.

Sub-section 160ZZO(4) specifies the circumstances in which a company is to be taken to be a subsidiary of another company (termed the "holding company") for the purposes of this section during the whole or a part of a year of income (the "relevant period") as required to satisfy sub-section (3).

Under sub-paragraph (4)(a)(i) this relationship is established if all the shares in the subsidiary company were beneficially owned by the holding company at all times during the relevant period. Sub-paragraph (a)(ii) establishes the relationship if all the shares in the subsidiary company were beneficially owned during the relevant period by a company that is, or by two or more companies each of which is, a subsidiary of the holding company. By sub-paragraph (a)(iii) the necessary relationship will also exist if all the shares in the subsidiary company were owned during the relevant period by the holding company and by a company that is, or two or more companies each of which is, a subsidiary of the holding company.

Paragraph (4)(b) imposes the further requirement that during the relevant period no person was in a position, or would become in a position after the relevant period, to affect rights of the holding company, or of another subsidiary of the holding company in relation to the particular subsidiary company. This is a safeguard against the possibility of any collateral arrangements being used to circumvent the intended operation of the provisions.

Sub-section 160ZZO(5) extends the operation of sub-sections (3) and (4) by establishing a qualifying group relationship between companies which are part of a wholly-owned chain of subsidiaries of a holding company. Thus, in a corporate structure under which all of the shares in a subsidiary are owned by one or more wholly-owned companies that are interposed between a holding company and the end subsidiary company, a qualifying group relationship will be found between each of those companies.

Sub-section 160ZZO(6) qualifies sub-section (4). It specifies the circumstances in which a person is to be regarded as being in a position at a particular time to affect the rights of one company in relation to another company. A person will be in that position if he or she has at the particular time a right, power or option (whether by virtue of any provision in the constituent document of either of the companies, or by virtue of any agreement or otherwise) to acquire any of the rights of the first company in its subsidiary or to prevent that company from exercising rights in the subsidiary for its own benefit or receiving any benefits accruing under those rights.

An agreement referred to in sub-section 160ZZO(6) is defined by sub-section 160ZZO(7) to include an agreement, arrangement or understanding whether formal or informal, whether express or implied and whether or not enforceable, or intended to be enforceable.

The practical effect of sub-section 160ZZO(8), when taken together with sub-section (3), is that a company which was not a group company for the whole of the year of income will only be regarded as such if it was a company that was incorporated during the year and was, in practical effect, wholly owned for the remainder of the year by another group company. Where either an existing group company is disposed of, in whole or in part, during a year, or a company which was not previously a group company is wholly acquired during a year, neither of those companies can be a group company for loss transfer purposes in relation to that particular year of income. However, where a company is acquired during a year of income, that company would be a group company for these purposes in subsequent years if the specified 100 per cent common ownership rule continues to be met.

Sub-section 160ZZO(9) ensures that a personal-use asset of the transferor retains its character in the hands of the transferee.

Section 160ZZP : Exchange of shares in the same company

Section 160ZZP extends roll-over relief to reorganisations of share capital within a company where, as part of the reorganisation, a shareholder surrenders all his or her shares of a particular class to the company in exchange solely for other shares of the same company. This category of roll-over thus deals with transactions that may, broadly, be described as share splits and share consolidations. A roll-over will not be permitted where any other form of consideration, such as cash, is received in relation to the exchange of shares. A pre-20 September 1985 share which, if it had been acquired on or after that date, would have qualified for roll-over in this way, will transfer its capital-gains-tax-exempt status to the replacement share.

Sub-section 160ZZP(1) sets out the conditions for and declares the consequences of a valid election made in relation to an exchange of shares. The conditions are that:

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a company redeems or cancels all the shares of a particular class in the company (paragraph (a));

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the taxpayer holds shares of that class in the company (the "original shares") (paragraph (b));

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the taxpayer is a resident of Australia or the redemption or cancellation constitutes a disposal of a taxable Australian asset (paragraph (c));

•

the company issues to the taxpayer other shares in the company (the "new shares") in substitution for the original shares (paragraph (d));

•

the market value of the new shares immediately after their issue is not less than the market value of the original shares immediately before their redemption or cancellation (paragraph(e));

•

the taxpayer did not receive any consideration other than the new shares by reason of the redemption or cancellation (paragraph (f)); and

•

the taxpayer has elected by notice in writing, given to the Commissioner of Taxation on or before the date of lodgment of the return of income of the taxpayer for the year of income in which the disposal took place, or within such further period as the Commissioner allows, that this section apply in respect of the redemption or cancellation (paragraph (g)).

Where the shares being surrendered by the taxpayer were acquired by the taxpayer before 20 September 1985 and the above conditions are met, the taxpayer is deemed by virtue of paragraph (h) to have acquired the new shares before that date. Accordingly, a subsequent disposal of the new shares by the taxpayer would not be subject to tax on any capital gain.

Paragraph (j) applies where the shares given up in exchange were acquired by the taxpayer on or after 20 September 1985. For the purposes of ascertaining whether a capital gain accrued to the taxpayer on a subsequent disposal of the new shares by the taxpayer, the taxpayer will be deemed, by sub-paragraph (j)(i), to have paid as consideration in respect of the acquisition of the new shares, an amount equal to the indexed cost base to the taxpayer of the asset as if Part IIIA had applied to the disposal of the original shares by the taxpayer.

Similarly, for the purposes of ascertaining whether a capital loss was incurred when the taxpayer disposes of the new shares, the taxpayer is deemed by sub-paragraph (j)(ii) to have acquired the shares for consideration equal to the reduced cost base to the taxpayer of the original shares again determined as if the disposal of the original shares by the taxpayer had been a disposal to which this Part applies.

Sub-section (2) modifies the operation of paragraph (1)(j) where the new shares are disposed of by the taxpayer within 12 months after the day on which the original shares were acquired by the taxpayer. In this case, a reference to the indexed cost base of the asset is to be taken as a reference to the cost base of the original shares.

DIVISION 18 - PRINCIPAL RESIDENCE

Introduction

Division 18 will override the normal rules in circumstances where the asset that has been disposed of by a taxpayer was a dwelling that was at any time during which it was owned by the taxpayer the sole or principal residence of the taxpayer.

It will also override the normal rules where the asset that was disposed of by the taxpayer is a dwelling that was acquired by the taxpayer as the beneficiary in the estate of a deceased person, or which is owned by the taxpayer as trustee of a deceased estate, if the dwelling was at any time the sole or principal residence of the deceased, (this requirement only applies to residences acquired by the deceased after 19 September 1985) or, following the death of the deceased, the sole or principal residence of the spouse of the deceased person.

For purposes of the Division, the term "dwelling" has a wide meaning. It includes a house, flat, home unit, caravan, houseboat or other mobile home, which is used wholly or substantially as residential accommodation. Land adjacent to the dwelling, up to two hectares in area (including the area on which the dwelling is erected) which is used primarily for private or domestic purposes in association with the dwelling, is taken as being part of the dwelling and so, as a consequence, will be any building such as a garage or storeroom that stands on the land and is used for that purpose.

The provision will also apply to, in effect, treat, as a dwelling for up to four years, vacant land owned by the taxpayer on which a dwelling is subsequently erected by the taxpayer for use as his or her sole or principal residence, if the taxpayer or his or her spouse owned no other dwelling in that period that was used as the taxpayer's, or his or her spouse's, sole or principal residence. This provision will not apply to a dependent child.

A taxpayer who is absent for no more than four years from the dwelling that was his or her sole or principal residence may elect that that residence be treated as his or her sole or principal residence in that period and if he or she does so, no other dwelling will then be considered to be the taxpayer's sole or principal residence in that period. If the taxpayer uses the dwelling for income producing purposes during this period, this will not be taken into account in determining whether any part of a real capital gain or loss that results following the subsequent disposal of the dwelling by the taxpayer falls within the provisions relating to tax on capital gains.

Provision is made in the Division for two dwellings to be taken as being a taxpayer's sole or principal private residence for up to three months where a taxpayer changes homes.

In the case of a dwelling acquired otherwise than as a beneficiary in a deceased estate, the provisions in the Division operate to exclude any real gain that is derived, or loss that is incurred, on the disposal of the dwelling from being taken into account for the purposes of the provisions relating to tax on capital gains, if the dwelling was the taxpayer's sole or principal residence for the whole of the period that he or she owned it and was not used in that period for income producing purposes.

Where the dwelling is disposed of by a taxpayer who acquired the dwelling as a beneficiary in the estate of a deceased person, the provisions will exclude any capital gain that is made or loss that is incurred if certain criteria are met. Those criteria are that the dwelling was used as the sole or principal residence, of the taxpayer throughout his or her period of ownership of it, of the deceased person throughout his or her period of ownership of it, and, where applicable, of the spouse of the deceased person from the time of the deceased's death until the taxpayer became the legal owner of it. It is also necessary that the dwelling was not used in any of those periods to gain or produce assessable income.

Where the trustee of a deceased estate disposes of a dwelling that was the sole or principal residence of the deceased person throughout his or her period of ownership of it, and, where applicable, of the spouse of the deceased from the date of death of the deceased until the time of disposal, the provisions will exclude any capital gain that is made or loss that is incurred on the disposal of the dwelling from the operation of the provisions relating to tax on capital gains unless the dwelling was used at any time to produce income.

The provisions will operate in a corresponding manner if the dwelling is disposed of by either the beneficiary or trustee within twelve months of the death of the deceased, regardless of whether the dwelling was occupied in that time by the spouse of the deceased as his or her sole or principal residence unless the dwelling was used to produce income at any time from the date the deceased acquired it.

Provisions exist to include only a proportion of the gain or allow a proportion of the loss on the disposal of the dwelling if the rules set out above relating to the use of the dwelling as the sole or principal residence of the taxpayer, deceased person, or spouse of the deceased person are not satisfied for a period during which the dwelling was owned by the taxpayer, the deceased person or the trustee (or any one or more of those periods, as the case may be).

Where a dwelling used as the sole or principal residence of any of those persons prior to its disposal is at the same time also used for income producing purposes, the abovementioned rules ace to be modified having regard to the period in which, and the extent to which, the dwelling was used for income producing purposes.

Notes on the provisions of the Division are set out below.

Section 160ZZQ : Exemption of principal residence

The Division has only one section - section 160ZZQ. Sub-section (1) of the section defines the following terms which have a general use in the section:

"dependent child" is a term used in relation to the limitation of the principal residence concession to one dwelling for each family. The term dependent child means a child of the taxpayer who is under the age of 18 years and is dependent on the taxpayer for economic support.

"dwelling" is defined to include -

•

a unit of accommodation, contained in or consisting of a building, which is wholly or substantially used for residential accommodation (paragraph (a)); and

•

a caravan, houseboat or mobile home (paragraph (b)).

The term - which is to be read with sub-sections (3), (4) and (5) which extend the definition - is central to the operation of the proposed section because the principal residence concession applies to a "dwelling".

"relevant period" is defined as the period after 19 September 1985 during which a dwelling was owned by a taxpayer, and includes a period after that date during which land on which a dwelling was subsequently erected by a taxpayer was owned by a taxpayer. The term is used in relation to the disposal of a dwelling by the taxpayer, to determine the total period of ownership of the dwelling. It is a convenient method of referring to the period during which a taxpayer owned a dwelling.

Sub-section 160ZZQ(2) sets out the circumstances in which a taxpayer will be taken to own or to have acquired a dwelling other than a caravan, houseboat or mobile home. That will be where the person has ownership rights as an owner or long-term lessee of the land on which the dwelling is built. In the case of a dwelling other than a home unit or flat, the taxpayer will be taken to own the dwelling if he or she has an estate in fee simple, or a lease in perpetuity or for a term of not less than 99 years in the land on which the dwelling is erected (paragraph (2)(a)).

In the case of a home unit or flat, the taxpayer must own such an interest in a stratum unit in relation to the flat or home unit (sub-paragraph (2)(b)(i)). Alternatively, the taxpayer may own a share in a company - that has an estate in fee simple, or either a lease in perpetuity or for a term of 99 years or more in the land on which the building is erected - which entitles the taxpayer to exclusive occupancy of the home unit or flat (sub-paragraph (2)(b)(ii)).

Sub-section 160ZZQ (3) includes within the definition of "dwelling" certain land adjacent to the dwelling - and as a consequence a garage or storeroom on the land - in the case of a dwelling other than a home unit or flat - or a garage, storeroom or other structure associated with a home unit or flat. The sub-section makes it clear that the adjacent land, or a garage, storeroom or other structure, must be used by the owner primarily for private or domestic purposes in association with the dwelling to qualify as part of the dwelling. It also makes it clear that the land that is to be taken as part of the dwelling is limited to a maximum area (including the area on which the dwelling is erected) of two hectares.

Sub-section 160ZZQ(4) covers the situation where land, or a garage, storeroom or other structure, which is included within the definition of "dwelling" by virtue of sub-section (3) is disposed of separately from the dwelling. In such cases the principal residence concession will not, by virtue of the sub-section, apply to the disposal of the land, or garage, storeroom or other structure.

Sub-section 160ZZQ(5) covers the situation where, after 19 September 1985 a taxpayer acquires land on which to erect a dwelling. In such circumstances, the land may, subject to certain conditions, be deemed to be the principal residence of the taxpayer, notwithstanding that no dwelling has yet been erected on the land, if the dwelling that is subsequently erected on the land by the taxpayer becomes his or her sole or principal residence as soon as practicable after the dwelling was erected and continues to be so for a period of not less than twelve months (paragraph (5)(d)). Where the taxpayer fulfils these conditions, the period for which the dwelling that was subsequently erected on the land will be taken to be the sole or principal residence of the taxpayer will include the period (up to a maximum period of 4 years) from the date on which the land was acquired by the taxpayer to the date on which the taxpayer commenced occupation of the dwelling, during which the taxpayer was not a dependent child, or the taxpayer or the spouse of the taxpayer did not own another dwelling which was the sole or principal residence of either person.

Sub-section 160ZZQ(6) refers to the acquisition of a dwelling by a taxpayer as a beneficiary in the estate of a deceased person. Such a reference means the acquisition of a dwelling either under a will of a deceased person, or under such a will as varied by an order of a court (paragraph (6)(a)), or by operation of a law as a result of the intestacy of a deceased person, or by operation of such a law as varied by an order of a court (paragraph (6)(b)). The sub-section will apply where the dwelling is transferred directly to the taxpayer, or where the dwelling is transferred by the executor of the will, or the administrator of the estate, of the deceased person.

This sub-section is of primary significance in the operation of sub-sections 160ZZQ(13), (14), (17) and (18) (refer to discussion of those sub-sections in the notes below), by virtue of which the period in which a dwelling is the sole or principal residence of a taxpayer may include a period in which the dwelling was the sole or principal residence of a deceased person.

Sub-section 160ZZQ(7) is a drafting measure. It provides that a reference to the acquisition or disposal of a dwelling by a person, or the transmission or transfer of a dwelling to a person, is also to include a reference to the ownership of the asset (for example, the ownership of a share in a company which gives a right to exclusive occupancy of a dwelling) which by virtue of sub-section 160ZZQ(2) is to be taken as the ownership of the dwelling.

Sub-section 160ZZQ(8) covers two situations. Paragraph (a) of the sub-section covers the situation where a person uses his or her sole or principal residence both as a residence and for another purpose or purposes (e.g., a doctor's surgery). In such situations the sub-section makes it clear that the dwelling is to be taken as the sole or principal residence of a taxpayer. Sub-section (21) will operate, in effect, to tax the part of any real capital gain on the subsequent disposal of the dwelling related to the business use.

Paragraph (b) covers the situation where a taxpayer owns two homes at the time of changing homes and specifies the circumstances in which both dwellings will be taken to be the sole or principal residence of the taxpayer for a limited period. These are:

(a)

that the dwelling that was disposed of was the sole or principal residence of the taxpayer for a continuous period of at least three months during the period of twelve months before the time of disposal (sub-sub-paragraph (8)(b)(i)(A));

(b)

that dwelling was not used for income producing purposes during that twelve month period, other than during the period in which it was the taxpayer's sole or principal residence (sub-sub-paragraph (8)(b)(i)(B));

(c)

before disposing of the dwelling, the taxpayer acquired another dwelling which becomes his or her next sole or principal residence (sub-paragraph (8)(b)(ii)).

As indicated above the period that the taxpayer is to be allowed two sole or principal residences is limited to a maximum period of three months. Where the taxpayer acquired his or her new dwelling more than three months before the time of disposal of the old home, both homes will qualify as the taxpayer's sole or principal residence for the period of three months ending at the time of disposal of the old home (sub-paragraph (8)(b)(iii)). Where the disposal of the old home takes place three months or less from the time the new residence was acquired, both homes will be deemed to be the taxpayer's sole or principal residence for the period from the date of acquisition of the new home to the time of disposal of the old home (sub-paragraph (8)(b)(iv)).

Sub-section 160ZZQ(9) provides that only one residence of the family is to qualify for the concession. It applies where, at a particular time, a dwelling is the sole or principal residence of the taxpayer (paragraph (9)(a)), and at that time another dwelling is the sole or principal residence of his or her spouse or dependent child (paragraph (9)(b)). In such a case, if both taxpayer and spouse nominate the same dwelling, that dwelling will be deemed to be the sole or principal residence of the taxpayer and the spouse. If the other dwelling referred to in paragraph (b) is the sole or principal residence of a dependent child of the taxpayer, the dwelling nominated by the taxpayer will be deemed to be the sole or principal residence of the taxpayer and the dependent child.

Sub-section 160ZZQ(10) applies to those cases where the taxpayer and the spouse of the taxpayer nominate a different dwelling for the purposes of sub-section 160ZZQ(9), as their sole or principal residence in respect of the same period.

Paragraph (10)(a) applies in relation to the dwelling nominated by the taxpayer as his or her sole or principal residence in respect of the period in question. If throughout that period the taxpayer had a 50% (or less) interest in the ownership of the dwelling it is to be taken to be the sole or principal residence of the taxpayer for the whole of that period - sub-paragraph (10)(a)(i) is to that effect. This has the effect of allowing the concession, provided the other rules are satisfied for the whole of that period in respect of the taxpayer's interest. If the taxpayer's interest in the dwelling exceeded 50% at any time in the period in question, sub-paragraph (10)(b)(ii) will operate to deem the dwelling to be the sole or principal residence of the taxpayer for half of that period.

Paragraph (10)(b) operates in a corresponding way to the taxpayer's spouse and the dwelling nominated by him or her as his or her sole or principal residence, as paragraph (10)(a) operates in relation to the taxpayer and to the dwelling nominated by the taxpayer as his or her sole or principal residence, for the period in question.

Sub-section 160ZZQ(11) covers the situation where a person is temporarily absent from his or her sole or principal residence (for example, a person who is posted interstate). It allows a dwelling owned by a taxpayer that was his or her sole or principal residence to be taken to be the taxpayer's sole or principal residence for a period of absence of up to four years, notwithstanding that during that period, the dwelling has ceased to be the taxpayer's sole or principal residence.

To qualify as a sole or principal residence of the taxpayer during the time he or she has ceased to occupy it the dwelling must again become the taxpayer's sole or principal residence within the period of four years after it temporarily ceased to be his or her sole or principal residence (paragraph (11)(b)), and the taxpayer must notify the Commissioner in writing that the dwelling has again become his or her sole or principal residence, no later than the date of lodgment of the taxpayer's return of income for the year of income in which the taxpayer resumed occupation of the dwelling as his or her sole or principal residence (paragraph (11)(c)).

If these requirements are satisfied, the dwelling is deemed to have been the sole or principal residence of the taxpayer for the period from the date it temporarily ceased to be his or her sole or principal residence to the date on which it again became so (paragraph (11)(d)) and no other dwelling is to be deemed to have been the sole or principal residence of the taxpayer in that period (paragraph (11)(e)). Furthermore, if the dwelling (or if the whole of the dwelling (within the expanded meaning of that term) was not used by the taxpayer prior to its ceasing to be occupied as his or her sole or principal residence - the part that was used for that purpose) is also used during the taxpayer's temporary absence for income producing purposes that use is to be disregarded in respect of the dwelling, or part concerned, for the purposes of sub-section 160ZZQ(21) (refer to notes below) (paragraph (11)(f)).

Sub-section 160ZZQ(12), is to apply, in relation to the disposal of a dwelling, by a taxpayer, (other than where the dwelling was acquired by the taxpayer as a beneficiary in the estate of a deceased person, or where the taxpayer is a person in the capacity of trustee) that was the sole or principal residence of the taxpayer throughout the relevant period (see notes on that term in sub-section 160ZZQ(1)). In such circumstances, unless the dwelling was used at some stage for income producing purposes (in which case sub-section 160ZZQ(21) would apply), any real capital gain that is made on the disposal will not be liable for the tax on capital gains. Correspondingly, if a loss is incurred on the disposal of the dwelling, that loss will not be allowable for purposes of the provisions.

Sub-section 160ZZQ(13) is to apply in relation to the disposal of a dwelling acquired by a taxpayer as a beneficiary in the estate of a deceased person (paragraph (13)(a)). If in such a case:

(a)

the dwelling was the taxpayer's sole or principal residence throughout the period during which the dwelling was legally owned by the taxpayer (paragraph (13)(b));

(b)

if the dwelling was acquired by the deceased person after 19 September 1985, it was his or her sole or principal residence for the whole of the period that he or she owned the dwelling (paragraph (13)(c)); and

(c)

the dwelling was the sole or principal residence of the spouse of the deceased person throughout the period from the death of the deceased person during which the dwelling was owned by the legal personal representative of the deceased person (paragraph (13)(d)),

then unless the dwelling was used during any of the periods referred to to produce assessable income - in which case section 160ZZQ(21) would apply - any real capital gain that is made on the disposal will not be liable for the tax on capital gains. Correspondingly, if a loss is incurred on the disposal of the dwelling, that loss will not be allowable for purposes of the provisions.

Sub-section 160ZZQ(14) is to apply in relation to the disposal of a dwelling by a taxpayer who acquired the dwelling as a beneficiary in the estate of a deceased person where the disposal takes place within twelve months of the date of death of that person.

In such circumstances if the deceased person acquired the dwelling before 20 September 1985, then subject to the dwelling not having been used by the taxpayer for income producing purposes - in which case sub-section 160ZZQ(21) will apply - any real capital gain that is made on a disposal will not be liable for the tax on capital gains. Correspondingly, if a loss is incurred on a dwelling, that loss will not be allowable for purposes of the provisions.

If the dwelling was acquired by the deceased person after 19 September 1985 it will also be necessary for the dwelling to have been the sole or principal residence of the deceased person throughout his or her ownership of it and for the dwelling not to have been used in the period for income producing purposes, for the exemption to apply.

Sub-section 160ZZQ(15) is to apply in relation to the disposal of a dwelling owned by the trustee of the estate of a deceased person. If the dwelling was acquired by the deceased before 20 September 1985 and:

(a)

is disposed of by the trustee within twelve months of the deceased person's death; or

(b)

the dwelling was throughout the period from the date of the death of the deceased person to the time of disposal by the trustee the sole or principal residence of the spouse (at the date of death) of the deceased person,

then subject to the trustee not having used the premises to produce assessable income - in which case sub-section 160ZZQ(21) will apply - any real capital gain that is made on the disposal will not be liable for the tax on capital gains. Correspondingly, if a loss is incurred on the dwelling, that loss will not be allowable for the purposes of the provision.

If the dwelling was acquired by the deceased person after 19 September 1985, it will also be necessary for the residence to have been the sole or principal residence of the deceased person throughout his or her ownership of it and for the dwelling not to have been used in that period for income producing purposes for the exemption to apply.

Sub-section 160ZZQ(16) provides for the calculation of the part of any real capital gain that is made, or the allowable part of any capital loss that is incurred, on the disposal of a dwelling which was the sole or principal residence of the taxpayer referred to in the notes on sub-section 160ZZQ(12) throughout part only of the period of ownership.

In these circumstances, a proportion of the real capital gain will be liable for tax on capital gains or a proportion of the loss allowable. The proportion is calculated in accordance with the formula

(A*B)/(C)


Component A is the amount of the capital gain or loss in respect of the disposal of the dwelling;

Component B is the number of days during the period of ownership in which the dwelling was not the taxpayer's sole or principal residence; and

Component C is the total number of days in the period of ownership.

Where the sub-section applies, its effect is to exempt a proportion of the gain, or disallow a proportion of the capital loss, according to the proportion of the period of ownership during which the dwelling was not the taxpayer's sole or principal residence.

This sub-section is subject to the provisions of sub-section 160ZZQ(21) if the dwelling was used at any time to produce assessable income.

Sub-section 160ZZQ(17) is a similar provision to sub-section 160ZZQ(16) and applies to the disposal of a dwelling by a person who acquired the dwelling as a beneficiary in the estate of a deceased person where the disposal is made more than twelve months after the date of death of the deceased person (paragraph (17)(a)), and where any one or more of the following situations exist:

-

the dwelling was the taxpayer's sole or principal residence for only part of the period of his or her ownership of it (sub-paragraph (17)(b)(i));

-

if the dwelling was acquired by the deceased person after 19 September 1985, the dwelling was the sole or principal residence of the deceased person, for part only of the period of his or her ownership of it (sub-paragraph (17)(b)(ii)); or

-

the dwelling was the sole or principal residence of the spouse of the deceased person during part only of the period between the date of death of the deceased person and the date of acquisition of the dwelling by the taxpayer (sub-paragraph (17)(b)(iii)).

Where any of these situations exist, a proportion of any real capital gain will be liable for the tax on capital gains or a proportion of the capital loss will be allowable. The proportion is to be calculated in accordance with the formula

(A*B)/(C)


Component A is the amount of the capital gain or capital loss accrued or incurred on the disposal of the dwelling;

Component B is the total number of days where, in the respective situations outlined above (if applicable), the dwelling was not the sole or principal residence of the taxpayer, the deceased person, or the spouse of the deceased person; and

Component C is -

•

where the deceased person acquired the dwelling before 20 September 1985 - the number of days from the date of death of that person to the date of disposal.

•

where the dwelling was acquired by the deceased person on or after 20 September 1985, - the number of days from the date of acquisition by that person to the date of disposal.

This sub-section is modified by sub-section 160ZZQ(21) if the dwelling was used at any time to produce assessable income.

Sub-section 160ZZQ(18) applies where -

(a)

a dwelling is disposed of by a person referred to in paragraph (14)(a), that is, a person who acquired the dwelling as a beneficiary in the estate of a deceased person (paragraph (18)(a));

(b)

the disposal took place within twelve months of the date of death of the deceased person (paragraph (18)(b)); and

(c)

the dwelling was acquired by the deceased person after 19 September 1985, and was not the sole or principal residence of the deceased for the whole of the period of his or her ownership of it (paragraph (18)(c)).

In such circumstances, a proportion of any real capital gain derived or capital loss incurred in respect of the disposal will be liable for the tax on capital gains or taken into account for the purposes of the provisions. The amount is to be calculated in accordance with the formula

(A*B)/(C)


Component A is the amount of the capital gain or loss;

Component B is the number of days during which the dwelling was not the sole or principal residence of the deceased person during the period of his or her ownership of it; and

Component C is the number of days in the period from the date of acquisition of the dwelling by the deceased person to the date of death of that person.

This sub-section is modified by sub-section 160ZZQ(21) if the residence was used at any time to produce assessable income.

Sub-section 160ZZQ(19) is to apply where -

(a)

a taxpayer in the capacity of trustee of the estate of a deceased person, disposes of a dwelling that was owned by the deceased person more than twelve months after the date of death of the deceased person (paragraph (19)(a)); and

(b)

either of the following situations exist:

•

the dwelling was not the sole or principal residence of the spouse of the deceased person for the whole of the period from the date of death of the deceased person to the time of the disposal of the dwelling (sub-paragraph (19)(b)(i)); or

•

if the dwelling was acquired by the deceased person after 19 September 1985 it was not the sole or principal residence of the deceased person for the whole of the period of his or her ownership of the dwelling (sub-paragraph (19)(b)(ii)).

Where either, or both ,of these situations exist, a proportion of any real capital gain will be liable for the tax on capital gains or a proportion of any loss allowable for the purposes of the provisions. The amount is calculated in accordance with the formula -

(A*B)/(C)


Component A represents the amount of the capital gain or loss in respect of the disposal of the dwelling;

Component B is the sum of the periods in which the dwelling was not the sole or principal residence of the deceased person or the spouse of the deceased person, in either or both of the situations outlined above;

Component C is -

•

where the deceased person acquired the dwelling before 20 September 1985 - the number of days from the date of death of that person to the date of disposal;

•

where the dwelling was acquired by the deceased person on or after 20 September 1985, - the number of days from the date of acquisition by the deceased person to the date of disposal.

The sub-section is subject to sub-section 160ZZQ(21) if the dwelling was used at any time to produce assessable income.

Sub-section 160ZZQ(20) applies to the disposal of a dwelling by a taxpayer in the capacity of trustee of a deceased estate (paragraph (20)(a)) if -

(a)

the disposal occurs within twelve months of the date of death of the deceased person (paragraph (20)(b)); and

(b)

the dwelling was acquired by the deceased person after 19 September 1985 and was not the sole or principal residence of the deceased person for the whole of the period of his or her ownership of it (paragraph (20)(c)).

Any capital gain derived, or capital loss incurred in respect of the disposal that is to be subject to the tax on capital gains or allowable as a capital loss is to be calculated in accordance with the formula -

(A*B)/(C)


Component A is the amount of the capital gain or loss;

Component B is the number of days in which the dwelling was not the sole or principal residence of the deceased person during the period of his or her ownership of it; and

Component C is the number of days in the period from the date of acquisition of the dwelling by the deceased person to the date of death of that person.

This sub-section is subject to sub-section 160ZZQ(21) if the residence was used at any time to produce assessable income.

Sub-section 160ZZQ(21) applies to the disposal of a dwelling by a taxpayer (paragraph (21)(a)) where -

(a)

any of sub-sections (12), (13), (14), (15), (16), (17), (18), (19) or (20) would normally apply because the dwelling was, during a particular period, the sole or principal residence of the taxpayer or another person (paragraph (21)(b)); and

(b)

during any part of that period, the dwelling was also used for the purpose of gaining or producing assessable income (paragraph (21)(c)).

In these circumstances whichever of the abovementioned sub-sections that would normally apply to the disposal is not to apply. Instead, the Commissioner shall determine the amount of the real capital gain that is to be subject to tax on capital gains, or the allowable capital loss,in respect of the disposal, having regard to the amount of the capital gain or loss (paragraph (21)(d)) and the extent to which, and the period for which, the dwelling was used for the purpose of gaining or producing assessable income during the period during which the dwelling was the sole or principal residence of a person (paragraph (21)(e)).

DIVISION 19 - GOODWILL

This Division sets out the circumstances under which a taxpayer may be entitled to an exemption of one-fifth of a capital gain that has accrued to the taxpayer on the disposal of the goodwill of a business. This exemption, broadly stated, is to be available to a taxpayer whose net business interests are less than $1M and where the goodwill was created and not purchased by the taxpayer.

Section 160ZZR : Exemption of part of gain attributable to goodwill

Sub-section 160ZZR(1) outlines the pre-conditions for the exemption of part of a capital gain that has accrued on the disposal of the goodwill component of a business. The following conditions must be met before the exemption is allowed -

(a)

a taxpayer has disposed of a business or an interest in a business ('the relevant business') and the disposal includes, or includes an interest in, the goodwill of the business (paragraph (a));

(b)

where paragraph (c) does not apply and the net value (as defined in paragraph (2)(b)) of the relevant business, or the value of the taxpayer's interest in the net value of the relevant business, is less than $1,000,000 (paragraph (b));

(c)

if at the time of the disposal of the business or the interest in the business, there was another business or businesses "associated" (as defined in paragraph (2)(a)) with the relevant business - the sum of the net values of the relevant business and the associated businesses (or the sum of the values of the taxpayer's interests in the net values of the relevant business and associated businesses) is less than $1,000,000 (paragraph (c));

(d)

the goodwill was either -

(i)

created by the taxpayer; or

(ii)

before its acquisition by the taxpayer, the goodwill formed part of a deceased estate and related to a business that was commenced by the deceased person on or after 20 September 1985 and passed to the taxpayer as the legal personal representative of, or beneficiary in the estate of, the deceased person, and the goodwill was created either by the deceased person or partly by the deceased person and partly by the taxpayer (paragraph (d)).

(e)

the taxpayer or the taxpayer and the deceased person, as the case requires, did not pay or give any consideration in respect of the creation of the goodwill; and

(f)

a capital gain has accrued to the taxpayer in terms of Part IIIA in respect of the disposal of the goodwill.

Where all the above conditions are satisfied the amount of the capital gain that accrued on the disposal of the goodwill is to be reduced by one-fifth.

Sub-section 160ZZR(2) defines two of the terms used in sub-section (1). Sub-paragraph (2)(a) defines an associated business of a relevant business, for the purposes of paragraph 160ZZR(1)(c). A business will be taken to be associated with the relevant business if -

(a)

where the taxpayer is not a company or a trustee carrying on the relevant business - the associated business is carried on by the taxpayer (other than as a trustee) (sub-paragraph (i));

(b)

where the taxpayer is a company (not in the capacity of a trustee) - the associated business is carried on by the company or by another company that is "related" (defined in section 160G - see notes on that section) to the company (sub-paragraph (ii)); or

(c)

where the taxpayer carries on the relevant business as a trustee of a trust estate - the associated business is carried on by the taxpayer in the capacity of a trustee of that trust estate or of an "associated trust estate" (defined in section 160F - see notes on that section) (sub-paragraph (iii)).

Sub-paragraph (2)(b) defines the 'net value' of a business as being the total value of the assets (including goodwill) of the business less the total liabilities of the business. This definition is relevant in determining whether or not a taxpayer is entitled to the exemption for part of a capital gain that has accrued on the disposal of goodwill.

Sub-section 160ZZR(3) governs the situation where goodwill was acquired by the deceased person referred to in sub-paragraph (1)(d)(ii) as the legal personal representative, or as a beneficiary of the estate, of another deceased person and that other deceased person created the goodwill so acquired. Sub-section 160ZZR(4) applies where goodwill was created by a person and is passed through several estates before the relevant disposal.

In both these situations the exemption for one-fifth of the capital gain that accrued on the disposal of the goodwill will apply where the person who originally created the goodwill and the person disposing of the goodwill did not pay or give any consideration for it.

DIVISION 20 - TRANSITIONAL

This Division is intended to close potential avenues for avoidance of tax through arrangements to take advantage of the general limitation of Part IIIA to capital gains on assets acquired on or after 20 September 1985. One such case is where there is a substantial change in ownership interests in an entity on or after 20 September 1985 which could result in the new beneficial owners effectively not being subject to the tax on capital gains. Where a change occurs on or after 20 September 1985 in the beneficial ownership of an asset acquired before 20 September 1985, that asset will be deemed to have been acquired on or after 20 September 1985 unless, following the change, there is, broadly stated, a continuity of beneficial ownership of more than 50%. The Division will also apply to prevent potential avoidance of the tax on capital gains 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 acquired before 20 September 1985.

Section 160ZZS : When asset acquired

Section 160ZZS contains rules for the application of Part IIIA where there is a partial change in the beneficial ownership of an asset on or after 20 September 1985.

The broad effect of sub-section 160ZZS(1) is that, where a taxpayer acquired an asset before 20 September 1985 (so that the Part would not ordinarily apply) and holds the asset on or after 20 September 1985, the taxpayer will be deemed to have acquired the property on or after 20 September 1985 (and so be subject to the Part) if continuity of beneficial ownership in the relevant property of more than 50% is not maintained on or after 20 September 1985. The sub-section would apply only where there is a relevant major change in beneficial ownership (for example, through a change in shareholding in a company or in beneficial interests in trust property) on or after 20 September 1985. The sub-section will not operate, as described above, where the Commissioner of Taxation is satisfied as to, or considers it reasonable to assume there has been, the required continuity of beneficial ownership.

Sub-section 160ZZS(2) restricts the operation of sub-section (1) so that a change in the beneficial ownership of an asset on account of death will not be regarded as a change in ownership. An underlying interest in an asset held by the deceased at any time is deemed to have been held at the time by the person acquiring the underlying interest by reason of the death. The provision is expressed in terms of percentages of total underlying interests to ensure that it applies where the deceased has held different kinds of beneficial interests in the asset at different times (for example, a shareholder in a company that had owned the asset and who became the legal owner after acquiring the asset from the company).

Sub-section 160ZZS(3) gives the terms "majority underlying interests" and "underlying interest" as used in this section the same meaning as in Subdivision G of Division 3 of Part III of the Principal Act. Subdivision G is to be inserted in the Principal Act by the Taxation Laws Amendment Bill 1986 and explanations of those terms are contained in the explanatory memorandum on that Bill. Very briefly, an underlying interest in relation to property (widely defined) means a beneficial interest held by a natural person, either directly or indirectly, in the property or in any income that may be derived from the property. A majority underlying interest in property or income that may be derived from the property requires a majority continuing ownership. That is, natural persons must continue to hold more than one-half of each of the total interests in the property and in income that may be derived from it. The respective interests may be held directly or through interposed entities.

Section 160ZZT : Disposal of shares or interest in partnership or trust

Section 160ZZT is the operative provision which will bring to account as a capital gain that part of the disposal proceeds of shares in a company, an interest in a partnership or an interest in a trust estate acquired before 20 September 1985 that is attributable to an increase in the value of underlying property acquired on or after 20 September 1985. It will apply in a case where either -

•

shares in a company or an interest in a trust estate are disposed of to realise a capital gain on underlying property owned by the company or the trustee of the trust estate (sub-paragraph (c)(i)); or

•

shares in a company, an interest in a trust estate or an interest in a partnership are disposed of, and the company, partnership or trustee of the trust estate holds an interest, through one or more interposed companies, partnerships or trusts, in underlying property (sub-paragraph (c)(ii)).

Paragraph (1)(a) specifies the three kinds of basic transactions to which the provision will apply, namely, the disposal by a taxpayer of an asset, being -

•

shares in a private company;

•

an interest in a partnership; or

•

an interest in a private trust estate.

Paragraph (1)(b) stipulates the further condition that the asset being disposed of must have been acquired by the taxpayer before 20 September 1985.

As mentioned previously, paragraph (c) of new sub-section (1) is divided into 2 parts, the first of which (sub-paragraph (c)(i)) deals with the disposal of shares in a private company or an interest in a private trust estate where, immediately before the disposal date, the property of the company or trust included property ("underlying property") that -

(A)

was acquired by the company or trustee on or after 20 September 1985; and

(B)

was not trading stock of the company or trust estate.

Sub-paragraph (c)(ii) deals with the case of the disposal of shares in a private company, an interest in a private trust estate or an interest in a partnership where, immediately before the disposal date, the company, trustee or partnership in turn held an interest, through one or more interposed companies, partnerships or trusts, in underlying property that -

(A)

was acquired by another private company, partnership or trustee of a private trust on or after 20 September 1985; and

(B)

was not trading stock of the company, partnership or trust estate.

The final test necessary for the application of sub-section (1) is contained in paragraph (d). It requires that, immediately before a relevant disposal by a taxpayer of shares in a private company or an interest in a private trust estate, the value of underlying company or trust property being disposed of in that way was not less than 75 per cent of the net worth of the company or trust estate. In a case where an interest in underlying property is less directly held through interposed companies, partnerships or trusts and is being disposed of (i.e., in a case where sub-paragraph (c)(ii) applies), the value of the interest in the underlying property owned by the relevant company, partnership or trustee will be taken into account in the application of this section if it is not less than 75 per cent of the net worth of that company, partnership or trust estate.

Where all the conditions contained in paragraphs (a) to (d) of sub-section (1) apply, a capital gain is deemed to have accrued to the taxpayer in the year of income in which the taxpayer disposed of the asset, determined by reference to so much of the consideration received or receivable by the taxpayer in respect of the disposal as may be reasonably be attributed to the amount (if any) by which the value of the underlying property immediately before the disposal exceeds the indexed cost bases of the underlying property if they had been disposed of immediately before the taxpayer disposed of the asset.

Sub-section 160ZZT(2) is a drafting measure by which terms used in sub-section (1) are to have the same meaning as in section 26AAA of the Principal Act. These include the terms net worth, private company and private trust estate.

Proposed sub-section (3) is a safeguarding measure to prevent taxpayers from avoiding the intended operation of sub-section (1) by arranging to have the value of the underlying property of a company, partnership or trust estate fall below 75 per cent of the net worth of the company, partnership or trust estate. In calculating net worth, the Commissioner of Taxation is to be empowered to disregard in value any discharge or release of liabilities, or any acquisition of assets, if the Commissioner is satisfied that the liabilities were discharged or released, or the assets acquired, with a purpose of ensuring that sub-section (1) would not apply.

DIVISION 21 - MISCELLANEOUS

Section 160ZZU : keeping of records

Section 160ZZU sets out the requirements for the keeping of records in relation to persons who acquire assets after 19 September 1985 that may give rise to capital gains subject to Part IIIA.

Proposed sub-section (1) of section 160ZZU imposes a requirement to keep records relating to the acquisition and disposal of assets. Any person who owns an asset (other than an excepted asset as defined in sub-section 160ZZU(2)) after 19 September 1985 is required to keep records in the English language in relation to the asset to enable the following information to be readily ascertained -

(a)

the date of acquisition of the asset;

(b)

if the asset has not been disposed of: any amount that would form part of the cost base to the person in respect of the asset if the asset were disposed of;

(c)

if the asset has been disposed of:

(i)

the date of disposal;

(ii)

amounts included in the cost base of the asset; and

(iii)

the consideration received for the disposal.

A statutory maximum penalty on conviction of $2,000 is imposed under the sub-section for non-compliance. This is consistent with existing sub-sections 262A(1) and (1A) of the Principal Act relating to the keeping of records by persons carrying on a business.

Proposed sub-section 160ZZU(2) specifies the circumstances under which an asset is an excepted asset in relation to a person for the purposes of sub-section 160ZZU(1). An asset will be an excepted asset, and therefore the record keeping requirements of sub-section 160ZZU(1) will not apply, if the asset has been disposed of and Part IIIA did not apply to the disposal or, if the asset has not been disposed of, the Part would not apply in the event of its disposal.

Proposed sub-section 160ZZU(3) stipulates three situations in which an owner of an asset will not be required to keep records. Paragraph (3)(a) means that records are not required to be kept in relation to an asset if a period of 7 years has elapsed since the disposal of the asset. By paragraph (b) a person is not required to keep records if so notified by the Commissioner. Paragraph (c) dispenses with the requirement in relation to records of a company that has been wound up and dissolved.

Clause 20: Annual returns

Clause 20 proposes an amendment to section 161 of the Principal Act to require that a return furnished to the Commissioner by a person is to contain a full and complete statement of profits, gains or losses of a capital nature as well as income derived by that person.

Clause 21: Further returns, etc.

Section 162 of the Principal Act empowers the Commissioner to request further or fuller returns of income derived in any year. This clause proposes to extend section 162 of the Principal Act, by adding new sub-section 162(3) to the effect that references in section 162 to income derived by a person are to include references to profits or gains of a capital nature derived by the person.

Clause 22: Amendment of assessments

Section 170 of the Principal Act authorises the Commissioner to amend an assessment in specified circumstances. Clause 22 proposes to amend sub-section 170(9) of the Principal Act to extend its operation to permit the Commissioner to amend an assessment to ensure its completeness and accuracy where an assessment of the taxable income of a taxpayer has included an estimated amount of income or of profits or gains of a capital nature derived by the taxpayer in a year from an operation or series of operations extending over more than one year and the actual profit or loss is subsequently ascertained. The amendment may be made within 3 years after the Commissioner ascertains the actual profit or loss.

Clause 23: Where no notice of assessment served

Sub-section 171(1) of the Principal Act enables a taxpayer to request an assessment of a return of income if a notice of assessment has not been served within 12 months after the return was lodged.

The amendment proposed by sub-clause 23(a) proposes to extend sub-section 171(1) to allow a taxpayer to request an assessment where the return furnished by him or her includes profits or gains of a capital nature.

Sub-section 171(2) of the Principal Act deems an assessment which is issued more than three months after a request under sub-section 171(1) to be an amended assessment in respect of the income returned. Sub-clause 23(b) proposes to extend sub-section 171(2) so that an assessment subsequently issued that is to be treated as an amended assessment may include the assessment of a return of income or profits or gains of a capital nature.

Clause 24: When tax not paid during lifetime

Section 216 of the Principal Act applies where tax has not been assessed or paid on the whole of the income derived by a taxpayer up to the time of death of the taxpayer. The amendment proposed by sub-clause 24(a) to sub-section 216(1) will extend the operation of that section to situations where tax has not been assessed or paid on the whole of the income and of the profits or gains of a capital nature derived by a taxpayer during his or her lifetime.

Sub-clause 24(b) proposes to extend paragraph 216(1)(aa) of the Principal Act to the effect that where section 216 applies, the trustees of a deceased estate are required to furnish a return which includes any income or profits or gains of a capital nature derived by the deceased during a year of income during his or her lifetime.

Clause 25: Consolidation assessments

This clause proposes to amend section 219 of the Principal Act which enables the Commissioner to consolidate an assessment where several persons are in receipt of income for or on behalf of a non-resident or a person absent from Australia. The amendment will extend the operation of that section to allow the Commissioner to consolidate assessments of a year of income where several persons are in receipt of income or of profits or gains of a capital nature for or on behalf of a non-resident or a person absent from Australia.

Clause 26: Assessment where no administration

Section 220 of the Principal Act facilitates the recovery of tax owing by a deceased taxpayer where probate has not been granted or letters of administration taken out within 6 months of death and tax has not been assessed or paid on the whole of the taxpayer's income up to the date of his or her death, by authorising the Commissioner to make an assessment of the amount of tax payable in respect of income derived up to the date of death.

This clause proposes to amend paragraph 220(1)(a) of the Principal Act to extend the application of section 220 to include situations where tax has not been assessed or paid on the whole of profits or gains of a capital nature derived by the taxpayer during his or her lifetime.

Clauses 27, 28 and 29 relate to Division 1A of Part VI of the Principal Act concerning the Collection by Instalments of Tax on Companies. They will have the effect of excluding from the calculation of the instalments any amount of net capital gains.

Clause 27: Interpretation

Clause 27 proposes to amend section 221AA of the Principal Act which enables company tax to be collected by instalments based on the taxable income of the previous year by inserting new sub-section 221AA(6) which will provide that a reference in Division 1A of Part Vl of the Principal Act to the amount of the taxable income of a company in a year is to be construed as a reference to the amount of the taxable income reduced by the amount of any net capital gain within the meaning of new Part IIIA.

Clause 28: Amount of notional tax

Section 221AD of the Principal Act determines the amount of notional tax payable by a company on which company tax instalments are based by reference to the amount of tax payable in the previous year. Clause 28 amends section 221AD by the insertion of two new sub-sections, sub-section 221AD(1A) and sub-section 221AD(2AA).

New sub-section 221AD(1A) will mean that the reference in sub-section 221AD(1) to the income tax assessed in respect of the taxable income of a company of the year prior to the year of income will be construed as a reference to the income tax that would have been payable had the taxable income of that preceding year not included a net capital gain within the meaning of new Part IIIA.

New sub-section 221AD(2AA) will ensure that for the purposes of section 221AD any estimate of the amount of income tax that will be payable by a company in respect of its taxable income of the year of income is based on the assumption that the assessable income of the company will not include any net capital gain within the meaning of proposed Part IIIA.

Clause 29: Estimated income tax

Section 221AG enables a company to reduce an amount payable as an instalment of tax by furnishing an estimate of the amount of income tax, if any, that the company believes will be payable by it in respect of its taxable income of the relevant year. This clause proposes to amend section 221AG by the insertion of new sub-section 221AG(1A), so that any estimate made for the purposes of section 221AG of the amount of income tax that will be payable by a company in respect of its taxable income of a year of income will be based on the assumption that the assessable income of the company for that year will not include any net capital gain within the meaning of the new Part IIIA.

Clauses 30, 31 and 32 will have a similar effect to that of the preceding three clauses in respect of Division 3 of Part Vl of the Principal Act which provides for the imposition of provisional tax in respect of a year based on the tax assessed on the taxable income of the preceding year of income. They will exclude any net capital gain in that year of income from the calculation of provisional tax.

Clause 30: Interpretation

Clause 30 proposes to amend section 221YA of Division 3 of Part Vl of the Principal Act by the insertion of new sub-section 221YA(1B). New sub-section 221YA(1B) will mean that, for the purposes of the Division dealing with provisional tax, the taxable income of a taxpayer for a year will be adjusted to the amount that would be the taxable income if the amount of a net capital gain had not been included in assessable income by virtue of proposed Part IIIA. This amendment thus excludes any net capital gain from the calculation of provisional tax liability.

Clause 31: Amount of provisional tax

Clause 31 proposes the amendment of section 221YC of the Principal Act by the insertion of new sub-section 221YC(1AA). Section 221YC specifies the amount of the provisional tax payable by a taxpayer in respect of a year of income. New sub-section 221YC(1AA) will ensure that the reference in paragraph 221YC(1)(a) to the income tax assessed or the reference in paragraph 221YC(1)(b) to the income tax which would have been payable in respect of the taxable income of the year next preceding the year of income will, where relevant, be construed as a reference to the income tax which would have been payable had the taxable income not included any amount of net capital gain in terms of proposed Part IIIA.

Clause 32: Provisional tax on estimated income

Under section 221YDA of the Principal Act, a taxpayer may furnish an estimate of his or her taxable income for the current year of income in order that the person's provisional tax liability may be recalculated on the basis of that estimate.

Clause 32 proposes to amend section 221YDA by the insertion of new sub-section 221YDA(1AA) to require that any estimate of the taxable income of a taxpayer for a year of income for the purposes of the section be calculated on the assumption that the assessable income of the taxpayer of that year of income will not include any net capital gain within the meaning of the proposed Part IIIA.

Clause 33: Agents and trustees

Under section 254 of the Principal Act, an agent or trustee is answerable as the taxpayer for the doing of all things required to be done by the Act in respect of income derived by the agent or trustee in a representative capacity, or derived by the principal through the agency, and for the payment of tax thereon.

Sub-clause 33(a) proposes to amend paragraph 254(1)(a) by ensuring that agents and trustees are also answerable for things required to be done by virtue of the Act in respect of any profits or gains of a capital nature as well as in respect of income derived.

Sub-clause 33(b) proposes to amend paragraph 254(1)(b) of the Principal Act to require agents and trustees, in their representative capacity, to make returns of any profits or gains of a capital nature as well as of income derived.

Paragraph 254(1)(d) authorises and requires agents and trustees to retain any money which comes to them in their representative capacity sufficient to pay the tax which is due in respect of income derived. Paragraph 254(1)(e) makes the agent or trustee personally liable for the tax payable in respect of the income derived to the extent of any amount retained or which should have been retained under paragraph (d). Sub-clause 33(c) proposes to amend paragraphs 254(1)(d) and (e) to extend their operation to capital gains.

Clause 34: Person in receipt or control of money from non-resident

Section 255 of the Principal Act empowers the Commissioner to collect tax due and payable by a non-resident from any person who has the control, receipt or disposal of money belonging to the non-resident.

The amendment proposed by this clause to sub-section 255(1) will extend the application of the section to persons who have the receipt, control or disposal of money belonging to a non-resident who derives income or profits or gains of a capital nature from a source in Australia, or who is a shareholder, debenture holder or depositor in a company deriving income or profits or gains of a capital nature from a source in Australia.

Clause 35: Payment of tax by banker

Clause 35 proposes to amend the provisions of section 257 of the Principal Act - which empowers the Commissioner to appoint a banker as the agent of any person out of Australia where any income of the person is paid into an account of that person with the banker - to extend the application of the section to situations where any proceeds of the disposal of an asset of any person out of Australia are paid into the account of that person with a banker.

INCOME TAX (RATES) AMENDMENT (CAPITAL GAINS) BILL 1986

The purpose of this Bill is to amend the Income Tax (Rates) Act 1982 (in this section of these notes referred to as "the Principal Act") which declares the rates of tax payable in respect of the income of individuals and trusts for the financial year that commenced on 1 July 1982 and subsequent financial years. The amendments will declare the rate of tax to be payable on the incomes of individuals and trusts for the 1985-86 and subsequent financial years where the taxpayer's taxable income includes a capital gain that is subject to tax under the new provisions being inserted in the Income Tax Assessment Act 1936 by the Income Tax Assessment Amendment (Capital Gains) Bill 1986.

Notes on clauses of the Bill are set out below.

Clause 1: Short Title, etc.

This clause provides for the amending Act to be cited as the Income Tax (Rates) Amendment (Capital Gains) Act 1986 and for the Income Tax Rates Act 1982 as previously amended to be referred to in the amending Act as the Principal Act.

Clause 2: Commencement

By this clause, it is proposed that the amending Act will come into operation on the day on which it receives the Royal Assent. But for this clause, the amending Act, by reason of sub-section 5(1A) of the Acts Interpretation Act 1901, would not come into operation until the twenty-eighth day after the date of Assent.

Clause 3: Interpretation

This clause proposes an amendment to section 3 of the Principal Act to insert a number of new definitions in the Principal Act.

By paragraph (a) of clause 3 definitions of "capital gains component" and "eligible part" - terms which are used in provisions that are being inserted in the Principal Act by other clauses of the Bill - are to be inserted in sub-section 3(1) of that Act.

The definitions are as follows:

"capital gains component" is a term that is used in other provisions being inserted in the Principal Act by this Bill in relation to the taxable income of a taxpayer. Where used in those provisions the term is to be taken, in circumstances where the taxpayer's taxable income includes a net capital gain as well as income from sources other than capital gains, as being the part of the taxpayer's taxable income which arises from a net capital gain being included in the taxpayer's assessable income under proposed section 160ZO of the Income Tax Assessment Act 1936 which is being inserted in that Act by the Income Tax Assessment Amendment (Capital Gains) Bill 1986. Paragraph (a)(ii) of the definition is to that effect.

Where a taxpayer has no taxable income apart from that arising from a capital gain, or would apart from the capital gain have had a loss, the whole of the taxable income will comprise the capital gains component. Paragraph (a)(i) of the definition is to that effect.

By paragraph (b) of the definition of capital gains component, the term is to have a corresponding meaning in relation to the net income, or a share or a part of the net income of a trust estate, as it has in relation to the taxable income of a person.

"Eligible part" is a term that is used in the clauses that are being inserted in Schedules 23 and 24 of the Principal Act. Schedule 23 applies where the taxable income of a minor includes income that is eligible taxable income for the purposes of Division 6AA of Part III of the Assessment Act of more than $416. The schedule will not apply if the eligible income is $416 or less, and the general rates of tax will in that case apply to the whole of the taxable income.

Schedule 24 applies to the trustee of a trust estate who is liable to be assessed and to pay tax under section 98 of the Assessment Act on a share of the net income of a trust estate to which a resident taxpayer who is a minor is presently entitled, where Division 6AA of Part III of the Assessment Act is applicable to a part of that share or to parts of two or more such shares, if the part, or sum of the parts, is greater than $416.

"Eligible part" where used in relation to the taxable income of a taxpayer is, by paragraph (a) of the definition, to mean the part of the taxpayer's capital gains component that is eligible taxable income for the purpose of Division 6AA of Part III of the Assessment Act. Where used in relation to the capital gains component of the net income, or share or part of the net income of the trust estate, the term is by paragraph (b) of the definition to be taken to mean the part of the relevant capital gains component that is net income to which Division 6AA of Part III of the Assessment Act applies.

Paragraph (b) of clause 3 will insert in sub-section 3(1) of the Principal Act definitions of "reduced notional income", "reduced share" and "reduced taxable income". These terms are used in clauses that are, by other provisions of this Bill, being inserted in Schedules 19, 21, 23 and 24 to the Principal Act, to declare the rate of tax payable on a taxpayer's taxable income, or the net income of a trust estate, in circumstances where the taxable income of the taxpayer or the net income of the trust estate includes a capital gains component for the financial year.

The meanings of the definitions are as follows:

"Reduced notional income". This term is used in the new clauses of the schedules of the Principal Act which declare the rates of tax applicable to a taxpayer deriving a notional income as specified by section 59AB (depreciation recouped), section 86 (lease premium) or section 158D (abnormal income of authors or inventors) of the Assessment Act. Where used, the term is to be taken to mean, in effect, the amount that would have been the notional income of the taxpayer if the taxpayer had not had a capital gain included in his or her assessable income for the year of income.

"reduced share" is a term that is used in clauses that are being inserted in the schedules to the Principal Act in relation to the share of a beneficiary in the net income of a trust estate. It means the part of the share of the beneficiary of that net income other than the capital gains component of that share.

"reduced taxable income" is a term used in new clauses which are being inserted in the schedules to the Principal Act. Where used, it is to be taken to mean the taxable income other than the capital gains component of that income.

Paragraph (c) of clause 3 omits existing paragraph 3(2)(a) of the Principal Act, which states that references in the Principal Act to net income or taxable income are to be taken to be references to the taxable income or net income of the year of income, and inserts in its place a new paragraph (a) which provides that a reference to net income, taxable income, reduced notional income or reduced taxable income in the Principal Act is to be read as a reference to such income of the year of income. The amendment is a drafting measure to save repeated references to "the year of income" in other provisions.

Clause 4: Amendments of Schedule 19.

This clause will amend Schedule 19 to the Principal Act which sets out the general rates of tax that apply to the taxable incomes of the 1985-86 and subsequent income years of most individuals. As amended, the Schedule will include the method of calculating the rate of tax payable generally where the taxable income of a taxpayer includes a capital gains component.

Paragraph (a) of clause 4 of the Bill will amend Part I of Schedule 19 to the Principal Act to provide, in effect, that the existing rates of tax for resident individual taxpayers will continue to apply to the taxable income of such taxpayers, subject to the operation of proposed Clauses 2 and 3, to be inserted by paragraph (b) of this clause, where the taxable income includes a capital gains component.

Paragraph (b) of clause 4 of the Bill inserts two new clauses - Clauses 2 and 3 - in Part I of Schedule 19.

New Clause 2 of Schedule 19 to the Principal Act sets out the formula for the calculation of the rate of tax that is to be payable by resident taxpayers generally, where the taxpayer's taxable income includes a capital gains component but does not include income that is subject to the primary producer averaging provisions. Paragraphs (a) and (b) of the new clause, when read with other provisions of the Principal Act, are to that effect.

In circumstances where new Clause 2 is applicable to a taxpayer, the rate of tax that is to be payable by the taxpayer on his or her taxable income is to be calculated by the formula

(A + B)/(C)


. A of the formula represents the tax payable on the taxpayer's reduced taxable income and is, in effect, the tax that would be payable by the taxpayer under Clause 1 of Part I of the Schedule - that is, the clause that applies where the taxpayer's taxable income does not include a capital gains component - on the amount that would have been his or her taxable income if that income did not include a capital gains component.

B of the formula represents the tax payable on the part of the taxable income that is the capital gains component. The calculation of this amount, according to paragraphs (c) and (d) of new Clause 2, proceeds by:

(a)

determining the tax that would be payable at the rates set out in Clause 1 of Part I of the Schedule (i.e., the rates that apply generally) on a taxable income equal to the sum of the taxpayer's reduced taxable income (i.e., the taxable income other than the capital gains component) and one-fifth of the capital gains component; and

(b)

deducting the amount of tax calculated under A of the formula - which is the tax on the reduced taxable income - from the amount calculated in (a) above.

That difference is, in effect, the tax that would be payable on one-fifth of the capital gains component if it were the last slice of income. The difference is then multiplied by five to obtain the tax payable on the total capital gains component.

The sum of the amounts obtained in the calculations of A and B is then divided by the taxpayer's total taxable income (C of the formula is to that effect) to obtain the rate to be applied to the total taxable income.

New Clause 3 of Part I of Schedule 19 sets out the formula for the calculation of the rate of tax of resident individual taxpayers generally where the taxpayer's taxable income includes a capital gains component and also includes income that is subject to the primary producer averaging provisions. The taxpayer's average income (which by virtue of clause 17 of the Income Tax Assessment Amendment (Capital Gains) Bill 1986 is the average of the taxable incomes of the current year and the preceding four years, excluding any capital gains components) is to be used as the base to which one-fifth of the capital gains component is to be added for the purposes of calculating the tax payable on that component, instead of the reduced taxable income that was used for that purpose in the new Clause 2 of Part I of the Schedule. Apart from that, the formula will have an identical effect to the formula in Clause 2.

Paragraphs (c) and (d) of clause 4 of the Bill will amend Part II of Schedule 19 to the Principal Act - which applies to non-resident taxpayers, - in identical terms to the amendments of Part I of the Schedule proposed by paragraphs (a) and (b) of Clause 4.

Clause 5: Amendments of Schedule 21

This clause will amend Schedule 21 to the Principal Act, which applies to a taxpayer deriving a notional income as specified by Section 59AB (recouped depreciation), section 86 (lease premiums) or section 158D (abnormal income of authors or inventors) of the Assessment Act.

The amendments set out the rules to be applied in determining the rate of tax payable by taxpayers to whom the schedule applies in circumstances where the taxable income of the taxpayer includes a capital gains component.

Paragraph (a) of clause 5 will amend Part I of the Schedule - which applies to resident taxpayers - to, in effect, provide that the existing rates in that schedule are only to apply if the taxpayer does not have a capital gains component included in his or her taxable income.

Paragraph (b) of the clause inserts a new Clause 2 in Part I of Schedule 21 which sets out the method of calculating the rate of tax on a taxpayer's taxable income where the taxable income includes a capital gains component.

The method set out for the calculation of the tax in such cases corresponds to that discussed in the notes on new Clause 2 of Schedule 19, with two exceptions. The first exception is that the tax calculated on the basis of the reduced taxable income represented by A in the formula

(A + B)/(C)


is to be calculated under existing Clause 1 of Part I of Schedule 21 (and not the existing Clause 1 of Part I of Schedule 19). The other exception is that, for purposes of calculating the tax on the capital gains component, the reduced notional income (i.e., the amount that would have been the notional income if the taxpayer had not derived a capital gain) is used as the base to which one-fifth of the capital gains component is to be added, (paragraph (c) of new Clause 2) instead of the reduced taxable income, and in calculating the amount of tax under paragraph (d) of the new Clause, for the purposes of ascertaining the amount B in the formula.

Paragraphs (c) and (d) of clause 5 propose identical amendments, to Part II of Schedule 21 of the Principal Act, to those amendments proposed by paragraphs (a) and (b) to Part I of the Schedule. Part II of Schedule 21 sets out the rules for the calculation of the rates of tax in respect of the taxable income of a non-resident taxpayer who derives a notional income.

Clause 6: Amendments of Schedule 23

Clause 6 will amend Schedule 23 to the Principal Act to set out the rules for the calculation of the rates of tax applicable to a minor, whose taxable income includes income that is eligible taxable income for the purposes of Division 6AA of Part III of the Assessment Act of more than $416.

Paragraph (a) of clause 6 of the Bill will amend existing Clauses 1 and 2 of Part I of Schedule 23 to, in effect, limit the application of those clauses to resident taxpayers in receipt of a taxable income which includes eligible taxable income but does not include a capital gains component.

Paragraph (b) of clause 6 of the Bill will insert a new Clause 3 in Schedule 23. This clause specifies the rules for the calculation of the rates of tax to be payable on the taxable income of a resident taxpayer which includes eligible taxable income and a capital gains component.

The rate of tax is to be calculated by the formula

(A+B+C)/(D)


A of the formula is, in effect, the amount of tax that would have been payable by the taxpayer under Clauses 1 and 2 of Schedule 23 if the taxable income had not included a capital gains component.

B of the formula represents the amount of tax payable in respect of the capital gains component of the taxable income, other than the eligible part (see notes on clause 3 of the Bill for the definition of that term).

The amount that will be calculated under this component of the formula will be identical to that which would have been calculated in respect of a capital gain, equal to the minor's capital gain other than the eligible part of the gain, under Schedule 19, if the minor were an adult.

The base to which one-fifth of the capital gains component other than the eligible part is to be added, for the purposes of the calculation of the tax on the part of the minor's capital gain other than the eligible part, will be the average income (if the minor's income is subject to the primary producer averaging provisions), the reduced notional income (if the minor has a notional income for the purposes of section 59AB, section 86 or section 158D of the Assessment Act) or, in other cases, the reduced taxable income.

C of the formula will represent the amount of tax payable in respect of the eligible part of the minor's capital gains component. The steps by which this is done are to first calculate the difference between the tax that would be payable under Clause 1 of Part I of Schedule 19 on:

(a)

a taxable income equal to the sum of the reduced taxable income and 20 per cent of the full amount of the capital gains component; and

(b)

a taxable income equal to the sum of the reduced taxable income and 20 per cent of that part of the capital gains component on which the tax was calculated under component B of the formula, that is, the capital gains component other than the eligible part,

and then calculate the amount that would be payable if the rate of 46% were applied to the eligible part of the capital gains component. Component C will be the greater of these two amounts.

D in the formula is the number of whole dollars in the taxable income (including the full amount of the capital gains component).

Paragraphs (c) and (d) of clause 6 will amend Part II of Schedule 23 in identical terms to the amendments of Part I of the Schedule made by paragraphs (a) and (b). Part II of Schedule 23 is applicable to a non-resident taxpayer whose taxable income includes a capital gains component.

Clause 7: Amendments of Schedule 24

This clause will amend Schedule 24 of the Principal Act to set out the rules for the calculation of the rate of tax payable by a trustee of a trust estate who is assessed on behalf of a beneficiary where Division 6AA of Part III of the Assessment Act applies. The rules are identical in effect to those set out in clause 6 for minors where Division 6AA of Part Ill of the Assessment Act applies to their income.