House of Representatives

Explanatory Memorandum

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

Chapter 8 - Roll-over for financial services reform transitions

Outline of chapter

8.1 Schedule 9 to this bill amends the ITAA 1997 to provide an automatic CGT roll-over for financial service providers on transition to the FSR regime when, during the FSR transitional period:

•

an existing statutory licence, registration or authority is replaced with an Australian financial services licence;

•

a qualified Australian financial services licence is replaced with an Australian financial services licence; and

•

an intangible CGT asset is replaced with another intangible CGT asset.

8.2 The CGT roll-over will ensure that the capital gain or capital loss that would otherwise be made when the original asset comes to an end is deferred until a CGT event happens to the replacement asset.

Context of amendments

8.3 The FSR regime aims to reform and consolidate regulation of the financial services sector and affects most financial services and products. The objective of the FSR regime is to ensure that:

•

comparable financial products are subject to the same rules;

•

providers of financial services are subject to the same licensing regime;

•

the same disclosure standards apply to similar products; and

•

financial markets are each subject to a single licensing regime.

8.4 The FSR regime generally came into effect on 11 March 2002. However, financial service providers who were operating under the pre-FSR regime have a 2 year period for the transition of diverse licensing arrangements, services and products to the FSR framework.

8.5 Financial service providers have raised concerns that the potential CGT consequences arising on the transition to the FSR regime are an impediment to moving to the FSR regime. The amendments will remove that impediment.

Summary of new law

8.6 An automatic CGT roll-over will apply when, during the period from 11 March 2002 to 10 March 2004 inclusive (the FSR transitional period):

•

an existing statutory licence, registration or authority is replaced with an Australian financial services licence;

•

a qualified Australian financial services licence is replaced with an Australian financial services licence; and

•

an intangible CGT asset is replaced with another intangible CGT asset.

8.7 The replacement Australian financial services licence or intangible CGT asset can be held by:

•

the owner of the original licence, registration, authority, qualified Australian financial services licence or intangible CGT asset;

•

a company or trust in the same consolidatable group as the owner of the original licence, registration, authority, qualified Australian financial services licence or other intangible CGT asset; or

•

a company or fixed trust that is wholly-owned by the owner of the original licence, registration, authority, qualified Australian financial services licence or other intangible CGT asset.

8.8 The effect of the CGT roll-over is that:

•

the capital gain or capital loss that would otherwise be made when the original asset (i.e. the statutory licence, registration, authority, qualified Australian financial services licence or other intangible CGT asset) comes to an end is disregarded - recognition of the accrued gain or loss is deferred until a CGT event happens to the replacement asset; and

•

if the original asset was acquired before 20 September 1985, the asset's pre-CGT status is attributed to the replacement asset.

Comparison of key features of new law and current law

Detailed explanation of new law

8.9 Schedule 9 to this bill inserts new Subdivision 124-O into the ITAA 1997. The new Subdivision provides 6 automatic CGT roll-overs for financial service providers on transition to the FSR regime:

•

the old licence roll-over (same owner) - that is, when an existing statutory licence, registration or authority is replaced during the FSR transitional period with an Australian financial services licence that is held by the owner of the original licence, registration or authority;

•

the old licence roll-over (new owner) - that is, when an existing statutory licence, registration or authority is replaced during the FSR transitional period with an Australian financial services licence that is held by:

-

a company or trust in the same consolidatable group as the owner of the original licence, registration or authority; or

-

a company or fixed trust that is wholly-owned by the owner of the original licence, registration or authority;

•

the qualified licence roll-over (same owner) - that is, when a qualified Australian financial services licence is replaced during the FSR transitional period with an Australian financial services licence that is held by the owner of the original qualified licence;

•

the qualified Australian financial services licence roll-over (new owner) - that is, when a qualified Australian financial services licence is replaced during the FSR transitional period with an Australian financial services licence that is held by:

-

a company or trust in the same consolidatable group as the owner of the original qualified Australian financial services licence; or

-

a company or fixed trust that is wholly-owned by the owner of the original qualified Australian financial services licence;

•

the rights roll-over (same owner) - that is, when an intangible CGT asset is replaced during the FSR transitional period with another intangible CGT asset that is held by the owner of the original intangible CGT asset; and

•

the rights roll-over (new owner) - that is, when an intangible CGT asset is replaced during the FSR transitional period with another intangible CGT asset that is held by:

-

a company or trust in the same consolidatable group as the owner of the original intangible CGT asset; or

-

a company or fixed trust that is wholly-owned by the owner of the original intangible CGT asset.

Old licence roll-over (same owner)

8.10 A key feature of FSR is that it imposes a new uniform licensing regime for financial service providers. Consequently, existing statutory licences, registrations or other authorities issued to financial service providers under various laws will be replaced with Australian financial services licences.

8.11 An Australian financial services licence is defined to have the meaning given by section 761A of the Corporations Act 2001. [Schedule 9, item 16, definition of 'Australian financial services licence' in subsection 995-1(1)]

8.12 Section 761A of the Corporations Act 2001 defines an Australian financial services licence to mean a licence issued under section 913B that authorises a person who carries on a financial services business to provide financial services. Such a licence may be granted either to an applicant seeking to commence a financial services business or to an applicant who already conducts such a business.

8.13 Prior to the granting of an Australian financial services licence, an applicant who conducts a financial services business is subject to regulation under the relevant old legislation (as defined in section 1430 of the Corporations Act 2001 ). Licences, registrations or authorities issued under the relevant old legislation, as in force at any time before 11 March 2002, cease to have effect when an Australian financial services licence is issued.

8.14 A licence, registration or authority issued under the relevant old legislation is an intangible CGT asset that may come to an end when it ceases to have effect because an Australian financial services licence is issued to the licence holder. If an intangible CGT asset does come to an end, there is a disposal of a CGT asset (CGT event C2) that may give rise to a capital gain or capital loss.

8.15 In some cases part of an old licence may continue to have effect after the Australian financial services licence is granted to the licence holder. That is, the Australian financial services licence may cover only some of the activities of the licence holder. In this event, it will be a question of fact as to whether CGT event C2 happens because the old licence, or part of the old licence, comes to an end.

Conditions for an old licence roll-over (same owner)

8.16 The old licence roll-over (same owner) applies if an old licence or licences held by the licence holder cease to have effect (whether wholly or partly) because that licence holder:

•

is granted an Australian financial services licence during the FSR transitional period; or

•

applies for an Australian financial services licence during the FSR transitional period and, as a result of the application, is subsequently granted an Australian financial services licence.

[Schedule 9, item 13, section 124-880]

8.17 In addition, to qualify for the old licence roll-over, the Australian financial services licence must cover some or all of the activities that the old licence or licences authorised the licence holder to carry on. [Schedule 9, item 13, paragraph 124-880(d)]

8.18 An old licence is any licence, registration, approval, authority or other similar thing that gave the holder the status of a regulated principal within the meaning of section 1430 of the Corporations Act 2001. [Schedule 9, item 13, paragraph 124-880(b)]

8.19 A regulated principal is essentially a person who conducts a financial services business and includes the holder of a dealers licence, investment advisers licence, futures brokers licence or future advisers licence and a registered insurance broker before the transition to FSR. A regulated principal also includes a person who is listed in Regulation 10.2.38 of the Corporations Regulations 2001.

8.20 The old licence or licences are taken to have authorised the regulated principal to carry on certain activities if they had the effect of making those activities lawful under the relevant old legislation. For example, registration of an insurance broker under the Insurance (Agents and Brokers) Act 1984, which made it lawful for a person to carry on business as an insurance broker, is taken to have authorised that person to carry on that business.

Consequences of an old licence roll-over (same owner)

8.21 The consequences of same owner roll-overs are set out in section 124-895. That section applies separately to:

•

old licence roll-overs (same owner);

•

qualified licence roll-overs (same owner); and

•

rights roll-overs (same owner).

8.22 Section 124-895 provides that the consequences of an old licence roll-over (same owner) are generally set out in Subdivision 124-A (with 2 modifications). [Schedule 9, item 13, subsection 124-895(1)]

8.23 The general Subdivision 124-A consequences that apply to an old licence roll-over (same owner) are:

•

the capital gain or capital loss made when the old licence comes to an end is disregarded - recognition of the accrued capital gain or capital loss is deferred until a CGT event happens to the replacement Australian financial services licence;

•

if the old licence or licences were acquired by the licence holder on or after 20 September 1985, then the cost base and reduced cost base of the old licence or licences is attributed to the first element of the cost base and reduced cost base of the replacement Australian financial services licence; and

•

if the old licence or licences were acquired by the licence holder before 20 September 1985, then the replacement Australian financial services licence will be taken to have been acquired before that day - that is, the pre-CGT status of the old licence or licences will be preserved.

8.24 The first modification to the general Subdivision 124-A consequences is that any amount paid (including the giving of property) to get the replacement Australian financial services licence will be included in the first element of the cost base and reduced cost base of the replacement asset. This will include any incidental costs, such as fees paid on application for the Australian financial services licence. [Schedule 9, item 13, subsection 124-895(2)]

8.25 The second modification to the general Subdivision 124-A consequences is that, if the licence owner has more than one licence and some of those licences were acquired before 20 September 1985, then:

•

to the extent that part of the replacement Australian financial services licence relates to one or more old licences acquired by the licence holder before 20 September 1985, that part is taken to be a separate asset that is acquired before 20 September 1985 - that is, it will be taken to be a pre-CGT asset; and

•

the first element of the cost base and reduced cost base of the asset which represents the remaining part of the replacement Australian financial services licence includes:

-

the cost base and reduced cost base of the old licence or licences acquired by the licence holder on or after 20 September 1985; and

-

such part of any amount paid to get the replacement Australian financial services licence as is reasonably attributed to the part of the asset that is taken to be acquired by the licence holder on or after 20 September 1985.

[Schedule 9, item 13, subsections 124-895(3) to (7)]

8.26 If an old licence that was acquired on or after 20 September 1985 ceases to only partly have effect, then the amount of cost base or reduced cost base that is attributed to the replacement Australian financial services licence is such part of the cost base of the old licence that is reasonably attributable to the part of the old licence that ceases to have effect. [Schedule 9, item 13, subsection 124-895(8)]

Old licence roll-over (new owner)

8.27 Under the FSR regime, in certain circumstances, financial service providers may provide financial services under the authority of an Australian financial services licence held by another person. In this event, the original licence holder is exempt from holding an Australian financial services licence. However, the original licence holder's old licence, registration or authority will cease to have effect and is effectively replaced with an Australian financial services licence that is held by that other person.

8.28 A licence, registration or authority issued under the relevant old legislation is an intangible CGT asset that may come to an end when it ceases to have effect because the original licence holder is covered by an exemption from holding an Australian financial services licence. If an intangible CGT asset does come to an end, there is a disposal of a CGT asset (CGT event C2) by the original licence holder that may give rise to a capital gain or capital loss.

8.29 In some cases, part of an old licence may continue to have effect after the Australian financial services licence is granted. That is, the Australian financial services licence may cover only some of the activities of the original licence holder. In this event, it will be a question of fact as to whether CGT event C2 happens because the old licence, or part of the old licence, comes to an end.

Conditions for an old licence roll-over (new owner)

8.30 The old licence roll-over (new owner) applies if:

•

a person (the new owner) applies for an Australian financial services licence during the FSR transitional period;

•

at the time the application is made, another person (the original owner) holds one or more old licences; and

•

the original owner and the new owner are appropriately connected.

[Schedule 9, item 13, subsection 124-900(1)]

8.31 In addition, if the Australian financial services licence is granted to the new owner during the FSR transitional period, the old licence roll-over (new owner) will apply only if an old licence or licences held by the original owner cease to have effect (whether wholly or partly) because, as a result of the Australian financial services licence being granted to the new owner, the original owner starts to be covered by an exemption under subsection 911A(2) of the Corporations Act 2001 in respect of the original owner's regulated activities. [Schedule 9, item 13, paragraph 124-900(1)(d)]

8.32 Alternatively, if the Australian financial services licence is granted to the new owner after the end of the FSR transitional period, the old licence roll-over (new owner) will apply provided that:

•

the old licence or licences held by the original owner cease to have effect (whether wholly or partly) at the end of the FSR transitional period; and

•

if the Australian financial services licence had been granted to the new owner during the FSR transitional period, the old licence or licences held by the original owner would have ceased to have effect (whether wholly or partly) because the original owner would have started to have been covered by an exemption under subsection 911A(2) of the Corporations Act 2001 in respect of the original owner's regulated activities.

[Schedule 9, item 13, paragraph 124-900(1)(e)]

8.33 An old licence is any licence, registration, approval, authority or other similar thing that gave the holder the status of a regulated principal within the meaning of section 1430 of the Corporations Act 2001. [Schedule 9, item 13, paragraph 124-900(1)(b)]

8.34 A regulated principal is essentially a person who conducts a financial services business and includes the holder of a dealers licence, investment advisers licence, futures brokers licence or future advisers licence and a registered insurance broker before the transition to FSR. A regulated principal also includes a person who is listed in Regulation 10.2.38 of the Corporations Regulations 2001.

8.35 The original owner may be exempt from holding an Australian financial services licence under subsection 911A(2) of the Corporations Act 2001 in respect of a financial service they provide where they provide that service as a representative of the new owner. The new owner must carry on a financial services business and, generally, hold an Australian financial services licence that covers the provision of the service.

8.36 If the original owner is a company or trust, the original owner and the new owner will be appropriately connected if, at the time the new owner acquires the Australian financial services licence, the original owner and new owner are members of the same consolidatable group. [Schedule 9, item 13, subsection 124-900(2)]

8.37 A consolidatable group is defined in section 703-10 of the ITAA 1997 and consists broadly of a head entity and its wholly-owned subsidiaries. A wholly-owned subsidiary includes a company or trust where all the membership interests are wholly-owned by other members of the consolidatable group.

8.38 If the original owner is an individual, the original owner and the new owner will be appropriately connected if, at the time the new owner acquires the Australian financial services licence:

•

the new owner is a company that is wholly-owned by the original owner; or

•

the new owner is a trust where:

-

CGT event E4 is capable of applying to all the units and interests of the trust (i.e. broadly, where the trust is a fixed trust); and

-

all the membership interests in the trust are wholly-owned by the original owner.

[Schedule 9, item 13, paragraph 124-900(3)(a)]

8.39 In addition, at the same time as or just after the new owner acquires the Australian financial services licence, the original owner must become:

•

an authorised representative of the new owner - an authorised representative is defined in section 761A of the Corporations Act 2001 to be a person authorised in accordance with section 916A or 916B of that Act to provide a financial service or financial services on behalf of the financial services licensee;

•

an employee of the new owner; or

•

a director (within the meaning of the Corporations Act 2001 ) of the new owner - a director is defined in section 9 of that Act to mean, broadly, a person who is appointed to the position of a director or alternate director (regardless of the name given to their position).

[Schedule 9, item 13, paragraph 124-900(3)(b)]

Consequences of an old licence roll-over (new owner) where one original old licence comes to an end

8.40 The consequences of new owner roll-overs where one CGT asset comes to an end are set out in section 124-915. That section applies separately to:

•

old licence roll-overs (new owner);

•

qualified licence roll-overs (new owner); and

•

rights roll-overs (new owner).

8.41 Section 124-915 provides that the consequences of an old licence roll-over (new owner) where the original owner's ownership of a single old licence comes to an end and is replaced with an Australian financial services licence are:

•

the capital gain or capital loss made by the original owner when the old licence comes to an end is disregarded - recognition of the accrued capital gain or capital loss is deferred until a CGT event happens to the replacement Australian financial services licence held by the new owner;

•

if the original owner acquired the old licence on or after 20 September 1985, then the first element of the cost base and reduced cost base of the replacement Australian financial services licence held by the new owner includes:

-

the cost base and reduced cost base of the old licence; and

-

any amount paid (including the giving of property) to get the replacement Australian financial services licence. This will include any incidental costs, such as fees paid on application for the Australian financial services licence; and

•

if the original owner acquired the old licence before 20 September 1985, then the replacement Australian financial services licence will be taken to have been acquired before that day - that is, the pre-CGT status of the old licence will be preserved.

[Schedule 9, item 13, subsections 124-915(1) to (6)]

8.42 If the old licence was acquired on or after 20 September 1985 and ceases to only partly have effect, then the amount of cost base or reduced cost base that is attributed to the replacement Australian financial services licence is such part of the cost base of the old licence that is reasonably attributable to the part of the old licence that ceases to have effect. [Schedule 9, item 13, subsection 124-915(7)]

Consequences of an old licence roll-over (new owner) where 2 or more old licences come to an end

8.43 The consequences of new owner roll-overs where 2 or more CGT assets come to an end are set out in section 124-920. As qualified licence roll-overs (new owner) involve only a single CGT asset coming to an end, section 124-920 has no relevance to those roll-overs. However, section 124-920 applies separately to:

•

old licence roll-overs (new owner); and

•

rights roll-overs (new owner).

8.44 Section 124-920 provides that the consequences of an old licence roll-over where the original owner's ownership of 2 or more old licences come to an end and is replaced with an Australian financial services licence are:

•

the capital gain or capital loss made by the original owner when each old licence comes to an end is disregarded - recognition of the accrued capital gain or capital loss is deferred until a CGT event happens to the replacement Australian financial services licence held by the new owner;

•

if the original owner acquired all the old licences on or after 20 September 1985, then the first element of the cost base and reduced cost base of the replacement Australian financial services licence held by the new owner includes:

-

the cost base and reduced cost base of all of the old licences; and

-

any amount paid (including the giving of property) to get the replacement Australian financial services licence. This will include any incidental costs, such as fees paid on application for the Australian financial services licence; and

•

if the original owner acquired all the old licences before 20 September 1985, then the replacement Australian financial services licence will be taken to have been acquired before that day - that is, the pre-CGT status of the old licences will be preserved.

[Schedule 9, item 13, subsections 124-920(1) to (6)]

8.45 In addition, if the original owner acquired some (but not all) of the old licences before 20 September 1985, then the replacement Australian financial services licence is taken to be 2 assets. That is:

•

to the extent that it relates to old licences that were acquired before 20 September 1985, part of the replacement Australian financial services licence is taken to be a separate asset that was acquired before 20 September 1985 - that is, the pre-CGT status of those old licences will be preserved; and

•

to the extent that it relates to old licences that were acquired on or after 20 September 1985, part of the replacement Australian financial services licence is taken to be a separate asset that was acquired on or after 20 September 1985. The first element of the cost base or reduced cost base of this separate asset is the sum of:

-

the total cost base or bases of the old licence or licences that were acquired on or after 20 September 1985; and

-

that part of any amount paid (including the giving of property) to get the replacement Australian financial services licence that is reasonably attributable to that part of the licence that is taken to be acquired on or after 20 September 1985. This will include an appropriate share of any incidental costs, such as fees paid on application for the Australian financial services licence.

[Schedule 9, item 13, subsections 124-920(7) to (10)]

8.46 If an old licence that was acquired on or after 20 September 1985 ceases to only partly have effect, then the amount of cost base or reduced cost base that is attributed to the replacement Australian financial services licence is such part of the cost base of the old licence that is reasonably attributable to the part of the old licence that ceases to have effect. [Schedule 9, item 13, subsection 124-920(11)]

Qualified licence roll-over (same owner)

8.47 A special qualified Australian financial services licence may be issued to an insurance multi-agent during the FSR transitional period.

8.48 An insurance multi-agent is defined in section 1434 of the Corporations Act 2001 to mean a person who is an insurance intermediary (but not an insurance broker) within the meaning of the Insurance (Agents and Brokers) Act 1984 and who has agreements with 2 or more different insurers under that Act.

8.49 The qualified licence gives insurance multi-agents additional time to meet the competency requirements imposed on holders of Australian financial services licences during the FSR transitional period. The qualified licences are limited to dealing and providing financial advice only in relation to risk insurance and investment life insurance products.

8.50 A qualified Australian financial services licence issued to an insurance multi-agent ceases to be in force (unless earlier revoked) at the end of the FSR transitional period. The qualified licence is revoked before the end of the FSR transitional period if it is replaced with an Australian financial services licence during that period.

8.51 A qualified Australian financial services licence issued to an insurance multi-agent is an intangible CGT asset that comes to an end when it is revoked or ceases to be in force. This constitutes a disposal of a CGT asset (CGT event C2) that may give rise to a capital gain or capital loss.

Conditions for a qualified licence roll-over (same owner)

8.52 The qualified licence roll-over (same owner) applies if a qualified Australian financial services licence issued to an insurance multi-agent is revoked because that insurance multi-agent:

•

is granted an Australian financial services licence during the FSR transitional period; or

•

applies for an Australian financial services licence during the FSR transitional period and, as a result of the application, is subsequently granted an Australian financial services licence.

[Schedule 9, item 13, section 124-885]

Consequences of a qualified licence roll-over (same owner)

8.53 The consequences of same owner roll-overs are set out in section 124-895. That section applies separately to:

•

old licence roll-overs (same owner);

•

qualified licence roll-overs (same owner); and

•

rights roll-overs (same owner).

8.54 Section 124-895 provides that the consequences of a qualified licence roll-over (same owner) are generally set out in Subdivision 124-A (with one modification). [Schedule 9, item 13, subsection 124-895(1)]

8.55 The general Subdivision 124-A consequences that apply to a qualified licence roll-over (same owner) are:

•

the capital gain or capital loss made when a qualified licence comes to an end is disregarded - recognition of the accrued capital gain or capital loss is deferred until a CGT event happens to the replacement Australian financial services licence; and

•

the cost base and reduced cost base of the qualified licence is attributed to the first element of the cost base and reduced cost base of the replacement Australian financial services licence.

8.56 In addition, any amount paid (including the giving of property) to get the replacement Australian financial services licence will be included in the first element of the cost base and reduced cost base of the replacement asset. This will include any incidental costs, such as fees paid on application for the Australian financial services licence. [Schedule 9, item 13, subsection 124-895(2)]

Qualified licence roll-over (new owner)

8.57 Under the FSR regime, in certain circumstances, insurance multi-agent's may provide financial services under the authority of an Australian financial services licence held by another person. In this event, the insurance multi-agent is exempt from holding an Australian financial services licence. However, the qualified Australian financial services licence will be revoked and is effectively replaced with an Australian financial services licence that is held by that other person.

8.58 In these circumstances, the qualified Australian financial services licence is an intangible CGT asset that comes to an end when it is revoked because the original qualified licence holder is covered by an exemption from holding an Australian financial services licence. This constitutes a disposal of a CGT asset (CGT event C2) by the insurance multi-agent (the original owner) that may give rise to a capital gain or capital loss.

Conditions for a qualified licence roll-over (new owner)

8.59 The qualified licence roll-over (new owner) applies if:

•

a person (the new owner) applies for an Australian financial services licence during the FSR transitional period;

•

at the time the application is made, another person (the original owner) holds a qualified Australian financial services licence; and

•

the original owner and the new owner are appropriately connected.

[Schedule 9, item 13, subsection 124-905(1)]

8.60 In addition, if the Australian financial services licence is granted to the new owner during the FSR transitional period, the qualified licence roll-over (new owner) will apply only if the qualified Australian financial services licence is revoked as a result of the Australian financial services licence being granted to the new owner. [Schedule 9, item 13, paragraph 124-905(1)(d)]

8.61 Alternatively, if the Australian financial services licence is granted to the new owner after the end of the FSR transitional period, the qualified licence roll-over (new owner) will apply provided that:

•

the qualified Australian financial services licence held by the original owner ceases to have effect at the end of the FSR transitional period; and

•

if the Australian financial services licence had been granted to the new owner during the FSR transitional period, the qualified Australian financial services licence held by the original owner would have been revoked as a result of the Australian financial services licence being granted to the new owner.

[Schedule 9, item 13, paragraph 124-905(1)(e)]

8.62 If the original owner is a company or trust, the original owner and the new owner will be appropriately connected if, at the time the new owner acquires the Australian financial services licence, the original owner and new owner are members of the same consolidatable group. [Schedule 9, item 13, subsection 124-905(2)]

8.63 A consolidatable group is defined in section 703-10 of the ITAA 1997 and consists broadly of a head entity and its wholly-owned subsidiaries. A wholly-owned subsidiary includes a company or trust where all the membership interests are wholly-owned by other members of the consolidatable group.

8.64 If the original owner is an individual, the original owner and the new owner will be appropriately connected if, at the time the new owner acquires the Australian financial services licence:

•

the new owner is a company that is wholly-owned by the original owner; or

•

the new owner is a trust where:

-

CGT event E4 is capable of applying to all the units and interests of the trust (i.e. broadly, a trust that is a fixed trust); and

-

all the membership interests in the trust are wholly-owned by the original owner.

[Schedule 9, item 13, paragraph 124-905(3)(a)]

8.65 In addition, at the same time as or just after the new owner acquires the Australian financial services licence, the original owner must become:

•

an authorised representative of the new owner - an authorised representative is defined in section 761A of the Corporations Act 2001 to be a person authorised in accordance with section 916A or 916B of that Act to provide a financial service or financial services on behalf of the financial services licensee;

•

an employee of the new owner; or

•

a director (within the meaning of the Corporations Act 2001 ) of the new owner - a director is defined in section 9 of that Act to mean, broadly, a person who is appointed to the position of a director or alternate director (regardless of the name given to their position).

[Schedule 9, item 13, paragraph 124-905(3)(b)]

Consequences of a qualified licence roll-over (new owner)

8.66 The consequences of new owner roll-overs where one CGT asset comes to an end are set out in section 124-915. That section applies separately to:

•

old licence roll-overs (new owner);

•

qualified licence roll-overs (new owner); and

•

rights roll-overs (new owner).

8.67 Section 124-915 provides that the consequences of a qualified licence roll-over (new owner) are:

•

the capital gain or capital loss made by the original owner when the qualified Australian financial services licence comes to an end is disregarded - recognition of the accrued capital gain or capital loss is deferred until a CGT event happens to the replacement Australian financial services licence held by the new owner; and

•

the first element of the cost base and reduced cost base of the replacement Australian financial services licence held by the new owner includes:

•

the cost base and reduced cost base of the qualified Australian financial services licence; and

•

any amount paid (including the giving of property) to get the replacement Australian financial services licence. This will include any incidental costs, such as fees paid on application for the Australian financial services licence.

[Schedule 9, item 13, subsections 124-915(1) to (6)]

Rights roll-over (same owner)

8.68 A consequence of FSR is that existing contracts that created rights (such as a right to income or other intangible CGT assets) held by financial services providers may expire and be replaced with new contracts during the FSR transitional period. This constitutes a disposal of a CGT asset (CGT event C2) that may give rise to a capital gain or capital loss.

Conditions for a rights roll-over (same owner)

8.69 The rights roll-over (same owner) applies if:

•

one or more intangible CGT assets held by a person who carries on financial services business cease to exist during the FSR transitional period;

•

the asset or assets cease to exist because of the termination of one or more contracts;

•

the termination is directly connected with Chapter 7 of the Corporations Act 2001 beginning to apply to the person - that is, the termination must be connected with (but not necessarily required by) the person's transition to the FSR regime; and

•

the person acquires one or more intangible CGT assets by entering into one or more contracts which wholly or partly replace the contract or contracts that were terminated - in this regard the replacement contract could be with a different party to the original contract.

[Schedule 9, item 13, section 124-890]

Consequences of a rights roll-over (same owner)

8.70 The consequences of same owner roll-overs are set out in section 124-895. That section applies separately to:

•

old licence roll-overs (same owner);

•

qualified licence roll-overs (same owner); and

•

rights roll-overs (same owner).

8.71 Section 124-895 provides that the consequences of a rights roll-over (same owner) are generally set out in Subdivision 124-A (with 2 modifications). [Schedule 9, item 13, subsection 124-895(1)]

8.72 The general Subdivision 124-A consequences that apply to a rights roll-over (same owner) are:

•

the capital gain or capital loss made when the original asset comes to an end is disregarded - recognition of the accrued capital gain or capital loss is deferred until a CGT event happens to the replacement asset;

•

if the original asset or all the original assets were acquired on or after 20 September 1985, then the cost base and reduced cost base of the original asset or assets is attributed to the first element of the cost base and reduced cost base of the replacement asset or assets; and

•

if the original asset or all the original assets were acquired before 20 September 1985, then the replacement asset or assets will be taken to have been acquired before that day - that is, the pre-CGT status of the original asset or assets will be preserved.

8.73 The first modification to the general Subdivision 124-A consequences is that any amount paid (including the giving of property) to get the replacement asset or assets will be included in the first element of the cost base and reduced cost base of the replacement asset or assets. [Schedule 9, item 13, subsection 124-895(2)]

8.74 The second modification to the general Subdivision 124-A consequences is that, where 2 or more original intangible CGT assets come to an end and some of those assets were acquired before 20 September 1985, then:

•

to the extent that each replacement asset (or part of a replacement asset) relates to one or more original assets acquired before 20 September 1985, that replacement asset (or part of a replacement asset) is taken to be a separate asset that is acquired before 20 September 1985 - that is, it will be taken to be a pre-CGT asset; and

•

the first element of the cost base and reduced cost base of any remaining assets includes the cost base and reduced cost base of the original assets acquired on or after 20 September 1985 and either:

•

any amount paid (including the giving of property) to get the replacement asset; or

•

for a replacement asset, part of which is treated as a separate asset and taken to be acquired before 20 September 1985, such part of any amount paid to get the replacement asset as is reasonably attributed to the part of the asset that is taken to be acquired on or after 20 September 1985.

[Schedule 9, item 13, subsections 124-895(3) to (7)]

Rights roll-over (new owner)

8.75 The original owner of rights (such as a right to income or other intangible CGT asset) may choose for another person (the new owner) to conduct their financial services business after the original owner's transition to FSR.

8.76 In this event, the existing contracts that create intangible CGT assets that are held by the original owner may expire during the FSR transitional period and be replaced by contracts held by the new owner. This constitutes a disposal of a CGT asset (CGT event C2) by the original owner that may give rise to a capital gain or capital loss.

Conditions for a rights roll-over (new owner)

8.77 The rights roll-over (new owner) applies if:

•

one or more intangible CGT assets owned by a person who carries on financial services business (the original owner) cease to exist during the FSR transitional period;

•

the asset or assets cease to exist because of the termination of one or more contracts;

•

the termination is directly connected with the original owner choosing that another person (the new owner) will conduct the original owner's financial services business that is regulated under Chapter 7 of the Corporations Act 2001 - that is, the termination must be connected with (but not necessarily required by) the original owner's transition to the FSR regime;

•

the new owner acquires one or more intangible CGT assets by entering into one or more contracts which wholly or partly replace the contract or contracts that were terminated - in this regard the replacement contract could be with a different party to the original contract; and

•

the original owner and the new owner are appropriately connected.

[Schedule 9, item 13, subsection 124-910(1)]

8.78 If the original owner is a company or trust, the original owner and the new owner will be appropriately connected if, at the time the new owner acquires the intangible CGT asset, the original owner and new owner are members of the same consolidatable group. [Schedule 9, item 13, subsection 124-910(2)]

8.79 A consolidatable group is defined in section 703-10 of the ITAA 1997 and consists broadly of a head entity and its wholly-owned subsidiaries. A wholly-owned subsidiary includes a company or trust where all the membership interests are wholly-owned by other members of the consolidatable group.

8.80 If the original owner is an individual, the original owner and the new owner will be appropriately connected if, at the time the new owner acquires the intangible CGT asset:

•

the new owner is a company that is wholly-owned by the original owner; or

•

the new owner is a trust where:

-

CGT event E4 is capable of applying to all the units and interests of the trust (i.e. broadly, where the trust is a fixed trust); and

-

all the membership interests in the trust are wholly-owned by the original owner.

[Schedule 9, item 13, paragraph 124-910(3)(a)]

8.81 In addition, at the same time as or just after the new owner acquires the Australian financial services licence, the original owner must become:

•

an authorised representative of the new owner - an authorised representative is defined in section 761A of the Corporations Act 2001 to be a person authorised in accordance with section 916A or 916B of that Act to provide a financial service or financial services on behalf of the financial services licensee;

•

an employee of the new owner; or

•

a director (within the meaning of the Corporations Act 2001 ) of the new owner - a director is defined in section 9 of that Act to mean, broadly, a person who is appointed to the position of a director or alternate director (regardless of the name given to their position).

[Schedule 9, item 13, paragraph 124-910(3)(b)]

Consequences of rights roll-over (new owner) where one CGT asset comes to an end

8.82 The consequences of new owner roll-overs where one CGT asset comes to an end are set out in section 124-915. That section applies separately to:

•

old licence roll-overs (new owner);

•

qualified licence roll-overs (new owner); and

•

rights roll-overs (new owner).

8.83 Section 124-915 provides that the consequences of a rights roll-over (new owner) where the original owner's ownership of a single original CGT asset comes to an end are:

•

the capital gain or capital loss made by the original owner when the original asset comes to an end is disregarded - recognition of the accrued capital gain or capital loss is deferred until a CGT event happens to the replacement asset held by the new owner;

•

if the original owner acquired the original asset on or after 20 September 1985, then the first element of the cost base and reduced cost base of the replacement asset or assets includes:

-

the cost base and reduced cost base of the original asset that is attributed to the first element of the cost base and reduced cost base of the replacement asset or assets; and

-

any amount paid (including the giving of property) in entering into a new contract or contracts or other incidental costs to get the replacement asset or assets; and

•

if the original owner acquired the original asset before 20 September 1985, then the replacement asset or assets will be taken to have been acquired before that day - that is, the pre-CGT status of the original asset will be preserved.

[Schedule 9, item 13, subsections 124-915(1) to (6)]

Consequences of a rights roll-over (new owner) where 2 or more CGT assets come to an end

8.84 The consequences of new owner roll-overs where 2 or more CGT assets come to an end are set out in section 124-920. As qualified licence roll-overs (new owner) involve only a single CGT asset coming to an end, section 124-920 has no relevance to those roll-overs. However, section 124-920 applies separately to:

•

old licence roll-overs (new owner); and

•

rights roll-overs (new owner).

8.85 Section 124-920 provides that the consequences of a rights roll-over (new owner) where the original owner's ownership of 2 or more original CGT assets come to an end are:

•

the capital gain or capital loss made by the original owner when each original asset comes to an end is disregarded - recognition of the accrued capital gain or capital loss is deferred until a CGT event happens to the replacement asset or assets held by the new owner;

•

if the original owner acquired all the original assets on or after 20 September 1985, then the first element of the cost base and reduced cost base of the replacement asset or assets held by the new owner includes:

-

the cost base and reduced cost base of all of the original assets; and

-

any amount paid (including the giving of property) to get the replacement asset or assets; and

•

if the original owner acquired all the original assets before 20 September 1985, then the replacement asset or assets will be taken to have been acquired before that day - that is, the pre-CGT status of the original assets will be preserved.

[Schedule 9, item 13, subsections 124-920(1) to (6)]

8.86 In addition, if the original owner acquired some (but not all) of the original assets before 20 September 1985, then:

•

to the extent that each replacement asset (or part of a replacement asset) relates to one or more original assets acquired before 20 September 1985, that replacement asset (or part of a replacement asset) is taken to be a separate asset that is acquired before 20 September 1985 - that is, it will be taken to be a pre-CGT asset; and

•

the first element of the cost base and reduced cost base of any remaining assets includes the cost base and reduced cost base of the original assets acquired on or after 20 September 1985 and either:

-

any amount paid (including the giving of property) to get the replacement asset; or

-

for a replacement asset, part of which is treated as a separate asset and taken to be acquired before 20 September 1985, such part of any amount paid to get the replacement asset as is reasonably attributed to the part of the asset that is taken to be acquired on or after 20 September 1985.

[Schedule 9, item 13, subsections 124-920(7) to (10)]

Capital improvements to pre-CGT assets

8.87 Section 108-75 of the ITAA 1997 provides that, in certain circumstances, capital improvements to certain pre-CGT assets (including statutory licences) for which a roll-over is available are treated as separate assets for CGT purposes.

8.88 The amendments ensure that section 108-75 applies to Australian financial services licences acquired as the result of a roll-over under new Subdivision 124-O in the same way that it applies to other statutory licences acquired as a result of a roll-over under Subdivision 124-C. [Schedule 9, item 2, subsection 108-75(2)]

CGT small businesses concessions

8.89 Division 152 of the ITAA 1997 provides 4 CGT concessions to small businesses.

8.90 Subdivision 152-A outlines the basic conditions for relief under Division 152. One of those conditions is the active asset test in section 152-35, which requires the CGT asset to be an active asset both at a particular time and for half a particular period. That is, if the business has not ceased and the asset has been owned for less than 15 years, the CGT asset must be an active asset just before the CGT event and for at least half the period of ownership. If the asset has been owned for more than 15 years, it only needs to be an active asset for at least half of the 15 year period ending at the time of the CGT event or the small business ceasing if earlier.

8.91 The time periods for the active asset test are modified for assets acquired as a result of an FSR transition roll-over to ensure that, for the purposes of applying these tests, the replacement asset is taken to be acquired at the time the original asset was acquired. [Schedule 9, item 14, subsections 152-45(1A) and (1B)]

8.92 Subdivision 152-B provides small businesses with an exemption from a capital gain arising on a CGT asset that has been owned continuously for at least 15 years provided certain conditions are met. The time periods for applying the 15-year test are modified for assets acquired as a result of an FSR transition roll-over to ensure that the replacement asset is taken to be acquired at the time the original asset was acquired. [Schedule 9, item 15, subsections 152-115(1A) and (1B)]

Discount capital gains

8.93 Section 115-25 provides that capital gains arising from a CGT event happening to a CGT asset after 21 September 1999 that was acquired at least 12 months before the CGT event are treated as discount capital gains.

8.94 Section 115-30 contains special rules about the time of acquisition for these purposes. Item 2 in the table in section 115-30 provides that a CGT asset acquired as a replacement asset for a replacement-asset roll-over (including an FSR transition roll-over) is taken to be acquired at the time the original asset was acquired.

Application and transitional provisions

8.95 The FSR transition roll-overs are available only if a CGT event happens to a relevant CGT asset during the FSR transitional period - that is, between 11 March 2002 and 10 March 2004 (inclusive). [Schedule 9, items 13 and 17, sections 124-880, 124-885, 124-890, 124-900, 124-905 and 124-910]

Extension of the FSR transitional period

8.96 Subsection 1437(3) of the Corporations Act 2001 gives ASIC the power to make a declaration to extend the FSR transitional period.

8.97 If ASIC makes a declaration to extend the FSR transitional period, the FSR transition roll-overs will be available for relevant CGT events that happen before the end of the last day of the period declared by ASIC. [Schedule 9, item 13, sections 124-925 and 124-930]

Consequential amendments

Separate CGT assets

8.98 Section 108-50 of the ITAA 1997 provides some guide material on when building and structures, adjacent land and capital improvements to a CGT asset are treated as separate CGT assets. The note in section 108-50 makes reference to the additional circumstances in which separate CGT asset treatment can apply. As sections 124-895, 124-910 and 124-915 contain separate CGT asset treatment for the FSR transition roll-overs, the relevant note in section 108-50 is amended to make a reference to these sections. [Schedule 9, item 1, section 108-50]

Acquisition rules

8.99 Section 109-55 of the ITAA 1997 contains a table which outlines CGT acquisition rules which apply in specific situations and which are dealt with in specific provisions covering those situations. This table has been amended to make reference to the FSR transition roll-overs with respect to a replacement asset or part of a replacement asset that relates to a pre-1985 original asset in sections 124-895, 124-915 and 124-920. [Schedule 9, items 3 and 4, section 109-55]

General rules for replacement-asset roll-overs

8.100 Each of the FSR transition roll-overs involve an existing CGT asset being replaced with a new CGT asset - that is, the roll-overs are replacement-asset roll-overs.

8.101 Therefore, the table in section 112-115 of the ITAA 1997, which contains a list of replacement-asset roll-overs, is amended to make a reference to the FSR transition roll-overs in new Subdivision 124-O. [Schedule 9, item 5, section 112-115]

8.102 Section 124-5, which provides some guide material for replacement-asset roll-overs, is amended to make a reference to the FSR transition roll-overs in new Subdivision 124-O. [Schedule 9, item 6 subsection 124-5(1)]

8.103 The notes in subsections 124-5(1) and (2) are also amended to make reference to the FSR transition roll-overs for new owners in Subdivision 124-O. [Schedule 9, items 7 to 9, subsections 124-5(1) and (2)]

8.104 Section 124-10 outlines the general consequences of replacement-asset roll-overs. Notes in section 124-10 make references to variations to those general consequences for some specific replacement-asset roll-overs. As new Subdivision 124-O makes variations to the general consequences for specific replacement-asset roll-overs for each of the FSR transition roll-overs, the relevant notes in section 124-10 are amended to make a reference to new Subdivision 124-O. [Schedule 9, items 10 and 11, subsection 124-10(3)]

8.105 Subsection 124-15(5) provides a rule where there is more than one original asset, some of those assets were acquired before 20 September 1985 to determine whether the replacement assets are taken to pre-CGT assets. A note is inserted into this section to indicate that section 124-895 provides a different rule for FSR transition roll-overs. [Schedule 9, item 12, subsection 124-15(5)]