Explanatory Memorandum
(Circulated by the authority of the Treasurer,the Hon Ralph Willis, M.P.)Chapter 7 Capital Gains Tax Roll-over Relief for Partnerships
Clauses: 51 and 63
Overview
Corrects a deficiency in the CGT roll-over provisions for transfers of partnership assets to wholly-owned companies, by ensuring that the cost bases of shares received as consideration for such transfers reflect the amount of partnership liabilities assumed by the company.
Applies to transfers of assets after 6 December 1990.
Capital Gains Tax Roll-over Relief for Partnerships
Summary of the proposed amendments
7.1 The Bill will amend the CGT roll-over provisions for transfers of partnership assets to wholly-owned companies. It will require the amount of partnership liabilities assumed by the company to be reflected in the cost bases of shares received for the transfer.
Background to the legislation
7.2 The broad purpose of the roll-over provisions is to ensure that adverse CGT consequences do not follow from asset disposals occurring in circumstances where it is considered unreasonable for the usual rules to apply. The consequence of roll-over relief for an asset disposal is that assets acquired before the introduction of CGT transfer their exempt status, and accrued capital gains in respect of assets acquired after the introduction of CGT are deferred.
7.3 Circumstances where it is considered unreasonable for CGT to apply is on a disposal of an asset without any change in its underlying ownership, as occurs when an asset is transferred to a company wholly-owned by the person(s) transferring the asset. Roll-over relief will mean that, for example, taxpayers can reorganise their business affairs in this way without adverse CGT consequences.
7.4 Accordingly CGT roll-over relief is available for the transfer of partnership assets to a company wholly-owned by the partners (section 160ZZNA allows such roll-over relief for disposals of assets after 6 December 1990). A requirement is that each partner must only receive "replacement" shares in the company - comparable in value to their respective interest in the transferred asset - as consideration for the transfer.
7.5 To ensure that CGT operates appropriately if partners subsequently sell replacement shares, those shares inherit the CGT characteristics of the asset for which they were received in exchange. This means that shares received in exchange for pre CGT interests in a partnership asset will be treated as acquired pre CGT. Similarly, shares received in exchange for post CGT interests in a partnership will be treated as acquired post CGT, for consideration equal to the cost bases of those interests.
Explanation of the proposed amendments
7.6 The partnership roll-over provisions described above (section 160ZZNA) contemplate the transfer of a partnership asset encumbered by an attached partnership liability. Where this occurs, the market value of shares received in exchange for the asset's transfer would reflect the amount of assumed liability. Correspondingly, the cost bases attributable to those shares should also reflect the assumed liability.
7.7 Under the existing rules, the cost bases of replacement shares cannot be reduced to reflect the amount of the assumed liabilities. This is an unintended outcome. Accordingly, the proposed amendments will require the cost bases of replacement shares to reflect the amount of the assumed liability that is attributable to those shares. [Clause 51]
Example of the deficiency to be remedied (for convenience, cost base indexation is ignored)
7.8 A partnership has a post CGT asset with a market value of $10000 and a cost base of $8000. A capital gain of $2000 (ie. $10000 - $8000) would accrue if the asset was sold.
7.9 The asset, together with an attached partnership liability of $6000, is transferred to a wholly-owned company and CGT roll-over relief is obtained. Under the rules described above, the partners would receive replacement shares in the company to the value of $4000, ie. the market value of the asset ($10000) less the assumed liability ($6000).
7.10 Under the existing rules, the replacement shares would be deemed to have a cost base of $8000 (ie. equal to the cost base of the transferred asset) for the purposes of calculating any capital gain or loss from their disposal. The partners could immediately sell the shares and realise a capital loss of $4000 (ie. sale proceeds of $4000 less cost base of $8000).
7.11 The law is to be changed so that the replacement shares in the above example would have a cost base of $2000 (ie. cost base of the asset of $8000, minus the assumed liability of $6000). A capital gain of $2000 would then accrue if the partners were to immediately sell the shares.
Commencement date
7.12 As the amendments correct an unintended outcome, it is proposed that they apply to disposals of assets after 6 December 1990, the application date for section 160ZZNA.
Clauses involved in the amendments.
Clause 51: amends subsection 160ZZNA(10) and inserts subsection 160ZZNA(10A).
Subclause 63(13): contains the application provisions.