Explanatory Memorandum
(Circulated by the authority of the Treasurer, the Hon John Dawkins, M.P.)Chapter 2 Capital Gains Tax Goodwill Exemption
Clauses: 45,46 and 67
Increase the capital gains tax exemption for gains realised on the disposal of the goodwill of a business from 20% to 50%. The exemption will be available where the net business interests of the taxpayer are worth less than $2 million and the exemption threshold will be indexed annually from the 1993-94 year of income.
Capital Gains Tax Goodwill Exemption
Capital Gains Tax Goodwill Exemption
Summary of the proposed amendments
2.1. The Bill proposes an amendment to increase from 20% to 50% the capital gains tax (CGT) exemption for a capital gain realised on the disposal of the goodwill of a business. The exemption is to apply where the net business interests of the taxpayer are worth less than $2 million and the exemption threshold is to be indexed annually from the 1993-94 year of income.
2.2. These changes will apply to disposals of goodwill after 26 February 1992.
Background to the legislation
2.3. Broadly, the CGT provisions contained in Part IIIA of the Income Tax Assessment Act 1936 apply to tax gains realised on the disposal of assets. The term "asset" is defined in section 160A and includes goodwill.
2.4. Section 160ZZR provides that on the disposal of a business, a portion of any capital gain attributable to the goodwill of the business is exempt from CGT. The exemption is only available where the total net value of the business, or the business and any associated businesses held by the taxpayer, is less than a certain amount: this amount (the exemption threshold ) is currently $1 million. The portion of the capital gain on the disposal of goodwill that is currently exempt is 20%.
2.5. Whether a business is an "associated business" of a taxpayer is determined by reference to subsection 160ZZR(2). Briefly, a business will be an associated business if it is carried on by the same individual, the same company or related company or the same trustee of a trust estate or an "associated trust estate".
2.6. Section 160F sets out the criteria for determining whether a particular trust estate will be an "associated trust estate" in relation to another trust estate. Generally, a trust estate will be an "associated trust estate" if a beneficiary of one trust estate can also be a beneficiary of the other trust estate.
2.7. In the case of related companies, section 160G provides that companies will be "related companies" if they both belong to the same 100% commonly owned company group. For example, if one company is a subsidiary of the other or both companies are subsidiaries of the same holding company.
Explanation of the proposed amendments
2.8. The Bill proposes an amendment to section 160ZZR which will increase the CGT exemption for gains realised on the disposal of the goodwill of a business.
2.9. For disposals occurring after 26 February 1992, the percentage of the gain realised on the disposal of the goodwill that is exempt from capital gains tax will increase from 20% to 50%. Also the exemption threshold (as outlined above) will increase from $1 million to $2 million [Clause 45]. This threshold will then be indexed annually from the 1993-94 year of income.
Indexation of Exemption Threshold
2.10. Indexation of the exemption threshold will occur annually from the 1993-94 year of income (new section 160ZZRAA). The new exemption threshold will be determined by reference to an indexation factor which will be calculated using the all groups consumer price index, averaged for the eight capital cities, as published by the Australian Statistician. The indexation factor will be applied to the previous years exemption threshold to determine the threshold for the following year, and the resulting figure will be rounded up or down, as the case may be, to the nearest $1,000. However, by paragraph 160ZZRAA(3)(d), the exemption threshold is never to be less than $2 million.
2.11. The Commissioner of Taxation is required to publish, by written notice, both the indexation factor and the resulting exemption threshold prior to 1 July of each year. Notification will generally be contained in a press release issued by the Commissioner (subsection 160ZZRAA(7)). [Clause 46]
Commencement date
2.12. The amendments apply to disposals of goodwill occurring on or after 27 February 1992.
Clauses involved in the proposed amendments
Clause 45 : Amends section 160ZZR to increase the CGT goodwill exemption.
Clause 46 : Inserts section 160ZZRAA dealing with the exemption threshold.
Subclause 67(10) : Provides that the amendments apply to disposals occurring after 26 February 1992.