Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)CHANGE OF TITLE - TAX LAW IMPROVEMENT BILL (No. 1) 1998 - SENATE - Explanatory Memorandum.
Chapter 2.9 - Modifications to cost base and reduced cost base
Overview
This segment covers the rules in Division 112 about modifications to the cost base and reduced cost base of CGT assets.
Part A summarises these rules.
Part B explains the changes to the 1936.
A. Summary of the new law
Subdivision 112-A: General modifications
Subdivision 112-A sets out four situations that may modify the general rules for working out the cost base and reduced cost base of a CGT asset.
Market value substitution rule
In some cases the market value of the CGT asset is taken into account in calculating the cost base and reduced cost base. Broadly, these are where:
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- no money is paid or no property given to acquire the asset; or
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- part or all of the consideration cannot be valued; or
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- the asset is not acquired through an arms length dealing.
[section 112-20]
Merged, split or changed assets
If two or more CGT assets are merged the respective cost bases or reduced cost bases are combined.
A reasonable apportionment of the cost base and reduced cost base of a CGT asset is required if:
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- the asset is divided into two or more separate assets; or
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- the asset is changed, wholly or partly, into an asset of a different nature.
[section 112-25]
Apportionment rules on acquisition or part disposal
An apportionment is also required where:
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- a transaction covers the acquisition of two or more CGT assets; or
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- part of a transaction is for the acquisition of a CGT asset; or
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- part of a CGT asset comes under a specific CGT event.
[section 112-30]
Assumption of liability on acquisition
If a liability is assumed when a CGT asset is acquired, the cost base and reduced cost base of the asset take account of the liability. [section 112-35]
Subdivision 112-B: Finding tables for special rules
Subdivision 112-B is a guide that sets out in tabular form:
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- situations that modify the general rules about cost base and reduced cost base;
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- elements of the cost base or reduced cost base affected by the modification; and
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- where the detailed rules can be found.
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- main residence;
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- the effect of an individual dying;
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- bonus shares and units;
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- exercise of rights;
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- convertible notes;
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- employee share schemes
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- leases;
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- options;
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- units that stop being a pre-CGT unit;
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- transfer of a net capital loss;
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- modifications outside Parts 3-1 & 3-3;
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- residency.
Subdivision 112-C: Replacement-asset roll-over
Subdivision 112-C is a guide containing:
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- a list of the replacement-asset roll-overs; and
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- where details of these can be found.
Meaning of replacement-asset roll-over
A replacement-asset roll-over is one where the CGT consequences are deferred until a later event affects the replacement-asset.
Some of the more common examples of such roll-overs are:
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- a strata title conversion;
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- the receipt of a new asset for the compulsory acquisition, loss, destruction or damage of a CGT asset; and
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- the receipt of shares or units in exchange for the transfer of a CGT asset to a wholly-owned company or trust. [section 112-105]
Cost base and reduced cost base of a replacement asset
The first elements of the cost base and reduced cost base of a replacement asset adopt the cost base and reduced cost base of the original asset at the time of replacement. [section 112-110]
Subdivision 112-D: Same-asset roll-over
Subdivision 112-D is a tabular guide to all of the same-asset roll-overs.
Meaning of same-asset roll-over event
A same-asset roll-over is where a CGT asset changes hands and any capital gain or loss is deferred until another CGT event under the new ownership.
The same-asset roll-overs are:
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- transfer of an asset from a company or trust to a spouse because of a marriage breakdown;
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- transfer of an asset between spouses because of a marriage breakdown;
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- transfer to a wholly-owned company;
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- transfer from a partnership to a wholly-owned company;
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- transfer between related companies; and
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- disposal of a CGT asset because a trust deed is changed.
[section 112-150]
How the cost base and reduced cost base are modified
The new owner calculates the cost base and reduced cost base of the rolled-over asset as if the first element of the cost base or reduced cost base were the cost base and reduced cost base of the original asset, at the time the new owner acquired it. [section 112-145]
B. Discussion of the change
The Division brings together all the cost base and reduced cost base modification rules.
The 1936 Act contains the same rules but they are not collocated. This makes it difficult to determine when a cost base or reduced cost base is subject to modification.
Section 112-30: Apportionment rules on acquisition or part disposal
An apportionment is made to calculate a CGT assets cost base and reduced cost base when:
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- a transaction relates to the acquisition of more than one CGT asset; or
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- an asset is acquired as part of a broader transaction; or
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- only part of an asset is the subject of a CGT event.
Require allocation, on a reasonable basis, of money paid or property given if a CGT asset is acquired as part of a broader transaction. The first element of the cost base and reduced cost base of the asset is based on that allocation.
The 1936 Act states that the first element of the cost base or reduced cost base is the consideration in respect of the acquisition of the asset. It is implicit that this requires the reasonable allocation of any undissected amount paid or given in relation to a broader transaction. The rewritten provision makes this explicit.