Senate

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 2.11 - Capital proceeds

Overview

This segment covers the rules in Division 116 for working out what are the capital proceeds from a CGT event.

Part A summarises these rules.

Part B explains the changes to the 1936 Act.

A. Summary of the new law

Division 116: Capital proceeds

What the Division does

Division 116 specifies the capital proceeds to be taken into account in working out whether a capital gain or loss has been made. A table describes modifications and whether any special rules apply. [sections 116-5, 116-10, 116-20 and 116-25]

General rules about capital proceeds

Capital proceeds from a CGT event are ordinarily:

•

money a taxpayer receives, or is entitled to receive, for the event happening;

•

the market value of any property a taxpayer receives, or is entitled to receive, for the event happening; or

•

a combination of these.

[section 116-20]

Modifications to the general rules

•

1. The market value of the CGT asset is substituted if:

•

there are no capital proceeds; or

•

any part or all of the capital proceeds cannot be valued; or

•

the asset was disposed of in a non-arms length dealing. [section 116-30]

2.

An amount is apportioned if only part of it relates to the CGT event [section 116-40] ;

3.

Capital proceeds are reduced by any amount owed that is unlikely to be received (as long as the taxpayer tries to recover it). [section 116-45] ;

4.

Capital proceeds are reduced by any non-deductible amount a taxpayer has to repay [section 116-50] ; and

Modifications to the general rules continued

5. Capital proceeds are increased by the amount of any liability assumed in connection with the asset. [section 116-55]

Special rules

CGT event A1

If CGT event A1 (disposal of a CGT asset) happens because an option has been exercised over the asset,the capital proceeds include those from the grant of the option. [section 116-65]

CGT event C2: Cancellation, surrender etc. of a CGT asset

Where CGT event C2 (cancellation, surrender and similar endings) happens to an asset there are three special rules:

1.

The first modification to the general rules does not apply if the CGT asset expires or it is a statutory licence that is cancelled. [subsection 116-30(3)]

2.

In all other cases where a CGT asset ends, the market value is determined as if the asset still existed. [subsection 116-30(4)]

3.

On expiry, surrender or forfeiture of a lease, the capital proceeds include any amount that the lessor pays to the taxpayer as lessee for improvements to the lease property. [section 116-75]

Where a company or trust owns a collectable or personal use asset

Where a taxpayer disposes of shares or an interest in a trust, and the capital proceeds reflect a fall in the market value of collectables or personal use assets (other than a car, motor cycle or similar vehicle) of the company or trust, the market value of the shares or interest is determined as if that fall had not occurred. [section 116-80]

Section 47A of the 1936 Act applies to certain rolled-over assets

Where a CGT event happens to a CGT asset you own, the capital proceeds from the event are reduced if you acquired the asset in the following circumstances:

•

you acquired the asset from a company;

•

the company obtained roll-over relief for that disposal;

•

in relation to that disposal, you or another entity received an assessable deemed dividend under section 47A of the 1936 Act.

[section 116-85]

CFC changes residency from an unlisted country to a listed country

The capital proceeds are adjusted if a CGT event happens to an asset that the taxpayer acquired from a CFC which held it since changing residency from an unlisted country to a listed country. [section 116-95]

B. Discussion of changes

Section 116-25 Table of modifications to the general rules

Change

The section clarifies that the market value substitution rule does not apply to CGT events F1, F2, F4 and F5 which deal with the grant or variation of a lease.

Explanation

The 1936 Act is unclear whether the market value substitution rule applies when a lease is granted or varied without the payment of a premium or other amount. The section clarifies that it does not apply. This is consistent with administrative practice.

Section 116-50 Repaid rule: modification 4

Change

Reduce capital proceeds by any amount repaid, to the extent that a deduction is not allowable for the repayment.

Explanation

The 1936 Act does not allow for a capital gain or loss to be adjusted for consideration that the seller later repays.

The rewritten provision gives a more equitable result, corresponding with the treatment of the purchaser.