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 2.16 - Replacement asset roll-overs
Overview
This segment covers the rules that are dealt with in Division 124 that allow a roll-over of CGT liability where ownership of one or more CGT assets ends and replacement CGT assets are acquired.
Part A summarises these rules.
Part B explains the changes to the 1936 Act.
Part C identifies provisions that have not been rewritten.
A. Summary of the new law
Subdivision 124-A: General rules
Subdivision 124-A sets out the roll-over relief available when ownership of certain CGT assets ends under a CGT event and another asset or assets are acquired. Roll-over allows deferral of a capital gain or loss until a later CGT event happens to the new assets. [sections 124-10 and 124-15]
If the original asset or assets were acquired after 19 September 1985 (post-CGT), their cost bases are apportioned across the new assets. This becomes, broadly speaking, the cost base of the new asset or assets. [subsections 124-10(3) and 124-15(3)]
Original asset or assets acquired pre-CGT
If the original asset or assets were acquired before 20September1985 (pre-CGT), the new assets are taken to have been acquired pre-CGT. [subsections 124-10(4) and 124-15(4)]
Some of the original assets acquired pre-CGT
If some, but not all, of the original assets were acquired pre-CGT, a formula applies to determine which of the new assets are to be taken as acquired pre-CGT. [subsection 124-15(5)]
Cost base of new assets taken to have been acquired post-CGT
The cost bases of original assets acquired post-CGT are apportioned among the new assets taken to have been acquired post-CGT. [subsection 124-15(6)]
Indexation of new assets cost base
Indexation is available from the time of acquisition of the original assets provided the combined ownership period for both the original and new assets is at least 12 months. [sections 114-10 and 114-20 and Subdivision 960-M]
Subdivision 124-B: Asset compulsorily acquired, lost or destroyed
Subdivision 124-B provides an optional roll-over if your asset is:
- •
- compulsorily acquired;
- •
- disposed of under threat of compulsory acquisition;
- •
- lost or destroyed; or
- •
- an expired lease that is not renewed
and in return you receive money, another CGT asset or both.[section 124-70]
If you receive money, it must be used to acquire a new asset or for repairs or restoration of the original asset. [section 124-75]
Consequences if original asset is a post-CGT asset
If the original asset is a post-CGT asset, any gain on its disposal is reduced or eliminated, depending on the kind and amount of compensation. [sections 124-85 and 124-90]
If a capital loss is made a roll-over is not available. [subsection 124-70(1)]
Consequences if original asset is a pre-CGT asset
If the original asset is a pre-CGT asset, the new asset is taken to have been acquired pre-CGT only if:
- •
- the expenditure on it is less than 120% of the market value of the original asset when the event happened ; or
- •
- the original asset was lost or destroyed as a result of a natural disaster and it is reasonable to treat the new asset as being substantially the same as the original asset.
[subsection 124-85(3)]
Both the original asset and the new asset must have a necessary connection with Australia or the taxpayer must be an Australian resident. [subsection 124-70(4)]
Subdivision 124-C: Statutory licences
Subdivision 124-C provides automatic roll-over where a taxpayer's statutory licence (original licence) expires or is surrendered and the taxpayer gets a new licence by renewing or extending it. [section 124-140]
A statutory licence is an authority, licence, permit or quota granted by an Australian government agency or a foreign government agency.
It does not include a lease or a mining right or a prospecting right. [subsection 124-140(3)]
The cost base or reduced cost base of the new licence includes any amount paid for it. [subsection 124-140(2)]
Subdivision 124-D: Strata title conversion
Subdivision 124-D provides an optional roll-over where a building is converted to strata title. [section 124-190]
Roll-over is only available if the stratum unit that is transferred to the taxpayer is the unit that they had the right to occupy just before the strata title conversion. [paragraph 124-190(1)(c)]
The cost base or reduced cost base of the stratum unit includes any amount paid for it. [subsection 124-190(2)]
Subdivision 124-E: Exchange of shares or units
Subdivision 124-E provides an optional roll-over to a shareholder where a company or trustee of a unit trust redeems or cancels all the shares or units of a certain class and issues new shares or units in substitution. [sections 124- 240 and 124-245]
Market value of new shares or units
The market value of the new shares or units must not be less than the market value of the original shares or units.
Subdivision 124-F: Exchange of rights or options
Subdivision 124-F provides an optional roll-over to the holder of an option to acquire shares or units where, as part of a consolidation or division of shares or units, a company or trustee of a unit trust cancels the options and issues new ones. [sections 124-295 and 124-300]
The market value of the new options must not be less than the market value of the original ones. [subsections 124-295(6) and 124-300(6)]
Subdivision 124-G: Exchange of shares in one company for share in another company
Subdivision 124-G gives the option of roll-over relief to shareholders where, in the reorganisation of the affairs of a company, their shares are exchanged for non-redeemable shares in another company that is interposed directly between the original company and the shareholders. [sections 124-360 and 124-370 and subsection 124-380(1)]
A shareholder can choose a roll-over if:
- •
- all shareholders in the original company dispose of their shares to the interposed company in exchange for shares in the interposed company [section 124-360] ; or
- •
- the interposed company acquires not more than 5 shares in the original company, and all other shares in the original company are redeemed or cancelled and shares in the interposed company are issued in exchange.
[section 124-370]
Ownership of shares in interposed company
There are rules concerning the ownership of shares in the interposed company after the re-organisation. [sections 124-365, 124-375 and 124-380]
Either the shareholder must be an Australian resident or his or her shares in the original company must have the necessary connection with Australia. [subsections 124-365(4) and 124-375(4)]
Both the original company and the interposed company must be Australian residents at the completion of the reorganisation. [subsection 124-380(4)]
The right of shareholders to choose a roll-over depends upon the interposed company agreeing, within two months after the completion of the reorganisation, that the roll-over consequences are to apply to it. [subsection 124-380(5)]
Consequences for the interposed company
Some shares in the original company owned by the interposed company are taken to be acquired pre-CGT, if sufficient of the original companys assets were acquired pre-CGT. There are rules for working out the cost base and reduced cost base of the post-CGT shares. [section 124-385]
Subdivision 124-H: Exchange of units in a unit trust for shares in a company
Subdivision 124-H gives a unit holder an optional roll-over where, in the reorganisation of the affairs of a unit trust, the unit holder's units are replaced by non-redeemable shares in a company that is interposed between it and the unit holders. [sections 124-445 and 124-455]
The provisions of this subdivision parallel those of Subdivision 124-G. [sections 124-440 to 124-470]
Subdivision 124-I: Conversion of a body to an incorporated body
Subdivision 124-I contains an optional roll-over for a member of a body that is incorporated under a law (other than company law) where, as a result of the body being converted to a company, the members receive shares in the company in exchange for their interests in the body. [section 124-520]
The roll-over is not available if there is a significant change in the ownership of the body on its conversion. [paragraph 124-520(1)(d)]
Subdivision 124-J: Crown leases
Subdivision 124-J gives an automatic roll-over to a holder of rights under a Crown lease over land when the lease is renewed, extended or converted to a fee simple title. [section 124-575]
Same land or acceptable variation
The new right must relate to the same land or, if different, specified criteria must be satisfied. [section 124-585]
Partial roll-over if land excised
A partial roll-over is available if some of the land that is the subject of the original right is not covered by the new right. [section 124-590] The cost base of the original right is adjusted to take account of any excised land. [section 124-600]
Roll-over may apply if there is a change of lessor. [section 124-605]
Subdivision 124-K: Depreciable plant
Subdivision 124-K provides automatic roll-over if plant is attached to land that you hold under a quasi-ownership right granted by an exempt Australian or foreign government agency, and you are granted a new right or an estate in fee simple in the land. [section 124-655]
If the new quasi-ownership right or estate in fee simple is instead given to your associate, roll-over is not available, but the reduced cost base of the plant is adjusted. [section 124-660]
Subdivision 124-L: Prospecting and mining entitlements
Subdivision 124-L provides an automatic roll-over where a prospecting or mining right expires or is surrendered and is replaced by a new prospecting or mining right. [section 124-700]
B. Discussion of changes
Subdivision 124-A General rules
Adopt a standard statement of the consequences of a roll-over.
In the 1936 Act, the consequences of choosing a roll-over are separately stated for each provision that allows a roll-over. The rewritten provisions identify all of these instances and state the roll-over consequences in standard terms. This avoids repetition and simplifies the law.
Section 124-10 & Section 124-15 Your ownership of one or more CGT assets ends
Allow indexation of the cost base of a new asset where a CGT event happens to that asset within 12 months of the event to which the roll-over applies, but at least 12 months after the original asset was acquired.
The 1936 Act denies indexation if a new asset is disposed of within 12 months of its acquisition (the roll-over). The rewritten provision is consistent with the general design of the roll-over provisions, which transfer the CGT attributes of the original asset to the new asset or assets.
Section 124-15 Your ownership of more than one CGT asset ends
Provide that the maximum number of the new assets that can be treated as acquired pre-CGT are so treated automatically.
The 1936 Act allows you to elect that a number of the new assets be taken to have been acquired pre-CGT where a proportion of the original assets were acquired before that date. It is always in your interest to choose that the maximum number be taken as acquired pre-CGT. Making this automatic reduces compliance costs and streamlines the law.
Section 124-75 Other requirements if you receive money
This section lists additional requirements that need to be met before roll-over relief is available for the compulsory acquisition, loss or destruction of an asset.
State that only some of the expenditure incurred on acquiring a new asset, or on repairs or restoration of the original asset must be incurred within the specified time.
The 1936 Act requires expenditure on acquiring a new asset, or on the repair or restoration of the original asset to be incurred within a specified time of the disposal of the original asset. It is unclear whether it is the total expenditure, or only a part of it, that must be incurred within this period. The rewritten provision adopts current administrative practice that only some of the expenditure must be incurred within the specified time.
Section 124-95 You receive both money and an asset
This section helps determine the roll-over relief consequences of receiving both money and another CGT asset as a result of an involuntary disposal.
This is a new provision.
This section gives legislative guidance as to how to determine the roll-over consequences when, as a result of the involuntary disposal of the original asset, the taxpayer receives both cash and a new asset. It adopts current administrative practice.
Section 124-190 Strata title conversion
Provide a standard definition of stratum unit.
The 1936 Act contains two conflicting definitions of stratum unit. The rewritten provisions, to simplify and standardise the law, adopt the broader definition which extends to units registered in another country and commercial buildings. The only practical effect of the adoption of this wider definition is that it enables the main residence exemption to be claimed for an overseas stratum unit that is the main residence of an Australian resident.
Section 124-240 Exchange of shares in the same company
Section 124-245 Exchange of units in the same unit trust
Section 124-295 Exchange of options to acquire shares in a company
Section 124-300 Exchange of options to acquire units in a unit trust
State specifically that the time at which the security holder must be an Australian resident is when the original securities are redeemed or cancelled.
The 1936 Act states that the security holder must be a resident of Australia without specifying when this condition must be satisfied. It is implicit that it must be satisfied at the time of redemption or cancellation.
Sections 124-365, 124-375, 124-450 & 124-460 Other requirements to be satisfied
These sections set out the requirements for a roll-over where a shareholder in a company, or a unit holder in a unit trust, exchange shares or units for shares in an interposed company.
Require that each exchanging shareholder or unit holder be issued a whole number of shares in the interposed company.
The 1936 Act requires that each exchanging shareholder or unit holder be issued a number of shares in the interposed company that is equal to, or is a multiple of, the number of shares or units that the shareholder or unit holder previously held in the original company or unit trust respectively. This prevents an exchange of shares or units that results in joint ownership of some shares in the interposed company. The rewritten provision achieves the same result more directly and states clearly the purpose of the requirement.
Remove the requirement that each exchanging shareholder or unit holder dispose of all their shares or units in the original company or unit trust at the same time.
The 1936 Act requires that each exchanging shareholder or unit holder dispose of all their shares or units in the original company or unit trust at the same time. This is to ensure that the holdings in the original company or unit trust can be compared to shareholdings in the interposed company immediately after completion of the reorganisation. This is unnecessary as the existing separate requirement that each exchanging shareholder or unit holder retain their shares in the interposed company until the reorganisation has been completed enables this comparison to be made.
Change the time for measuring the ratio of the market value of the taxpayers shares or units in the original company or unit trust to the market value of all the shares or units in that company or unit trust respectively.
The purpose of measuring this ratio is to ensure that the exchanging shareholder or unit holders holding in the interposed company is the same as in the original company or unit trust. The present law gives an inappropriate result if all the shares in the company, or units in the unit trust, are not redeemed or cancelled at the same time. In this case, the market value of shares or units being redeemed or cancelled is compared to the market value of a progressively declining number of shares or units. The rewritten provision ensures that this ratio is measured appropriately in all circumstances to give the test its intended effect.
Section 124-370 Redemption or cancellation of shares in one company for shares in another
Section 124-455 Redemption or cancellation of units in a unit trust for shares in a company
Remove unnecessarily prescriptive requirements for the issuing of shares in the original company or units in the unit trust to the interposed company.
The 1936 Act requires that:
- •
- the interposed company acquire not more than five shares, called formal shares in the original company; and
- •
- the original company issue to the interposed company shares in itself, called scheme shares, and that the number of scheme shares be equal to, or a multiple of, the shares that were redeemed or cancelled.
Corresponding rules apply as between an interposed company and a unit trust.
The critical outcome of these requirements is that, immediately after the reorganisation, the interposed company owns all of the shares in the original company or all the units in the unit trust. This requirement is directly stated in the rewritten provision.
Section 124-380 Requirements to be satisfied in both cases
Adopt the 1997 Act definition of redeemable shares.
This standardises terminology.
Require that both the original and interposed company be Australian residents at the completion of the reorganisation.
The 1936 Act imposes this requirement from the time of the first disposal of shares in the original company until the completion of the reorganisation to ensure that, where the companies are either private companies or public companies in which a shareholder (alone or with associates) owns 10% or more of the capital, all shares in both companies have the necessary connection with Australia at the time of the reorganisation. The same outcome is achieved by the rewritten provision in a less restrictive way.
Sections 124-385 & 124-470 Consequences for the interposed company
Provide that the maximum number of the interposed entitys shares or units in the original company or unit trust that can be treated as though they were acquired pre-CGT are so treated automatically.
This parallels the change to section 124-15.
Apply the standard rule which permits indexation of cost bases where assets are held for at least 12 months.
Under the 1936 Act, if the interposed company disposes of any of its shares or units in the original company or unit trust, within 12 months of acquiring them, the cost base of those shares or units is based on the unindexed cost base of the assets of the original company or unit trust. This could disadvantage taxpayers where the original company or trust has held assets through a period of significant price increase.
Section 124-465 Requirements to be satisfied in both cases
Adopt the 1997 Act definition of redeemable shares.
This standardises terminology.
Require that the company be an Australian resident at the completion of the reorganisation.
This parallels the second change to section 124-380.
Section 124-520 Conversion of a body corporate to an incorporated company
Remove from the income tax law the requirement that the body have at least two members.
Specification of the minimum number of members for an association is properly a matter for the law under which the body is incorporated, not the income tax law.
Replace two administrative discretions with objective tests.
To bring the law in line with the self-assessment system, the following discretions have been replaced by objective tests:
| Discretion | How replaced |
|---|---|
| To allow roll-over relief. | A requirement that there be no significant difference in the ownership of the body before conversion and the company after conversion. |
| To determine the status of shares as pre-CGT or to determine the cost base or reduced cost base of shares. | Apply the standardised, objective tests in Subdivision 124-A. |
C. Provisions of the old law that have not been rewritten
The following provisions of the 1936 Act have not been rewritten:
| Provision | Subject | Reason for omission |
|---|---|---|
| 160ZWA(1)(c), 160ZZPA(1)(j), 160ZZPB(1)(j), 160ZZPE(1)(c) | Trust must be the same trust. | Not required. A different trust is a different entity (ref. section 960-100 of the 1997 Act). |
| 160ZZK(3) and 160ZZL(2) | These provisions repeat the general principle that specific provisions prevail if there is a conflict between general and specific. | Well known general interpretational rule not needed in the rewritten law. |
| 160ZZK(7D) | Definition of natural disaster. | There is no need for this definition as it is consistent with the ordinary meaning of natural disaster. |
| 160ZZP(1)(g), 160ZZPAA(4), 160ZZPAB(4), 160ZZPAC(4), 160ZZPA(1)(p), 160ZZPA(4), 160ZZPB(1)(p), 160ZZPB(4), 160ZZPH(5) | Form of election. | Formal elections are not generally required under self assessment. |
| 160ZZPA(1)(a)(ii) 160ZZPB(1)(a)(i) | Identification of reorganisation as one that commenced after 9December1987. | As the 1997 Act operates prospectively, reference to this date is not required. |
| 160ZZPA(1)(d) | Time of disposal of units in a trust or shares in an original company. | Redundant. See change 2 under sections 124-365 and 124-450. |
| 160ZZPA(2)(e),(f) | Identification of replacement shares that are taken to have been acquired on or after 20September1985. | Because of the form of the rewritten provisions, this express identification is not required. |
| 160ZZPA(6) | Identification of shares in the original company (or units in the unit trust) held by the interposed company that are taken to have been acquired on or after 20September1985. | Because of the form of the rewritten provisions, this express identification is not required. |
| 160ZZPB(1)(d) | Time of disposal of units in a trust or shares in an original company | Redundant. See change 2 under sections 124-375 and 124-460. |
| 160ZZPB(2)(e),(f) | Identification of replacement shares that are taken to have been acquired on or after 20September1985. | Because of the form of the rewritten provisions, this express identification is not required. |
| 160ZZPB(6) | Identification of shares in the original company (or units in the unit trust) held by the interposed company that are taken to have been acquired on or after 20September1985. | Because of the form of the rewritten provisions, this express identification is not required. |
| 160ZZPC(a),(b), 160ZZPD(a),(b) | Cross references to apply provisions relating to a unit trust to a company. | The cross reference is unnecessary because the rewritten provisions refer to a company directly. |
| 160ZZPF | In specie distribution of shares by trustee of public trading trust between 29January and 30June1988. | As the 1997 Act operates prospectively, these provisions are not required. |
| 160ZZPG(2)(a) and (5) | Election for strata title conversion roll-over relief. | No longer required under self assessment |
| 160ZZPH(4) | Determination of consideration. | Refers to a guideline for the exercise of a Commissioners discretion that has been replaced by an objective test. This is part of change 2 under section 124-520. |