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 2.19 - Investments
Overview
This segment explains the special rules, in Division 130, for cost base modifications and timing of acquisition of bonus shares and units, rights, employee share schemes and the conversion of convertible notes.
Part A summarises these rules.
Part B explains the changes to the 1936 Act.
Part C identifies provisions of the 1936 Act not rewritten.
A. Summary of the new law
Subdivision 130-A: Bonus shares and units
Subdivision 130-A sets out the rules for modifying the cost base or reduced cost base in working out a gain or loss on the issue of a bonus share or unit (bonus equity) in satisfaction of an amount payable to an equity holder. It also determines when the equity holder is taken to acquire the bonus equity. [section 130-20]
Working out the cost base of the bonus share or unit
Where the bonus equity is assessable, the cost base or reduced cost base of the bonus equity includes the assessable amount at the time of issue. [subsection 130-20(2)]
If the bonus equity is not assessable, the cost base or reduced cost base will depend on when the original equity was acquired. The following table sets out the time at which the bonus equities are taken to be acquired and the effect on the cost base and reduced cost base.
[subsection 130-20(3)]
| Time of acquisition of original equities | Time of acquisition of bonus equities | Modification to cost base or reduced cost base |
|---|---|---|
| Acquired after 19/9/85. | When original equities acquired. | The first element of the cost base or reduced cost base of the original equities is apportioned reasonably over the original and bonus equities. |
| Acquired before 20/9/85 and the taxpayer paid, or was required to pay, for the bonus equities. | When the liability to pay for the bonus equities arose. | The first element of the cost base or reduced cost base of the bonus equities is the market value just before that time. |
| Acquired before 20/9/85 and the bonus equities are fully paid. | When original equities acquired. | Any capital gain or loss made from the bonus equities is disregarded. |
Subdivision 130-B has rules for modifying the cost base or reduced cost base when an equity holder exercises rights to acquire additional shares, units or options that they did not pay or give anything for and establishes the time when the equity holder is taken to acquire the share, unit or option. [section 130-40]
It also contains cost base modification rules for an entity acquiring rights from an existing equity holder.
Three situations can have an impact on the cost base or reduced cost base of equities acquired as a result of exercising a right. These are set out in a table which explains the modification to be made. [subsections 130-40(2)-(6)]
The shares, units or options are taken to be acquired at the time the rights are exercised. [subsection 130-45(2)]
Consequences if rights are disposed of
If the right is not exercised and is disposed of at a gain, CGT event A1 determines the amount of the capital gain.
Rights are taken to have been acquired at the same time as the original shares or units. [subsection 130-45(1)]
Subdivision 130-C: Convertible notes
When the convertible note is a traditional security
If the convertible note is a traditional security, the cost base or reduced cost base of the resulting share or unit is its market value at the time of conversion. [subsection 130-60(1), item 1]
When the convertible note is not a traditional security
If the convertible note is not a traditional security the cost base or reduced cost base of the share or unit is the sum of:
- •
- the amount paid for the convertible note; and
- •
- any further amount paid for the conversion. [subsection 130-60(1), item 3]
Subdivision 130-D: Employee share schemes
Subdivision 130-D contains rules for modifying the cost base or reduced cost base of a share or right acquired at a discount under an employee share scheme. It also deals with how a trustee of an employee share trust is treated on the disposal of shares or rights held in the trust.
Working out the cost base or reduced cost base
Generally, the first element of the cost base or reduced cost base is the market value of the share or right at acquisition. [subsection 130-80(2)]
There is an exception if the share or right is a qualifying share or right, and the taxpayer did not elect to be assessed immediately. [section 130-83]
In these circumstances, the assessment is normally made in the year in which the schemes restriction on disposing of the share or right ceases.
Trustee of the employee share trust
A capital gain or loss that a trustee makes when a beneficiary becomes absolutely entitled to a share or right held on behalf of an employee is disregarded, unless the disposal proceeds exceed the cost base of the share or right. [section 130-90]
B. Discussion of changes
The provisions dealing with investments have been restructured to reduce complexity and repetition, mainly by the merger of 10 separate Divisions of the 1936 Act into four Subdivisions. There are no substantive changes in the way the provisions operate.
Adopt a new label, right, for the terms right and option.
The terms right and option are commonly used interchangeably in the 1936 Act and have a comparable interpretation. The use of a common label, right, simplifies expression of the law and is consistent with the approach taken in the 1997 Act of adopting common labels whenever appropriate. Subdivision 130-B applies to options in the same way as to rights.
Subdivision 130-C: Convertible notes
Clarify the rules dealing with how indexation applies to a share or unit acquired on conversion of a convertible note.
It is unclear under the existing provisions whether indexation would be available for the cost of the convertible note on disposal of the share or unit. The new provisions clarify that indexation for the cost of the convertible note will be allowed on a share or unit acquired from conversion from the time when the liability first arose to pay the convertible note. [subsection 130-60(2)] This clarification reflects the current administrative practice of the Australian Taxation Office.
Subdivision 130-D: Employee share schemes
Where an employee becomes absolutely entitled to a share as against a trustee, and the share passes at market value, it will be made clear that the trustee is not liable to tax.
The present law operates in this way where the share is at discount but not where market value applies.
C. Provisions of the old law not rewritten
Some provisions of the 1936 Act are redundant or have rare application with the passage of time and are not included in the rewritten law. They are summarised in the following table:
| Provision | Subject | Reason for omission |
|---|---|---|
| 6BA | References to 6BA. | Numerous references to section 6BA are not replicated in the new law as that section is not being rewritten. |
| 160ZYD(a)(i) and 160ZYG(a)(i) | Bonus units or shares issued after 1 PM on 10 December 1986. | Dealt with as a transitional provision. |
| 160ZYHB(b) | Bonus shares issued after 1July 1987. | Dealt with as a transitional provision. |
| 160ZYO(4)(b) and 160ZYV(4)(b) | Rights acquired before 20 September 1985. | Dealt with as a transitional provision. |
| 160ZZ(a) | Timing of when share is acquired for a pre-20 September 1985 convertible note. | Dealt with as a transitional provision. |
| 160ZZA(a) | Consideration for shares acquired by converting a convertible note acquired pre-20 September 1985. | Dealt with as a transitional provision. |
| 160ZZBE(2) and 160ZZBF(2) | Convertible note acquired between 10 May and 15 August 1989. | Dealt with as a transitional provision. |
| 160ZZBE(3) and 160ZZBF(3) | A convertible note that is a traditional security acquired after 15 August 1989. | Dealt with as a transitional provision. |