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 2.24 - When an asset stops being a pre-CGT asset
Overview
This segment covers the rules that govern when an asset acquired before 20 September 1985 is to be treated as acquired after that date.
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 149-A: Key concepts
Subdivision 149-A defines the key concepts used in Division 149.
An asset is a pre-CGT asset if it was last acquired before 20 September 1985 and no provision has operated to treat it as having been acquired after that date. [section 149-10]
Majority underlying interests in a CGT asset
The majority underlying interests in an asset consist of more than one half of the beneficial interests that ultimate owners have (directly or indirectly) in an asset or in ordinary income that may be derived from the asset. [section 149-15]
Special rules apply to work out majority underlying interests in an asset if an ultimate owner acquired an underlying interest in it because of:
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- the death of the former owner; or
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- roll-over under Subdivision 126-A.
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- [sections 149-30 and 149-60]
An ultimate owner is:
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- an individual;
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- a company that is prevented by its constituent documents from making any distribution to its members;
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- the Commonwealth, a State or Territory
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- a local governing body; or
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- a foreign country government.
[section 149-15]
When ultimate owner has indirect beneficial interest in capital or ordinary income of an entity.
An ultimate owner has an indirect beneficial interest if it would receive for its own benefit any capital or ordinary income distributed by the entity through interposed entities. [section 149-15]
Subdivision 149-B: When asset of non-public entity stops being a pre-CGT asset
Subdivision 149-B sets out when an asset of a non-public entity stops being a pre-CGT asset. It also contains rules that modify the cost base of the asset. [section 149-25]
When asset stops being a pre-CGT asset
An asset stops being a pre-CGT asset if the majority underlying interests in it are not held by ultimate owners who held those interests just before 20 September 1985. [section 149-30]
Effect if asset stops being a pre-CGT asset
The entity is taken to have acquired the asset at the earliest time when majority underlying interests in the asset were no longer held by ultimate owners who had held majority underlying interests immediately before 20 September 1985. The first element of the asset's cost base is its market value at that earliest time. [sections 149-30 and 149-35]
Subdivision 149-C: When asset of public entity stops being a pre-CGT asset
Subdivision 149-C sets out when an asset of a public entity stops being a pre-CGT asset. It also contains rules that modify the cost base of the asset.
The subdivision applies to:
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- a company, if its shares are listed on an approved stock exchange;
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- a publicly traded unit trust;
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- a mutual insurance or mutual affiliate company; and
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- certain related entities.
[section 149-50]
When entity is to test whether asset is still a pre-CGT asset
Generally, an entity must determine the majority underlying interests in the asset within 6 months after each test day. [section 149-55]
Test days recur each five years, after 20 January 1997. If the day is a non-business day the test day is the next business day.
It is also a test day if there is abnormal trading of relevant shares or units. [subsection 149-55(2)]
What the determination must show
The determination is whether majority underlying interests in the asset on the test day were held by ultimate owners who also held majority underlying interests on the starting day. [section 149-60]
The starting day is 19 September 1985 or any day the entity chooses in the period 1 July 1985-30 June 1986 that gives a reasonable approximation of the ultimate owners who had underlying interests in the assets of the entity on 19 September 1985. [section 149-60]
Effects of not making determination
If the entity does not make a determination, the asset stops being a pre-CGT asset. The entity is then treated as if it acquired the asset at the end of the preceding test day. The first element of the asset's cost base is its market value at that time. Special rules apply if the entity became a public entity since the last test day. [section 149-65]
Effects if asset no longer has the same majority underlying ownership
If the determination shows that majority underlying interests have not been maintained, the asset stops being a pre-CGT asset. The entity is treated as if it acquired the asset at the end of the test day. The first element of the asset's cost base is its market value at that time. [sections 149-70 and 149-75]
Subdivision 149-D: How to treat holdings of less than 1% in certain entities
This subdivision has rules that assist companies and trusts determine who has underlying interests in an asset.
All holdings of shares or units of less than 1% in the entity are treated as if they were held by a single notional individual. Similarly, holdings of less than 1% in an interposed entity are treated as if they were held by a different single notional individual. [sections 149-110 - 149-125]
When the Subdivision does not apply
The notional holder rules do not apply if the Commissioner considers it reasonable to assume that at the end of the test day majority underlying interests in the asset were not held by ultimate owners who had majority underlying interests in the asset at the end of the starting day. [section 149-140]
Subdivision 149-E: How to treat certain interposed funds, companies and government bodies
This subdivision has rules that assist companies and trusts determine who has underlying interests in an asset where certain superannuation or approved deposit funds, companies or government bodies are interposed between the entity and the ultimate owners.
The particular rules that apply depend on whether the interposed entity is a government body or has more than 50 members. [sections 149-150 and 149-155]
Subdivision 149-F: How to treat a 'demutualised' public entity
Subdivision 149-F contains rules for determining the underlying interests in assets of certain entities that were mutual companies at the starting day but have demutualised since that time. It also contains rules that apply when an interposed entity is demutualised.
Members underlying interests in assets
An ultimate owner who was a member of the entity (or interposed entity) immediately before the demutualisation is regarded as having had an underlying interest at all times from the starting day until just after the demutualisation. [sections 149-165 and 149-170]
B. Discussion of changes
Sections 149-35 & 149-70 Cost base elements of asset that stops being a pre-CGT asset
These sections contain cost base modifications that apply when an asset stops being a pre-CGT asset.
Specify that any expenditure incurred before the time when an asset stops being a pre-CGT asset is not included in any element of its cost base (market value applies).
This ensures that expenditure such as incidental expenditure incurred before the asset stops being a pre-CGT asset cannot be included in its cost base. The result is consistent with the 1936 Act.
Section 149-30 Effects if asset no longer has same majority underlying ownership
Section 149-60 What the determination must show
Specify that where a pre-CGT share is acquired as the result of a Subdivision 126-A same-asset roll-over, the person acquiring the share is treated as having held an underlying interest in it before 20 September 1985.
The 1936 Act is silent as to the effect of these roll-overs in determining the majority underlying interest in a CGT asset. The change is consistent with administrative practice.
C. Provisions of the old law that have not been rewritten
The following provision of the 1936 Act is redundant and has not been included in the new law:
| Provision | Subject | Reason for omission |
|---|---|---|
| 160ZZSC | First test time. | The rewritten provisions apply prospectively from the 1998-99 income year. |