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 2.27 - Amendment of the Income Tax (Transitional Provisions) Act 1997
Overview
This Chapter outlines the transitional amendment of the Income Tax (Transitional Provisions) Act 1997 resulting from the rewritten CGT rules.
Transitional provisions for the CGT rewritten rules are contained in Part 1 of Schedule 2 of the Bill.
Part 1 of Schedule 2 contains measures needed for the transition from the old CGT law to the rewritten law. Items 1 to 3 will amend the Income Tax (Transitional Provisions) Act 1997.
Under that Act, the 1997 Act applies to assessments for the 1997-98 income year and later years.
The approach of the CGT transitional provisions is to apply the rewritten law to CGT events that occur in the 1998-99 or later income years. [section 102-1, item 2]
In some situations, it is necessary to modify the rewritten provisions or to specify that they apply when working out whether a capital gain or loss is made in the 1998-99 or later income years, even though certain things that affect that calculation may have happened before 1998-99.
One important such modification is for roll-overs. The transitional provision will ensure that where a CGT asset has been acquired as part of a roll-over transaction before the 1998-99 income year, the rewritten law applies to the asset from when the roll-over happened. However, the first element of the cost base and reduced cost base is the assets acquisition consideration under the 1936 Act.
The rule about the first element of cost base or reduced cost base applies to, but is not limited to, the asset as acquired by the transferee (in the case of a same-asset roll-over) or to the replacement asset (in the case of a replacement-asset roll-over). It also extends to any other asset for which an amount is taken to have been paid as acquisition consideration under the roll-over provision in the 1936 Act.
For example, if a roll-over provision in the 1936 Act applied to the transfer of an asset to a company and specified that the shares in the transferee company had a particular acquisition consideration (say, their market value), the first element of the cost base or reduced cost base of the shares would be their specified acquisition consideration under the roll-over rule in the 1936 Act. [subsection 102-5(2), item 2]
The remainder of the transitional provisions in items 2 to 3 are explained in the following table:
| Transitional provision | About | What the amendment will do |
|---|---|---|
| Application of Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 | ||
| 102-5(1) | Working out capital gains and losses | The rewritten CGT provisions apply to a CGT event that happens in relation to the 1998-99 or a later income year. |
| 102-15 | Applying net capital losses from income years before 1998-99 | Unapplied net capital losses brought forward from the 1996-97 and 1997-98 income years will be calculated using the old CGT provisions, as will net listed personal-use asset losses brought forward from the 1997-98 income year. |
| 102-20 | Net capital gains, capital gains and capital losses for income years before 1998-99 | Defines terms for the purpose of applying provisions of the 1936 Act that may apply either to income years from 1998-99 or to income years before then. Without this provision theterms, which are defined in the CGT rewrite, could apply incorrectly to income years before 1998-99.GT events |
| CGT events | ||
| 104-15 | CGT event B1: Use and enjoyment before title passes | This provision will retrace the disposal of an asset that is deemed to have occurred in the 1997-98 or earlier year where the anticipated change in ownership of the asset does not eventuate. |
| 104-70 | CGT event E4: Capital payment before 18 December 1986 for trust interest | This provision ensures that amounts attributable to Division 10C or 10D deductions will not be excluded from the non-assessable part of payments made before the exclusion came into effect. |
| 104-72 | CGT event E4: Capital payment for trust interest | Ensures that deductions under the 1936 Act provisions and those under the corresponding rewritten provisions are treated in the same way. |
| Transitional provision | About | What the amendment will do |
|---|---|---|
| CGT events | ||
| 104-175 | CGT event J1: Company ceasing to be a member of a wholly-owned group after roll-over | Treats a roll-over under section 160ZZO of the 1936 Act in the same way as one under the corresponding rewritten provision. |
| 104-210 | CGT event K2: Bankrupt pays amount in relation to debt | Ensures that a CGT event applies to payments in relation to debts that were taken into account in calculating net capital losses under either the 1936 Act or the 1997 Act. |
| CGT assets | ||
| 108-5 | Pre-26 June 1992 definition of asset | Preserve the definition of an asset under Part IIIA of the 1936 Act prior to 26 June 1992 for assets acquired before that date. |
| 108-15 | Sets of collectables | Ensures that the special rule for sets of collectables does not apply to collectables acquired before the rule came into effect under the 1936 Act. |
| 108-75 | Capital improvements to CGT assets for which a roll-over may be available | Treats a roll-over under certain 1936 Act provisions in the same way as one under the corresponding rewritten provision. |
| 108-85 | Improvement threshold | Allows the Commissioner, for the 1998-99 income year only, to publish the improvement threshold figures within a reasonable time after the commencement of that income year. |
| Acquisition of CGT assets | ||
| 109-5 | General acquisition rules | Prevents the acquisition rule for CGT event E9 (creating a trust over future property) from applying to agreements made before the rule was inserted in the 1936 Act. |
| Cost base and reduced cost base | ||
| 110-35 | Incidental costs to acquire a CGT asset, or in relation to a CGT event | Limits the requirement that advice be given by a recognised tax adviser to expenditure incurred from 1July 1989. |
| Transitional provision | About | What the amendment will do |
|---|---|---|
| Cost base modifications | ||
| 112-20 | Market value substitution rule | Prevents the rule applying to certain assets acquired before 16 August 1989. |
| Exemptions | ||
| 118-10 | Interests in collectables | Ensures the exemption threshold for interests in collectables does not apply to interests acquired before the rule came into effect under the 1936 Act. |
| 118-195 | Main residence exemption - dwelling or ownership interest acquired from deceased estate | Maintains the exemption conditions for a dwelling or ownership interest that passed to a legal personal representative or a beneficiary before later conditions came into effect under the 1936 Act. |
| 118-260 | Business exemption threshold | Allows the Commissioner, for the 1998/99 income year only, to publish the exemption threshold figures within a reasonable time after the commencement of that income year. |
| Record keeping | ||
| 121-15 | Retaining records under Division 121 | Continues the obligation under the 1936 Act to retain records for CGT purposes. |
| 121-25 | Records for mergers between qualifying superannuation funds | Preserves the record-keeping requirements for assets transferred as a result of the merger of superannuation funds. |
| Same-asset roll-over events | ||
| 126-100 | Merger of qualifying superannuation funds | Preserves the cost base rule that applies to an asset transferred as a result of the merger of superannuation funds. |
| Effect of death | ||
| 128-15 | Effect on the legal personal representative or beneficiary | Prevents the market value cost base rule from applying to a dwelling that passed to a legal personal representative or a beneficiary before that rule came into effect under the 1936 Act. |
| Transitional provision | About | What the amendment will do |
|---|---|---|
| Investments | ||
| 130-20 | Issue of bonus shares or units | Modifies cost base rules for bonus shares or bonus units issued on or before 30 June 1987, and modifies a rule dealing with the acquisition of bonus equities issued before 10December 1986. |
| 130-40 | Exercise of rights | Modifies cost base rules for the exercise of rights issued before the 1993-94 income year, and applies a cost base modification to a right, acquired before 20 September 1985, to acquire shares or options to acquire shares |
| 130-60 | Convertible notes | Modifies cost base rules for certain shares or units in a unit trust acquired by the conversion of convertible notes acquired before certain operative dates. |
| Subdivision 130-D (sections 130-95 to 130-120) | Employee share schemes | Modifies the rules that apply to shares, or rights to acquire shares, acquired before certain dates under employee share schemes. |
| Options | ||
| 134-1 | Exercise of options | Modifies cost base rules for a CGT asset acquired by the exercise of an option granted before 20 September 1985. |
| Non residents | ||
| 136-25 | When an asset has the necessary connection with Australia | Allows the category of assets having the necessary connection with Australia to capture certain assets acquired by a company after 28 January 1988 and before 26 May 1988. |
| Transitional provision | About | What the amendment will do |
|---|---|---|
| Share value shifting | ||
| 140-7 | Pre-1994 share value shifts irrelevant | Prevent Division 140 applying to share value shifts before 12 noon on 12 January 1994. |
| 140-15 | Off-market buy-backs | Ensure that the share value shift rules apply to a share buy-back after 7.30PM on 9 May 1995 only if the buy-back was under an excluded transitional arrangement. |
| When an asset stops being a pre-CGT asset | ||
| 149-5 | Assets that stopped being pre-CGT assets under the old law | Ensures that pre-CGT assets deemed by the 1936 Act to have been acquired after 19September 1985 are treated in the same way under the rewritten law. |
| Income tax consequences of changing ownership or control of a company | ||
| 165-95 | Applying net capital losses of earlier income years | Ensures that this part of the rewritten law relating to corporate taxpayers applies to assessments for the 1998-99 income year and later income years. |
| 165-105 | Working out the net capital gain and net capital loss | Ensures that this part of the rewritten law relating to corporate taxpayers applies to assessments for the 1998-99 income year and later income years. |
| Transfer of net capital losses within wholly-owned company groups | ||
| 170-101 | Application of Subdivision 170-B of the 1997 Act. | Ensures that this part of the rewritten law relating to corporate taxpayers applies to assessments for the 1998-99 income year and later income years. |
| 170-175 | Direct and indirect interests in the loss company | Treat a reduction in the cost base or reduced cost base of a share or debt under subsection 160ZP(13) of the 1936 Act as having been made under the 1997 Act. |
| Transitional provision | About | What the amendment will do |
|---|---|---|
| Transfer of net capital losses within wholly-owned company groups | ||
| 170-180 | Direct and indirect interests in the gain company | Treat an increase in the cost base or reduced cost base of a share or debt under subsections 160ZP(14) and (15) of the 1936 Act as having been made under the 1997 Act. |
| Use of a company's losses or deductions to avoid income tax | ||
| 175-40 | Tax benefits from unused tax losses of earlier income years | Ensures that this part of the rewritten law relating to corporate taxpayers applies to assessments for the 1998-99 income year and later income years. |
| 175-55 | Tax benefits from unused capital losses of the current income year | Ensures that this part of the rewritten law relating to corporate taxpayers applies to assessments for the 1998-99 income year and later income years. |
| Dictionary | ||
| 960-262 | Indexation | Ensures the indexation rules apply to assessments for the 1998-99 income year and later income years (or the 1998-99 and later financial years for working out the car depreciation limit). |
| 960-275 | Indexation factor | Substitutes the general rule for cost base indexation in cases where certain assets were acquired before the specific rule came into effect under the 1936 Act. |