Explanatory Memorandum
(Circulated by the Treasurer, the Hon. B.M. Snedden, Q.C., M.P.)Introductory Note
This Bill proposes an amendment to the Income Tax Assessment Act 1936-1972 (referred to in this memorandum as the "Principal Act") which will have the effect that otherwise taxable profits or deductible losses made by a person (not including a company) on the sale of shares will not be taken into account for income tax purposes if specified conditions are satisfied. Broadly stated, these conditions are
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- The shares in question were listed on a stock exchange at the time of acquisition by the person, or within three months afterwards.
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- The person had not acquired the shares as an incident of a business carried on by him and had not formally notified the Commissioner of Taxation that they had been acquired by him for the purpose of profit-making by sale.
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- The person had continued to be the owner of the shares for a period of eighteen months or more.
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- The shares were acquired by the person on or after 12 April 1972.
The clauses of the Bill are explained in the notes that follow.
Notes on Clauses
Clause 1: Short title and citation.
This clause formally provides for the short title and citation of the amending Act and of the Principal Act as amended.
Clause 2: Commencement.
Section 5(1A.) of the Acts Interpretation Act 1901-1966 provides that every Act shall come into operation on the twenty-eighth day after the day on which the Act receives the Royal Assent, unless the contrary intention appears in the Act.
Clause 2 proposes that the amending Act shall be deemed to have come into operation on 12 April 1972 - the day immediately following the announcement to Parliament of the proposals contained in the Bill.
Clause 3: Transactions involving shares held for eighteen months or more.
This clause proposes to insert a new section, section 6D, in the Principal Act and gives effect to the main purpose of the Bill.
Sub-section (1.) of section 6D provides that a person who, after the commencement of the section (i.e. on or after 12 April 1972) becomes the owner or a joint owner of a share, will be treated as not having acquired the share (or his interest in the share as co-owner) for the purpose of profit making by sale in the circumstances described in paragraphs (a) and (b) of the provision. Paragraph (a) stipulates that the share must not have been acquired by the person in a transaction made in the course of a business carried on by him and that the share must be listed on a stock exchange in Australia or elsewhere at the time of acquisition or within three months afterwards. Paragraph (b) requires that there be no change in the ownership of the share for a period of at least eighteen months after it was acquired by the person.
Under section 26(a) of the Principal Act profit arising from the sale by a taxpayer of any property acquired by him for the purpose of profit-making by sale is included in his assessable income. Similarly a loss incurred by a taxpayer on the sale of property acquired with this purpose is allowable as a deduction in accordance with the provisions of section 52 of the Principal Act. The effect of sub-section (1.) of proposed section 6D will be that a profit derived by a person from the sale of shares cannot be included in his assessable income if the requirements of the proposed section have been satisfied in relation to those shares. As a corollary, a loss incurred by him on the sale of shares, where the requirements of proposed section 6D have been met, cannot qualify as a deduction for income tax purposes.
It will be noted that, while the general principles of the law expressed in sections 26(a) and 52 have application in relation to profits or losses arising on the sale of any form of property acquired for the purpose of profit-making by sale, proposed section 6D will have effect only in relation to shares listed for quotation on a stock exchange at the time of acquisition or within the following three months. The period of three months is designed to meet the case where a person takes up shares in a newly-incorporated company, or is allotted shares in a new issue by an established company, that are subsequently listed on a stock exchange.
Provided the requirements of sub-section (1.) of proposed section 6D are satisfied, any profit or loss made by a person on the sale of shares he has owned for a continuous period of eighteen months or more will (with one exception referred to hereunder) be disregarded for income tax purposes. As regards shares that are resold less than eighteen months after acquisition, the present operation of the income tax law will be unchanged.
Sub-section (2.) of section 6D has effect where a person has formally notified the Commissioner that he has acquired shares for the purpose of profit-making by sale and will preclude the application of the section in respect of those shares.
As mentioned above, section 52 of the Principal Act authorises the allowance of a deduction for a loss incurred by a taxpayer on the sale of property if any profit on the sale would have been included in his assessable income, i.e. if the property had been acquired by the taxpayer for the purpose of profit-making by sale or by some or other undertaking or scheme. The deduction under section 52 is not allowable (except where the Commissioner is independently satisfied that the property was acquired for the purpose mentioned) unless the taxpayer has notified the Commissioner that the property was acquired by him for this purpose. The notification under this provision is required to be given not later than the date on which the taxpayer lodges his first return following acquisition of the property.
By sub-section (2.), proposed section 6D will not apply in relation to a sale of shares where the seller has duly notified the Commissioner that they had been acquired by him for the purpose of profit-making by sale or by another undertaking or scheme. Accordingly, a sale by a person of shares that are the subject of a notification given in accordance with section 52, may, as at present, give rise to a deductible loss - or a profit assessable to income tax - irrespective of whether the shares had been sold by the person within or after eighteen months from the time at which they were acquired by him.
Sub-section (3.) is designed to cover situations that may arise where, in the course of a reconstruction of the capital of a company, shares owned by a person are replaced by other shares or are converted into stock in the capital of that company. Briefly stated, the sub-section provides that shares converted into stock in the same company, or stock reconverted into shares, or shares or stock replaced by substituted shares, during the period of ownership of a person, will be treated for the purposes of the section as being identical with the replacement shares or stock. The continuity of the person's ownership will be unbroken by the replacement or conversion.
This will make it clear that, in determining whether he has owned shares for not less than eighteen months to comply with the requirements of sub-section (1.), a person will not be disadvantaged by a change that may occur in the nature of his shareholding in a company following re-organisation of its capital structure. The sub-section does not have effect in cases involving inter-company amalgamations or takeovers where shareholders dispose of shares in a particular company for shares in another company.
Under sub-section (4.), a change in the ownership of shares which comes about by reason of the death or bankruptcy of the owner or joint owner will not be taken as constituting a change in the ownership of the shares for the purposes of the section. The sub-section refers to situations where, on the death of a joint owner, the whole of the ownership of the shares vests in the co-owner, or where the shares vest in a trustee of a deceased or bankrupt estate.
The sub-section will make it clear that in a case involving the sale of shares acquired in the circumstances outlined, the period for which they originally had been owned by the deceased or bankrupt person, together with the period of ownership by the seller will be regarded as a continuous period of ownership in determining whether the eighteen months test of ownership under sub-section (1.) has been satisfied.
Sub-section (5.) has effect where a person acquires an interest in shares as an owner in common and provides that for the purposes of section 6D the ownership by the person of his interest in the shares will be treated as the ownership of shares.
Accordingly, a person who becomes a co-owner of shares and who remains the owner in common of his interest in them for an unbroken period of not less than eighteen months may comply with the period of holding test laid down in sub-section (1.), whether or not his co-owners dispose of their respective interests in the shares during the period.
Sub-section (6.) provides that, for the purposes of section 6D, any ownership of shares other than beneficial ownership is to be disregarded. In determining whether the section has application it will accordingly be necessary to have regard to the person who is the beneficial owner of particular shares which are registered in the name of a nominee or are held by a trustee. A further effect of the provision will be that the period of ownership for the purposes of sub-section (1.) will be accepted as commencing from the time the purchaser of shares acquires the beneficial interest in them even though there is some delay before the transfer of the shares to him is recorded in the company's share register.
Sub-section (7.) is a drafting provision which ensures that section 6D has effect in relation to both shares and stock in the capital of a company. Although section 6 of the Principal Act already contains a provision to similar effect, this sub-section makes it clear that the separate references to shares and stock in sub-section (3.) are not to be construed as excluding transactions in stock from the general operation of the section.
By sub-section ( 8.) a reference in section 6D to a person does not include a reference to a company. As a result the ownership of shares by companies will not be brought within the operation of the section which will, accordingly, be applicable only where shares are owned by individual persons.