Taxation Laws Amendment Act (No. 3) 1997 (147 of 1997)
Schedule 1 CGT exemption: disposing of small business retirement assets
Part 1 Amendment of the Income Tax Assessment Act 1936
Division 1 Amendment of CGT provisions
3 After Division 17A of Part IIIA
Insert:
Division 17B - Disposal of small business assets: proceeds used for retirement
Subdivision A - Introduction
160ZZPZA What this Division is about
Broadly, a capital gain accruing on the disposal of an asset by a small business is exempt from tax under this Part, if the proceeds of the disposal are used in connection with the retirement of an individual, or 2 individuals, who control that business. The amount of the gain will be treated as a special kind of eligible termination payment made to the individuals.
160ZZPZB Structure of the Division
Sole traders and partnerships
(1) For a taxpayer who is an individual (carrying on business as a sole trader or as a partner in a partnership) to get an exemption, and for the other consequences set out in this Division to apply, the conditions in Subdivision B must be satisfied.
Companies and trusts
(2) For a taxpayer that is a private company or trust to get an exemption, and for the other consequences set out in this Division to apply, the conditions in Subdivision C must be satisfied.
Lifetime exemption limit
(3) There is a lifetime limit of $500,000 on the total of amounts that may be exempt in relation to a particular individual under this Division (see section 160ZZPZN). The single limit applies to all exempt amounts involving the individual, whether under Subdivision B or C.
Previous years' net capital losses
(4) An exemption under this Division is not available to the extent that the taxpayer has net capital losses from previous years of income available to set off against the capital gain (see Subdivision D).
Definitions
(5) Definitions of various expressions used in the Division are in Subdivision E.
Subdivision B - Taxpayers who are individuals
160ZZPZC Scope of Subdivision
The consequences set out in section 160ZZPZE apply to a taxpayer who is an individual if the conditions in section 160ZZPZD are met.
160ZZPZD Conditions for exemption
First condition
(1) The first condition is that:
(a) the requirements of paragraphs 160ZZPQ(1)(a) to (d) must be satisfied in relation to the disposal of an asset by the taxpayer other than as a trustee; and
(b) the taxpayer must receive all of the actual consideration (see section 160ZZPZO), if any, in respect of the disposal within the period beginning one year before, and ending 2 years after, the disposal.
The whole of the actual consideration mentioned in paragraph (b) need not be received all at once; parts of the actual consideration may be received at different times during the period.
Second condition
(2) The second condition is that:
(a) the taxpayer must elect in writing, on or before the date of lodgment of the taxpayer's return of income for the year of income mentioned in paragraph 160ZZPQ(1)(a), that this Division is to apply to the taxpayer in respect of the disposal; and
(b) the election must specify an amount as the asset's CGT exempt amount ; and
(c) that amount must not be greater than the amount of the capital gain concerned (possibly as reduced by Subdivision D, which deals with previous years' net capital losses); and
(d) the asset's CGT exempt amount must not exceed the individual's CGT retirement exemption limit (see section 160ZZPZN) immediately before the election is made; and
(e) the taxpayer must not have already made an election under section 160ZZPQ in respect of the disposal.
160ZZPZE What happens if the disposal is exempt
(1) If the conditions in section 160ZZPZD are met, the following consequences apply.
Capital gain reduced by asset's CGT exempt amount
(2) The amount of the capital gain that otherwise would have accrued to the taxpayer in respect of the disposal of the asset concerned is reduced (but not below nil) by the asset's CGT exempt amount.
Other CGT exemptions/concessions are not available
(3) Divisions 15, 17, 17A, 18 and 19 do not apply in respect of the disposal.
Proceeds of disposal taken to be an ETP
(4) Also, for each amount the taxpayer receives as actual consideration in respect of the disposal at a particular time, an ETP of that amount (but possibly reduced by subsection (5)) is taken, for the purposes of this Act, to have been made in relation to the taxpayer at the later of the following times:
(a) the time the election is made;
(b) the time the actual consideration is received.
Note: For the rules about ETPs (eligible termination payments), see Subdivision AA of Division 2 of Part III.
No ETP to the extent that the total actual consideration received exceeds the asset's CGT exempt amount
(5) However, if the sum of:
(a) the amount of the actual consideration; and
(b) the total amount of any actual consideration the taxpayer received earlier in respect of the disposal;
exceeds the asset's CGT exempt amount, the amount of the ETP is reduced by the amount of the excess.
Note: In some cases, this will reduce the amount of the ETP to nil.
Example: Assume that the asset's CGT exempt amount is $1,000. Assume that the taxpayer receives an amount of actual consideration of $300, and has previously received $900 as actual consideration in respect of the disposal. The sum of that actual consideration is $1,200, which exceeds the asset's CGT exempt amount by $200. Therefore the amount of this ETP is reduced by $200 to $100.
160ZZPZF Taxpayers under 55 must roll over proceeds, or lose exemption
(1) If the taxpayer was under 55 immediately before the disposal, an amount equal to the amount of each ETP that is taken to have been made under subsection 160ZZPZE(4) must be rolled over (within the meaning of Subdivision AA of Division 2 of Part III, but assuming that paragraph 27A(12)(c) had not been enacted) by the taxpayer.
(2) If the taxpayer does not comply with subsection (1), the election is taken never to have been made.
Note: Because making the election is a condition (see paragraph 160ZZPZD(2)(a)), the taxpayer will lose the benefit of this Subdivision in such a case.
Subdivision C - Taxpayers that are private companies or trusts
160ZZPZG Scope of Subdivision
The consequences set out in section 160ZZPZJ apply to a taxpayer that is a company (other than a public company) or a trust (other than a publicly traded unit trust) if either:
(a) the single-controller conditions set out in section 160ZZPZH are met; or
(b) the dual-controller conditions set out in section 160ZZPZI are met.
160ZZPZH Single-controller conditions
(1) This section sets out the conditions that are the single-controller conditions .
First condition
(2) The first condition is that:
(a) the requirements of paragraphs 160ZZPQ(1)(a) to (d) must be satisfied in relation to the disposal of an asset by the taxpayer; and
(b) the taxpayer must receive all of the actual consideration (see section 160ZZPZO), if any, in respect of the disposal within the period beginning one year before, and ending 2 years after, the disposal.
The whole of the actual consideration mentioned in paragraph (b) need not be received all at once; parts of the actual consideration may be received at different times during the period.
Second condition
(3) The second condition is that, immediately before the disposal, there must be one, and only one, controlling individual (see section 160ZZPZP) of the taxpayer.
Third condition
(4) The third condition is that:
(a) the taxpayer must elect in writing, on or before the date of lodgment of the taxpayer's return of income for the year of income mentioned in paragraph 160ZZPQ(1)(a), that this Division is to apply to the taxpayer in respect of the disposal; and
(b) the election must specify an amount as the asset's CGT exempt amount ; and
(c) that amount must not be greater than the amount of the capital gain concerned (possibly as reduced by Subdivision D, which deals with previous years' net capital losses); and
(d) the asset's CGT exempt amount must not exceed the controlling individual's CGT retirement exemption limit (see section 160ZZPZN) immediately before the election is made; and
(e) the taxpayer must not have already made an election under section 160ZZPQ in respect of the disposal.
Fourth condition
(5) The fourth single-controller condition is that, within:
(a) 7 days after making the election; or
(b) 7 days after the taxpayer receives the whole or a part (the payment amount ) of the actual consideration as mentioned in paragraph (2)(b);
whichever comes later, the taxpayer must make an ETP in relation to the controlling individual whose amount is at least equal to the payment amount.
Note: The payment amount may be reduced under subsection (8).
If there are 2 or more ETPs required
(6) If, at a particular time, subsection (5) requires a taxpayer to make 2 or more ETPs to the controlling individual (whether or not by the same time), the taxpayer may meet that requirement either:
(a) by making separate ETPs whose amounts are in total at least equal to the sum of the payment amounts; or
(b) by making a single ETP whose amount is at least equal to the sum of the payment amounts.
Fifth condition
(7) The fifth condition is that, if the controlling individual was under 55 immediately before the disposal, an amount, in relation to the ETP, at least equal to the payment amount must be rolled over (within the meaning of Subdivision AA of Division 2 of Part III, reading references in that Subdivision to "the taxpayer" as references to the controlling individual instead, and assuming that paragraph 27A(12)(c) had not been enacted) by the controlling individual.
Note: The payment amount may be reduced under subsection (8).
ETP not required to the extent that the total actual consideration received exceeds the asset's CGT exempt amount
(8) However, if the sum of:
(a) the payment amount; and
(b) the total amount of any actual consideration the taxpayer received, as mentioned in paragraph (2)(b), earlier in respect of the disposal;
exceeds the asset's CGT exempt amount, the payment amount is reduced, for the purposes of subsections (5), (6) and (7), by the amount of the excess.
Note: In some cases, this will reduce that amount to nil.
Example: Assume that the asset's CGT exempt amount is $1,000. Assume that the taxpayer receives a payment amount of $300, and has previously received $900 as actual consideration in respect of the disposal. The sum of those amounts is $1,200, which exceeds the asset's CGT exempt amount by $200. Therefore the amount of this payment amount is reduced by $200 to $100.
160ZZPZI Dual-controller conditions
(1) This section sets out the conditions that are the dual-controller conditions .
First condition
(2) The first condition is that:
(a) the requirements of paragraphs 160ZZPQ(1)(a) to (d) must be satisfied in relation to the disposal of an asset by the taxpayer; and
(b) the taxpayer must receive all of the actual consideration (see section 160ZZPZO), if any, in respect of the disposal within the period beginning one year before, and ending 2 years after, the disposal.
The whole of the actual consideration mentioned in paragraph (b) need not be received all at once; parts of the actual consideration may be received at different times during the period.
Second condition
(3) The second condition is that, immediately before the disposal, there must be 2 controlling individuals (see section 160ZZPZP) of the taxpayer.
Third condition
(4) The third condition is that:
(a) the taxpayer must elect in writing, on or before the date of lodgment of the taxpayer's return of income for the year of income mentioned in paragraph 160ZZPQ(1)(a), that this Division is to apply to the taxpayer in respect of the disposal; and
(b) the election must specify an amount as the asset's CGT exempt amount ; and
(c) that amount must not be greater than the amount of the capital gain concerned (possibly as reduced by Subdivision D, which deals with previous years' net capital losses); and
(d) the election must specify the percentages (the exemption percentages ) of the asset's CGT exempt amount that are to be regarded as attributable to each of the 2 controlling individuals. One of the percentages may be nil, but the 2 percentages must add up to 100%; and
(e) for each of the 2 controlling individuals, the individual's exemption percentage of the asset's CGT exempt amount must not exceed that individual's CGT retirement exemption limit immediately before the election is made; and
Example: Fiona is a controlling individual of a taxpayer. Her exemption percentage is 10% (which means that the other controlling individual's exemption percentage must be 90%). Fiona's CGT retirement exemption limit is $500,000. To determine whether paragraph (e) is complied with, she would take 10% of the asset's CGT exempt amount and see whether that amount exceeds $500,000.
(f) the taxpayer must not have already made an election under section 160ZZPQ in respect of the disposal.
Fourth condition
(5) The conditions in subsections 160ZZPZH(5) to (8) are also dual-controller conditions, except that the subsections apply separately in respect of each of the 2 controlling individuals as if:
(a) each were the only controlling individual; and
(b) references (other than in paragraph (5)(b) and subsection (8)) to the payment amount were, in relation to each controlling individual, instead a reference to the following amount:
(Controlling individual's exemption percentage) x Payment amount
160ZZPZJ What happens if the disposal is exempt
(1) If the conditions in section 160ZZPZH or 160ZZPZI are met, the following consequences apply.
Capital gain reduced by asset's CGT exempt amount
(2) The amount of the capital gain that otherwise would have accrued in respect of the disposal concerned is reduced (but not below nil) by the asset's CGT exempt amount.
Other CGT exemptions/concessions are not available
(3) Divisions 15, 17, 17A, 18 and 19 do not apply in respect of the disposal.
Treatment of ETP
(4) Any ETP, or part of an ETP, the taxpayer makes, to the extent required to comply with subsection 160ZZPZH(5) (including as it is applied by subsection 160ZZPZI(5)):
(a) is taken, for the purposes of this Act, to consist solely of a CGT exempt component; and
(b) is not an allowable deduction of the taxpayer.
Note: For the rules about ETPs (eligible termination payments), see Subdivision AA of Division 2 of Part III.
160ZZPZK Exemption reduced if controlling individual did not control taxpayer throughout taxpayer's ownership of asset
(1) If:
(a) immediately before the disposal of the asset concerned, there was only one controlling individual of the taxpayer; and
(b) at any time during the period (the ownership period ) from the later of:
(i) the start of the 1992-93 year of income; and
(ii) the time when the taxpayer acquired the asset;
until immediately before the disposal, the individual was not the controlling individual of the taxpayer;
the asset's CGT exempt amount is reduced by the following amount:
Part of ownership period when individual was not controlling individual of the taxpayer Asset`s CGT exempt amount x ------------------------------ Ownership period
(2) However, if, disregarding subparagraph (1)(b)(i), the asset's CGT exempt amount would be reduced by a lesser amount, the asset's CGT exempt amount is instead reduced by that lesser amount.
If there are 2 controlling individuals
(3) If, immediately before the disposal, there were 2 controlling individuals of the taxpayer, the asset's CGT exempt amount is reduced by the sum of the amounts, worked out for each controlling individual, using the formula:
Reduction required under Individual's exemption percentage x subsection (1) or (2) if the (see paragraph 160ZZPZI(4)(d)) individual were the only controlling individual
Subdivision D - Previous years' net capital losses
160ZZPZL Exemption reduced if net capital losses available from previous years
(1) This section applies if:
(a) a taxpayer makes one or more elections under paragraph 160ZZPZD(2)(a), 160ZZPZH(4)(a) or 160ZZPZI(4)(a) in respect of disposals of assets during a particular year of income (the current year ); and
(b) the taxpayer incurred one or more net capital losses in respect of years of income before the current year, but after the 1994-95 year of income, that have not been fully applied under section 160ZC in respect of years of income before the current year; and
(c) the losses would, apart from this Division, be fully or partly applied in determining whether a net capital gain accrues to the taxpayer in respect of the current year (if sufficient capital gains accrue in the current year). The extent to which a loss would be so applied is called the unapplied loss .
Capital gains are reduced
(2) The capital gain in respect of each of the disposals is reduced (but not below nil) by an amount (the reduction amount ) equal to so much of the total amount of the unapplied losses as has not already (see subsection (4)) been applied in reducing other capital gains under this subsection for the current year or an earlier year of income.
Losses are also reduced, in the order in which they were incurred
(3) The net capital losses are reduced (but not below nil) by the reduction amount, in the order in which the taxpayer incurred the losses.
Order of reduction of capital gains is the order in which elections were made
(4) Capital gains in respect of disposals are to be reduced under subsection (2) in the order in which the taxpayer made the elections as mentioned in paragraph (1)(a) in respect of the disposals.
This section applies before other net capital loss provisions
(5) For any given year of income, this section is to be applied in reduction of net capital losses before section 160ZC and Division 17A are to be applied in relation to those losses.
Example
(6) The following is an example of how this section works:
Example: Assume that a taxpayer has net capital losses from previous years of income of $200 and $300 (incurred in that order). Assume that the taxpayer made elections in respect of the disposal of assets A, B and C (in that order) and that the amounts of the respective capital gains were $200, $400 and $700.
First, the capital gain in respect of asset A is reduced to nil by the $200 loss. (Note that the election for asset A must therefore specify nil as that asset's CGT exempt amount.) The $300 loss is then applied against the capital gain in respect of asset B, reducing it to $100.
Now that all of the total amount of the losses has been applied, the capital gain in respect of asset C is not reduced under this section.
Subdivision E - Definitions
160ZZPZM List of expressions
In this Division:
actual consideration has the meaning given by section 160ZZPZO.
asset has the same meaning as in Division 17A.
CGT retirement exemption limit has the meaning given by section 160ZZPZN.
controlling individual has the meaning given by section 160ZZPZP.
ETP means an eligible termination payment within the meaning of section 27A.
pattern of distributions test has the meaning given by subsection 160ZZPZQ(1).
public company has the same meaning as in Division 17A.
publicly traded unit trust has the same meaning as in Division 17A.
test year has the meaning given by subsection 160ZZPZQ(2).
trust has the same meaning as in Division 17A.
160ZZPZN CGT retirement exemption limit
(1) An individual's CGT retirement exemption limit at a particular time is the amount worked out as follows:
$500,000 - Total of CGT exempt amounts specified in previous elections
where:
previous elections means elections under paragraph 160ZZPZD(2)(a), 160ZZPZH(4)(a) or 160ZZPZI(4)(a) made before the particular time by:
(a) the individual; or
(b) a company or trust whose controlling individual, or one of whose controlling individuals, was the individual.
If there are 2 controlling individuals
(2) If the individual was one of 2 controlling individuals of a company or trust that made a previous election, only the individual's exemption percentage (see paragraph 160ZZPZI(4)(d)) of the CGT exempt amount specified in the election is to be taken into account under subsection (1).
160ZZPZO Actual consideration
(1) For the purposes of this Division, actual consideration means consideration disregarding the effect of subsection 160ZD(2).
(2) For the purposes of this Division, if the actual consideration in respect of the disposal of an asset is an obligation to pay money or do any other thing, the actual consideration is taken to be received when the money is paid or the other thing is done.
160ZZPZP Controlling individual
(1) This section sets out the meaning of controlling individual of (in turn) a company, a fixed trust and any other trust.
Companies
(2) An individual is the controlling individual of a company at a particular time if, at that time, the individual:
(a) is an employee (see subsection (6)) of the company; and
(b) holds all of the legal and equitable interests in shares that carry (between them) the right to exercise at least 50% of the voting power in the company; and
(c) holds all of the legal and equitable interests in shares that carry (between them) the right to receive at least 50% of any dividends that the company may pay; and
(d) holds all of the legal and equitable interests in shares that carry (between them) the right to receive at least 50% of any distribution of capital of the company.
Control of fixed trusts
(3) An individual is the controlling individual of a fixed trust (see subsection (5)) at a particular time if, at that time, the individual:
(a) is an employee (see subsection (6)) of the trust; and
(b) has, for his or her own benefit, entitlements to at least a 50% share of the income of the trust; and
(c) has, for his or her own benefit, entitlements to at least a 50% share of the capital of the trust.
Control of other trusts
(4) An individual is the controlling individual of a trust, other than a fixed trust, at a particular time (the test time ) if:
(a) the individual is an employee (see subsection (6)) of the trust at the test time; and
(b) the trust passes the pattern of distributions test, for the test year, in relation to the individual (see section 160ZZPZQ).
Fixed trust
(5) A trust is a fixed trust if persons have entitlements to all of the income and capital of the trust.
Employee
(6) In this section:
employee has the same meaning as in theSuperannuation Guarantee (Administration) Act 1992, except that subsection 12(11) of that Act is to be disregarded.
Redeemable shares to be disregarded
(7) For the purposes of subsection (2), a person who, at a particular time, holds a legal or equitable interest in a share:
(a) that is liable to be redeemed; or
(b) that, at the option of the company that issued it, is liable to be redeemed;
is taken not to hold the interest at that time.
160ZZPZQ Pattern of distributions test
(1) A trust passes the pattern of distributions test for the test year (see subsection (2)) in relation to an individual if:
(a) during the test year, the trust made a distribution of income, a distribution of capital or both; and
(b) if the trust made at least one such distribution of income - the trust distributed to the individual, for the individual's benefit, at least a 50% share of all distributions of income made by the trust during the test year; and
(c) if the trust made at least one such distribution of capital - the trust distributed to the individual, for the individual's benefit, at least a 50% share of all distributions of capital made by the trust during the test year.
Test year
(2) For the purposes of subsection (1), the test year is:
(a) if the test time concerned (see subsection 160ZZPZP(4)) is in the same year of income as the disposal concerned - the year of income immediately before that year of income; or
(b) in any other case - the year of income in which the test time occurs.