Taxation Laws Amendment Act (No. 4) 2002

(53 of 2002)

An Act to amend the law relating to taxation, and for related purposes

[Assented to 29 June 2002]

The Parliament of Australia enacts:

1   Short title

This Act may be cited as theTaxation Laws Amendment Act (No. 4) 2002.

2   Commencement

 

(1) Each provision of this Act specified in column 1 of the table commences, or is taken to have commenced, on the day or at the time specified in column 2 of the table.

Note: This table relates only to the provisions of this Act as originally passed by the Parliament and assented to. It will not be expanded to deal with provisions inserted in this Act after assent.

      

(2) Column 3 of the table is for additional information that is not part of this Act. This information may be included in any published version of this Act.

3   Schedule(s)

Each Act that is specified in a Schedule to this Act is amended or repealed as set out in the applicable items in the Schedule concerned, and any other item in a Schedule to this Act has effect according to its terms.

4   Amendment of assessments

Section 170 of the Income Tax Assessment Act 1936 does not prevent the amendment of an assessment made before the commencement of this section for the purposes of giving effect to this Act.

Schedule 1   Thin capitalisation

Part 1   Amendments

Income Tax Assessment Act 1997

1   Section 820-10 (after table item 5)

Insert:

2   Section 820-10 (after table item 8)

Insert:

3   After section 820-30

Insert:

820-32 Exemption for private or domestic assets and non-debt liabilities

This Division does not apply to:

(a) an asset that is used (or held for use) wholly or principally for private or domestic purposes; or

(b) a *non-debt liability that is wholly or principally of a private or domestic nature.

4   Section 820-37 (definition of average Australian assets )

Repeal the definition, substitute:

average Australian assets :

(a) of an *Australian entity - is the average value, for that year, of all the assets of the entity, other than:

(i) any assets attributable to the entity's *overseas permanent establishments; or

(ii) any *debt interests held by the entity, to the extent to which any value of the interests is all or a part of the *controlled foreign entity debt of the entity; or

(iii) any *equity interests or debt interests held by the entity, to the extent to which any value of the interests is all or a part of the *controlled foreign entity equity of the entity; or

(iv) any debt interests that are *issued by *associates of the entity, that are *on issue, and that are held by the entity; or

(v) any equity interests that the entity holds in associates of the entity; and

(b) of a *foreign entity - is the average value, for that year, of all the assets of the entity that are:

(i) located in Australia; or

(ii) attributable to the entity's *Australian permanent establishments; or

(iii) debt interests held by the entity, to the extent to which the interests are covered by subsection (2); or

(iv) equity interests held by the entity, to the extent to which the interests are covered by subsection (3);

other than:

(v) any debt interests that are issued by associates of the entity, that are on issue, and that are held by the entity; or

(vi) any equity interests that the entity holds in associates of the entity.

5   Section 820-37 (definition of average total assets )

Repeal the definition, substitute:

average total assets of an entity is the average value, for that year, of all the assets of the entity, other than:

(a) any *debt interests that are *issued by *associates of the entity, that are *on issue, and that are held by the entity; or

(b) any *equity interests that the entity holds in associates of the entity.

6   At the end of section 820-37

Add:

Foreign entity - debt interest issued by an Australian entity

(2) If a *foreign entity holds a *debt interest that:

(a) was *issued by an *Australian entity; and

(b) is *on issue;

this subsection covers the interest to the extent to which the interest is not attributable to any *foreign permanent establishments of the Australian entity.

Foreign entity - equity interest in an Australian entity

(3) If a *foreign entity holds an *equity interest in an *Australian entity, this subsection covers the interest to the extent to which the interest is not attributable to any *foreign permanent establishments of the Australian entity.

7   Subsection 820-85(3) (step 2 of the method statement)

Omit "(other than any *controlled foreign entity debt of the entity)".

8   Subsection 820-85(3) (step 5 of the method statement)

Repeal the step, substitute:

Step 5. Add to the result of step 4 the average value, for the relevant year, of the *cost-free debt capital of the entity. The result of this step is the adjusted average debt .

9   Section 820-95 (step 2 of the method statement)

Omit ", other than associate entity debt that is *controlled foreign entity debt of the entity".

10   Section 820-95 (step 3 of the method statement)

Omit ", other than associate entity equity that is *controlled foreign entity equity of the entity".

11   Subsection 820-100(2) (step 2 of the method statement)

Omit ", other than associate entity debt that is *controlled foreign entity debt of the entity".

12   Subsection 820-100(2) (step 3 of the method statement)

Omit ", other than associate entity equity that is *controlled foreign entity equity of the entity".

13   Subsection 820-100(3) (step 2 of the method statement)

Omit ", other than associate entity equity that is *controlled foreign entity equity of the entity".

14   Subsection 820-100(3) (step 9 of the method statement)

Omit ", other than associate entity debt that is *controlled foreign entity debt of the entity".

15   Section 820-115 (definition of average debt )

Repeal the definition, substitute:

average debt means the sum of:

(a) the average value, for the income year, of the entity's *debt capital that is covered by step 1 of the method statement in subsection 820-85(3); and

(b) the average value, for that year, of the entity's *cost-free debt capital that is covered by step 5 of that method statement;

(disregarding any amount that is attributableto the entity's *overseas permanent establishments in working out the average values).

16   Subsection 820-120(2) (step 2 of the method statement)

Omit "(other than any *controlled foreign entity debt of the entity)".

17   Subsection 820-120(2) (step 5 of the method statement)

Repeal the step, substitute:

Step 5. Add to the result of step 4 the average value, for that period, of the *cost-free debt capital of the entity. The result of this step is the adjusted average debt .

18   Subsection 820-120(4) (definition of average debt in table item 4)

Repeal the definition, substitute:

19   Subsection 820-185(3) (step 4 of the method statement)

Repeal the step, substitute:

Step 4. Add to the result of step 3 the average value, for the relevant year, of the *cost-free debt capital of the entity. The result of this step is the adjusted average debt .

20   Section 820-220 (definition of average debt )

Repeal the definition, substitute:

average debt means the sum of:

(a) the average value, for the income year, of the entity's *debt capital that is covered by step 1 of the method statement in subsection 820-185(3); and

(b) the average value, for that year, of the entity's *cost-free debt capital that is covered by step 4 of that method statement.

21   Subsection 820-225(2) (step 4 of the method statement)

Repeal the step, substitute:

Step 4. Add to the result of step 3 the average value, for that period, of the *cost-free debt capital of the entity. The result of this step is the adjusted average debt .

22   Subsection 820-225(3) (definition of average debt in table item 4)

Repeal the definition, substitute:

23   Subsection 820-815(2)

Repeal the subsection, substitute:

(2) This section does not apply to an *associate entity of the entity if:

(a) the associate entity is a *foreign entity and the associate entity is such an associate entity only because of subsection 820-905(3A); or

(b) the associate entity is such an associate entity only because of subsection 820-905(3B).

24   Subsection 820-820(3)

Omit "This subsection does not apply to an associate entity of the entity if it is such an associate entity only because of subsection 820-905(3B).".

25   After subsection 820-820(3)

Insert:

(3A) Subsection (3) does not apply to an *associate entity of the entity if:

(a) the associate entity is a *foreign entity and the associate entity is such an associate entity only because of subsection 820-905(3A); or

(b) the associate entity is such an associate entity only because of subsection 820-905(3B).

26   Subsection 820-825(2)

Omit "This subsection does not apply to an associate entity of one or more entities in the group if it is such an associate entity only because of subsection 820-905(3B).".

27   After subsection 820-825(2)

Insert:

(2A) Subsection (2) does not apply to an *associate entity of one or more entities in the group if:

(a) the associate entity is a *foreign entity and the associate entity is such an associate entity only because of subsection 820-905(3A); or

(b) the associate entity is such an associate entity only because of subsection 820-905(3B).

28   After section 820-875

Insert:

Subdivision 820-HA - Controlled foreign entity debt and controlled foreign entity equity

Guide to Subdivision 820-HA

820-880 What this Subdivision is about

Controlled foreign entity debt and controlled foreign entity equity are concepts used in this Division. This Subdivision sets out the meaning of each of these concepts.

Table of sections

820-881 Application

820-885 What is controlled foreign entity debt ?

820-990 What is controlled foreign entity equity ?

[This is the end of the Guide.]

820-881 Application

This Subdivision applies to:

(a) an entity (the relevant entity ) that is an *outward investing entity (non-ADI), or an *outward investing entity (ADI), for a period (the relevant period ) that is all or a part of an income year; and

(b) each entity ( controlled entity of the relevant entity ) that is an *Australian controlled foreign entity of which:

(i) the relevant entity is an *Australian controller; or

(ii) an *associate entity of the relevant entity is an Australian controller.

820-885 What is controlled foreign entity debt ?

(1) The relevant entity's controlled foreign entity debt at a particular time during the relevant period is the total value of all the *debt interests held by the relevant entity at that time that satisfy all of the following:

(a) the interests are *on issue at that time;

(b) each of the interests was *issued by an entity that is a controlled entity of the relevant entity at that time;

(c) each of the interests gives rise to a cost, at any time, that is covered by paragraph 820-40(1)(a).

(2) For the purposes of subsection (1), take into account the value of a *debt interest issued by a controlled entity of the relevant entity only to the extent that the interest is not attributable to any of the following assets that are held by the controlled entity throughout the relevant period:

(a) assets attributable to the controlled entity's *Australian permanent establishments;

(b) other assets that are held by the controlled entity for the purposes of producing assessable income of the controlled entity.

820-890 What is controlled foreign entity equity ?

(1) The relevant entity's controlled foreign entity equity at a particular time during the relevant period is the total value of:

(a) all the *equity interests that the entity holds, at that time, in entities that are controlled entities of the relevant entity at that time; and

(b) all the *debt interests *on issue and held by the entity at that time that satisfy both of the following:

(i) the interests were *issued by entities that are controlled entities of the relevant entity at that time;

(ii) none of the interests gives rise to any cost, at any time, that is covered by paragraph 820-40(1)(a).

(2) For the purposes of subsection (1), take into account the value of an *equity interest in, or a *debt interest issued by, a controlled entity of the relevant entity only to the extent that the interest is not attributable to any of the following assets that are held by the controlled entity throughout the relevant period:

(a) assets attributable to the controlled entity's *Australian permanent establishments;

(b) other assets that are held by the controlled entity for the purposes of producing assessable income of the controlled entity.

29   Section 820-910

Repeal the section, substitute:

820-910 Associate entity debt

(1) This section applies to an entity (the relevant entity ) that is an *outward investing entity (non-ADI), or an *inward investing entity (non-ADI), for a period (the relevant period ) that is all or a part of an income year.

(2) This section also applies, for the relevant entity, to each entity ( relevant associate entity ) that is an *associate entity of the relevant entity and that satisfies all of the following:

(a) one of the following applies to the relevant associate entity:

(i) the relevant associate entity is an *outward investing entity (non-ADI), an *inward investment vehicle (general), or an *inward investment vehicle (financial), for the relevant period;

(ii) the relevant associate entity is an *inward investor (general) or an *inward investor (financial) for the relevant period, and it carries on its *business in Australia at or through one or more of its *Australian permanent establishments throughout the relevant period;

(b) both of the following apply to the relevant associate entity:

(i) the total *debt deductions of the relevant associate entity and all its associate entities for the income year are more than $250,000;

(ii) the result of applying the formula in section 820-37 to the relevant associate entity for the income year is less than 0.9;

(c) the relevant associate entity is not an *exempt entity for the income year.

Note: Paragraph (b) corresponds to the threshold tests for this Division set out in sections 820-35 and 820-37.

(3) The relevant entity's associate entity debt at a particular time during the relevant period is the total value of all the *debt interests held by the relevant entity at that time that satisfy all of the following:

(a) the interests are *on issue at that time;

(b) each of the interests was *issued by a relevant associate entity;

(c) each of the interests gives rise to costs:

(i) that are *debt deductions, for an income year, of the relevant associate entity that issued the interest; and

(ii) to the extent that the costs are not amounts mentioned in paragraph 820-40(2)(c) and are costs ordinarily payable to an entity other than the relevant entity - that are assessable income of the relevant entity for an income year;

(d) the terms and conditions for each of the interests are those that would apply if the relevant entity and the relevant associate entity that issued the interest were dealing at arm's length with each other.

(4) For the purposes of subsection (3), take into account the value of a *debt interest issued by a *foreign entity only to the extent that the interest is attributable to any of the following assets that are held by the foreign entity throughout the relevant period:

(a) assets that are attributable to the foreign entity's *Australian permanent establishments;

(b) other assets held by the foreign entity for the purposes of producing the foreign entity's assessable income.

30   Section 820-915

Repeal the section, substitute:

820-915 Associate entity equity

(1) This section applies to an entity (the relevant entity ) that is an *outward investing entity (non-ADI) or an *inward investing entity (non-ADI) for a period (the relevant period ) that is all or a part of an income year.

(2) This section also applies, for the relevant entity, to each entity ( relevant associate entity ) that is an *associate entity of the relevant entity and that is:

(a) an *Australian entity; or

(b) a *foreign entity that, throughout the relevant period, holds any of the following assets:

(i) assets that are attributable to the foreign entity's *Australian permanent establishments;

(ii) other assets that are held for the purposes of producing the foreign entity's assessable income.

(3) The relevant entity's associate entity equity at a particular time during the relevant period is the total value of:

(a) all the *equity interests that the entity holds, at that time, in relevant associate entities; and

(b) all the *debt interests *on issue and held by the relevant entity at that time that satisfy all of the following:

(i) the interests were *issued by relevant associate entities;

(ii) neither the value of each of the interests, nor any part of that value, is all or a part of any *cost-free debt capital of the issuer of the interest at that time;

(iii) none of the interests gives rise to any cost, at any time, that is covered by paragraph 820-40(1)(a); and

(c) all the debt interests on issue and held by the relevant entity at that time that satisfy both of the following:

(i) the interests were issued by relevant associate entities;

(ii) each of the interests gives rise to a cost, at any time, that is covered by paragraph 820-40(1)(a), but the cost is not deductible from the assessable income of the issuer of the interest for any income year.

(4) For the purposes of subsection (3), take into account the value of an *equity interest in, or a *debt interest issued by, a *foreign entity only to the extent that the interest is attributable to assets covered by subparagraph (2)(b)(i) or (ii) that are held by the foreign entity throughout the relevant period.

31   Subsection 820-920(1)

After "applies to an entity", insert "(the relevant entity )".

32   Subsection 820-920(2)

Omit "The entity's associate entity excess amount ", substitute "The relevant entity's associate entity excess amount ".

33   Subsection 820-920(2) (step 1 of the method statement)

Repeal the step, substitute:

Step 1. Work out the premium excess amount (see subsection (3)), as at that particular time, for an *associate entity of the relevant entity that is the issuer of an *equity interest or a *debt interest any value of which is all or a part of the relevant entity's *associate entity equity at that time.

34   Subsection 820-920(3) (method statement)

Repeal the method statement, substitute:

Method statement

Step 1. Work out the value, as at that particular time, of all the *associate entity equity of the relevant entity that is attributable to the *associate entity (disregarding the value of any *debt interest *issued by the associate entity that is held by the relevant entity at that time).

Step 2. Work out the value, as at that time, of all the *equity capital of the *associate entity that is attributable to the relevant entity, then reduce it by so much of the value of all the *equity interests as satisfies both of the following:

(a) the relevant entity holds the equity interests in the associate entity at that time;

(b) the value of the equity interests is all or a part of the relevant entity's *controlled foreign entity equity at that time.

Step 3. Reduce the result of step 1 by the result of step 2. However, if the result of step 2 is a negative amount, the result of step 2 is taken to be nil for the purpose of this step.

Step 4. Multiply the result of step 3 by:

(a) 20/21 if the *associate entity excess amount is applied for the purpose of working out the *total debt amount of the relevant entity for that period under subsection 820-100(2), 820-200(2) or 820-210(2); or

(b) 3/4 if the associate entity excess amount is applied for the purpose of working out the *adjusted on-lent amount of the relevant entity for that period under subsection 820-100(3), 820-200(3) or 820-210(3); or

(c) 3/4 if the associate entity excess amount is applied for the purpose of working out the *safe harbour debt amount of the relevant entity for that period under section 820-95, 820-195 or 820-205; or

(d) the result of step 4 of the method statement in subsection (1) or (2) of section 820-110 (as appropriate) if the associate entity excess amount is applied for the purpose of working out the *worldwide gearing debt amount of the relevant entity for that period.

The result of this step is the premium excess amount .

35   Subsection 820-920(4) (steps 3 and 4 of the method statement)

Repeal the steps, substitute:

Step 3. Multiply the result of step 2 by the sum of:

(a) the value, as at that time, of all the *equity capital of the *associate entity that is attributable to the relevant entity at that time; and

(b) the value, as at that time, of all the *debt interests *issued by the associate entity that are covered by subsection (5), and held by the relevant entity, at that time; and

(c) the value, as at that time, of all the debt interests issued by the associate entity that are covered by subsection (6), and held by the relevant entity, at that time.

Step 4. Divide the result of step 3 by the sum of:

(a) the value, as at that time, of all the *equity capital of the *associate entity; and

(b) the value, as at that time, of all the *debt interests *issued by the associate entity that are covered by subsection (5) at that time; and

(c) the value, as at that time, of all the debt interests issued by the associate entity that are covered by subsection (6) at that time.

36   At the end of section 820-920

Add:

(5) For the purposes of the method statement in subsection (4), this subsection covers a *debt interest at a particular time if the interest satisfies all of the following:

(a) the interest is *on issue at that time;

(b) neither the value of the interest, nor any part of that value, is all or a part of any *cost-free debt capital of the issuer of the interest at that time;

(c) the interest does not give rise to any cost, at any time, that is covered by paragraph 820-40(1)(a).

(6) For the purposes of the method statement in subsection (4), this subsection covers a *debt interest at a particular time if the interest satisfies both of the following:

(a) the interest is *on issue at that time;

(b) the interest gives rise to a cost, at any time, that is covered by paragraph 820-40(1)(a), but the cost is not deductible from the assessable income of the issuer of the interest for any income year.

37   After section 820-942

Insert:

Subdivision 820-KA - Cost-free debt capital

Guide to Subdivision 820-KA

820-945 What this Subdivision is about

This Subdivision sets out the meaning of cost-free debt capital for the purposes of this Division.

Table of sections

820-946 What is cost-free debt capital ?

[This is the end of the Guide.]

820-946 What is cost-free debt capital ?

(1) This subsection applies to an entity for a period that is all or a part of an income year if the entity satisfies all of the following:

(a) the entity is an *outward investing entity (non-ADI) or *inward investing entity (non-ADI) for that period;

(b) if the entity is a *foreign entity - the entity holds any of the following assets throughout that period:

(i) assets that are attributable to the entity's *Australian permanent establishments;

(ii) other assets that are held for the purposes of producing the entity's assessable income;

(c) both of the following apply to the entity:

(i) the total *debt deductions of the entity and all its *associate entities for the income year are more than $250,000;

(ii) the result of applying the formula in section 820-37 to the entity for the income year is less than 0.9;

(d) the entity is not an *exempt entity for the income year.

Note: Paragraph (c) corresponds to the threshold tests for this Division set out in sections 820-35 and 820-37.

(2) If subsection (1) applies to an entity for a period (the relevant period ), the cost-free debt capital of the entity at a particular time during the relevant period is the total value of all the *debt interests *issued by the entity that satisfy all of the following:

(a) the interests are *on issue at that time;

(b) none of the interests gives rise to any cost, at any time, that is covered by paragraph 820-40(1)(a);

(c) each of the interests is covered by subsection (3) or (4) of this section at that time.

(3) This subsection covers a *debt interest held by an entity (the holder ) at that time if:

(a) subsection (1) also applies to the holder for a period (the overlapped period ) that is, or includes, all or a part of the relevant period; and

(b) for the purposes of applying this Division to both the holder and the issuer of the interest (the issuer ), and in relation to only that part of the overlapped period that falls within the relevant period, either or both of the following apply:

(i) the *valuation days used to calculate the average value of the holder's assets are different from the valuation days used to calculate the issuer's *adjusted average debt;

(ii) the number of valuation days used to calculate the average value of the holder's assets are different from the number of valuation days used to calculate the issuer's adjusted average debt.

(4) This subsection covers a *debt interest held by an entity (the holder ) at the particular time mentioned in subsection (2) if:

(a) subsection (1) does not apply to the holder for a period that is, or includes, all or a part of the relevant period; and

(b) at that time, the debt interest has been *on issue for a period of less than 180 days.

(5) For the purposes of subsection (2), take into account the value of a *debt interest issued by a *foreign entity only to the extent that the interest is attributable to assets covered by subparagraph (1)(b)(i) or (ii) that are held by the foreign entity throughout the relevant period.

38   At the end of section 820-980 (before the note)

Add:

(3) The entity must prepare the records before the time by which the entity must lodge its *income tax return for the income year in relation to all or a part of which the amount is worked out.

39   Section 995-1 (definition of controlled foreign entity debt )

Repeal the definition, substitute:

controlled foreign entity debt has the meaning given by section 820-885.

40   Section 995-1 (definition of controlled foreign entity equity )

Repeal the definition, substitute:

controlled foreign entity equity has the meaning given by section 820-890.

41   Section 995-1

Insert:

cost-free debt capital has the meaning given by section 820-946.

42   Section 995-1 (subparagraph (c)(i) of the definition of financial entity )

Omit "financial products", insert "at least one of the financial products".

Income Tax Assessment Act 1936

43   Subsection 160AF(8) (paragraph (c) of the definition of net foreign income )

Omit "that are not", substitute "and".

44   Paragraph 262A(3)(d)

Omit "subsection (2)", substitute "subsections (2) and (3)".

Income Tax (Transitional Provisions) Act 1997

45   At the end of subsection 820-40(1)

Add:

; and (d) the arrangement giving rise to the interest is not an arrangement covered by paragraphs (a), (b), (c) and (d) of subsection 974-75(4) of the Income Tax Assessment Act 1997 before that subsection ceases to have effect on 1 January 2003 (as provided by that subsection).

Part 2   Application of amendments

46   Application - amendments of the Income Tax Assessment Act 1997 and the Income Tax (Transitional Provisions) Act 1997

The amendments of the Income Tax Assessment Act 1997 and the Income Tax (Transitional Provisions) Act 1997 made by this Schedule apply in relation to an income year that begins on or after 1 July 2001.

47   Application - amendment of section 160AF of the Income Tax Assessment Act 1936

The amendment of section 160AF of the Income Tax Assessment Act 1936 made by this Schedule applies in relation to assessable income of a year of income that begins on or after 1 July 2001.

48   Application - amendment of section 262A of the Income Tax Assessment Act 1936

The amendment of section 262A of the Income Tax Assessment Act 1936 made by this Schedule applies in relation to a year of income that begins on or after 1 July 2001.

Schedule 2   Trust to company roll-over

Part 1   Roll-over

Income Tax Assessment Act 1997

1   At the end of Division 124

Add:

Subdivision 124-N - Disposal of assets by a trust to a company

Guide to Subdivision 124-N

124-850 What this Subdivision is about

Entities can choose to obtain a roll-over if:

(a) a trust disposes of all of its assets to a company; and

(b) units and interests in the trust are replaced by shares in the company.

The roll-over may also be available for 2 or more trusts disposing of all their assets to a single company.

Note: The effect of the roll-over may be reversed if the trust does not cease to exist within 6 months: see section 104-195.

Table of sections

Operative provisions

124-855 What this Subdivision deals with

124-860 Requirements for roll-over

124-865 Entities both choose the roll-over

124-870 Roll-over for owner of units or interests in a trust

124-875 Effect on the transferor and transferee

[This is the end of the Guide.]

Operative provisions

124-855 What this Subdivision deals with

(1) A roll-over may be available for a restructuring (a trust restructure ) if:

(a) a trust, or 2 or more trusts, (the transferor ) *dispose of all of their *CGT assets to a company limited by *shares (the transferee ); and

(b) *CGT event E4 is capable of applying to all of the units and interests in the transferor; and

(c) the requirements in section 124-860 are met.

Note: A roll-over is not available for a restructure undertaken by a discretionary trust.

(2) For 2 or more transferors, units and interests in each transferor must be owned in the same proportions by the same beneficiaries.

Example: Matthew and Jaclyn each own 50% of the units in the Spring Unit Trust and the Dale Unit trust. All of the assets of both trusts are disposed of to Jonathon Pty Ltd. A roll-over for a trust restructure is available if the other requirements of this Subdivision are met.

124-860 Requirements for roll-over

(1) All of the *CGT assets owned by the transferor must be disposed of to the transferee during the *trust restructuring period. However, ignore any CGT assets retained by the transferor to pay existing or expected debts of the transferor.

(2) The trust restructuring period for a trust restructure:

(a) starts just before the first *CGT asset is *disposed of to the transferee under the trust restructure, which must happen on or after 11 November 1999; and

(b) ends when the last CGT asset of the transferor is disposed of to the transferee.

(3) The transferee must not be an *exempt entity.

(4) The transferee must be a company that:

(a) has never carried on commercial activities; and

(b) has no *CGT assets other than small amounts of cash or debt; and

(c) has no losses of any kind.

Example: It could be a shelf company.

(5) Subsection (4) does not apply to a transferee that is the trustee of the transferor.

(6) Just after the end of the *trust restructuring period:

(a) each entity that owned interests in a transferor just before the start of the trust restructuring period must own replacement interests in the transferee in the same proportion as it owned those interests in that transferor; and

(b) the *market value of the replacement interests each of those entities owns in the transferee must be at least substantially the same as the market value of the interests it owned in the transferor or transferors just before the start of the trust restructuring period.

Note: Any assets in the company just before the start of the trust restructuring period may affect the ability of owners of units or interests to comply with paragraph (6)(b).

(7) For the purposes of subsection (6), ignore any *shares in the transferee that:

(a) just before the start of the *trust restructuring period, were owned by entities who together owned no more than 5 shares; and

(b) just after the end of that period, represented such a low percentage of the total market value of all the shares that it is reasonable to treat other entities as if they owned all the shares in the transferee.

Example: To continue the example in subsection 124-855(2), assume that Jonathon Pty Ltd was a shelf company organised for Matthew and Jaclyn by their solicitor, Indira.

Indira owned the 2 shares in Jonathon Pty Ltd before the trust restructuring period. The company issues Matthew and Jaclyn 5,000 shares each.

In these circumstances, it is reasonable to treat Matthew and Jaclyn as if they owned all the shares in Jonathon Pty Ltd.

(8) The transferee must be an Australian resident.

124-865 Entities both choose the roll-over

A roll-over is only available for the transferor and transferee if both the transferor and transferee choose to obtain it.

Note 1: If they do so, the consequences for the transferor and transferee are set out in section 124-875.

Note 2: An entity that owns a unit or interest in the transferor can also choose to obtain a roll-over: see section 124-870.

124-870 Roll-over for owner of units or interests in a trust

(1) You can choose to obtain a roll-over(whether or not the transferor and transferee choose to obtain a roll-over, and even if *CGT event J4 applies) if:

(a) you own units or interests in the transferor (your original interests ); and

(b) the ownership of all your units or interests ends under a trust restructure in exchange for *shares in the transferee (your replacement interests ).

Note 1: The roll-over consequences are set out in Subdivision 124-A. The original assets are your units and interests in the transferor. The new assets are your shares in the transferee.

Note 2: The effect of the roll-over may be reversed if the transferor does not cease to exist within 6 months: see section 104-195.

(2) You must make the choice for each of your original interests.

(3) An entity that is not an Australian resident cannot choose a roll-over under this section unless the replacement interests the entity *acquires in the transferee have the *necessary connection with Australia just after their acquisition.

(4) If you choose a roll-over, you cannot make a *capital loss from a *CGT event that happens to your original interests during the *trust restructuring period.

Note: The rule in subsection (4) prevents a capital loss arising on your units or interests after the trust assets have been disposed of to the company ut before your shares are issued to you.

Exception: trading stock

(5) This section does not apply to your ownership of an original interest ending if:

(a) the interest was an item of your *trading stock and the corresponding replacement interest becomes an item of your trading stock when you *acquire it; or

(b) the interest was not an item of your trading stock but the corresponding replacement interest becomes an item of your trading stock when you acquire it.

124-875 Effect on the transferor and transferee

Capital gains and losses disregarded

(1) Any *capital gain or *capital loss from *CGT event A1 happening to the transferor under the trust restructure is disregarded (even if *CGT event J4 applies).

Note: The effect of the roll-over may be reversed if the transferor does not cease to exist within 6 months: see section 104-195.

Cost base is transferred

(2) The first element of the *cost base and *reduced cost base (for the transferee) of each *CGT asset that the transferee *acquires under the trust restructure is the same as the cost base and reduced cost base of that asset (for the transferor) just before that acquisition.

Note: For the cost base and reduced cost base of interests in the transferee: see Subdivision 124-A.

Pre-CGT assets retain their status

(3) If the transferor *acquired any of the *CGT assets *disposed of to the transferee under the trust restructure before 20 September 1985, the transferee is taken to have acquired it before that day.

(4) However, subsection (3) is taken never to have applied to such an asset of the transferee if subsection 104-195(4) (CGT event J4) applies to the transferee in relation to the asset.

Exception: trading stock

(5) This section does not apply to a *CGT asset if:

(a) the asset was an item of *trading stock of the transferor and becomes an item of trading stock of the transferee; or

(b) the asset was not an item of trading stock of the transferor but becomes an item of trading stock of the transferee when the transferee *acquires it.

Part 2   Consequential amendments

Income Tax Assessment Act 1997

2   At the end of section 102-20

Add:

Note 3: You cannot make a capital loss from a CGT event that happens to your original interests during a trust restructuring period if you choose a roll-over under Subdivision 124-N.

3   Section 104-5 (after table item J3)

Insert:

4   At the end of Subdivision 104-J

Add:

104-195 Trust failing to cease to exist after roll-over under Subdivision 124-N: CGT event J4

(1) CGT event J4 happens if:

(a) there is a roll-over under Subdivision 124-N for a trust *disposing of a *CGT asset to a company under a trust restructure; and

(b) the trust fails to cease to exist:

(i) within 6 months after the start of the *trust restructuring period; or

(ii) if that is not possible because of circumstances outside the control of the trustee - as soon as practicable after the end of that 6 month period; and

(c) the company owns the asset when the failure happens.

Example: Circumstances would be outside the control of the trustee if the trustee is involved in litigation concerning the trust and cannot wind up the trust until the litigation is finished.

(2) CGT event J4 also happens if:

(a) there is a roll-over under Subdivision 124-N for an entity (the shareholding entity ) receiving a *share in a company in exchange for a unit or interest in a trust under a trust restructure; and

(b) the trust fails to cease to exist:

(i) within 6 months after the start of the *trust restructuring period; or

(ii) if that is not possible because of circumstances outside the control of the trustee - as soon as practicable after the end of that 6 month period; and

(c) the shareholding entity owns the share when the failure happens.

(3) The time of the event is when the failure to cease to exist happens.

(4) The company makes a capital gain if the *CGT asset's *market value at the time the company *acquired the asset is more than its *cost base at that time. The company makes a capital loss if that market value is less than the asset's *reduced cost base at that time.

(5) This Part and Part 3-3 apply to the company from just after the time of the event as if the first element of the *cost base and *reduced cost base of the asset were its *market value at the time the company *acquired the asset.

(6) The shareholding entity makes a capital gain if the *share's *market value at the time the entity *acquired the share is more than its *cost base at that time. The shareholding entity makes a capital loss if that market value is less than the share's *reduced cost base at that time.

(7) This Part and Part 3-3 apply to the shareholding entity from just after the time of the event as if the first element of the *cost base and *reduced cost base of the *share were its *market value at the time the entity *acquired the share.

Exception

(8) This section does not apply to a *CGT asset acquired under a trust restructure that happened before the day on which the Taxation Laws Amendment Act (No. 4) 2002 received the Royal Assent.

5   Section 109-55 (table item 8)

Before "Divisions 122 and 126", insert "Subdivision 124-N and".

6   Section 112-45 (after table item G3)

Insert:

7   Section 112-115 (after table item 14A)

Insert:

8   Section 112-140

After "122", insert ", 124".

9   Section 112-150 (after table item 4)

Insert:

10   Subsection 124-5(1)

Omit "124-M", substitute "124-N".

11   At the end of section 124-10

Add:

(5) However, subsection (4) is taken never to have applied to a *share to which subsection 104-195(6) applies (CGT event J4).

12   At the end of section 124-15

Add:

(7) However, subsections (4) and (5) are taken never to have applied to a *share to which subsection 104-195(6) applies (CGT event J4).

13   Subsection 134-1(4)

After "disregarded.", insert "However, this rule does not apply if the grantee *acquired the option under a trust restructure (see Subdivision 124-N) and, on exercising the option, held the resulting asset as an item of *trading stock.".

14   Section 136-10 (after table item J3)

Insert:

15   Subsection 995-1(1)

Insert:

trust restructuring period has the meaning given by section 124-860.

Part 3   Transitional

16   Transitional

The choice referred to in section 124-865, or subsection 124-870(1), of the Income Tax Assessment Act 1997 must be made within 12 months after the day on which the Taxation Laws Amendment Act (No. 4) 2002 received the Royal Assent (the Assent day ) for a trust restructure that happened on or after 11 November 1999 and before the Assent day.

Part 4   Application of amendments

17   Application of amendments

The amendments made by this Schedule apply to CGT events happening on or after 11 November 1999.

Schedule 4   Effective life of depreciating assets

Part 1   Amendments

Income Tax Assessment Act 1997

1   At the end of subsection 40-95(1)

Add:

Note: If you choose to use an effective life determined by the Commissioner for a depreciating asset, a capped life may apply to the asset under section 40-102.

2   After subsection 40-95(4)

Insert:

(4A) Subsection (4) does not apply to a *depreciating asset if subsection (4B) or (4C) applies to the asset.

(4B) For a *depreciating asset that you start to *hold if:

(a) the former holder is an *associate of yours; and

(b) the associate has deducted or can deduct an amount for the asset under this Division; and

(c) section 40-102 applied to the asset immediately before you started to hold it because an item in the tables in subsections 40-102(4) and (5) applied to it at the relevant time (the relevant time for the associate ) that applied to the associate under subsection 40-102(3); and

(d) a different item in the tables in subsections 40-102(4) and (5) applies to the asset when you start to hold it; and

(e) the item referred to in paragraph (d) would have applied to the asset at the relevant time for the associate if the use to which the asset were put at that time were the use (the new use ) to which it is put when you start to hold it;

you must use:

(f) if the associate was using the *diminishing value method for the asset - an *effective life equal to the *capped life that would have applied to the asset under subsection 40-102(4) or (5) at the relevant time for the associate if the use to which the asset were put at that time were the new use; or

(g) if the associate was using the *prime cost method - an effective life equal to the capped life that:

(i) would have applied to the asset under subsection 40-102(4) or (5) at the relevant time for the associate if the use to which the asset were put at that time were the new use; and

(ii) is yet to elapse at the time you start to hold it.

Note 1: If paragraph (e) is not satisfied, subsection (4C) may apply to the depreciating asset.

Note 2: You can require the associate to tell you the relevant time that applied to the associate under subsection 40-102(3): see section 40-140.

(4C) For a *depreciating asset that you start to *hold if:

(a) the former holder is an *associate of yours; and

(b) the associate has deducted or can deduct an amount for the asset under this Division; and

(c) section 40-102 applied to the asset immediately before you started to hold it; and

(d) one of the following applies:

(i) no item in the tables in subsections 40-102(4) and (5) applies to the asset when you start to hold it;

(ii) subsection (4B) would apply to the asset but for paragraph (e) of that subsection not being satisfied;

you must use:

(e) if the associate was using the *diminishing value method for the asset - the *effective life determined by the Commissioner for the asset under section 40-100 that the associate would have used if section 40-102 had not applied to the asset; or

(f) if the associate was using the *prime cost method - an effective life equal to any period of the effective life determined by the Commissioner for the asset under section 40-100 that:

(i) the associate would have used if section 40-102 had not applied to the asset; and

(ii) is yet to elapse at the time you start to hold it.

Note: You can require the associate to tell you which effective life the associate would have used if section 40-102 had not applied to the asset: see section 40-140.

3   After subsection 40-95(5)

Insert:

(5A) Subsection (5) does not apply to a *depreciating asset if subsection (5B) or (5C) applies to the asset.

(5B) For a *depreciating asset that you start to *hold if:

(a) paragraphs (5)(a) and (b) apply; and

(b) section 40-102 applied to the asset immediately before you started to hold it because an item in the tables in subsections 40-102(4) and (5) applied to it at the relevant time (the relevant time for the former holder ) that applied to the former holder under subsection 40-102(3); and

(c) a different item in the tables in subsections 40-102(4) and (5) applies to the asset when you start to hold it; and

(d) the item referred to in paragraph (c) would have applied to the asset at the relevant time for the former holder if the use to which the asset were put at that time were the use (the new use ) to which it is put when you start to hold it;

you must use:

(e) if the former holder was using the *diminishing value method for the asset - an *effective life equal to the *capped life that would have applied to the asset under subsection 40-102(4) or (5) at the relevant time for the former holder if the use to which the asset were put at that time were the new use; or

(f) if the former holder was using the *prime cost method - an effective life equal to the capped life that:

(i) would have applied to the asset under subsection 40-102(4) or (5) at the relevant time for the former holder if the use to which the asset were put at that time were the new use; and

(ii) is yet to elapse at the time you start to hold it.

Note: If paragraph (d) is not satisfied, subsection (5C) may apply to the depreciating asset.

(5C) For a *depreciating asset that you start to *hold if:

(a) paragraphs (5)(a) and (b) apply; and

(b) section 40-102 applied to the asset immediately before you started to hold it; and

(c) one of the following applies:

(i) no item in the tables in subsections 40-102(4) and (5) applies to the asset when you start to hold it;

(ii) subsection (5B) would apply to the asset but for paragraph (d) of that subsection not being satisfied;

you must use:

(d) if the former holder was using the *diminishing value method for the asset - the *effective life determined by the Commissioner for the asset under section 40-100 that the former holder would have used if section 40-102 had not applied to the asset; or

(e) if the former holder was using the *prime cost method - an effective life equal to any period of the effective life determined by the Commissioner for the asset under section 40-100 that:

(i) the former holder would have used if section 40-102 had not applied to the asset; and

(ii) is yet to elapse at the time you start to hold it.

4   Paragraph 40-95(6)(a)

Repeal the paragraph, substitute:

(a) you do not know, and cannot readily find out, which effective life the former holder was using and, if subsection (5B) or (5C) applied to the asset, either of the following matters:

(i) the effective life the former holder would have used if section 40-102 had not applied to the asset;

(ii) the relevant time that applied to the former holder under subsection 40-102(3); or

5   After section 40-100

Insert:

40-102 Capped life of certain depreciating assets

(1) If this section applies to a *depreciating asset, the effective life of the asset is the period (the capped life) that applies to the asset under subsection (4) or (5) at the relevant time (which is worked out using subsection (3)).

Working out if this section applies

(2) This section applies to a *depreciating asset if:

(a) you choose, under paragraph 40-95(1)(a), to use an *effective life determined by the Commissioner for the asset under section 40-100; and

(b) your choice is limited to a determination in force at the time mentioned in paragraph 40-95(2)(a) or (c); and

(c) a *capped life applies to the asset under subsection (4) or (5) at the relevant time (which is worked out using subsection (3)); and

(d) the capped life is shorter than the effective life mentioned in paragraph (a).

(3) For the purposes of this section, the relevant time is:

(a) the *start time of the *depreciating asset if:

(i) paragraph 40-95(2)(c) applies to you; or

(ii) paragraph 40-95(2)(a) applies to you and a *capped life does not apply to the asset under subsection (4) or (5) at the time mentioned in that paragraph; or

(iii) paragraph 40-95(2)(a) applies to you and the capped life that applies to the asset under subsection (4) or (5) at the time mentioned in that paragraph is longer than the capped life that applies to the asset at its start time; or

(b) if paragraph (a) does not apply - the time mentioned in paragraph 40-95(2)(a).

Capped life

(4) If the *depreciating asset corresponds exactly to the description in column 2 of the table, the capped life of the asset is the period specified in column 3 of the table.

(5) If the *depreciating asset is of a kind described in column 2 of the table and is used in the industry specified in column 3 of the table for the asset, the capped life of the asset is the period specified in column 4 of the table.

6   Subparagraph 40-110(2)(a)(ii)

Before "and", insert ", or 40-102 (about the capped life of certain depreciating assets),".

7   Subparagraph 40-110(2)(a)(iii)

Omit "or (5)", insert ", (4B), (4C), (5), (5B) or (5C)".

8   Paragraph 40-110(3)(a)

Omit "or (5)", insert ", (4B), (4C), (5), (5B) or (5C)".

9   At the end of subsection 40-140(1)

Add:

; and (c) if section 40-102 applied to the asset at any time:

(i) the effective life that the associate would have used if section 40-102 had not applied to the asset; and

(ii) the relevant time that applied to the associate under subsection 40-102(3).

10   After subsection 58-75(5)

Insert:

(5A) Assume that section 40-102 did not apply to a *privatised asset unless all of the following are satisfied:

(a) it is an entity sale situation within the meaning of section 58-5;

(b) a *capped life applies to the asset under subsection 40-102(4) or (5) at both the asset's *start time and the *transition time;

(c) the *transition entity chooses, for the purposes of this section, to have section 40-102 apply to the asset.

If section 40-102 is to be applied to the asset, disregard paragraphs 40-102(2)(a) and (b) and assume that the relevant time for the purposes of the application of that section to the asset were the transition time.

11   At the end of subsection 58-80(6)

Add:

Note: Section 40-102 does not apply to a privatised asset for the purposes of this section.

12   At the end of section 58-90

Add:

(2) In working out the decline in value of a *privatised asset held by a *transition entity:

(a) if section 40-102 applied to the asset for the purposes of subsection 58-75(5A) - section 40-102 applies to the asset and applies as if the relevant time for the asset for the purposes of that section were the *transition time; or

(b) if section 40-102 did not apply to the asset for the purposes of subsection 58-75(5A) or section 58-80 - section 40-102 does not apply to the asset.

Note: The heading to section 58-90 is altered by inserting " and effective life " after " Method ".

13   Subsection 995-1(1)

Insert:

capped life of a *depreciating asset has the meaning given by section 40-102.

14   Subsection 995-1(1) (definition of effective life )

After "40-100,", insert "40-102,".

Part 2   Application of amendments

15  Application

 

(1) The amendments made by items 1 to 9, 13 and 14 apply to a depreciating asset if the start time for the asset occurs on or after 1 July 2002.

      

(2) The amendments made by items 10 to 12 apply to a privatised asset held on or after 1 July 2002.