House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon. P.J. Keating, M.P.)

Notes on Clauses

PART 1 - PRELIMINARY

Clause 1: Short title

This clause provides for the amending Act to be cited as the Taxation Laws Amendment Act 1990.

Clause 2: Commencement

By this clause the amending Act is to commence on the day on which it receives the Royal Assent. But for this clause, by reason of subsection 5(1A) of the Acts Interpretation Act 1901, the Act would commence on the twenty-eighth day after the date of Assent.

PART 2 - AMENDMENT OF THE INCOME TAX ASSESSMENT ACT 1936

Clause 3: Principal Act

This clause facilitates reference to the Income Tax Assessment Act 1936 which, in this Part, is referred to as "the Principal Act".

Clause 4: Interpretation

Subsection 6(1) of the Principal Act sets out definitions of terms used in that Act. This clause will insert in subsection 6(1) a definition of "dual resident investment company". This definition is relevant to the measures relating to transfers of losses within company groups to be given effect to by clause 12 and subclause 23(1) of this Bill.

"Dual resident investment company" is defined by reference to proposed section 6F which is explained in the following notes on clause 5 of the Bill.

Clause 5: Dual resident investment company

Introductory note

The amendment proposed by clause 5 will insert a new section - section 6F - in the Principal Act. This amendment, together with the proposed amendments in clause 12 and subclause 23(1), will give effect to the outcome of a review of proposals announced on 17 December 1986 for amendments of the income tax law to counter certain arrangements referred to as "double dipping" schemes. The expression "double dipping" is used in this context to describe the situation when tax benefits in two countries are obtained for the same, or effectively the same, expenditure. Since that announcement the scope of the legislative action required to counter such schemes has been reviewed. As a consequence, the proposed amendments are limited to the denial of the transfer of losses under the group relief provisions of the Principal Act by dual resident companies which do not carry on trading activities in Australia. These amendments, which are broadly in line with like measures taken by other countries, are designed to prevent a company - characterised as a dual resident investment company - which might otherwise be able to transfer the same loss to more than one company under the group relief provisions of Australia and another country, from obtaining the benefit of these provisions in Australia.

Proposed section 6F, together with proposed paragraphs 80G(6)(ba) and 160ZP(7)(ba) - to be inserted in the Principal Act by clause 12 and subclause 23(1) respectively and explained in later notes on those clauses - will override the application of the following provisions in relation to dual resident investment companies -

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section 80G, which allows the right to a deduction for a loss or losses incurred by a resident company in deriving assessable income to be transferred to another resident company where there is 100% common ownership of all classes of shares in the relevant companies; and

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section 160ZP, which allows a resident company to transfer a net capital loss to another resident company where the same common ownership test is met.

Notes on the individual provisions of new section 6F follow.

Subsection 6F(1) describes the conditions under which a company will be treated as a dual resident investment company in relation to a year of income. In summary, to be so treated a company must satisfy both a dual residency test and an activity or purpose test.

The first element of the dual residency condition is that the company is a resident of Australia (as defined in subsection 6(1) of the Principal Act) at any time during the year of income (paragraph (a)).

The second element is that the company is also liable to tax in a foreign country in respect of some or all of its income or profits of the year of income by reason that it is treated as resident or domiciled in that country, or its management and control is treated as being located there, under the relevant law of that country (paragraph (b)). Broadly, that element is designed to encompass a company which is considered by another country to be "resident" there and as a result of that "residency" it is liable to tax in that other country on its earnings. It would not extend to a company that is liable to tax on income from a source in a particular country as a "non-resident" of that country.

Paragraph (1)(b) specifically provides for the foreign tax liability condition to be treated as met if the company did not derive income or profits in a year of income but would have been liable to tax in the foreign country if it had derived income or profits in that year. In other words, a company that is a resident of another country will not cease to have that status for any year in which it did not derive income or profits.

The reference in paragraph (1)(b) to "liable to tax" in a foreign country envisages the situation where the tax law of the foreign country declares that tax shall be paid upon income or profits of the company. It is irrelevant whether, and when, the actual amount of this tax liability may be assessed by, or paid to, the relevant foreign tax country.

It is to be noted that a company will be treated as a dual resident company in relation to a year of income if it is a dual resident for any part of the income year - it is not necessary for the company to have this character for the whole income year. That is, the test covers the situation where a company is an Australian resident during part of one income year and is treated as "resident" in another country under the tax law of that country for the same or another part of that income year.

Having satisfied the dual residency condition in relation to a year of income, the company must also satisfy the activity or purpose conditions set out in paragraph (c) of subsection 6F(1). If either of the conditions set out in paragraph (c) are met at any time during a year of income, the company will be a dual resident investment company for that year of income. The broad objective of these conditions is to exclude from the scope of the new measures a company that is carrying on genuine trading or other business activities.

Subparagraph (c)(i) specifies the first of these conditions. It is that, at any time during the year of income, the company was not carrying on business for the objectively determined purpose of making a profit. Thus, the commercial reality that business is ordinarily carried on for the objective purpose of profit is made an essential element of this business test. Clearly, a dual resident company that is created to make losses for the purpose of obtaining a tax benefit will be treated as a dual resident investment company under this provision.

Subparagraph (c)(ii) specifies an alternative condition that will cause a company which meets the dual residency conditions of paragraphs (a) and (b) to be treated as a dual resident investment company. This condition is that a substantial purpose of the company - as measured by its actual activities regardless of any purpose stated in its constituent document - was directly or indirectly to acquire or hold shares, securities or other investments in related companies.

The term "substantial" is used in this provision in its relative sense and is intended to signify something that is real or of substance. That is, the actual activities of the business must be examined to determine if the activity in subparagraph (c)(ii) is a substantial purpose. It is sufficient if this purpose is one of a number of purposes provided that it is a substantial purpose of the company. In the context of this provision, the word 'purpose' looks to the effect which is sought to be achieved, including the immediate intended result.

Subsection 6F(2) sets out the circumstances in which companies will be treated as "related companies" for the purposes of proposed subparagraph 6F(1)(c)(ii). By this provision two or more companies will be treated as related companies if the same person has control (as defined by subsection 6F(3)) of both companies, either alone or together with associates (within the meaning of proposed subsection 6F(5)) of that person.

By subsection 6F(3), control of a company for the purposes of this section is to be measured by reference to alternative tests set out in paragraphs (a) and (b) of the subsection. The tests set out in subparagraphs (a)(i) to (iii) relate to control of voting power, beneficial entitlement to dividends or capital, or the capacity to gain such control under a scheme (as defined in subsection 6F(5)) by a person, either alone or together with any associates.

Paragraph (3)(b) sets out another test which operates where control by a person of a company, either alone or with associates, is less direct or formal, but the company or its directors might act in accordance with the instructions of that person. This test may be met where here is no past patterns of conduct which would evidence control of the type described in the paragraph but the circumstances are such that the company or directors might reasonably be expected to so act.

Subsection 6F(4) is related to the operation of the "control" test set out in subparagraph 6F(3)(a)(ii) mentioned earlier. It applies the provisions of section 159GZH (in the "thin capitalisation" measures of the Principal Act) for the purpose of determining the beneficial entitlement of a person to share in a dividend or capital distribution of a company.

Specifically, section 159GZH enables beneficial entitlements to capital or income of companies to be traced through a chain of companies, partnerships or trusts. For the purposes of this section, beneficial entitlements include the appropriate proportion of joint beneficial entitlements. So far as is relevant, section 159GZH allows for the tracing of a person's beneficial entitlement to the whole or part of a distribution of income or capital of a company on the assumption that successive distributions would be made by all interposed entities to permit that person to receive the relevant distribution.

Example:

A non-resident individual A is beneficially entitled to 100% of the income of a resident trust estate B but not to any of the corpus. B holds 50% of the shares in a resident company C. A therefore has no direct interest in C. However, section 159GZH assumes that C may pay a dividend to B which will then flow onto B's income beneficiaries. Thus B will receive 50% of the dividend paid by C and 100% of that sum (i.e., one-half of C's dividend) would flow onto A. In those circumstances, A is treated as beneficially entitled to 50% of any dividends paid by C and, in terms of subsection 6F(4), would be a controller in relation to both B and C.

Proposed subsection (5) contains a number of definitions and interpretative provisions necessary for the operation of new section 6F. The term "associate" is to have the same wide meaning as in subsection 26AAB(14) of the Principal Act, while "scheme" is defined in a manner similar to that used in Part IVA (the general anti-avoidance provision) of that Act, with the addition that it is to include any scheme involving one or more parties.

Clause 6: Exemption of certain pensions

Section 23AD of the Principal Act operates to determine which pensions, benefits and allowances paid under social security, repatriation and other welfare legislation are subject to, or exempt, from income tax.

The amendments of section 23AD proposed by clause 6 of the Bill fall into two groups:

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those that are consequential on the extension of the carer's service pension following an amendment of the Veterans' Entitlements Act 1986 by the Social Security and Veterans' Affairs Legislation Amendment Act (No.4) 1989 (Act No. 164 of 1989) (paragraphs (a), (b) and (d)); and

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those relating to the removal of references to an allowance formerly paid under the Tuberculosis Act 1948 (paragraphs (c), (e), (f) and (g).

The legislative scheme of section 23AD of the Principal Act is that subsection (3) exempts from tax all pensions, allowances or benefits paid under the relevant legislation other than those included within the term "excepted payment", which is defined in subsection (1). This term includes pensions, allowances and benefits that are assessable irrespective of the age of the recipient and other payments, specified in the definition of "excepted pension" in subsection (1). Payments of excepted pension are assessable only when the recipient is a "prescribed person" as defined in subsection (1), e.g., a man or woman of age pension age or a person in receipt of a "carer's pension" as defined in subsection (1).

The existing carer's service pension is exempt from tax where both the carer and the veteran are below age pension age, and the veteran being cared for receives a service pension under section 39 of the Veterans' Entitlements Act because he or she is permanently incapacitated for work, i.e., the veteran is receiving the equivalent of an invalid pension. In any other case, including the case where the carer or veteran is of age pension age, the carer's service pension is taxable.

From 1 November 1989, the carer's service pension is payable to a person providing care and attention to a severely handicapped veteran without regard to whether the veteran is a relative.

The amendments proposed by paragraphs (a), (b) and (d) will ensure that the taxation treatment now given a carer related to the severely handicapped veteran is extended to a carer who is not related.

Paragraph (a) will amend paragraph (b) of the definition of "carer's pension" in subsection 23AD(1) of the Principal Act. The definition presently describes the person cared for by the recipient of a carer's service pension as a "relative" of the carer and the amendment will change the description of that person to a "severely handicapped veteran".

The purpose of the definition, which operates in conjunction with the definitions of "prescribed person" and "excepted payment", is to ensure that a person receiving a carer's pension, as defined, in respect of the care of an aged veteran (i.e., a man 65 years or older or a woman 60 years or older) is taxed on the pension. The amendment will ensure that this taxation treatment is extended to a carer who is not a relative of the veteran.

By paragraph (b), subparagraph (b)(ii) of the definition of "excepted payment" in subsection 23AD(1) of the Principal Act will be amended. A payment that qualifies as an excepted payment is not exempt from tax. The definition of "excepted payment" presently refers in subparagraph (b)(ii) to a pension, allowance or benefit payable under Part III of the Veterans' Entitlements Act 1986 (e.g., a service pension or a carer's service pension) to a person or a relative of the person, otherwise than by virtue of section 39 of that Act. That is, the service pension is not payable because the veteran is permanently incapacitated for work. In this situation the service pension paid to the veteran, and any carer's service pension paid to a person caring for the veteran, is taxable. This amendment will extend that taxation treatment to include a pension paid to a carer (a relative or not) who cares for such a veteran.

Paragraph (d) will amend paragraph (c) of the definition of "excepted pension" in subsection 23AD(1) of the Principal Act. A payment that qualifies as an excepted pension is exempt from tax except when paid to a prescribed person. The definition of "excepted pension" presently refers in paragraph (c) to a pension, allowance or benefit payable under Part III of the Veterans' Entitlements Act (i.e., a service pension or a carer's service pension) to a person or a relative of the person by virtue of section 39 of that Act. That is, a pension is payable to the veteran because he or she is permanently incapacitated for work.

The amendment to paragraph (c) of the definition of "excepted pension" will extend the definition to include any pension, allowance or benefit paid to a person (whether a relative or not) who cares for a veteran, where the veteran is permanently incapacitated for work.

This amendment, operating in conjunction with the definition of "carer's pension" (paragraph (a) above), will ensure that a carer's service pension paid to a carer who is not a relative of a veteran, but is receiving a pension by virtue of section 39 of the Veterans' Entitlements Act applying to the veteran who is permanently incapacitated, will be taxed where the carer, being a man, is 65 years or older or, being a woman, is 60 years or older.

As indicated above, the amendments to the definitions will account for the extension of the availability of the carer's service pension from 1 November 1989 to non-relatives of a veteran. The income tax treatment previously given the carer's service pension payable to a relative of the veteran only, is now extended on the same basis to the non-relative carer.

By subclause 38(2) of the Bill the amendments by paragraphs (a), (b) and (d) will apply in relation to payments under section 41 of the Veterans' Entitlements Act made in accordance with a claim for carer's service pension lodged on or after 1 November 1989.

Paragraph (e) will omit paragraph (b) of the definition of "excepted pension" in subsection 23AD(1) of the Principal Act that refers to an allowance formerly payable in accordance with section 9 of the Tuberculosis Act. This allowance is no longer paid. As a consequence, paragraphs (e), (f) and (g) together operate to omit paragraph (c) - which refers to an allowance payable under section 9 of the Tuberculosis Act - from the definition of "wife's pension" in subsection 23AD(1) of the Principal Act.

By subclause 38(3), the amendments to be made by paragraphs (c), (e), (f) and (g) of clause 6 will apply from the date of the Royal Assent to the Bill.

Clause 7: Assessable income to include annuities and superannuation pensions

Section 27H of the Principal Act provides for the inclusion in assessable income of annuities (including superannuation pensions) that commence to be paid on or after 1 July 1983. It also contains rules for deducting from an annuity for assessment purposes an amount calculated by reference to that part of the purchase price of the annuity that has not attracted a tax deduction (the undeducted purchase price).

The amount to be excluded from an assessable annuity is calculated in accordance with the formula in subsection 27H(2). However, in some cases the amount ascertained under the formula may bear no real relationship to the capital component of the annuity. Accordingly, subsection 27H(3) in such cases permits the exclusion from the annuity of an amount which more accurately represents the undeducted purchase price. In determining this amount, the Commissioner of Taxation is required to have regard to several factors. One of these factors relates to a certificate provided by an "approved actuary" (paragraph 27H(3)(d)).

"Approved actuary" is defined in subsection 27H(4) by reference to subsection 4A(2) of the Life Insurance Act 1945. As subsection 4A(2) was repealed with effect from 1 July 1985, this reference is inappropriate. Accordingly, clause 7 proposes to replace the definition of "approved actuary" with a new definition of "actuary".

This change of definition requires the deletion of the word "approved" (wherever it occurs) from paragraph 27H(3)(d) (paragraph (a)).

Paragraphs (b) and (c) of clause 7 provide for the deletion of the definition of "approved actuary" and the insertion of the new definition of "actuary". An actuary is to mean a person who is either a Fellow or an Accredited Member of the Institute of Actuaries of Australia.

By subclause 38(4) this amendment is taken to apply to certificates issued on or after 1 July 1985, the date subsection 4A(2) of the Life Insurance Act 1945 was removed. Further, clause 39 includes a transitional measure in relation to certificates issued for the purposes of section 27H on or after 1 July 1985 and before the Taxation Laws Amendment Act 1990 receives Royal Assent.

Clauses 8-10: Expenditure on Research and Development

Introductory Note

Section 73B of the Principal Act provides special tax concessions for expenditure incurred by companies on research and development (R & D) activities.

Under that section, Australian companies which, after 1 July 1985, incur expenditure on R & D activities that does not qualify for any direct government assistance are eligible for a deduction of up to 150 per cent of the qualifying expenditure. In broad terms, R & D activities comprise systematic, investigative or experimental activities undertaken in Australia and involving innovation or technical risk for the purpose of acquiring new knowledge or creating new or improved products. The other major concessions under section 73B are the accelerated write-off arrangements for expenditure on plant and equipment used exclusively for R & D activities and, subject to certain time restrictions, on buildings similarly used for those activities.

The arrangements for concessional taxation treatment of R & D expenditure were amended by the Taxation Laws Amendment Act (No.4) 1989, so as to -

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extend the present 150 per cent R & D deductions scheme from 30 June 1991 to 30 June 1993, and continue it further to 30 June 1995 at a reduced rate of 125 per cent;

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authorise a taxation deduction for an eligible company that becomes entitled to, or receives, a recoupment or a grant in relation to any of its expenditure on an R & D project;

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allow a company that has incurred qualifying plant expenditure in relation to a unit of plant to permit another person to use that plant for R & D activities without affecting the company's deduction entitlements;

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gives partnerships of eligible companies access to deductions for R & D expenditure;

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extend to public trading trusts access to deductions for R & D expenditure;

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authorise deductions akin to depreciation for expenditure on certain buildings used for carrying on R & D activities; and

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clarify the meaning of the definitions of "pilot plant" and "plant" in the R & D provisions.

On 7 September 1989 it was announced that further amendments would be made to the legislation governing the R & D incentive. These amendments are to apply to all R & D tax concession arrangements and, in particular, to R & D projects being undertaken by syndicates.

In summary, the amendments now proposed will amend the Principal Act -

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to limit to 100 per cent the rate of deduction for expenditure on acquiring or acquiring the right to use core technology;

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to ensure that, where deductions have been allowed for expenditure on an R & D project, receipts from granting access to or a right to use the results of the project are to be included in assessable income; and

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where there is a guaranteed return from an R & D project, to provide that the deduction available is to be reduced in proportion to the reduction in risk to the company incurring the expenditure.

Clause 8: Expenditure on research and development activities

This clause will make several amendments to the research and development (R & D) provisions contained in section 73B of the Principal Act. Together with the additional measures proposed by clause 9 of the Bill (see later notes on that clause), these changes will, in relation to certain transactions, reduce the amounts of deductions available to companies incurring expenditure on R & D projects.

The "aggregate research and development amount", which is defined in subsection 73B(1) of the Principal Act as the sum of the amounts of expenditure that may qualify for deduction under section 73B in a year of income, is used in determining the relevant rate of deduction (of between 100 per cent and 150 per cent) to be applied in calculating the amount of an eligible company's tax deduction for R & D expenditure. Subclause (1) of clause 8 will extend this definition, by inserting new paragraph (aa), to include an additional component in the aggregate amount as a consequence of amendments proposed to be made by clause 8. Under these amendments, a new category of R & D expenditure, called "core technology expenditure", with a unique rate of deduction, is being added.

Subclause (2) of clause 8 will insert the following new definitions:

"core technology"

is technology that is, as provided in subsection 73B(1AB), core technology in relation to R & D activities.

"core technology expenditure"

is expenditure, on technology that is core technology, which is incurred after 7 September 1989 and before the end of the deduction period (defined in subsection 73B(1) to be 30 June 1995) in acquiring, or in acquiring the right to use, that technology for the purposes of R & D activities carried on by or on behalf of the company incurring the expenditure; the definition to be read in conjunction with the other definitions in the subclause and with proposed subsection 73B(1AB).

"knowledge"

, which is referred to in the definition (see below) of "technology", means any knowledge or other information and is not restricted to that to which the possessor has legally enforceable rights.

"technology"

is knowledge or anything produced by applying knowledge; thus in the context of the purchase by a company of core technology, what is purchased may be verbally transmitted information or the product of using that information such as a formula, a scale drawing or a prototype.

Subsection 73B(1) defines "research and development expenditure" as excluding expenditure incurred in the acquisition or construction of plant or a building or of an extension, alteration or improvement to a building and as being contracted expenditure, salary expenditure or other expenditure. Subclause (3) of clause 8 proposes that this definition be amended by excluding, from research and development expenditure, core technology expenditure.

Subclause (4) of clause 8 will amend subsection 73B(1AA), which provides that section 73B has effect subject to sections 73C and 73D (each of which addresses the treatment of a recoupment or grant received or entitled to be received by an eligible company in relation to expenditure on an R & D project), to include a reference to section 73CA. Section 73CA, which will be inserted by clause 9, concerns guaranteed returns to investors (see later notes on clause 9). Subclause (4) also amends paragraphs 73B(3A)(c), (d) and (f) (which deal with partnerships of otherwise eligible companies) by inserting a reference to section 73CA.

Subclause (5) of clause 8 inserts new subsection 73B(1AB). This subsection, which is to be read with the proposed definition in subsection 73B(1) of "core technology" (see earlier notes above), explains when technology is core technology, for the purposes of section 73B. In the context of particular R & D activities, it is the purpose of those activities which is critical. If the purpose is or was to obtain new knowledge (as proposed to be defined in subsection 73B(1) - see above notes) based on the technology, or to create new or improved materials, products, devices, processes, techniques or services based on that technology, then the technology will be core technology. Similarly, if the particular R & D activities carried on by the company acquiring the technology were an extension, continuation, development or completion of the activities which produced the technology, that technology will be core technology.

Subclause (6) of clause 8 inserts new subsection 73B(12). The purpose of this subsection is to set the rate of deduction, for core technology expenditure, at 100 per cent of the expenditure.

Subclause (7) of clause 8 inserts three new subsections (subsections 73B(27A), (27B) and (27C)) which address the assessability of project receipts arising from R & D activities.

New subsection 73B(27A) provides that where a deduction under section 73B has been allowed or is allowable or, if the company's income had not been exempt from tax, could have been allowable in respect of expenditure on R & D activities, and the company receives or is entitled to receive an amount in respect of the results of any of those activities or because it incurred that expenditure, the amount is to be included in assessable income. This amount is to be so included in the year of income in which the company receives or became entitled to receive the amount. The subsection will only apply in relation to expenditure incurred after 7 September 1989 (see notes on subclause 38(6)).

Subsection (27A) will apply where a deduction under section 73B has been or is allowable (paragraph (27A)(a)). It will also apply in a case where, when the expenditure was incurred, the company was exempt from tax (for example, a gold mining company or a privatised Government corporation) but would have been entitled to a deduction were it not exempt (paragraph (27A)(b)). The amount to be included in assessable income will be that received or entitled to be received in respect of the results of any of the R & D activities (paragraph 27A)(c)). The amount will also be an amount received, or entitled to be received, because the company incurred the expenditure; this would include an amount the company is entitled to receive irrespective of the results of the particular R & D activities - such as a guaranteed return (see notes on clause 9) - paragraph (27A)(d).

New subsection 73B(27B) explains the reference in subsection 73B(27A) to a company receiving or being entitled to receive an amount in respect of the results of any R & D activities. This reference is to include three situations. In the first situation, described in paragraph (27B)(a), a company grants access to or grants a right to use any of the results in return for which it receives or becomes entitled to receive an amount; here the company might sell the results outright or licence another to produce the results. In the second situation - described in paragraph (27B)(b) - the company disposes of plant (including pilot plant) or an interest in the plant or grants a right to use plant (including pilot plant) so that another person obtains a right of access to or a right to use any of the results of the R & D activities. Paragraph (27B)(c) describes the third situation which is where a company disposes of a building, or an interest in a building or grants a right to occupy or use a building so that another person obtains a right of access to or to use any of the results of the R & D activities.

The reference in subsection (27A) does not however extend to an amount which a company receives because of its own use of the results of the R & D activities. Such an amount would be income in accordance with general concepts.

Subsection 73B(27C) defines the amount to be included in assessable income, by virtue of subsection 73B(27A), in the circumstances outlined in paragraphs 73B(27B)(b) and (c). Thus, where a company receives an amount in relation to the disposal of, or of an interest in, or grants a right to use, plant (including pilot plant), as outlined in paragraph (27B)(b), the amount to be included in assessable income is the difference between the cost of acquisition or construction of the plant (or pilot plant) and the amount received from the disposal or grant of a right to use: paragraph (27C)(a). However the amount to be included in assessable income where paragraph (27B)(c) applies, that is, as a result of the disposal of, or of an interest in, or the grant of a right to occupy or use a building, is to be the difference between the sum of the deductions allowed or allowable under subsection 73B(17) (being one third of qualifying building expenditure in the year of income) and the amount received on the disposal or grant of a right to use or occupy: paragraph (27C)(b).

Project receipts, to be included in assessable income under proposed subsections 73B(27A), (27B) and (27C), are to be excluded from the operation of Part IIIA of the Principal Act, dealing with capital gains and capital losses. The exclusion provisions are described in the later notes on clause 13.

Subclause (8) of clause 8 inserts a new subsection 73B(35). This provision is to be read with new section 39LA of the Industry Research and Development Act 1986 which is proposed to be inserted by clause 43. Under that proposed section (see later notes), the Industry Research and Development Board ("the Board") is required, upon request by the Commissioner of Taxation, to give a certificate to the Commissioner stating whether particular technology was core technology in relation to particular R & D activities. The Board may provide a certificate without a prior request from the Commissioner.

New subsection 73B(35) further provides that, where such a certificate is given by the Board, it is binding on the Commissioner for the purpose of assessing the company's taxable income of any year of income in which expenditure was incurred on the acquisition of the technology or the right to use the technology.

Clause 9: Guaranteed returns to investors

The purpose of the R & D tax concession is to provide an incentive for investment in the development of new Australian products and industries. The premium provided by the concession (up to 50% in cases where deductions of 150% of expenditure are allowed) was designed to compensate eligible companies for the higher commercial risks which R & D could entail.

The R & D incentive was expanded in 1988 to permit syndication arrangements. One impact of the expansion is that some proposed syndication structures have endeavoured to remove all or most of the commercial risk to investors by guaranteeing a minimum return to the investors.

Clause 9 introduces new section 73CA to apply where there are guaranteed returns to investors.

Subsection 73CA(1) provides that, for interpretation purposes, section 73CA is to be read and construed as if it were part of section 73B. Section 73B details the operation of the R & D tax concessions, including the rates of deduction applicable to expenditure of various types.

Subsection 73CA(2) outlines the circumstances in which section 73CA is to have application. These circumstances (all of which have to apply) are that -

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where but for section 73CA and section 73D a deduction or deductions under section 73B (affected by section 73C) would be allowable in respect of expenditure incurred in a year of income (paragraph 73CA(2)(a));

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the amount of the deduction or the total of the amounts of the deductions exceeds the amount of the expenditure (paragraph 73CA(2)(b)); and

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the Commissioner of Taxation is satisfied that the company was not at risk, when the expenditure was incurred, in respect of all or part of the expenditure (paragraph 73CA(2)(c)).

Section 73D, referred to in paragraph 73CA(2)(a), deals with a case where a company receives a grant or recoupment, in relation to expenditure on R & D activities, which is not assessable. Section 73C, referred to in the same paragraph, provides for the treatment of a grant or recoupment, in relation to expenditure on R & D activities, which is assessable.

New subsection 73CA(3) provides that where the Commissioner is satisfied that the whole of the expenditure was not at risk, the amount of the deduction or the total of the amounts of deductions referred to in paragraph 73CA(2)(a) are to be reduced by the excess referred to in paragraph 73CA(2)(b).

Example:

An eligible company has $200,000 which it wishes to invest in an R & D project. It pays this amount, in full, to a research agency. A condition of the arrangement is that, at the option of the company, the research agency will pay to the company the sum of $200,000 at the end of the project, whether or not it is successful.

The company has a claim for contracted expenditure (defined in subsection 73B(1) to include expenditure to a research agency registered under the Industry Research and Development Act 1986) under subsection 73B(13). The amount of the deduction which would be allowable is the amount of the expenditure multiplied by 1.5 i.e., $300,000.

Under subsection 73CA(2) the amount of the deduction of $300,000 exceeds the amount of expenditure of $200,000 by $100,000 and the Commissioner, on the facts, would be entitled to be satisfied that the company was not at risk in relation to the whole of its expenditure.

By applying subsection 73CA(3), the deduction previously calculated would be reduced to $200,000 by deducting from it the amount of the excess of deduction over expenditure. Thus the company would only be entitled to a rate of deduction equivalent to 100% of its expenditure because of the guaranteed return.

Where the Commissioner is satisfied that part of the expenditure was not at risk, subsection 73CA(4) provides that the amount of the deductions, or the sum of the amounts of the deductions, in relation to the expenditure in the year of income (referred to in paragraph 73CA(2)(a)) is to be reduced by reference to the formula -

Excess * ((Part of expenditure not at risk) / (The amount of the expenditure))


In this formula "excess" is the amount referred to in paragraph 73CA(2)(b) - that is, deduction (or deductions) minus expenditure - and "part of expenditure not at risk" means that part which the Commissioner is satisfied was not at risk when the expenditure was incurred.

Example:

If, in the previous example (where the company incurred contracted expenditure of $200,000) the research agency had agreed to pay to the company, at the option of the company, the sum of $45,000 at the end of the project, the following would have applied:

•

the company's allowable deduction under subsection 73B(13) would be $300,000;

•

the amount of the deduction exceeds expenditure by $100,000;

•

the Commissioner would be entitled to be satisfied that the company was not at risk to the extent of the guaranteed return of $45,000,

and by applying the formula in subsection 73CA(4), the deduction of $300,000 would be reduced by the amount of -

((100,000) * (45,000)) / (200,000)


i.e., $22,500


The new deduction would thus be $277,500.

The effect of the formula is that as the excess of the deduction or sum of the deductions over the amount of expenditure reduces towards zero the part of the expenditure not at risk increases towards 100 per cent of the expenditure.

Subsection 73CA(5) defines when a company is to be taken not to have been at risk for the purposes of the application of the section in relation to any expenditure incurred. This will occur at the time the expenditure was incurred in respect of so much of the expenditure as does not exceed any consideration that in the Commissioner's opinion the company or an associate of the company could reasonably have expected to receive as a direct or indirect result of incurring the expenditure. "Consideration" in this subsection will have the same meaning as it has in section 21 of the Principal Act so that, if paid or given otherwise than in cash, the money value will be deemed to have been paid or given. An associate of the company could, in accordance with subsection 26AAB(14) of the Principal Act, read with subsection 73B(1A) of that Act, include a partner, a shareholder or another company. In forming an opinion for the purposes of the subsection, the Commissioner is to look at the whole of the arrangements, including arrangements that had been made (paragraph (5)(a)) or that were likely to be made (paragraph (5)(b)). In applying the section, exploitation of the results of R & D activities on normal commercial terms is not intended to indicate that a company was not at risk.

For the purposes of the section, the term "agreement" is defined in subsection 73CA(6). It means any agreement, arrangement, understanding or scheme, formal or informal and whether express or implied and whether or not intended to be legally enforceable.

Clause 10: Reduction of deductions

Clause 10 will amend section 73D of the Principal Act to insert in subsection (2) a reference to new section 73CA. The base for calculation of the deductions under section 73D will now be the deduction (or sum of the deductions) allowable under section 73B, as affected by sections 73C and 73CA.

Section 73D deals with a situation where an eligible company has incurred expenditure on R & D activities and, in relation to any part of that expenditure, has received, or become entitled to receive, a recoupment or a grant which is not assessable to the recipient company.

Clause 11: Gifts, Pensions etc.

The clause will amend the provisions of the Principal Act that authorise income tax deductions for gifts of the value of $2 and upwards of money - or of certain property other than money - made to the funds, authorities and institutions that are listed in the provisions.

The amendment proposed by this clause will replace subparagraph 78(1)(a)(lxxxvi) - which authorises a deduction for gifts to the Australian Academy of Technological Sciences - with new subparagraph 78(1)(a)(lxxxvi). The new subparagraph will authorise a deduction for gifts to the Australian Academy of Technological Sciences and Engineering Limited. The Academy formally changed its name on 29 January 1987 but has not altered its aims and objectives and is in all other respects the same body as that now specified in subparagraph 78(1)(a)(lxxxvi).

By subclause 38 (5), new subparagraph 78(1)(a)(lxxxvi) applies to gifts made on or after 27 January 1987, the date on which the Academy formally changed its name.

Clause 12: Transfer of loss within company group

This clause will amend subsection 80G(6) of the Principal Act to deny the transfer to a group company of a loss incurred by a dual resident investment company, as defined in proposed section 6F (see notes on clauses 4 and 5 of the Bill). The amendment proposed by subclause 23(1) of the Bill (see later notes on that subclause) will similarly deny the transfer by such a company - under subsection 160ZP(7) of the Principal Act - of a net capital loss to a group company.

Subsection 80G(6) is the main operative provision of section 80G. It sets out the basis on which a resident company that has incurred a loss for the purposes of section 80 (general losses), 80AAA (film losses) or 80AA (primary production losses) of the Principal Act in the year of income that commenced on 1 July 1984 or a subsequent year of income may transfer the loss to another resident group company. A loss so transferred will be treated for the purposes of the Principal Act to be a loss incurred by the transferee company under section 80, 80AAA or 80AA as the case requires. This is done so that all of the existing provisions of the income tax law relating to the allowance of deductions for losses will apply to the transferee company.

The basic tests for transfer of such losses between group companies are set out in paragraphs 80G(6)(a) and (b). They are that the transferor company (loss company) is deemed to have incurred a loss for the purposes of section 80 in the 1984-85 or a subsequent year of income (loss year) and the transferee company (income company) has, or would but for the loss transfer have, a taxable income in the 1984-85 or a subsequent year of income (income year).

Clause 12 will amend subsection 80G(6) by inserting a new paragraph - paragraph (ba) - which will specify an additional basic test for transfer of such a loss between group companies. This additional test is that the loss company is not a dual resident investment company in relation to the loss year, nor in relation to the income year. This means that a company which is characterised as a dual resident investment company under proposed section 6F in the year in which it incurs a loss will be denied the ability to transfer that loss to a group company. Similarly, an unrecouped prior year loss incurred by a company will not be capable of being transferred under section 80G to a group company if the loss company becomes a dual resident investment company after it has incurred the loss.

However, a dual resident investment company will retain the right to carry forward losses for offset against future income it may itself derive.

By subclause 38(7) of the Bill, the amendment of subsection 80G(6) to be made by this clause will apply in relation to losses incurred in the 1989-90 and subsequent years of income.

Clause 13: Part applies in respect of disposals of assets

Clause 13 will amend the Principal Act so as to exclude research and development project receipts from the operation of Part IIIA - capital gains and capital losses - of the Act.

Paragraph (a) of clause 13 adds the word "or" to the end of each of paragraphs 160L(3)(a), 160L(4)(a) and 160L(5)(a); this addition accords with modern drafting practice.

Paragraph (b) of clause 13 adds a new paragraph 160L(3)(d). By that paragraph, Part IIIA will not apply to the disposal of an asset if as a result of the disposal an amount has been or will be included in assessable income after applying subsection 73B(27A) (see earlier notes on subclause (7) of clause 8).

Paragraph (c) of clause 13 inserts new paragraph 160L(4)(d). By that paragraph Part IIIA will not apply to the disposal of an asset, owned by a taxpayer in the capacity of a trustee of a trust estate and to which a beneficiary was absolutely entitled, immediately before the disposal, if as a result of the disposal, an amount has been or will be included in the assessable income of the beneficiary or the net income of the trust estate by virtue of proposed subsection 73B(27A).

Paragraph 160L(5)(d), proposed to be inserted by paragraph (d) of clause 13, will apply in the case of a disposal of an asset of a partnership; Part IIIA will not apply to such a disposal if, as a result of the disposal, an amount has been or will be included in the assessable income of a partner in the partnership by virtue of proposed subsection 73B(27A).

Paragraph (e) of clause 13 also amends section 160L of the Principal Act by inserting a new subsection 160L(8).

New subsection 160L(8) will ensure that no provision of Part IIIA applies to disposals of created assets where the following three conditions are satisfied.

Subparagraph 160L(8)(a) requires the asset to be disposed of before 23 May 1986 which is the day following the day of introduction into Parliament of the Bill containing the CGT legislation.

Subparagraph 160L(8)(b) requires the asset to be created after 19 September 1985. Created assets will include assets which existed either by themselves or as part of other assets before the disposal or that were created by the disposal.

Subparagraph 160L(8)(c) outlines the types of created assets to which the subsection will apply. They include assets which have legal or equitable estates or interests in, or rights, powers or privileges over or in connection with, an underlying asset which was acquired by the taxpayer before 20 September 1985.

The provision is designed to relieve from CGT disposals of assets created after 19 September 1985 and before 23 May 1986 which comprise interests or rights in an underlying asset that was acquired by the taxpayer before 20 September 1985. Examples would include leases, licences, easements, etc., created between 19 September 1985 and 23 May 1986 over land or other assets owned by a taxpayer before the date of announcement of capital gains tax on 20 September 1985. However, the provision will not affect the rights and obligations of the person acquiring the created asset under the CGT provisions. Part IIIA will continue to apply to the taxpayer acquiring the asset, for example the lessee, on expiration or forfeiture of the lease.

Clause 14: What constitutes a disposal or acquisition

Paragraph (a) of clause 14 will insert new subsection 160M(1A) in the Principal Act. The new subsection is expressed as being inserted "for the avoidance of doubt" and therefore is intended only to express formally an interpretation that is already given to the existing provisions of Part IIIA. This is that a mere change in the form of legal ownership of an asset does not involve a change in its ownership for the purposes of Part IIIA, unless there is also a change in the beneficial ownership of the asset.

For the purposes of the application of section 160V of the Principal Act (as proposed to be amended by clause 15, refer to notes below), this is the position where the identity of the trustee in whom an asset is legally vested changes, thereby resulting in a change in the legal ownership of the asset for the proposes of Part IIIA.

In these cases, where the beneficiary remains absolutely entitled to the asset as against the trustee, the acts of the trustee are taken to be acts of the beneficiary. Therefore, the vesting of the asset in the trustee, and subsequent changes in the person to whom legal ownership of the asset is vested, are not taken to be changes in ownership of the asset for the purposes of the Part, where the beneficiary is absolutely entitled to the asset as against the trustee (other than because of a legal disability of the beneficiary). This is to be put beyond doubt by the insertion of new subsection 160M(1A).

The effect of the new subsection is that a change in ownership of an asset will not be taken to have occurred unless there is also a change in its beneficial ownership. In practice, a change in legal or equitable ownership of an asset will also result in a change in the beneficial ownership, unless the person disposing of the asset remains absolutely entitled to the asset as against the person who has acquired it, that is, on the establishment of a bare trust. In other cases, a change in beneficial ownership will occur, no matter how insignificant the change may be, in the effective rights in relation to the asset that continued to be owned by the person legally disposing of it.

Paragraph (b) of clause 14 will also amend section 160M of the Principal Act which outlines the circumstances which give rise to a disposal or acquisition of an asset, by inserting a new subsection 160M(7A).

Subsection 160M(7A) will limit the operation of subsection 160M(7) which applies in situations where there is a disposal of an asset which is created by a particular transaction or event. It deems a disposal of an asset to have occurred where a taxpayer receives, or becomes entitled to receive, an amount of money or other consideration for the forfeiture or surrender of a right, or for refraining from exercising the right, or receives consideration for the use or exploitation of an asset. Subsection 160M(7) also outlines what constitutes the consideration received on the disposal and the cost base of the acquired asset.

New subsection 160M(7A) will ensure that acts, transactions or events which occurred after 19 September 1985 and before 23 May 1986, in respect of underlying assets acquired by the taxpayer before 20 September 1985, will not give rise to a deemed disposal of an asset for CGT purposes.

Subsection 160M(7A) requires the acts, transactions or events to have taken place after 19 September 1985 and before 23 May 1986 in respect of an asset acquired by the person receiving or entitled to receive the money or other consideration, before 20 September 1985.

Clause 15: Disposals by bare trustees and persons enforcing securities

Clause 15 proposes the insertion of new subsection 160V(1A), to modify the application of subsection 160V(1), which applies to an asset legally owned by a trustee where another person is absolutely entitled to the asset as against the trustee. The effect of subsection 160V(1) is that the acts of the trustee are to be acts of that other person.

The new subsection provides that a person suffering a legal disability (eg. due to physical or mental infirmity, or as a minor), who would otherwise have been absolutely entitled to the asset as against the trustee, will be taken to be so entitled for the purposes of applying subsection 160V(1). This means that if, for example, a person is severely injured in an accident and legal ownership of assets he or she owned passes to a trustee, the former legal owner (now beneficiary) will be taken to continue to own the assets for the purposes of Part IIIA. This will mean that no liability to tax on accrued capital gains will arise at the time the trustee becomes legal owner of the assets, nor will assets originally acquired before 20 September 1985 lose their effective CGT-exempt status. This would also be the case where the person recovers from the incapacity and regains legal title to the assets.

It would also mean that in applying Division 18 of Part IIIA, which provides an exemption for a taxpayer's principal residence, the exemption would continue to be available for the period that the incapacitated person lived in the home. Alternatively, the requirements for the continued availability of an exemption during an incapacitated person's temporary absence from his or her home could be satisfied by the trustee.

Clause 16: Reductions of capital gains in certain circumstances

Subsection 160ZA(4) of the Principal Act applies on the disposal of an asset subject to the operation of Part IIIA where, in respect of the disposal, an amount is also included in the taxpayer's assessable income under another provision of the Act. Its broad effect is that a capital gain (for the purposes of Part IIIA) that accrued to the taxpayer on disposal of the asset may be reduced to reflect the inclusion of that other amount in the taxpayer's assessable income.

To overcome a technical deficiency in the operation of existing subsection 160ZA(4) and to express more clearly its intended effect, clause 16 proposes its omission and replacement with a new provision.

To this end, by new paragraph 160ZA(4)(a), the new subsection will apply where a capital gain (for the purposes of Part IIIA) would have accrued to a taxpayer on the disposal of an asset (referred to in the subsection as the "notional capital gain"). The other requirement for the operation of the subsection is that in respect of the asset's disposal, an amount (referred to as the "included amount") is included in the assessable income of the taxpayer under provisions of the Assessment Act other than in Part IIIA (new paragraph 160ZA(4)(b)). In these cases, the capital gain (for Part IIIA purposes) will be determined by subtracting the included amount (i.e. the amount assessable under that other provision) from the notional capital gain accrued on the asset's disposal. Alternatively, no capital gain (for Part IIIA purposes) will be deemed to accrue when the notional capital gain on the disposal is less than the included amount, that is, the amount otherwise assessable (new paragraph 160ZA(4)(d)).

However, one departure from this broad position will occur where an amount is assessable under a provision which provides for the recoupment of previously allowed deductions for capital expenses incurred in respect of the acquisition or improvement of an asset.

An example of such a provision is subsection 59(2) of the Principal Act. It operates on the disposal of depreciable property and if the consideration receivable exceeds tax depreciated value, the excess is assessable to the extent of the total amounts of depreciation allowed or allowable. Similar capital expenditure deduction recoupment provisions are contained elsewhere in the Principal Act; for example, section 122K of Division 10 which applies in relation to certain mining facilities, section 123C of Division 10AAA which applies to mineral transport facilities and section 124AM of Division 10AA which applies to petroleum facilities.

In these cases, the assessable amount will not be an "included amount" within the meaning of paragraph 160ZA(4)(b), and therefore will not reduce the amount of a capital gain taxable on an asset's disposal. These amendments will apply to disposals of assets that occur after 30 November 1989, by subclause 38(9) (refer to notes below).

Clause 17: Exemption of certain gains and losses

Subsection 160ZB(6) of the Principal Act provides that capital gains and losses are not to be taken to have accrued or to have been incurred on the disposal of an asset acquired after 10 May 1989 that is a "traditional security" within the meaning of section 26BB.

Although no substantial changes to the effect of the subsection are proposed, clause 17 of the Bill will replace existing subsection 160ZB(6). As with the existing provision, the new provision will exclude from the effective operation of Part IIIA assets that are "traditional securities".

However, the effect of proposed paragraphs 160ZB(6)(a) and (b) is that the subsection will not operate on the disposal of such a security that was either:

•

acquired as consideration on the transfer of an asset after 15 August 1989 in respect of which rollover relief under section 160ZZO (as proposed to be amended by clause 31 of this Bill, refer notes below) was obtained; or

•

subject to the operation of section 160ZP(13) (as proposed to be inserted by subclause 23(2) of this Bill, refer notes below) on the transfer of a capital loss between two companies in a wholly-owned company group.

In each of those circumstances, the cost base or indexed cost base of the securities may be less than their "cost" for the purposes of determining an amount included in assessable income under section 26BB. If the securities were subject to the exemption from the operation of Part IIIA provided by existing subsection 160ZB(6), the reduction of their cost bases for the purposes of Part IIIA would be of no practical effect. However, the effect of proposed new subsection 160ZB(6) will be that gains realised on the disposal of these particular types of traditional securities will be subject to the concurrent operation of both section 26BB and Part IIIA, although subsection 160ZA(4) would operate to effectively reduce the amount of a capital gain realised for the purposes of Part IIIA by the amount taxable on the disposal pursuant to section 26BB.

Clause 18: Consideration in respect of disposal

This clause will amend subsection 160ZD(2) of the Principal Act, which determines the amount that a taxpayer is to be taken as having received as consideration for the disposal of an asset in certain circumstances where no consideration or inadequate consideration is actually received. At present, a requirement for the operation of the subsection is that the asset is disposed of "to another person". By paragraph (a) of the clause, those words are to be omitted from subsection 160ZD(2). Consequently, in situations where the disposal of the asset does not involve its acquisition by another person (eg. on the cancellation of a share or the forgiveness of a debt), the subsection will now have effect.

Paragraph (b) of clause 18 proposes the replacement of existing paragraph 160ZD(2)(c) with a new paragraph (2)(c). The new paragraph proposes that a taxpayer will be deemed to have received the market value of an asset as consideration for its disposal in circumstances where the actual consideration received is either greater or less than the market value. However, in cases where the asset is disposed of to another person, the paragraph will only apply where the disposal does not take place at "arm's length".

Paragraph (c) of clause 18 will insert two new subsections after subsection (2) of section 160ZD. Proposed subsection 160ZD(2A) will modify the application of subsection (2) where the asset is not disposed of to another person. In these cases, the market value of the asset, which the taxpayer may be taken to have received as consideration for the disposal, will be determined as if the disposal did not occur and was never proposed to occur. For example, if the asset was a share in a company which was disposed of by way of cancellation, the market value of the share in view of its pending cancellation may be less than it would have been if the cancellation was not about to occur. This subsection will ensure that the market value of the share in such a case will be the amount that would have been its market value but for its pending cancellation.

Proposed subsection 160ZD(2B) ensures that, on the loss or destruction of an asset, the asset's market value will not be substituted as its disposal proceeds by the operation of subsection (2). Although the loss or destruction of an asset is a disposal of the asset for the purposes of Part IIIA, the disposal is not to another person so that subsection (2) (as proposed to be amended) would otherwise apply to the disposal. However, the effect of subsection (2) is that the consideration for disposal on the loss or destruction of an asset will continue to be the actual consideration received, including amounts received under a policy of insurance against the risk of loss, destruction or damage to the asset or by way of compensation for that loss, destruction or damage. For example, if a building is totally destroyed by fire, the disposal consideration will continue to be the amount paid to the taxpayer by the insurers or, if the property was uninsured, nil (unless compensation was otherwise payable).

By subclause 38(10) (refer to notes below) these amendments will apply in determining the consideration taken to have been received for assets disposed of after 15 August 1989.

Clause 19: Cost base, indexed cost base and reduced cost base

Clause 19 proposes to clarify the operation of section 160ZH of the Principal Act, by reference to which the amount of an asset's cost base, indexed cost base or reduced cost base is determined for the purposes of Part IIIA. That amount is determined, inter alia, by reference to the consideration paid by the taxpayer in respect of the acquisition of the asset. The clause proposes to modify the application of subsection 160ZH(9), which deems, in certain circumstances, a taxpayer to have paid as consideration for the acquisition of an asset an amount equal to its market value at that time. The amendments proposed to that subsection will, broadly speaking, ensure that it also applies where the acquisition of an asset does not involve what constitutes the disposal of the asset for the purposes of Part IIIA by another person. In this context, a disposal of an asset that was acquired before 20 September 1985 (and which is therefore not subject to the operation of Part IIIA) nevertheless constitutes a disposal for Part IIIA purposes. However, the amendments will only apply when the actual consideration paid is greater than the asset's market value, to reduce the consideration taken to have been paid to the market value. No adjustment will be made to increase the consideration taken to have been paid where the amount actually paid is less than the asset's market value.

By paragraph (a) of clause 19, existing paragraph (9)(a) of section 160ZH - which applies where no consideration is paid for the acquisition of an asset - is to be amended so that it will no longer apply where the acquisition does not also involve its disposal (for the purposes of Part IIIA) by the person from whom it was acquired.

In addition, paragraph (c) of the clause proposes to replace existing paragraph (9)(c) of section 160ZH with a new paragraph.

New paragraph (9)(c) will apply in two different situations. First, it applies where an asset is acquired by a taxpayer as a result of its disposal by another person and the actual consideration paid is greater or less than the asset's market value (sub-subparagraph (c)(i)(A)). If the taxpayer and the person from whom it was acquired do not deal with each other at arm's length (subparagraph (c)(ii)), the effect of new paragraph (9)(c) is that subsection 160ZH(9) will operate to substitute the market value of the asset as the consideration deemed to have been paid for its acquisition.

The other situation in which new paragraph (9)(c) will apply is where there is no disposal of the asset by another person on the acquisition of the asset by the taxpayer and where the actual consideration paid is greater than the asset's market value (subparagraph (c)(i)(B)). Again, provided the taxpayer and the person from whom the asset is acquired do not deal with each other at arm's length in relation to the transaction (subparagraph (c)(ii)), subsection 160ZH(9) will operate to deem the consideration paid for the acquisition of the asset to be its market value. However, sub-subparagraph (c)(i)(B) does not apply where the actual consideration paid is less than the asset's market value, in which case only the amount actually paid is included in the asset's cost base.

By subclause 38(11), (refer to notes below) these amendments will apply in determining the consideration taken to have been paid for assets acquired after 15 August 1989.

Clause 20: Indexation of amounts for purposes of indexed cost base

Clause 20 will amend section 160ZJ of the Principal Act, which provides for the indexation of amounts (to account for inflationary effects) in determining the indexed cost base of an asset to a taxpayer, by reference to which capital gains are determined where the asset has been owned for more than 12 months at the time of its disposal. The amendments are designed to prevent the indexation of certain amounts where a liability to pay those amounts has been incurred on the acquisition of an asset but the amounts remain unpaid by the taxpayer, in circumstances where the acquisition of the asset by the taxpayer does not involve its disposal by another person for the purposes of Part IIIA (eg. on the issue of shares in a company).

Clause 20 will replace the operative provisions of section 160ZJ - subsections 160ZJ(4), (5) and (6) - with a number of new subsections.

New subsection 160ZJ(3A) will apply in determining the indexed amount of any consideration in respect of the acquisition of the asset referred to in paragraph 160ZH(2)(a). Proposed paragraph (3A)(a) will apply where the taxpayer either acquired the asset in circumstances where the acquisition did not involve the asset's disposal by another person (subparagraph (a)(i)) or from a person who in turn had acquired the asset in circumstances where subparagraph (a)(i) had previously applied to the acquisition (subparagraph (a)(ii)). In respect of such an asset, where the amount of consideration is paid or given to the person from whom the asset was originally acquired (e.g., in the case of shares, the issuing company) at (or before) the time of acquisition, new subparagraph (a)(iii) provides that the indexed amount of that consideration will be the amount so paid or given multiplied by the factor determined in accordance with the provisions of new subsections (5) and (6). This factor is the number (calculated to 3 decimal places) ascertained by dividing the index number (as determined under existing subsection 160ZJ(1)) in respect of the quarter of the year in which the asset was disposed of by the index number in respect of the quarter of the year in which the liability to pay or give the consideration arose. However, if the number so determined is less than one, the effect of new paragraph (5)(b) is that the factor will be deemed to be one.

By proposed paragraph (3A)(b), this same factor will be applied in determining the indexed amount of any consideration in respect of the acquisition of an asset where acquisition of the asset involved its disposal by another person (unless that other person had, in turn, acquired the asset in either of the circumstances referred to in paragraph (3A)(a)). In addition, by new subsection (4), this factor will also apply in determining the indexed amount of incidental costs or expenses incurred by a taxpayer in respect of the acquisition or disposal of any asset (as referred to in existing paragraphs 160ZH(2)(b), (c), (d) or (e)), although in these cases the factor will be determined by reference to the quarter of the year in which the costs or expenses were incurred.

Proposed subparagraphs (3A)(a)(iv) and (v) will also apply where the acquisition does not involve the asset's disposal by another person, in determining the indexed amount of the consideration that a taxpayer is liable to pay to the person from whom the asset was originally acquired. Subparagraph (iv) determines the amount that will, in effect, be the indexed amount of any consideration (as referred to in subsection 160ZH(2)) paid or given at a later time than the time of acquisition of the asset. That indexed amount is determined by multiplying the consideration paid or given by a factor determined in accordance with proposed new subsections (5A) and (6). This factor is either the number (calculated to 3 decimal places) ascertained by dividing the index number in respect of the quarter of the year in which the asset was disposed of by the index number of the quarter of the year in which the consideration was actually paid or given, or the number one, whichever is the greater.

Proposed subparagraph (3A)(a)(v) applies where an amount of consideration incurred in respect of the acquisition of an asset has not actually been paid or given at the time of disposal of the asset. In these cases, the indexed amount of the consideration for the purposes of paragraph 160ZH(2)(a) will effectively be the unindexed amount of the consideration incurred.

In some circumstances, paragraph (3A)(a) will apply in determining the indexed amount of consideration on the acquisition of an asset payable to a person other than the person from whom the asset was originally acquired. This will be the case where the asset is acquired from a person in the circumstances referred to in subparagraph (a)(ii). For those amounts that the purchaser is liable to pay to the person from whom the asset was originally acquired (e.g., in the case of shares, the issuing company subparagraphs (a)(iii), (iv) and (v) would still apply in determining the indexation factor to be applied. However, for amounts payable to the person from whom the asset was actually acquired (i.e. the remainder of the consideration payable in respect of the acquisition of the asset), paragraph (3A)(a) provides that the indexed amount of that part of the consideration will be determined by reference to the factor ascertained in accordance with subsections (5) and (6). In effect, indexation for those amounts will commence from the time that the liability to pay or give the consideration to that person was incurred, rather than from the date of actual payment.

By subclause 38(12) (refer to notes below), these amendments will also apply to assets acquired of after 15 August 1989.

Clause 21: Return of capital on shares

Section 160ZL operates where an amount that is not a dividend is paid to a shareholder of a company in respect of shares acquired after 19 September 1985, otherwise than as proceeds of disposal of the shares. Its broad effect is to deem the share to have been disposed of at the time the payment is made and, where the amount paid is greater than the share's indexed cost base, a capital gain is deemed to accrue to the taxpayer. The taxpayer is then taken to have re-acquired the share for "nil" consideration. In other situations (ie. where the amount paid to the shareholder is less than or equal to the indexed cost base of the share), the share's indexed cost base (or reduced cost base) is effectively reduced by the non-dividend amount paid.

Where such an amount is paid within 12 months of the date of acquisition of a share, existing subsection 160ZL(4) states that this reduction is to be made by reference to the share's (unindexed) cost base rather than its indexed cost base at the time the payment is made. The effect of this subsection is to deny the benefits of indexation (available under section 160ZJ) for amounts that continue to be included in the share's cost base up to the point that the last non-dividend payment in respect of the share is made in the first 12 months of ownership of the share.

Clause 21 proposes to replace the existing subsection with new subsection 160ZL(4). The new subsection has the effect that the cost base (rather than the indexed cost base) of the share is to be reduced on the payment of an amount, in respect of the share, that is not a dividend, only where the share is subsequently sold within 12 months of the date of acquisition. Where a non-dividend payment is made in the first 12 months of ownership of a share which is not disposed of within 12 months of acquisition, in determining the indexed cost base of the share at the time of its subsequent disposal, the indexed cost base of the share at the time of that payment is to be taken to have been reduced. This ensures that amounts that then continued to be included in the share's cost base remain eligible for full indexation.

By subclause 38(13) (refer to notes below), these amendments will apply to shares disposed of after 15 August 1989.

Clause 22: Return of capital on investment in trust

This clause will insert a new subsection 160ZM(4). Section 160ZM applies where the trustee of a trust pays an amount to a taxpayer that is not assessable income of the taxpayer in respect of an interest or units in the trust (otherwise than as proceeds of disposal of the interest or units). The section is expressed in substantially the same terms as section 160ZL, except that section 160ZL applies to a share in a company.

Accordingly, existing subsection 160ZM(4) operates in substantially the same way as existing subsection 160ZL(4). The consequences of the replacement of that subsection with a new subsection 160ZL(4), as proposed by clause 21 (refer to notes above), are substantially the same as the consequences of the replacement of existing 160ZM(4) with a new subsection by this clause.

By subclause 38(14) (refer to notes below), these amendments will apply to units or interests disposed of after 15 August 1989.

Clause 23: Transfer of net capital loss within company group

Clause 23 proposes to amend section 160ZP of the Principal Act, which operates to allow the transfer of net capital losses between companies where one of the companies was a subsidiary of the other, or each was a subsidiary of the same parent company. A company is a subsidiary of another company (holding company) for the purposes of section 160ZP if all of the shares in the subsidiary are beneficially owned by the holding company for the whole of a particular year of income (or, broadly speaking, that part of the year in which both companies were in existence). Alternatively, a company will be a subsidiary of the holding company where all of its shares are owned by two or more companies, each of which is a subsidiary of the holding company, or where all of the shares are owned by the holding company and one or more other companies, each of which is a subsidiary of the holding company.

The amendment of subsection 160ZP(7) of the Principal Act, to be effected by subclause 23(1), mirrors in practical terms the amendment of section 80G (group loss transfer provisions) to be effected by clause 12 (see earlier notes on that clause). The combined effect of those amendments, together with the application provisions of subclause 38(7), will be to deny a dual resident investment company (see notes on clauses 4 and 5) the right to transfer an "income" loss or net capital loss to a group company so far as concerns losses incurred in the 1989-90 or a subsequent year of income.

Subclause 23(1) will amend subsection 160ZP(7) of the Principal Act to deny to a group company the transfer of a net capital loss incurred by a dual resident investment company as defined in proposed section 6F (see earlier notes on clauses 4 and 5 of the Bill).

Subsection 160ZP(7) is the main operative provision of section 160ZP. It sets out the basis on which a resident company that has incurred a net capital loss in respect of a year of income for the purposes of Part IIIA of the Principal Act may transfer the loss to another resident group company.

The basic tests for transfer of such losses between group companies are set out in paragraphs 160ZP(7)(a) and (b). They are that the transferor company (loss company) has incurred a net capital loss in respect of a year of income (loss year) and a net capital gain accrued, or would but for the loss transfer, have accrued to the transferee company (gain company) in respect of a year of income (gain year).

Subclause 23(1) will amend subsection 160ZP(7) by inserting a new paragraph - paragraph (ba) - which will specify an additional basic test for transfer of a net capital loss between group companies. This additional test is that the loss company is not a dual resident investment company in relation to the loss year, nor in relation to the gain year. This means that a company which is characterised as a dual resident investment company under proposed section 6F in the year in which it incurs a net capital loss for the purposes of Part IIIA of the Principal Act will be denied the ability to transfer that loss to a group company. Similarly, an unrecouped net capital loss incurred by a company in a year of income before it becomes a dual resident investment company will not be capable of being transferred under subsection 160ZP(7) to a group company in a subsequent year of income if the loss company becomes a dual resident investment company after the loss was incurred.

However, a dual resident investment company will retain the right to carry forward a net capital loss for offset against future capital gains it may itself derive.

By subclause 38(7) of the Bill, the amendment of subsection 160ZP(7) to be made by this subclause will apply in relation to net capital losses incurred in the 1989-90 and subsequent years of income.

By subclause 23(2), new subsection 160ZP(7A) will be inserted, which proposes to limit the amount of a capital loss incurred by a "loss company" that will be taken to be a capital loss incurred by a "gain company" for the purposes of Part IIIA, where the requirements specified in existing subsection 160ZP(7) are satisfied. By new subsection 160ZP(7B) this restriction will not apply to transfers of losses from the holding company of a group to any of the subsidiaries, that is, where the gain company is a subsidiary of the loss company. However, for transfers of losses from subsidiaries to the holding company or between subsidiaries, the effect of new paragraph 160ZP(7A)(a) is that no loss will be effectively transferable if there are neither:

•

shares in the loss company owned by other group companies that were acquired after 19 September 1985 (subparagraph (7A)(a)(i)); nor

•

loans made to the loss company by other group companies that commenced to be owned after 19 September 1985 (subparagraph (7A)(a)(ii)).

In other cases, the amount of the capital loss specified in a notice given pursuant to paragraph 160ZP(7)(c), that is to be eligible for this effective transfer between member companies of the company group, is limited to the sum of the following amounts:

•

the cost base of all shares in the loss company owned directly by other companies that are members of the company group, that were acquired by those other companies after 19 September 1985 (subparagraph (7A)(b)(i)); and

•

the cost base of debts owed by the loss company to other companies in the company group that commenced to be owed after 19 September 1985 (subparagraph (7A)(b)(ii)).

Where a capital loss that would otherwise be effectively transferrable pursuant to subsection 160ZP(7) exceeds the sum of these amounts, the effect of subsection 160ZP(7A) (in those cases where it applies) is to reduce the amount of that capital loss by the excess.

By subclause 23(3), new subsection 160ZP(13) will be inserted in the Principal Act. This subsection will have the effect that the cost base, indexed cost base or reduced cost base of shares or loans, held either directly or indirectly by other group companies in the loss company, will be reduced by reference to the amount of the capital loss specified in the notice given by the loss company under paragraph 160ZP(7)(c). The extent of the reduction (which, in respect of any shares or loans owned by any one of those other group companies, will not exceed the amount of the loss so specified) will depend on the extent to which any particular share or loan is representative of the total interests owned by members of the company group in the loss company. In effect, the reduction made in respect of any particular share or loan in respect of the loss specified will be proportionate to the extent to which that particular share or loan forms part of the total interests (ie. shares and loans) held in the loss company.

Example:

Assume that the total interests held in the loss company are 1000 shares each worth $2 owned by "Parent Company A" and a debt of $1000 owed by the loss company to "Creditor Company X". The amount of the capital loss specified in the notice given under paragraph 160ZP(7)(c) (to be effectively transferred to another group company) is $1500. On these facts, the cost base of each of the 1000 shares would be reduced by $1, and the cost base of the loan would be reduced by $500. Each reduction is to be made by reference to the proportion of the total interests in the loss company represented by the particular share or loan.

By proposed paragraph 160ZP(13)(a), the new subsection will apply, where an amount is specified by a loss company under paragraph 160ZP(7)(c), to either:

•

shares owned by one group company (referred to in the subsection as the "parent company") in another group company, that were acquired after 19 September 1985 (subparagraph (13)(b)(i)); or

•

a debt owed to a group company (referred to in the subsection as the "creditor company") by another group company that commenced to be owed after 19 September 1985 (subparagraph (13)(b)(ii)).

A further requirement is that the other company (in which shares are owned or which owes the debt) is the loss company (subparagraph (13)(c)(i)). Alternatively, the amount paid in respect of the shares or the amount loaned may, in turn, have been applied (either directly, or indirectly through one or more interposed companies, trusts or partnerships) in the acquisition of shares in, or the making of a loan to, the loss company (subparagraph (13)(c)(ii)).

The effect of this subsection in these circumstances, as described above, is then to reduce the cost base, indexed cost base or reduced cost of those shares or debts by the amount of the loss (specified in the notice given under subsection 160ZP(7)(c)) that is proportionate to the extent to which particular shares or loans form part of the total interests held (either directly or indirectly) in the loss company.

Where shares or debts are owned either directly or indirectly by a group company in the loss company, new subsection 160ZP(13) provides for the cost base, indexed cost base or reduced cost base of the particular shares or debts owned by that group company in the other group companies to be reduced following the transfer of a capital loss by the loss company. The amount of the reduction in these cases is specified to be the amount that is appropriate having regard to the extent that the direct or indirect interest (i.e., the shares or debts) is representative of the total interests held by all the group companies in the loss company. In determining this amount, the particular shares or debts must be examined to ascertain the extent to which they either represent direct interests in the loss company, or have been applied, in turn, directly or indirectly in the acquisition of directly owned shares or debts in the loss company. The proportion of the total value of the direct shares or debts that is represented by the particular shares or debts owned by a particular group company will determine the proportion of the transferred capital loss that is to be applied in the reduction of the cost bases of the shares or debts owned by that group company.

In the case of directly owned shares or debts, their cost bases will be reduced proportionate to the extent that their value forms part of the total value of all directly owned shares and debts in the loss company. If, for example, the only interests in the loss company are shares which each have the same value, it would only be necessary to divide the amount of the loss transferred by the number of shares to determine the amount by which the cost bases of each of the shares is to be reduced.

In some situations, a company group comprising a holding company and its subsidiaries may form part of a wider group i.e. the holding company and subsidiaries are all in turn subsidiaries of another company or companies. In these cases, where a loss is transferred from the holding company to a subsidiary, it would not be appropriate to reduce the cost bases of interests owned by other group companies in the holding company.

By subclause 38(15) (refer to notes below), the amendments to insert new subsection 160ZP(7A) will apply to notices given (to effectively transfer losses) after 15 August 1989. The amendment to insert new subsection 160ZP(13) will, by subclause 38(16) (refer to notes below), apply to shares or debts disposed of after 15 August 1989 where the notice to transfer the loss was also given after 15 August 1989.

Clause 24: Application

Division 10 of Part IIIA applies where a company issues rights to acquire shares in the company to its own shareholders. The circumstances in which the Division applies are specified in section 160ZYK.

Clause 26 proposes to insert new paragraph 160ZYK(b) in place of the existing paragraph. This new paragraph provides that Division 10 will now apply not only to rights issued by a particular company to its own shareholders but also to rights issued to shareholders of another company that is a "group company" (within the meaning given to that term by section 160ZZO) in relation to the particular company issuing the rights. However, in determining whether that other company is a "group company", the issue of the rights is not to be taken into account.

By subclause 38(17) (refer to notes below), these amendments will apply to rights issued after 15 August 1989.

Clause 25: Application

Section 160ZYR of the Principal Act sets out the circumstances in which Division 11 of Part IIIA will apply to company issued options to shareholders to acquire unissued shares. The section only applies to options granted to shareholders of the particular company granting the options. However, clause 25, which inserts new paragraph 160ZYR(b), will have the effect that the Division will apply not only in these circumstances but also where options are issued to shareholders of another company that is a "group company" (within the meaning of that term for the purposes of Section 160ZZO) in relation to the company issuing the options, or would have been a "group company" but for the issue of the options.

By subclause 38(18), (refer to notes below), these amendments will apply to options issued after 15 August 1989.

Convertible Notes that are Traditional Securities Clauses 26, 27 and 28

Introductory Note

Convertible notes acquired after 10 May 1989 that qualify as traditional securities are dealt with in accordance with sections 26BB or 70B of the Principal Act. Section 26BB provides that the gain on the disposal or redemption of such notes is to be included in assessable income in the year of disposal or redemption. The gain is the difference between the cost of acquiring and converting a note and the value of the consideration received on disposal or redemption (e.g., the value of shares or units acquired on conversion). Section 70B authorises a deduction in the year of disposal or redemption for any loss on the disposal or redemption of such notes.

Shares or units acquired by conversion of such notes are dealt with under Part IIIA of the Principal Act. Apart from these amendments, Division 12 would apply to shares and Division 12A to units. Such shares and units would be deemed to be acquired at the time of conversion, and the cost base for their acquisition would be the sum of the consideration paid or given for the acquisition of the convertible note and the amount paid in respect of its conversion.

The amendments now proposed will amend the Principal Act to ensure that no gain assessed on conversion under section 26BB is subsequently taxed under Part IIIA on the sale of shares or units acquired by the conversion. This measure, beneficial to taxpayers, will apply as from the commencement of section 26BB. Similarly, a loss allowed on conversion under section 70B will not also be available under Part IIIA when the shares or units are later sold. This measure, which removes an unintended advantage, will apply as from 16 August 1989.

Clause 26: Division not to apply to traditional securities

This clause proposes new section 160ZYYA to provide that convertible notes that are traditional securities within the meaning of section 26BB will not be dealt with under Division 12 of Part IIIA. It is intended that they be dealt with under the proposed Division 12B; the notes below to clause 28 give the intended effect of that Division.

By subclause 38(18), (refer to notes below), section 160ZYYA will apply to convertible notes acquired after 10 May 1989.

Clause 27: Division not to apply to traditional securities

This clause inserts new section 160ZZBAA into Division 12A of Part IIIA. The section provides that convertible notes that are traditional securities within the meaning of section 26BB will not be dealt with under the proposed Division 12B; the notes below to clause 28 give the intended effect of that Division.

By subsection 38(18), (refer to notes below), section 160ZZBAA will apply to convertible notes acquired after 10 May 1989.

Clause 28: Convertible Notes that are Traditional Securities

This clause introduces a new Division 12B of Part IIIA to provide for convertible notes, acquired after 10 May 1989, that are traditional securities within the meaning of section 26BB. The new Division comprises new section 160ZZBE dealing with the conversion of notes into shares and new section 160ZZBF dealing with the conversion of notes into units.

Subsection 160ZZBE(1) defines "convertible note" for the purpose of the section as any convertible note within the meaning of Division 12 that is also a traditional security within the meaning of section 26BB. The effect of this will be that any convertible note excluded from Division 12 under proposed section 160ZYYA will be a convertible note to which section 160ZZBE applies.

Subsection 160ZZBE(2) applies where a convertible note acquired after 10 May 1989 and on or before 15 August 1989 is converted to shares. In that case the taxpayer who acquired the shares is deemed for the purposes of Part IIIA to have acquired the shares for a consideration equal to the market value of the shares, or the sum of the consideration given by the taxpayer in respect of the acquisition of the convertible note and the amount paid by the taxpayer in respect of the conversion, whichever is the greater. This ensures that, for a convertible note acquired on or before 15 August 1989, no gain assessed under section 26BB on conversion will also be assessed under Part IIIA on disposal of shares obtained on conversion, because the cost of the shares is deemed to be no less than their market value. On the other hand, a loss allowed under section 70B on conversion may also be allowed under Part IIIA on disposal of shares acquired on conversion, because the cost of the shares will be deemed to exceed their market value to the extent to which the combined cost of the note and its conversion do so.

Subsection 160ZZBE(3) applies where a convertible note acquired after 15 August 1989 is converted to shares. The taxpayer who acquires the shares is deemed for the purposes of Part IIIA to have acquired the shares for a consideration equal to their market value. This ensures that, for a convertible note acquired after 15 August 1989, no gain assessed under section 26BB on conversion will also be assessed under Part IIIA on disposal of shares obtained on conversion; and no loss allowed on conversion under section 70B will also be allowed under Part IIIA on disposal of shares obtained on conversion. This is because gains and losses on conversion are determined by reference to the market value of the shares acquired, which is the deemed consideration given.

As there is no provision mirroring section 160ZYZ, gains or losses on conversion which are not assessed or deducted under sections 26BB or 70B may be dealt with under Part IIIA, where proposed subsection 160ZB(6) does not apply. (See notes on clause 17.)

Subsection 160ZZBF(1) defines "convertible note" for the purpose of the section as any convertible note within the meaning of Division 12A that is also a traditional security within the meaning of section 26BB. The effect of this will be that any convertible note excluded from Division 12A under proposed section 160ZZBAA will be a convertible note to which section 160ZZBF applies.

Subsection 160ZZBF(2) applies where a convertible note acquired after 10 May 1989 and on or before 15 August 1989 is converted to units. In that case the taxpayer who acquired the units is deemed for the purposes of Part IIIA to have acquired the units for a consideration equal to the market value of the units, or the sum of the consideration given by the taxpayer in respect of the acquisition of the convertible note and the amount paid by the taxpayer in respect of the conversion, whichever is the greater. This ensures that, for a convertible note acquired on or before 15 August 1989, no gain assessed under section 26BB on conversion will also be assessed under Part IIIA on disposal of units obtained on conversion, because the cost of the units is deemed to be no less that their market value. On the other hand, a loss allowed under section 70B on conversion may also be allowed under Part IIIA on disposal of units acquired on conversion because the cost of the units will be deemed to exceed their market value to the extent to which the combined cost of the note and its conversion do so.

Subsection 160ZZBF(3) applies where a convertible note acquired after 15 August 1989 is converted to units. In that case the taxpayer who acquired the units is deemed for the purposes of Part IIIA to have acquired the units for a consideration equal to their market value. This ensures that, for a convertible note acquired after 15 August 1989, no gain assessed under section 26BB on conversion will also be assessed under Part IIIA on disposal of units acquired on conversion; and no loss allowed on conversion under section 70B will also be allowed under Part IIIA on disposal of units obtained on conversion. This is because gains and losses on conversion are determined by reference to the market value of the units acquired, which is the deemed consideration given.

As there is no provision mirroring section 160ZZBB, gains or losses on conversion which are not assessed or deducted under sections 26BB or 70B may be dealt with under Part IIIA, where proposed subsection 160ZB(6) does not apply. (See the notes on clause 17).

Clause 29: Options

Paragraph (a) proposes a minor amendment to subsection 160ZZC(3) of the Principal Act which deems the grant of an option to be a disposal by the grantor of an asset (i.e. the option) and, the asset to be owned by the grantor immediately before the disposal. The amendment will ensure that subsection 160ZZC(3) only applies subject to subsections 160ZZC(3A), (3AA) and (3AB).

Paragraph (b) inserts two new subsections, subsections 160ZZC(3AA) and (3AB), into section 160ZZC which will exclude the granting of certain options from being deemed disposals of an assets by the grantor. The amendments will not alter or affect the grantee's CGT position.

Subsection 160ZZC(3AA) will ensure that options, granted after 19 September 1985 and before 23 May 1986 which bind the grantor to dispose of an asset which is acquired before 20 September 1985, are not deemed by subsection 160ZZC(3) to constitute a disposal of an asset, i.e. the option, by the grantor. Where the option is exercised subsection 160ZZC(3AA) will not affect the operation of subsections 160ZZC(7) and (8). The grantor's liability to CGT will not alter as the disposal is a disposal of a pre 20 September 1985 asset. The grantee in accordance with subsection 160ZZC(8) will include the consideration paid for the option as part of the consideration paid or given in respect of the acquisition of the asset.

Where the option is not exercised subsection 160ZZC(3AA) will not affect the grantee's position in respect of the option.

Subsection 160ZZC(3AB) will ensure that, any option which binds the grantor to acquire an asset that is granted after 19 September 1985 and before 23 May 1986 which is not exercised or capable of being exercised, is not deemed by subsection 160ZZC(3) to constitute a disposal of an asset, i.e. the option, by the grantor.

This provision will have no effect where the option is exercised, or on the grantee regardless of whether the option is exercised or not.

Paragraph (d) of the clause will insert new subparagraph (3A)(e)(iii), to exclude the application of subsection 160ZD(2) in determining any capital gain on the expiry of an option. This will ensure that where an option to acquire shares or units was granted for no actual consideration and subsequently expires without being exercised (or is otherwise extinguished), no deemed consideration will be taken to have been received by the company or trustee which originally issued the option. If actual consideration was paid to the company or trustee on the grant of an option to acquire shares, or units, the amount of that actual consideration will continue to be taken into account in determining any capital gain to the company or trustee as a result of the operation of paragraph 160ZZC(3A)(e).

Clause 30: Transfer of asset to wholly-owned company

In broad terms, section 160ZZN of the Principal Act provides "rollover relief" - that is, the effective deferral of tax on accrued capital gains or the retention of the CGT exempt status of an asset acquired before 19 September 1985 in certain circumstances where a change in the legal ownership of an asset has occurred but not in its underlying ownership. The section provides roll-over relief where an individual or a trust transfers an asset, or a partnership asset is transferred by the partners, (other than where the asset is a personal-use asset) to a company in exchange for shares or securities. Following the transfer, the individual or company must beneficially own 100 per cent of the shares in the company or, in the case of a partnership asset, the partners must beneficially own all of the shares in the company in the same proportions as their interests in the partnership were held immediately before the transfer of the asset.

The effect of the roll-over is that the asset will be taken to have been acquired by the company before 20 September 1985 if it was acquired by the individuals or trust before that date or, in the case of a partnership asset, to the extent that interests in the asset were acquired by the partners before that date. Where the asset (or part of the asset, as the case may be, in regard to certain partnership assets) was acquired by the particular transferring taxpayer after 19 September 1985, the company is taken to have paid as consideration for its acquisition what would have been the asset's cost base, indexed cost base, or reduced cost base to the transferring taxpayer, if the asset had been disposed of at the time of transfer.

The amendments to section 160ZZN proposed by clause 30 impose certain new conditions for the availability of the roll-over relief provided under the section. First, by paragraph (a) of the clause, existing paragraph 160ZZN(2)(b) is replaced with new paragraphs (2)(b) and (2)(ba). These paragraphs replace the existing conditions that the transferring taxpayer (being an individual or the partners of a partnership) take back as consideration for the transferred asset, shares or securities in the company with the new requirements:

•

that the consideration consist only of non-redeemable shares in the company (subject to new subsection (5A), refer notes below); and

•

the market value of those shares is substantially the same as that of the asset transferred, less an amount of any liabilities assumed by the company in connection with the transferred asset.

Paragraph (b) of the clause will insert new paragraphs (4)(b) and (4)(ba) in section 160ZZN. Existing paragraph (4)(b) imposes an identical requirement for assets transferred by the trustee of a trust estate to that imposed by existing paragraph (2)(b) on transfer of an asset by a taxpayer other than a company or trustee. Correspondingly, the new requirements imposed by new paragraphs (4)(b) and (4)(ba) are identical to those imposed by paragraphs (2)(b) and (2)(ba).

Paragraph (c) of clause 30 proposes to insert new subsection (5A) in section 160ZZN. The new subsection applies to assets transferred pursuant to subsections 160ZZN(2) and 160ZZN(4) to effectively permit the transferee company to assume a liability formerly owed by the transferor of the asset. It affords, in effect, an exception to the requirement that the consideration for the transfer of the asset consist only of non-redeemable shares, by providing that the requirement will also be satisfied if the transferee company assumes liabilities in respect of the transferred asset. However, this exception to the general requirement is only available on the transfer of an asset acquired before 20 September 1985 where the liabilities do not exceed the market value of the asset at the time of transfer (paragraph (5A)(a)). For assets acquired on or after that date, the liabilities cannot exceed either:

•

the asset's cost base to the transferor, if the asset is then sold by the company within 12 months of the asset's date of acquisition by the transferor (subparagraph (5A)(b)(i)): or

•

in other cases, the indexed cost base of the asset to the transferor (subparagraph (5A)(b)(ii)).

Paragraphs (d) and (g) of clause 30 propose amendments to subsections 160ZZN(7) and 160ZZN(8) to remove references in those subsections to "securities" that, as a result of the amendments proposed by clause 30, can no longer be taken as consideration for assets transferred in respect of which rollover relief under section 160ZZN is available.

Paragraphs (e) and (f) of the clause propose to amend subparagraphs 160ZZN(7)(b)(i) of 160ZZN(7)(b)(ii), which currently determine the indexed cost base or reduced cost base of shares in the company received as consideration for the transfer of an asset by the transferor, where rollover relief under section 160ZZN is available in respect of the transfer of the asset. The effect of the subparagraphs is that the indexed cost base or reduced cost base of the shares is the amount that would have been the indexed cost base or reduced cost base of the asset, if it had been disposed of at the time of its transfer to the company. The amendments proposed to the subparagraphs will also have the effect that the amount so determined will, in turn, be reduced by the amount of any liabilities assumed by the company in respect of the transfer of the asset.

These amendments will apply to assets transferred after 15 August 1989 - see notes on subclause 38(10).

Clause 31: Transfer of assets between companies in the same group

Clause 31 proposes a number of amendments to section 160ZZO, to restrict the circumstances in which roll-over relief pursuant to that section will be available on the transfer of assets between member companies of a company group.

Existing subsection 160ZZO(1) sets out the circumstances in which such asset transfers will be eligible for roll-over relief provided by the section. By paragraph (a) of subclause 31(1), a number of new paragraphs are to be inserted in subsection 160ZZO(1). New paragraph (1)(aa) specifies the forms of consideration that a transferor company may now receive from the transferee company on the transfer of an asset between the two, subject to the exception provided by new subsection 160ZZO(2A) (refer to notes below). Where the transferor is, by law, unable to own shares in the transferee (e.g., because the transferor is a subsidiary of the transferee), the consideration on the transfer may comprise securities in the transferee (subparagraph (aa)(i)). In other cases (eg. on the transfer of an asset where the transferor is not a subsidiary of the transferee) the permissible consideration may be either non-redeemable shares or securities in the transferee (subparagraph (aa)(ii)).

A further new requirement to be satisfied before the section 160ZZO roll-over will now be available for an asset-transfer is contained in new paragraph 160ZZO(1)(ab). This further requirement is that the market value of the shares or securities received as consideration on the transfer is the same (or substantially the same) as that of the asset transferred. However, where the transferee also assumes a liability in respect of the asset at the time of the transfer, the consideration otherwise taken to have been paid will be reduced by the amount of the liability assumed. Further, the market value of the asset at the time of transfer must be at least equal to the reduced cost base of the asset to the transferor at the time of the transfer, as a consequence of the proposed insertion of new paragraph 160ZZO(1)(ac). This additional requirement has the effect that roll-over relief under section 160ZZO will not be available on the transfer of an asset which, if it had been disposed of by the transferor at the time of the transfer, would have resulted in the realisation of a capital loss. This requirement effectively applies only to assets acquired by the transferor on or after 20 September 1985. It does not apply to assets taken to have been acquired before that date for the purposes of Part IIIA.

Paragraph (b) of subclause 31(1) will insert three new subsections after subsection 160ZZO(2). New subsection 160ZZO(2A) effectively provides an exception to the new requirement proposed by subparagraph (1)(a) (refer to notes previous) that the consideration for the asset-transfer comprise only of shares or, in some cases, securities, in the transferee. The subsection will have the effect that the transferee may also assume a liability owed by the transferor in respect of the asset, subject to the following requirements:

•

for assets acquired by the transferor before 20 September 1985, the amount of the liability must not exceed the market value of the asset at the time of the transfer (new paragraph (2A)(a)); or

•

for assets acquired on or after that date, the liabilities assumed must not exceed the cost base (for assets disposed of by the transferee within 12 months of the date of acquisition of the asset by the transferor) or the indexed cost base of the asset (in other cases) (new paragraph (2A)(b)).

Paragraph (b) of sub-clause 31(1) will also insert new subsection 160ZZO(2B). Where the asset transferred was acquired by the transferor company before 20 September 1985, new paragraph (2B)(a) provides that the shares or securities that form the consideration for the transfer will also be taken to have been acquired by the transferor company before that date for the purposes of Part IIIA. In effect, in such cases, the CGT exempt status of the transferred asset to the transferor company is retained for the shares or securities received by the transferor company following the asset's transfer.

For assets acquired by the transferor company on or after 20 September 1985, proposed paragraph (2B)(b) determines the amounts that will comprise the indexed cost base or reduced cost base to the transferor of the shares or securities received following the asset's transfer. In determining any capital gain on the subsequent disposal of those shares or securities by the transferor, proposed subparagraph (2B)(b)(i) specifies that their indexed cost base will be determined on the basis that the transferor had paid as consideration for their acquisition an amount equal to what would have been the transferred asset's indexed cost base to the transferor, if that asset had been taken to have been disposed of for the purposes of Part IIIA at the time of its transfer to the transferee. The amount of the consideration so taken to have been paid by the transferor will, however, be reduced by the amount of any liabilities assumed by the transferee in respect of the asset in connection with the asset's transfer.

Proposed subparagraph (2B)(b)(ii) will apply in determining the reduced cost base to the transferor of shares or securities received on the transfer of an asset to the transferee for the purposes of determining a capital loss on their subsequent disposal. The subsection will operate in substantially the same manner as subparagraph (2B)(b)(i) will operate in determining their indexed cost base, except that it is the reduced cost base of the transferred asset to the transferor at the time of the asset's transfer (less the amount of any liabilities assumed) by reference to which the reduced cost base of the shares or securities to the transferor will be determined.

New subsection 160ZZO(2C) will apply on the disposal of shares or securities by the transferor within 12 months of the date of acquisition of the transferred asset. It provides that, in determining any capital gain pursuant to paragraph (2B)(b) on the disposal of the shares or securities, the references in that paragraph to the indexed cost base to the transferor of the asset are to be taken to be references to the cost base to the transferor of the asset.

Paragraph (c) of clause 31 proposes to insert new subsection 160ZZO(10). This subsection has the effect that section 160ZZO will not apply on the transfer of an asset between companies in a company group where section 160ZZOA (proposed to be inserted by clause 32, refer to notes below) applies to the transfer.

These amendments will also apply to assets transferred after 15 August 1989 - see notes on subclause 38(10).

Clause 32: Transfer of asset from subsidiary to holding company for no consideration

Clause 32 will insert new section 160ZZOA in the Principal Act, to provide a modified form of roll-over relief on the transfer of an asset from a subsidiary company to a holding company for no consideration, at the election of the transferor and the transferee.

Subsection 160ZZOA(1) sets out the conditions for, and declares the consequences of, a valid election made under the section.

Paragraph (1)(a) refers to three specific situations in which the subsection may apply, namely:

•

a company (referred to as the "transferor") that is a resident of Australia disposes of an asset after 15 August 1989 to another company (referred to as the "transferee") that is also a resident of Australia (subparagraph (a)(i));

•

a company (again referred to as the "transferor") that is not a resident of Australia disposes of a taxable Australian asset after 15 August 1989 to another company (referred to as the "transferee") that is a resident of Australia (subparagraph (a)(i)); or

•

a company (also referred to as the "transferor") disposes of a taxable Australian asset after 15 August 1989 to another company (the "transferee") that is not a resident of Australia and, immediately after the disposal, the asset was a taxable Australian asset of the transferee (subparagraph (a)(iii)).

By paragraph (1)(b), the transferor must be a subsidiary of the transferee, within the meaning of subsection 160ZZO(4). By paragraph (1)(c) the market value of the transferred asset must, at the time of transfer, be equal to or greater than the reduced cost base of the asset to the transferor at the time of the transfer. In effect, this means that section 160ZZOA will not provide roll-over relief on the transfer of an asset which, if it had been disposed of by the transferor at the time of the transfer, would have resulted in the realisation of a capital loss. This requirement will not, however, apply to the transfer of assets acquired before 20 September 1985 by the transferor, because Part IIIA would not apply to the disposal of such an asset.

By paragraph (1)(d), the transferee must not pay or give any consideration in respect of the disposal, and under paragraph (1)(e), the transferee is not to be a person whose income of the year of income in which the disposal took place is exempt from tax by virtue of a relevant exempting provision (as defined).

Finally, paragraph (f) requires the lodgment, subject to the usual provisions as to the timing and manner of its lodgment, of an election by the transferor and transferee companies that section 160ZZOA is to apply to the disposal.

On the basis that the above conditions are met, paragraph (1)(g) sets out the consequence of transferring an asset that was acquired by the transferor before 20 September 1985, i.e., that the transferee is also to be taken as having acquired the asset before that date.

Paragraph (1)(h) refers to assets acquired by the transferor on or after 20 September 1985. Subparagraph (1)(h)(i) means that, for the purposes of ascertaining whether a capital gain accrued to the transferee on a subsequent disposal of the asset, the transferee is taken to have paid as consideration in respect of the acquisition of the asset, at the time of the transfer an amount equal to what would have been the indexed cost base to the transferor of the asset, if Part IIIA had applied to the disposal of the asset by the transferor to the transferee.

Similarly, for the purposes of ascertaining whether a capital loss was incurred when the transferee disposes of the asset, the transferee is to be deemed, by subparagraph (1)(h)(ii), to have acquired the asset for a consideration equal to the reduced cost base to the transferor of the asset, determined as if the disposal of the asset by the transferor to the transferee had been a disposal to which Part IIIA applied.

Subsection 160ZZOA(2) modifies the operation of paragraph (1)(h) where the asset is disposed of by the transferee within 12 months after the day on which the asset was acquired by the transferor. It requires that a reference to the indexed cost base of the asset be taken to be a reference to the cost base of the asset.

Subsection 160ZZOA(3) has effect where, following the transfer of the asset from the transferor to the transferee, a share in the transferor (paragraph (3)(a)) or a debt owed by the transferor (paragraph (3)(b)) is disposed of, provided the share or debt was acquired after 19 September 1985. The subsection provides for the reduction of the cost base, indexed cost base or reduced cost base of particular shares or debts to their respective owners to reflect the proportionate reduction in their value following the transfer of the asset from the transferor company to the transferee company. By paragraph (3)(c) the calculation of the reduction in value of particular shares or debts where the transferred asset was acquired by the transferor before 20 September 1985 must be calculated by reference to the asset's market value at the time of transfer, reduced by the amount of any liabilities in relation to the asset assumed by the transferee.

Paragraph (3)(d) will apply in determining the amount by which the cost base, indexed cost base or reduced cost base of the particular shares or particular debt is to be reduced to reflect the reduction in their (or its) value following the transfer of the asset, where the transferred asset was acquired by the transferor after 19 September 1985. Broadly speaking, that reduction is to occur by reference to what would have been the cost base, indexed cost base or reduced cost base of the transferred asset to the transferor if the transferred asset had been disposed of for the purposes of Part IIIA at the time of the transfer, less the amount of any liabilities in relation to the asset assumed by the transferee in connection with its transfer.

The practical effect of subsection 160ZZOA(3) is that the cost bases of shares in, or debts owed by, the transferor company, are to be reduced to reflect the proportionate reduction in their value following the transfer of the asset from the transferor to the transferee.

Proposed subsection 160ZZOA(4) will apply where an amount, by which the cost base, indexed cost base or reduced cost base of particular shares or a particular debt would be reduced by the application of subsection (3), would have exceeded the indexed cost base of the particular shares or debt to their (or its) owner at the time of transfer of the asset. By the subsection the owner of the particular shares or debt in these circumstances is to be taken as having realised a capital gain equal to the amount of the excess at that time.

Subsection 160ZZOA(5) will modify the operation of subsection 160ZZOA(4), where the particular shares or debt to which that subsection applies were, themselves, acquired by the owner within 12 months of the date on which the transferred asset was acquired by the transferee. In effect, subsection 160ZZOA(5) will apply where shares or debts had been owned for less than 12 months at the time of the transfer of an asset to which section 160ZZOA applies. In these circumstances the capital gain that may be taken to have accrued to the owner by the operation of subsection 160ZZOA(4) is determined by reference to the cost base of the shares or debt rather than by reference to their indexed cost base.

Finally, subsection 160ZZOA(6) provides that subsections 160ZZO(4) to (9) inclusive have the same effect in the application of section 160ZZOA(4) as they have in the application of section 160ZZO.

Subsection 160ZZO(4) specifies the circumstances in which a company is taken to be a subsidiary of another company (termed the "holding company") for the purposes of section 160ZZO during the whole or a part of a year of income (the "relevant period").

Under subparagraph (4)(a)(i) this relationship is established if all the shares in the subsidiary company were beneficially owned by the holding company at all times during the relevant period. Subparagraph (a)(ii) establishes the relationship if all the shares in the subsidiary company were beneficially owned during the relevant period by a company that is, or by two or more companies each of which is, a subsidiary of the holding company. By subparagraph (a)(iii), the necessary relationship also exists if all the shares in the subsidiary company were owned during the relevant period by the holding company and by a company that is, or two or more companies each of which is, a subsidiary of the holding company.

Paragraph (4)(b) imposes the further requirement that during the relevant period no person was in a position, or would become in a position after the relevant period, to affect rights of the holding company, or of another subsidiary of the holding company in relation to the particular subsidiary company. This safeguards against the possibility of any collateral arrangements being used to circumvent the intended operation of the provisions.

Subsection 160ZZO(5) extends the operation of subsections (3) and (4) by establishing a qualifying group relationship between companies which are part of a wholly-owned chain of subsidiaries of a holding company. Thus, in a corporate structure under which all of the shares in a subsidiary are owned by one or more wholly-owned companies that are interposed between a holding company and the end subsidiary company, a qualifying group relationship will be found between each of those companies.

Subsection 160ZZO(6) qualifies subsection (4). It specifies the circumstances in which a person is regarded as being in a position at a particular time to affect the rights of one company in relation to another company. A person is in that position if he or she has at the particular time a right, power or option (whether by virtue of any provision in the constituent document of either of the companies, or by virtue of any agreement or otherwise) to acquire any of the rights of the first company in its subsidiary or to prevent that company from exercising rights in the subsidiary for its own benefit or receiving any benefits accruing under those rights.

An agreement referred to in subsection 160ZZO(6) is defined by subsection 160ZZO(7) to include an agreement, arrangement or understanding whether formal or informal, whether express or implied and whether or not enforceable, or intended to be enforceable.

The practical effect of subsections 160ZZO(8), (8A) and (8B) is that two companies may be taken to be in a group relationship where one (or both) was (or were) incorporated during the particular year of income. Special rules also apply where a shelf company became a member of a company group during a particular year of income.

Subsection 160ZZO(9) ensures that a personal-use asset of the transferor retains its character in the hands of the transferee.

Clause 33: Strata title conversions and conversions of incorporated associations to companies incorporated under company law

Clause 33 will insert new sections 160ZZPG and 160ZZPH in the Principal Act, to extend roll-over relief to certain strata title conversions and conversions of incorporated associations to companies.

Subsection 160ZZPG(1) specifies that section 160ZZPG will apply where land on which a building (or buildings) is situated is subdivided into stratum units under a strata title law of a State, Territory or foreign country. The term "strata title law" is defined in proposed subsection 160ZZPG(7) (refer notes below). The section applies to a particular taxpayer (referred to in the subsection as the "converting taxpayer") who, immediately before the time of the subdivision, owned an asset (referred to in the section as the "original asset") in relation to the land so subdivided, although, before the subdivision occurs, two or more taxpayers may own interests in the land.

Subsection 160ZZPG(2) requires the Commissioner of Taxation to grant CGT rollover relief to a particular converting taxpayer in respect of the subdivision of the land in certain circumstances, provided that the taxpayer has elected that the subsection apply to the asset or assets he or she owns (paragraph (2)(a)).

The Commissioner must also be satisfied that it is reasonable to grant CGT rollover relief to the particular converting taxpayer in respect of the subdivision, having regard to such matters as:

•

the extent (if any) to which taxpayers, other than persons who owned assets in relation to the land immediately before the subdivision occurred, own interests in relation to stratum units following the subdivision;

•

the extent (if any) to which rights of occupancy held by converting taxpayers in relation to the stratum units differ from the rights of occupancy held in relation to the building (or buildings) before the subdivision (subparagraph (2)(b)(ii)); and

•

any other matters the Commissioner considers relevant (subparagraph (2)(b)(iii)).

In practice, this means that CGT roll-over relief will be available at the request of a taxpayer on the conversion to strata title of the ownership arrangements that previously existed in relation to a building where there are no significant changes in the effective ownership of rights to occupy particular units in the building. For example, if rights to occupy particular units following the subdivision to strata title are owned by the same persons who owned similar rights before the subdivision in relation to these units, the CGT roll-over relief would be available. This could be the case where persons formerly owned shares in a company (that owned a building) which entitled each of those persons to occupy a particular unit in the building. After conversion to strata title, rollover relief will be available if the strata title unit owned by each person is the same unit they were previously entitled to occupy by way of ownership of the shares.

However, it would not be reasonable for CGT roll-over relief to be available on the conversion to strata title ownership arrangements in relation to a building where there is any significant change in the effective rights to occupy particular units owned by taxpayers before and after the conversion.

Where the Commissioner is satisfied that it is reasonable for CGT roll-over relief to apply to a particular converting taxpayer, the steps that may be taken in granting that relief are specified in proposed subsection 160ZZPG(3). These include:

•

not treating the disposal of an original asset as the disposal of an asset for the purposes of Part IIIA, so that no capital gain or capital loss would occur to the taxpayer at that time (paragraph (3)(a));

•

treating a particular asset owned by a taxpayer following the subdivision as having been acquired before 20 September 1985 (and therefore effectively CGT-exempt) where the original asset has also been acquired before that date (paragraph (3)(b)); and

•

for the purposes of determining a capital gain or capital loss on the subsequent disposal of a new asset acquired on the subdivision, where the original asset was acquired by a converting taxpayer on or after 20 September 1985, to treat the taxpayer as having paid at the time of the subdivision as consideration for the acquisition of the new asset so acquired an amount that the Commissioner determines to be appropriate (paragraph (3)(c)).

Proposed subsection 160ZZPG(4) states that, in determining an amount that the Commissioner of Taxation will accept as having been paid as consideration for the acquisition of a particular asset pursuant to paragraph (3)(c), the Commissioner may do so in a different manner in different circumstances. This subsection is a drafting measure designed to permit the Commissioner to take into account the particular circumstances of a particular subdivision arrangement in determining the cost bases of a particular stratum title unit. In practice, in determining any capital gain on a subsequent disposal of a particular unit, the indexed cost base of that asset will be calculated as if the taxpayer had paid as consideration for its acquisition an amount equal to the indexed cost base of the original asset he or she owned prior to its conversion to strata title. For the purpose of calculating a capital loss, the reduced cost base of the original asset at the time of conversion would be taken into account in the same manner in determining the reduced cost base of the particular stratum title unit being disposed of.

Subsection 160ZZPG(5) specifies that the election which must be given by a taxpayer to the Commissioner under subsection 160ZZGP(2) as a pre-condition for the availability of the roll-over relief provided by section 160ZZPG, must be lodged (in writing) no later than the date of lodgment of the taxpayer's income tax return for either:

•

the year in which the subdivision of the land occurred (paragraph (5)(a)); or

•

the year (if later than the year in which the subdivision occurred) in which the section commences (paragraph (5)(b)).

The Commissioner also has the discretion to accept an election made at a later time than those prescribed in subsection on 160ZZPG(5).

Subsection 160ZZPG(6) specifies that an asset in relation to land will, for the purposes of the application or section 150ZZPG, include a share in a company that owns a legal or equitable estate or interest in land where the share entitles the shareholder to a right of occupancy of the whole or part of a building erected on the land owned by the company.

Subsection (7) defines two terms used in section 160ZZPG. "Strata title law" is defined broadly to include a range of laws which relate to the ownership of land by means of strata title, group title, cluster title, unit title or other similar title. "Stratum unit" is defined to mean any lot or unit (however described) in relation to such a strata title law.

Clause 33 will also insert new section 160ZZPH in the Principal Act, under which CGT roll-over relief is to be available on the conversion of certain associations to companies incorporated under company law. Roll-over relief is to be available to members of the association who become shareholders in the newly incorporated company.

By proposed subsection 160ZZPH(1), the circumstances in which the section will apply to a conversion are set out. The first of these, referred to in paragraph (1)(a), is that an entity which is a "company" for the purposes of the taxation law, by reason of the extended meaning given to that term in section 6 of the Principal Act, is nevertheless not a company incorporated under company law. An example of such an entity would be an association incorporated under a general law providing for the incorporation of certain types of associations, or a co-operative body incorporated under a law regulating the activities of co-operatives. The subsection applies where such an entity becomes incorporated as a company under company law at a particular time (referred to in the section as the "conversion time"). A further requirement is that the conversion of the original entity to an incorporated company does not involve the creation of a new legal entity. This requirement will therefore usually be satisfied where a law under which the incorporation as a company is to occur specifically provides for the legal succession of the company as successor to the former entity. A further consequence of the requirement is that the section need make no specific provision to extend rollover relief to assets owned by the former entity that, after the conversion, are owned by the newly incorporated company. Because each entity must be the same legal entity, the conversion does not involve a disposal or acquisition of assets for the purposes of Part IIIA. An asset's date of acquisition and its cost base, indexed cost base or reduced cost base to the original entity will therefore be the same for the newly incorporated company in respect of that asset.

The other circumstances that must exist for the section to apply are as follows:

•

two or more taxpayers (referred to in the section as the "converting taxpayers") owned an asset (referred to as the "original asset") being an interest owned as a member of the original entity immediately before the time of conversion (paragraph (1)(b));

•

the new company issued shares (called the "new shares") to each converting taxpayer at or about the conversion time (paragraph (1)(c));

•

each original asset (i.e. the interests owned as a member of an association being the original entity) owned by each converting taxpayer was disposed of at or about the conversion time (paragraph (1)(d)); and

•

the only consideration received by a converting taxpayer on the disposal of an original asset is new shares in the newly incorporated company (paragraph (1)(e)).

Where these circumstances exist, subsection 160ZZPH(2) requires the Commissioner of Taxation to take the steps necessary to grant CGT roll-over relief to the converting taxpayer in respect of the conversion of the original entity to a company incorporated under the company law, provided the following conditions are satisfied:

•

either the converting taxpayer is an Australian resident or the original asset owned by the taxpayer was a taxable Australian asset (paragraph (2)(a)); and

•

the taxpayer has elected that the section is to apply to the disposal of the original assets (paragraph (2)(b)).

The Commissioner is also required by paragraph (2)(c) to take into account a number of matters in determining whether or not it is reasonable to grant CGT roll-over relief in respect of the conversion. These are:

•

the extent (if any) to which a change has occurred in the proportionate interests held by converting taxpayers in the newly incorporated company compared with their interests in the original entity (subparagraph (2)(c)(i));

•

the extent (if any) to which the proportionate value of the original interests formerly owned by a converting taxpayer differs from the value of the new shares acquired by the converting taxpayer after the conversion (as calculated under a specified formula) (subparagraph (2)(c)(ii)); and

•

any other matters considered relevant by the Commissioner (subparagraph (2)(c)(iii)).

In practice, this means that the Commissioner will grant CGT roll-over relief at the request of a converting taxpayer in respect of the disposal of interests formerly held in the original entity and the acquisition of shares in the new company, provided no significant changes occur in the underlying ownership of the assets of each entity. If the former members and new shareholders continue to own assets of similar value, and their rights vis-a-vis each other do not change significantly following the conversion, the CGT roll-over relief will be available.

Where the Commissioner determines that it is reasonable to grant CGT roll-over relief to a particular converting taxpayer, the steps that he may take in granting that relief are specified in proposed subsection 160ZZPH(3). These include:

•

not treating the disposal of an original asset as the disposal of an asset for the purposes of Part IIIA, so that no capital gain or capital loss would accrue to the taxpayer at that time (paragraph (3)(a));

•

treating a particular share owned by a taxpayer following the conversion as having been acquired before 20 September 1985 (and therefore effectively CGT-exempt) where the original asset has also been acquired before that date (paragraph (3)(b)); and

•

for the purposes of determining a capital gain or capital loss on the subsequent disposal of a new share acquired on the conversion, where the original asset was acquired by a converting taxpayer on or after 20 September 1985, to treat the taxpayer as having paid at the time of the conversion as consideration for the acquisition of the new share so acquired an amount that the Commissioner determines to be appropriate (paragraph (3)(c)).

Proposed subsection 160ZZPH(4) specifies that, in determining an amount that will be accepted as having been paid as consideration for the acquisition of a particular share pursuant to paragraph (3)(c), the Commissioner may do so in a different manner in different circumstances. This subsection is designed to permit the Commissioner to take into account the particular circumstances of a conversion of an association to a company incorporated under company law, in determining those amounts to be taken as having been paid by a converting taxpayer for the acquisition of shares. In practice, in determining any capital gain on a subsequent disposal of new shares acquired, the indexed cost base of those shares will be calculated as if the taxpayer had paid as consideration for their acquisition an amount equal to the indexed cost base of the original asset at the time of conversion of the association to an incorporated company. For the purpose of calculating a capital loss, the reduced cost base of the original asset at the time of conversion would be taken into account in the same manner in determining the reduced cost base of the new shares disposed of.

Subsection 160ZZPH(5) specifies that the election which must be given by a taxpayer to the Commissioner under subsection 160ZZPH(2) as a pre-condition for the availability of the rollover relief provided by section 160ZZPH, must be lodged (in writing) no later than the date of lodgment of the taxpayer's income tax return for either:

•

the year in which the conversion to an incorporated company occurred (paragraph (5)(a));

•

the year (if later than the year in which the conversion occurred) in which the section commences (paragraph (5)(b)).

The Commissioner also has the discretion to accept an election made at a later time than those prescribed in subsection 160ZZPH(5).

Each of sections 160ZZPG and 160ZZPH will apply in respect of the 1986 and subsequent years of income - refer to notes on subclause 38(17).

Clause 34: Exemption of principal residence

Introductory Note

Clause 34 will amend a number of provisions in Division 18 of Part IIIA (section 160ZZQ) of the Principal Act which sets out the rules for exempting a taxpayer's sole or principal residence from the capital gains and capital losses provisions. The amendments broadly relate to the availability of the principal residence exemption where a taxpayer constructs a dwelling on vacant land and in the event of the taxpayer's death, the impact of a taxpayer's death on the principal residence status of the taxpayer's property and the treatment of beneficiaries of trust estates.

The amendments generally will be backdated to apply to properties acquired on or after 20 September 1985, when application of the capital gains tax provisions commenced.

Subclause 34(1) proposes to amend the definition of "relevant period" in subsection 160ZZQ(1) of the Principal Act. The term is used in relation to the disposal of a dwelling by a taxpayer, to determine the total period of ownership of the dwelling. At present the definition may disadvantage taxpayers, in that where a taxpayer acquired land on or before 19 September 1985 it results in the period following that date and up to the date of the commencement of construction of a dwelling on the land being inappropriately taken into account in determining the period that the taxpayer owned the dwelling and, accordingly, would have needed to have resided in the dwelling in order to obtain the full principal residence exemption on the dwelling. The amendment makes it clear that the period that the taxpayer owned the land is only to be taken into account in determining the relevant period where the land was acquired by the taxpayer after 19 September 1985, that is, where the land is also an asset subject to the capital gains tax provisions.

The amendment is, by subclause 38(8), being backdated to 20 September 1985, the date on which the capital gains tax provisions commenced.

Subclause 34(2) will omit subsection 160ZZQ(5) of the Principal Act and substitute new subsections 160ZZQ(5) and (5AA). Existing subsection 160ZZQ(5) applies where, after 19 September 1985, a taxpayer acquires vacant land on which a dwelling is constructed. In those circumstances, if the dwelling becomes the taxpayer's sole or principal residence as soon as practicable after the completion of its construction and continues to be so for a period of 12 months or more, then, at the taxpayer's option, the period of ownership of the land may be taken to form part of the period during which the dwelling is taken to be the sole or principal residence of the taxpayer.

New subsection 160ZZQ(5) expands the circumstances in which the provision may apply. As amended the subsection may apply (in circumstances otherwise than where a taxpayer dies before fulfilling the now-to-be 3 months minimum residence rule), where a taxpayer has at any time acquired vacant land, or land on which there was a partially erected dwelling, or a dwelling and after acquisition of the land the taxpayer erects a dwelling on the vacant land, completes the erection of a partially erected dwelling that was on the land, or demolishes a partially erected dwelling or a dwelling that was on the land and erects a new dwelling (paragraph (a), and sub-subparagraphs (b)(i)(A), (ii)(A) and (iii)(A)). In these circumstances if the new dwelling becomes the taxpayer's sole or principal residence as soon as practicable after the dwelling was erected, or the erection of the partially erected dwelling was completed, and continues to be so for a period of not less than 3 months (subparagraph (c)(i)) the taxpayer may elect (or if the taxpayer dies before the end of the period allowed for making an election without having made the election, the trustee or surviving joint tenant, as appropriate, may elect) in accordance with amended subsection 160ZZO(5A) that the new subsection is to apply in relation to the dwelling (paragraph (d)).

Where the above conditions are fulfilled, the period for which the new dwelling will be taken to be the sole or principal residence of the taxpayer will include the period (up to a maximum period of 4 years) from the relevant commencing date (see notes on new subsection 160ZZQ(5AA)) to the date on which the taxpayer commenced occupation of the new dwelling, during which the taxpayer was not a dependent child of another taxpayer. Where the new dwelling is so taken to be the taxpayer's sole or principal residence for a period no other dwelling will be taken to be the sole or principal residence of the taxpayer during the period in question (paragraph (e) when read with proposed subsection 160ZZQ(5AA)).

New subsection 160ZZQ(5) also provides for the situations where a taxpayer dies after the commencement of erection of a dwelling, or commencement of completion of the erection of a dwelling, on his or her land, or after the completion of the dwelling, but before fulfilling the now-to-be 3 months minimum residency requirement (sub-subparagraphs (b)(i)(B), (ii)(B) and (iii)(B) and subparagraph (c)(ii)). In those circumstances if an election is made in accordance with new subsection l60ZZQ(5B) by the trustee or surviving joint tenant, as applicable, that new subsection 160ZZQ(5) is to apply in relation to the dwelling (paragraph (d)) then the capital gains tax provisions have effect as if the dwelling was the sole or principal residence of the taxpayer at the time of his or her death, (subparagraph (f)(i)) and the period for which the dwelling will be taken to have been the sole or principal residence of the taxpayer will include the period (up to a maximum of 4 years) from the relevant commencing date, (see notes on new subsection 160ZZQ(5AA)) to and including the date of death of the deceased taxpayer during which the taxpayer was not a dependent child of another taxpayer (subparagraph (f)(ii)). In these circumstances no other dwelling will be taken to be the sole or principal residence of the taxpayer during the period in question (subparagraph (f)(iii)).

New subsection 160ZZQ(5) will, by subclause 38(8), be taken to have commenced on 20 September 1985, the date on which the capital gains tax provisions commenced.

New subsection 160ZZQ(5AA) of the Principal Act is a drafting measure. Paragraph (a) of the new subsection, defines the term "relevant commencing date" which is used in new subsection 160ZZQ(5), and which refers to the date on and from which a new dwelling that is constructed on land acquired by a taxpayer is to be taken to be the sole or principal residence of the taxpayer. The term means:

(a)

if there was a dwelling or a partly erected dwelling on the land at the time it was acquired that was subsequently demolished, and that dwelling or partly erected dwelling was occupied by the taxpayer or any other person before it was demolished - the date on which the demolished dwelling ceased, or last ceased, to be so occupied; or

(b)

otherwise - the date on which the taxpayer acquired the land.

Paragraph (b) of new subsection 160ZZQ(5AA) applies, for the purpose of new subsection 160ZZQ(5), in cases where a taxpayer has entered into a contract for the erection of, or the completion of the erection of, a dwelling on land that was acquired by the taxpayer. In such circumstances the taxpayer is to be taken to have commenced to erect, or to have commenced to complete the erection of, the dwelling at the time when the contract or the first contract was entered into.

New subsection 160ZZQ(5AA) will, by subclause 38(8), be taken to have commenced on 20 September 1985, the date on which the capital gains tax provisions commenced.

Subclause 34(3) will amend subsection 160ZZQ(5A) of the Principal Act to more clearly express the subsection. The amendment will have no effect in the practical application of the subsection.

Subclause 34(4) will insert new subsection 160ZZQ(5B) in the Principal Act. New subsection 160ZZQ(5B) follows from the expansion of subsection 160ZZQ(5) of the Principal Act to apply in relation to deceased taxpayers. (See notes on that subsection above). New subsection 160ZZQ(5B) provides that for an election that subsection 160ZZQ(5) apply in relation to a deceased taxpayer to be effective, the election has to be lodged with the Commissioner of Taxation by the surviving joint tenant or the trustee, as applicable, on or before the later of:

(a)

the date of lodgment of the return of income of the deceased taxpayer's estate for the year of income in which the taxpayer died; or

(b)

the last day of the year of income in which this Act receives the Royal Assent.

The Commissioner of Taxation is empowered by the subsection to allow a further period for an election to be made.

Paragraph 160ZZQ(5B)(b) follows from the amendments to subsection 160ZZQ(5) being back dated, by subclause 38(8), to the date of the commencement of the capital gains tax provisions, 20 September 1985.

Subclause 34(5) will insert new subsection 160ZZQ(6A) in the Principal Act. The existing capital gains tax provisions extend the principal residence exemption otherwise available to a deceased person to the disposal of the deceased person's home by a beneficiary under the will of the deceased or under a law relating to intestacy. The provisions do not apply to a surviving joint tenant who previously owned the home jointly with the deceased and who obtains title by the operation of the law. By subsection 160ZZQ(6A), the principal residence provisions will now apply in that situation in the same way as if the surviving joint tenant acquired the dwelling as the beneficiary in the estate of a deceased person.

New subsection 160ZZQ(6A) will, by subclause 38(8), be taken to have commenced on 20 September 1985, the date on which the capital gains provisions commenced.

Subclause 34(6) will omit subsection 160ZZQ(11) of the Principal Act and insert new subsections 160ZZQ(11) and (11A) in that Act. Existing subsection 160ZZQ(11) covers the situation where a person is temporarily absent from his or her sole or principal residence (for example, a person who is transferred interstate for employment reasons). It allows a dwelling owned by a taxpayer that was his or her sole or principal residence to be taken to be the taxpayer's sole or principal residence for a period of absence of up to four years, notwithstanding that during that period, the dwelling had ceased to be the taxpayer's sole or principal residence.

To qualify as the sole or principal residence of the taxpayer during the time he or she had ceased to occupy it the dwelling must again become the taxpayer's sole or principal residence within the period of four years after it temporarily ceased to be his or her sole or principal residence, and the taxpayer must notify the Commissioner in writing that he or she has elected that the dwelling be taken as his or her sole or principal residence during the temporary absence period. This election must be made no later than the date of lodgment of the taxpayer's return of income for the year of income in which the taxpayer resumed occupation of the dwelling as his or her sole or principal residence.

If these requirements are satisfied, the dwelling is deemed to have been the sole or principal residence of the taxpayer for the period from the date it temporarily ceased to be his or her sole or principal residence to the date on which it again became so, and no other dwelling is to be deemed to have been the sole or principal residence of the taxpayer in that period. Furthermore, if the dwelling (or if the whole of the dwelling (within the expanded meaning of that term) was not used by the taxpayer prior to its ceasing to be occupied as his or her sole or principal residence - the part that was used for that purpose) is also used during the taxpayer's temporary absence for income producing purposes that use is disregarded in respect of the dwelling, or part concerned, for the purposes of subsection 160ZZQ(21).

New subsections 160ZZQ(11) and (11A) when read together will have the same effect as regards taxpayers who do not die during a temporary period of absence from their sole or principal residence as existing subsection 160ZZQ(11) now has except in two respects. The first is that by new subsection 160ZZQ(11A) the Commissioner of Taxation is empowered to accept late elections from taxpayers that subsection 160ZZQ(11) apply in relation to the dwelling during the period of the taxpayer's temporary absence. The other is that where the taxpayer returns to reside in the dwelling and dies before the end of the period allowed for making an election without having made the election, the surviving joint tenant, where applicable, or the trustee may make the election (subparagraph 160ZZQ(c)(ii)).

As amended new subsection 160ZZQ(11) will also apply in circumstances where a taxpayer dies during a temporary period of absence from his or her sole or principal residence (subparagraph (b)(iii)) and the surviving joint tenant (where the taxpayer and the surviving joint tenant owned the dwelling as joint tenants) or the trustee of the taxpayer's estate makes an election in accordance with new subsection 160ZZQ(11A) that subsection 160ZZQ(11) is to apply in relation to the dwelling (subparagraph (c)(ii)). Where that is done the dwelling is deemed to have been the sole or principal residence of the taxpayer for the period from the date it temporarily ceased to be his or her sole or principal residence to the time of the death of the taxpayer (paragraph (d)) and no other dwelling is to be deemed to have been the sole or principal residence of the taxpayer in that period (paragraph (e)). Furthermore, consistent with the way the provision applies where a taxpayer returns to reside in the dwelling after a period of temporary absence, if the dwelling (or if the whole of the dwelling (within the expanded meaning of that term) was not used by the taxpayer prior to its ceasing to be occupied as his or her sole or principal residence - the part that was used for that purpose) was also used during the taxpayer's temporary absence for income producing purposes that use is to be disregarded in respect of the dwelling, or part concerned, for the purposes of subsection 160ZZQ(11) paragraph (f)).

New subsection 160ZZQ(11A) prescribes the time within which a taxpayer, or if the taxpayer has died, the trustee or where applicable the surviving joint tenant, must, for an election to be effective, elect that new subsection 160ZZQ(11) is to apply in relation to the taxpayer's dwelling during the period of the taxpayer's absence. This time period is:

(a)

in the case of an election by a taxpayer - on or before the date of lodgment of the taxpayer's return of income for the year of income in which the dwelling again became the sole or principal residence of the taxpayer (paragraph (a)); or

(b)

where the taxpayer died within the period of 4 years from the dwelling temporarily ceasing to be the taxpayer's sole or principal residence without the dwelling again becoming his or her sole or principal residence, or where the taxpayer, having returned to reside in the dwelling, died before the end of the period allowed for making an election without having made the election - the later of the date of lodgment of the return of income of the deceased taxpayer's estate for the year of income in which the taxpayer died (subparagraph (b)(i)) or the last day of the year of income in which this Act receives the Royal Assent (subparagraph (b)(ii)).

Subparagraph (b)(ii) follows from the proposed extension of the temporary absence provision to dwellings of deceased taxpayers being back dated, by subclause 38(8), to 20 September 1985, the date of the commencement of the capital gains tax provisions.

The Commissioner of Taxation is empowered by the closing words of the subsection to extend the time allowed for the making of an election by the taxpayer, the trustee or the surviving joint tenant, as the case may be.

Subclause 34(7) will amend subsection 160ZZQ(13) of the Principal Act by substituting a new paragraph (d) in the subsection for the existing paragraph (d).

Subsection 160ZZQ(13) applies in relation to the disposal of a dwelling acquired by a taxpayer as a beneficiary in the estate of a deceased person. The subsection sets out three conditions that must be fulfilled for the full principal residence exemption to apply to the dwelling. The first is that the dwelling was the sole or principal residence of the beneficiary during the period it was legally owned by the beneficiary. The second is that if the deceased person acquired the dwelling after 19 September 1985 it was his or her sole or principal residence during the period that he or she owned it. The third condition, which is set out in present paragraph (d) of the subsection, is that the dwelling was the sole or principal residence of the spouse of the deceased person throughout the period from the death of the deceased person during which the dwelling was owned by the legal personal representative of the deceased person.

The subsection is being amended to allow the principal residence exemption to apply on the sale of a deceased person's dwelling for any period from the date of death of the deceased person, during which the dwelling was owned by the legal personal representative of the deceased person, that the dwelling was the principal residence of a person who under the terms of the deceased person's will had a right to occupy the dwelling.

As amended subsection 160ZZQ(13) will apply to allow a full principal residence exemption on a deceased person's dwelling if the first two conditions set out above are fulfilled, and throughout the period from the death of the deceased person during which the dwelling was owned by the legal personal representative of the deceased person, the dwelling was the sole or principle residence of any one or more of the spouse of the deceased person (subparagraph (13)(d)(i)) or a person who under the terms of the deceased person's will had a right to occupy the dwelling (subparagraph (13)(d)(ii)).

The amendment is, by subclause 38(8), being back dated to 20 September 1985, the date on which the capital gains provisions commenced.

Subclause 34(8) will amend subsection 160ZZQ(15) of the Principal Act by substituting a new subparagraph (b)(ii) for the existing subparagraph (15)(b)(ii). Subsection 160ZZQ applies in relation to the disposal of a dwelling by the trustee of a deceased person's estate. As far as is relevant for present purposes, it applies to allow a full principal residence exemption on the dwelling in circumstances where if the deceased person acquired the dwelling after 19 September 1985, the dwelling was the sole or principal residence of the deceased person throughout the period that he or she owned it; and the dwelling was the sole or principal residence of the spouse of the deceased person throughout the period from the death of the deceased person during which the dwelling was owned by the trustee. As amended the principal residence exemption will, in addition to applying for the period that the dwelling was the sole or principal residence of the spouse of the deceased person, apply for any period, from the date of death of the deceased person, during which the dwelling was the sole or principal residence of a person who under the terms of the deceased person's will had a right to occupy the dwelling.

The amendment is, by subclause 38(8), being back dated to 20 September 1985, the date on which the capital gain provisions commenced.

Subclause 34(9) will amend section 160ZZQ of the Principal Act by substituting a new subparagraph (17)(b)(iii) in that subsection for the existing subparagraph (17)(b)(iii) and making a consequential amendment to paragraph (17)(f). Subsection 160ZZQ(17) applies to the disposal by a taxpayer (after 12 months after the date of death of a deceased person) of a dwelling that the taxpayer acquired as a beneficiary in the estate of the deceased person. It applies to allow a partial principal residence exemption where some only of the conditions set out in subsection 160ZZQ(13) that must be met for the full sole or principal residence exemption to apply are met. The amendment follows from the amendment being made to subsection 160ZZQ(13) by subclause 34(7) to allow the principal residence exemption to apply on the sale of a deceased person's dwelling for any period since the date of death of the deceased person, during which the dwelling had been the sole or principal residence of a person who under the terms of the deceased person's will had a right to occupy the dwelling.

The amendment is, by subclause 38(8), being back dated to 20 September 1985, the date on which the capital gains provisions commenced.

Subclause 34(10) will make two amendments to subsection 160ZZQ(17A) of the Principal Act. Subsection 160ZZQ(17A) of the Principal Act applies where a dwelling acquired by a beneficiary in the estate of a deceased person is disposed of more than 12 months after the date of death of the deceased person. It applies in those circumstances if the dwelling was the sole or principal residence of the beneficiary during part only of the period from the death of the deceased person to the disposal of the dwelling; and/or if the dwelling was acquired by the deceased person after 19 September 1985 the dwelling was the deceased person's sole or principal residence, for part only of the time that he or she owned it.

Where subsection 160ZZQ(17A) applies, the principal residence exemption is, in effect, calculated by reference to the proportion of the period from the date of acquisition of the home by the deceased person (or if the deceased person acquired the home before 20 September 1985, the date of the deceased person's death) to the date of disposal of the dwelling by the beneficiary, that the dwelling was the sole or principal residence of the beneficiary while he or she owned it and, if the dwelling was acquired by the deceased person after 19 September 1985, the dwelling was the sole or principal residence of the deceased person while the deceased person owned it.

This is in contrast to the situation where subsection on 160ZZQ(18) applies in circumstances where a beneficiary disposes of a dwelling within 12 months of the death of the deceased person and the dwelling was acquired by the deceased person after 19 September 1985 and used by the deceased person as the principal residence for part only of the period that he or she owned it. Where that subsection applies the principal residence exemption is calculated by reference to only the proportion of the period that the dwelling was the sole or principal residence of the deceased person; no account being taken of any use of the dwelling by the beneficiary as his or her sole or principal residence after he or she acquired it.

Where subsection 160ZZQ(18) applies and the proportionate use of the dwelling as the sole or principal residence of the beneficiary while he or she owned it - this proportion is not taken into account where that subsection applies - is greater than that of the deceased person while he or she owned it, the beneficiary is disadvantaged when compared with what his or her position THIS IS A LINE OF ILLEGIBLE SCRIPT. death and subsection 160ZZQ(17A) applied.

To overcome this problem the restriction of subsection 160ZZQ(17A) to cases where the beneficiary disposes of the dwelling more than 12 months after the date the deceased person's death is being removed by the amendment being made by paragraph (b) of subclause 34(10). Following that amendment subsections 160ZZQ(17A) and (18) will be alternative provisions in circumstances where a beneficiary disposes of a dwelling within 12 months of the deceased person's death.

By new subsection 160ZZQ(20A), which subclause 34(14) proposes be inserted in the Principal Act, where both subsections 160ZZQ(17A) and (18) apply in relation to the disposal of a dwelling only the subsection which provides the greater benefit to the beneficiary will apply (See notes on new subsection 160ZZQ(20A) in the notes on subclause 34(14)).

The amendment being made to subsection 160ZZQ(17A), by paragraph (a) of subclause 34(10), makes that subsection apply subject to proposed new subsection 160ZZQ(20A).

The amendments being made by this subclause are, by subclause 38(8), back dated to 20 September 1985, the date of commencement of the capital gains tax provisions.

Subclause 34(11) will amend subsection 160ZZQ(18) of the Principal Act to make that subsection subject to proposed new subsection 160ZZQ(20A) - see notes on that new subsection in the notes on subclause 34(14), and the notes on the amendment being made to subsection 160ZZQ(17A) by subclause 34(10).

The amendment being made by subclause 34(11) is, by subclause 38(8), back dated to 20 September 1985, the date of commencement of the capital gains tax provisions.

Subclause 34(12) will make a number of amendments to subsection 160ZZQ(l9) of the Principal Act. The amendment being made by paragraph (a) of the subclause will make the subsection subject to proposed new subsection 160ZZQ(20A) - see notes on that new subsection in the notes on subclause 34(14).

The amendment being made to subsection 160ZZQ(19) of the Principal Act, by paragraph (b) of this subclause, will allow that subsection to apply, in circumstances where a trustee disposes of a deceased person's dwelling within 12 months of the death of the deceased person, as an alternative to subsection 160ZZQ(20) of the Principal Act. Existing subsections 160ZZQ(19) and (20) apply to the trustee of a deceased person's estate in circumstances corresponding to those in which existing subsections 160ZZQ(17A) and (18) respectively apply to a beneficiary. Accordingly, as subsections 160ZZQ(19) and (20) stand at present a corresponding anomaly may occur in relation to the disposal of a dwelling by the trustee of a deceased person's estate within 12 months of the date of death of the deceased person, as that explained in the notes on the amendment being made to subsection 160ZZQ(17A) of the Principal Act in relation to the disposal of a dwelling by a beneficiary in the estate of a deceased person within 12 months of the death of the deceased person.

Paragraphs (c) and (d) of subclause 34(12) will substitute a new subparagraph 160ZZQ(19)(b)(i) in the Principal Act for the existing subparagraph, and as a consequence of that amendment, substitute in paragraph 160ZZQ(19)(d) the words "person referred to in that subparagraph" (ie. in subparagraph 19(b)(i)) for the words "spouse of the deceased person" respectively.

The amendments are being made to allow the sole or principal residence exemption to apply to the dwelling of a deceased person for any period since the date of the deceased person's death during which the dwelling had been the sole or principal residence of the spouse of the deceased person or of a person who had the right to occupy the dwelling (life tenant) under the terms of the deceased person's will. At present no account is taken of the time during which a dwelling owned by a trustee of a deceased person's estate was the sole or principal residence of a life tenant.

By subclause 38(8) that the proposed amendments to subsection 160ZZQ(19) will be back dated to 20 September 1985, the date on which the capital gains tax provisions commenced.

Subclause 34(13) will amend subsection 160ZZQ(20) of the Principal Act to make that subsection subject to proposed new subsection 160ZZQ(20A) (see notes on that new subsection in the notes on subclause 34(14) and the notes on subclause 34(12)).

The amendment will, by subclause 38(8), like the other amendments to the principal residence exemption, be backdated to 20 September 1985.

Subclause (14) of clause 34 inserts a number of new subsections in section 160ZZQ of the Principal Act.

New subsection 160ZZQ(20A) will apply where a dwelling is disposed of by the trustee of, or a beneficiary in, the estate of a deceased person within twelve months of the date of death of a deceased person and both amended subsections 160ZZQ(17A) and (18) apply - where the disposal is by a beneficiary - or both subsection (19) and amended subsection (20) apply - where the disposal is by a trustee. (See notes on subclauses 34(10), 34(11), 34(12) and 34(13)).

By new subsection 160ZZQ(20A) where both the applicable subsections in question apply to a beneficiary in, or to the trustee of, a deceased person's estate, and a capital gain is deemed to have accrued to the beneficiary or trustee, as applicable, then only the subsection which deems the smaller capital gain is to be taken to apply. Where each of the subsections deems the beneficiary or trustee, as applicable, to have incurred a capital loss, then only the subsection which deems the larger capital loss is to be taken to apply.

By the effect of subclause 38(8) (refer to notes below), new subsection 160ZZQ(20A) will effectively apply from 20 September 1985.

New subsection 160ZZQ(20B) will apply, in some circumstances, in determining the extent of the principal residence exemption available on the disposal of the former home of a deceased person by a trustee of, or a beneficiary in, that person's estate.

Where an asset was acquired by a deceased person after 19 September 1985, paragraph 160X(5)(b) of the Principal Act provides that the beneficiary or trustee will be taken to have acquired the asset at its indexed cost base or reduced cost base at the date of death. This has the effect that tax on accrued capital gains (or allowability of accrued losses) is deferred until the asset is actually disposed of. This will also be the case where the asset passes through further deceased estates - the next beneficiary (or trustee) acquires the asset with effective "built-in" capital gains or losses.

Under the existing provisions, in determining the extent of the principal residence exemption available, in as far as the time before the date of the death of the deceased person from whom the home was acquired is concerned, reference is made only to the use of the home as the principal residence of the deceased person. No reference is made to periods in which the home while owned by other persons, of whom the immediately pre-deceased person was in turn a beneficiary, was used as the then owner's principal residence, or to periods while the home was legally owned by the trustees of those other deceased persons' estates, when the home was occupied by, for example, the spouse of the applicable deceased person.

The consequences of these existing provisions may be either to the advantage or disadvantage of the beneficiary or trustee. For example, leaving aside cases where a trustee owned the home, if the proportional use of the home by earlier deceased persons as their principal residence is greater than that, if any, of the latest deceased person, the beneficiary should be entitled to a greater principal residence exemption than at present. In essence, the difficulty is that the capital gain (or loss) on disposal of the home is calculated by reference to the periods of ownership of all persons in the "chain of beneficiaries", as a consequence of the operation of section 160X. However, the calculation of the principal residence exemption available in respect of that gain (or loss) is made by reference only to periods of ownership by the immediately preceding deceased person and the trustee or beneficiary.

New subsection 160ZZQ(20B) will apply in effect where there are more than two deceased people, in the "ownership chain" contemplated by section 160X, who acquired the dwelling after 19 September 1985. Where it applies the exemption available will be based on the proportion of the total ownership period (from the date the home was first acquired after 19 September 1985) in which the home was occupied as the principal residence of the respective deceased persons involved, and while the home was held by a trustee of those people's estates it was the principal residence of the spouse of the deceased person or a person who had the right to occupy the home under the terms of the deceased person's will, or a beneficiary.

The subsection empowers the Commissioner to determine the exemption to be available having regard to these circumstances. Broadly speaking, this will be a cumulative exemption based on the proportion of the time that each deceased person, spouses of the deceased persons or life tenants under the wills in the "chain" used the home as their principal residence since the beginning of the "chain".

By the effect of subclause 38(8) (refer to notes below) new subsection 160ZZQ(20B) will effectively apply from 20 September 1985, but where the disposal of the dwelling was made on or before 15 August 1989 (the date of the Treasurer's announcement of the proposed amendment) the provision is by paragraph (c) of the subsection only to apply if it reduces a capital gain (or increases a capital loss) that would be deemed to have accrued (or would be deemed to have been incurred) under the other provision. The amended provision will thus not apply retrospectively to the detriment of taxpayers.

By paragraph 160ZZQ(20B)(d) the new provision will apply to the appropriate disposals after 15 August 1989 to increase or reduce capital gains or to increase or reduce capital losses.

New subsection 160ZZQ(20C) of the Principal Act will apply where a trustee of the estate of a deceased person, in accordance with the terms of that person's will, acquires a home to be occupied by a beneficiary.

Under the existing provisions, if title to the home purchased in such circumstances subsequently passes to the beneficiary, the trustee will be taken to have disposed of the asset and the beneficiary to have acquired it for the purposes of capital gains provisions. This is because section 160X of the Principal Act only applies where the asset was acquired by the deceased person - it does not apply where the asset that has passed to the beneficiary was acquired by the trustee (refer subsection 160X(5)). The amendment which new subsection 160ZZQ(20C) will make is therefore necessary to enable the trustee to obtain a principal residence exemption for those periods in which the newly acquired home is occupied by the beneficiary under the terms of the deceased person's will.

Where the home is disposed of by the trustee to the beneficiary (provided there is no consideration in respect of the disposal), new paragraph 160ZZQ(20C)(a) will operate so that the trustee is not taken to have disposed of the home. The beneficiary is then taken to have acquired the home on the date on which it was acquired by the trustee and the cost base, indexed cost base or reduced cost base to the beneficiary of the home is to include any amounts that would have been included in the relevant cost base to the trustee had the trustee disposed of the home at the time it was passed to the beneficiary.

New paragraph 160ZZQ(20C)(b) will apply where the trustee does not dispose of the home to the beneficiary for no consideration, in which case the trustee will be taken to have disposed of the home for the purposes of the capital gains tax provisions. In these cases, the new paragraph makes available to the trustee a principal residence exemption for the period in which the home was occupied by the beneficiary.

By new subparagraph 160ZZQ(20C)(b)(i), the trustee is not taken to realise a capital gain or capital loss in respect of the disposal if the home was occupied by the beneficiary as his or her principal residence for the whole of the period between the acquisition and disposal of the home (other than in respect of the period before settlement of the contract for acquisition).

In other cases, subparagraph 160ZZQ(20C)(b)(ii) will, in effect, provide a partial exemption in respect of capital gains or capital losses realised on disposal of the home to the extent to which the dwelling was used in this period as the beneficiary's principal residence.

New subsection 160ZZQ(20C) will, by the effect of subclause 38(8), be taken to have commenced on 20 September 1985, the date on which the capital gains tax provisions commenced.

Subclause 34(15) will amend paragraph 160ZZQ(21)(b) of the Principal Act to take into account of proposed new subsection 160ZZQ(20C) - see notes on that subsection in the notes on subclause 34(14).

This amendment will, like the other amendments to the principal residence provisions, be back dated to 20 September 1985. Subclause 38(8) is to that effect.

Clause 35: Disposal of shares or interest in partnership or trust

Section 160ZZT has the broad effect that a taxpayer may be taken to realise a capital gain on the disposal of certain shares in a company, an interest in a partnership or an interest in a trust which otherwise would have been effectively excluded from the operation of Part IIIA because they were acquired by the taxpayer before 20 September 1985. The section applies where more than 75% of the net worth of a company, partnership or trust is attributable to assets acquired after 19 September 1985. The capital gain taxable to a taxpayer on the disposal of shares or an interest is then calculated by reference to the increase in the value of those underlying assets to the extent that the increase can be attributed to the particular shares or interest being disposed of.

Section 160ZZT applies to the disposal of shares or interests in a company or trust estate which, at the time of the disposal, is a "private company" or a "private trust estate" within the meaning given to those terms by the operation of section 26AAA of the Principal Act.

By subclause 35(1), new subsection 160ZZT(1A) is to be inserted, to treat for the purposes of the section certain companies and trusts, not otherwise subject to the operation of the section, as, "private companies" or "private trust estates" at the time of disposal of particular shares or interests.

By paragraph (1A)(a), a company will be taken to be a "private company" at a particular time (referred to as the "relevant time") after 19 September 1985, if the company was an "unlisted company" (refer to notes below on paragraph 160ZZT(1A)(c) for the definition of that term) either:

•

at the relevant time (subparagraph (a)(i)); or

•

within the period of 5 years immediately before the relevant time (if after 15 August 1994) or, in other cases, in the period between 15 August 1989 and the relevant time (subparagraph (a)(ii)).

Paragraph (1A)(b) will operate in substantially the same terms as paragraph (1A)(a) in determining whether, at a particular time (e.g. on the disposal of an interest in a trust estate), a trust estate was a "private trust estate", except that it refers to whether the trust estate was not a unit trust or, if it was a unit trust, whether it was an "unlisted unit trust", as defined in paragraph (1A)(d) (refer to notes below).

By paragraph (1A)(c), a company is an unlisted company at a particular time if no shares in that company were listed on an Australian (or overseas) stock exchange. Correspondingly, by paragraph (1A)(d), a unit trust is only an "unlisted unit trust" if none of its units were officially listed on a stock exchange in Australia or elsewhere.

The broad effect of the proposed insertion of subsection 160ZZT(1A) is to ensure that the application of section 160ZZT cannot be avoided simply because a particular company or trust estate has ceased to be a private company or private trust estate.

New subsection 160ZZT(2), which replaces existing subsection (2), has the same broad effect as the existing subsection (which states that expressions used in section 26AAA have the same meaning for the purposes of applying section 160ZZT), except that the meaning of the expressions "private company" and "private trust estate" must, for the purposes of section 160ZZT, be determined having regard to subsection 160ZZT(1A).

By subclause 38(10), new subsection 160ZZT(1A) will apply to shares or an interest disposed of after 15 August 1989.

Subclause 35(2) proposes the insertion of new subsection 160ZZT(4), to apply to the disposal of shares owned by a taxpayer in a non-resident company. In determining the application of section 160ZZT to the disposal of such shares, the new subsection is intended to treat the company as having acquired an asset before 20 September 1985 (and therefore outside the section 160ZZT calculation) where the asset was acquired from another group company (as defined in section 160ZZO) which in turn had acquired it before 20 September 1985.

Clause 36: Payment of interest where assessment amended

Section 170AA of the Principal Act provides for the payment of interest to the Commissioner where an amendment of an assessment increasing the liability of a taxpayer to tax is made. Subsection 170AA(12) refers, among other things, to section 202 by ensuring that a reference to "income tax" or "tax" in section 202 includes a reference to interest payable under section 170AA.

Section 170AA was inserted by Act No.46 of 1986. It applies to assessments made on or after 1 July 1986. In referring to section 202, it was referring to a section dealing with the adjustment of tax after an appeal. Section 202 was repealed by Act No.48 of 1986, and was subsequently re-used for the Tax File Number provisions. The current reference to section 202 in subsection 170AA(12) was not intended to apply to the Tax File Number provisions, and the amendment proposed by this clause will rectify this situation.

Clause 37: Interpretation

Clause 37 proposes to amend the definition of "actuary" in subsection 267(1) of the Principal Act. Section 267 sets out the meanings of terms used in Part IX - Taxation of superannuation business and related business. In Part IX, an actuary is required to provide certain certificates which affect the way in which entities subject to Part IX are taxed.

The existing law defines "actuary" by reference to the Life Insurance Act 1945. In Part IX, this definition is not appropriate in all cases as parts of it are only relevant for life assurance companies (which are not subject to Part IX). Under the new definition, an "actuary" means a Fellow or an Accredited Member of the Institute of Actuaries of Australia.

By subclause (19) of clause 38, this amendment applies to certificates issued after the Taxation Laws Amendment Act 1990 receives Royal Assent.

Clause 38: Application of amendments

This clause, which will not amend the Principal Act, contains application provisions relating to the operation of certain measures contained in the Bill. For reference purposes the Principal Act, as proposed to be amended by this Bill, is (by subclause (1)) called the "amended Act".

Subclause 38(2) specifies that the amendments made by paragraphs (a), (b) and (d) of clause 6 in relation to the taxation treatment of the carer's service pension are to apply to a pension payment made in accordance with a claim for carer's service pension lodged on or after 1 November 1989. That date, by virtue of subclause 3(35) of the Social Security and Veterans' Affairs Legislation Amendment Act (No. 4) 1989, is the date from which a claim by a non-relative for carer's service pension may be lodged.

By subclause 38(3) of the Bill, the amendments in paragraphs (c), (e), (f) and (g) of clause 6 to remove references in subsection 23AD(1) of the Principal Act to an allowance under the Tuberculosis Act 1948 that is no longer paid will apply on or after the day on which the Bill receives the Royal Assent.

By subclause 38(4), the amendment to be made by clause 7 applies to certificates issued on or after 1 July 1985. The amendment by clause 7 replaces the definition of approved actuary in section 27H due to an incorrect reference which occurred on 1 July 1985 in the definition.

Subclause 38(5) is to the effect that the amendment made by clause 11 which inserts new paragraph 78(1)(a)(lxxxvi) is to apply to gifts made on or after 29 January 1987.

By subclause (6), the amendment proposed by clause 8 (expenditure on research and development activities), clause 9 (guaranteed returns to investors), clause 10 (reduction of deductions) and paragraphs (a), (b), (c) and (d) of clause 13 (disposals of assets) are to apply in respect of expenditure incurred after 7 September 1989.

By subclause 38(7), the amendments to be made by clause 12 and subclause 23(1) to the group relief loss transfer provisions of subsections 80G(6) and 160ZP(7) respectively, of the Principal Act, are to apply to relevant losses incurred in the 1989-90 and subsequent years of income.

Subclause 38(8) backdates to 19 September 1985 most of the amendments proposed by clause 34 to section 160ZZQ - the principal residence exemption provisions. It also applies to the technical amendments proposed by clauses 14(a) and 15 to sections 160M and 160V.

By subclause 38(9) the amendments proposed by clause 16 to the CGT "no double-tax" provision - subsection 160ZA(4) - are to apply to assets disposed of after 30 November 1989.

Subclause 38(10) applies to a number of amendments proposed by this Bill, and provides that those amendments are to apply to assets disposed of after 15 August 1989. The amendments to which subclause 38(10) applies are as follows:

•

clause 18, which amends section 160ZD in relation to the consideration for disposal of an asset;

•

clause 30, which amends section 160ZZN in relation to rollover relief on the transfer of an asset to a wholly-owned company;

•

clause 31, which amends section 160ZZO to limit rollover relief on assets transferred between companies in the same group; and

•

subclause 35(1), which amends section 160ZZT to deem certain companies or trusts to be "private companies" or "private trust estates".

Under subclause 38(11) the amendment proposed by clause 19 to section 160ZH, in relation to consideration for acquisition of an asset included in its cost base, will apply to assets acquired after 15 August 1989.

By subclause 38(12), the amendments proposed by clause 20, which amends section 160ZJ in relation to the indexation of amounts included in an assets cost base, will apply to disposals of assets that were acquired after 15 August 1989.

By subclause 38(13), the amendments to section 160ZL relating to returns of capital on shares proposed by clause 21 will apply to shares disposed of after 15 August 1989.

By subclause 38(14) the amendments to section 160ZM proposed by clause 22 in relation to returns of capital on investments in trusts will apply to units or interests in trusts disposed of after 15 August 1989.

Under subclause 38(15) amendments to section 160ZP, proposed by subclause 23(2) to restrict the transferability of capital losses, will apply to notices given after 15 August 1989 to effect such transfers.

Under subclause 38(16), the proposed amendment by subclause 23(3) will apply to disposals of assets that occur after 15 August 1989 where the relevant notices under paragraph 160ZP(7)(c) are also given after that date. The amendment to section 160ZP will reduce the cost base of certain shares or loans following the transfer of capital losses.

Subclause 38(17) will ensure that rights issued after 15 August 1989 will be subject to amendments proposed to section 160ZYK by clause 24.

Subclause 38(18) applies to amendments proposed by clause 25 to section 160ZYR, to ensure their application to options issued after 15 August 1989.

Under subclause 38(19) the new CGT rollover provisions for strata title conversions and incorporations of associations as companies - sections 160ZZPG and 160ZZPH, proposed to be inserted by clause 17 - will be effectively backdated to 19 September 1985, the commencement date of the CGT provisions.

Subclause 38(20) contains application provisions in relation to section 160ZYYA (proposed to be inserted by clause 26) and section 160ZZBAA (proposed to be inserted by clause 27). Those provisions are to apply to convertible notes acquired after 10 May 1989, the date from which sections 26BB and 70B apply.

Subclause 38(21) proposes that the amendment made by clause 37 will apply in relation to certificates issued after the Taxation Laws Amendment Bill 1990 receives Royal Assent. Clause 37 proposes to insert a new definition of actuary in subsection 267(1) of the Principal Act.

Clause 39: Transitional - section 27H of the amended Act

In relation to the provision of actuarial certificates, it is proposed by clause 7 (see notes on that clause) to replace the definition of "approved actuary" with a new definition of "actuary" in section 27H of the Principal Act. This is consequential upon the repeal of subsection 4A(2) of the Life Insurance Act 1945 with effect from 1 July 1985.

The new definition of actuary applies, by subclause (4) of clause 38, to certificates issued on or after 1 July 1985. Clause 39 provides transitional arrangements in relation to certificates issued on or after 1 July 1985 and before the Taxation Laws Amendment Bill (No. 6) 1989 receives Royal Assent, where the certificate purported to be for the purposes of section 27H.

By subclause (1) of clause 39 a reference in this section to the "amended Act" is a reference to the Principal Act as proposed to be amended by this Bill.

By subclause (2) of clause 39 an actuarial certificate is to be taken to have been issued by an actuary under section 27H of the Principal Act when all three conditions specified in paragraphs (a) to (c) are satisfied. The conditions required are that a certificate was issued -

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before this clause commenced (i.e. date of Royal Assent) (paragraph (a));

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in relation to section 27H of the Principal Act (paragraph (b)); and

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by a person referred in subsection 4A(2) of the Life Insurance Act 1985 as it existed before 1 July 1985 (paragraph (c)).

Clause 40: Transitional - elections under subsection 160ZZO(5) of the amended Act

Clause 40, which does not propose an amendment to the Principal Act, is a transitional measure necessary in relation to amendments proposed to subsections 160ZZQ(5) and 160ZZQ(5A) of the Principal Act by subclauses 34(2) and (3) respectively of this Bill. Those amendments will, broadly speaking, extend the circumstances in which a taxpayer may obtain the principal residence exemption for the construction period of a new home. The amendments are to apply, effectively, from 20 September 1985.

The transitional arrangements proposed by clause 40 are necessary because an extended exemption pursuant to subsection 160ZZQ(5) is only available at the election of a taxpayer and because of the backdating of the amendments to that subsection to 20 September 1985. Following the amendment to subsection 160ZZQ(5) a taxpayer who had previously not met the requirements to elect to have a home treated as his or her principal residence during the construction period mentioned in that subsection, but who under the amended provisions meets those requirements, may to elect to have a home treated as his or her principal residence during the construction period. However, but for Clause 40 that election would not be effective because, in general, it could not be lodged with the Commissioner within the time required by subsection 160ZZQ(5A) as amended by this Act.

Clause 40 provides, in effect, that where a home (to which the previous provisions did not apply but to which the extended exemption applies) was disposed of on or before 15 August 1989 (the date of the announcement by the Treasurer of the proposed amendments), the necessary election does not have to be lodged with the Commissioner of Taxation within the time requirements specified in amended subsection 160ZZQ(5A). It goes on to provide that the election to be effective must, however, be lodged no later than the date of lodgment of the taxpayer's first income tax return, in respect of any year of income, lodged after the provision comes into effect. The Commissioner of Taxation is empowered by clause 40 to accept elections made after that date. This discretion, in common with other similar discretions, would be exercised widely where there are genuine reasons for the taxpayer's failure to lodge the election by the prescribed date.

Clause 41: Amendment of assessments

Clause 41 of the Bill authorises the Commissioner of Taxation to re-open an income tax assessment made before the Bill becomes law should this be necessary for the purposes of giving effect to the amendments proposed by the Bill.

PART 3 - AMENDMENT OF THE INDUSTRY RESEARCH AND DEVELOPMENT ACT 1986

Clause 42: Principal Act

This clause facilitates reference to the Industry Research and Development Act 1986 which, in this Part, is referred to as "the Principal Act".

Clause 43: Certificate as to core technology

Clause 43 inserts a new section 39LA in the Principal Act. This provision is to be read with subsection 73B(35) of the Income Tax Assessment Act 1936 proposed to be inserted by subclause (8) of clause 8 (see earlier notes).

New section 39LA requires the Industry Research and Development Board ("the Board"), upon request by the Commissioner of Taxation, to give a certificate to the Commissioner stating whether particular technology was core technology in relation to particular research and development (R & D) activities. The Board may also provide a certificate without a prior request from the Commissioner.

Clause 44: Joint registration

Section 39P of the Principal Act permits applications for joint registration of 2 or more eligible companies in relation to proposed R & D activities. Subsection 39P(3) outlines criteria as to which the Board has to be satisfied before it may register companies jointly. Paragraph 39P(3)(d) requires that one or more of the companies not be able to utilise the results of R & D activities in a business carried on by that or those companies. Paragraph 39P(3)(e) specifies that the total expenditure expected to be incurred by the company or companies referred to in paragraph 39P(3)(d) must exceed $1,000,000.

The purpose of the amendment which will be effected by clause 44 is to omit paragraphs 39P(3)(d) and (e), thereby removing the restrictions imposed by those paragraphs.

Clause 45: Application of amendments

This clause, which will not amend the Principal Act, contains an application provision in relation to section 39LA (proposed to be inserted by clause 43) and the amendments proposed to be made to subsection 39P(3) by clause 44.

Those provisions are to be taken to have had effect on and from 8 September 1989.