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 (No. 3) 1988.

Clause 2: Commencement

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

PART II - AMENDMENT OF THE FRINGE BENEFITS TAX ASSESSMENT ACT 1986

Clause 3: Principal Act

This clause facilitates reference to the Fringe Benefits Tax Assessment Act 1986 which, in this Part, is referred to as the "Principal Act".

Clause 4: Reduction of taxable value - "otherwise deductible" rule

The amendment proposed by this clause modifies the usual operation of what is referred to as the "otherwise deductible" rule. Broadly, by that rule, the taxable value of a fringe benefit is reduced by the extent to which the expense, if borne by the employee receiving the benefit, would for income tax purposes have been deductible to the employee. For example, an employee using an employer-provided loan wholly to buy interest-bearing investments would be entitled to an income tax deduction for interest paid. In those circumstances, the taxable value of the loan fringe benefit would be nil.

The amendment ensures that the rule will not operate, after the date of introduction of this Bill, in respect of certain expenses otherwise deductible against income from foreign sources.

Under Australia's foreign tax credit system, expenses incurred in deriving foreign source income are 'quarantined', i.e., they can only be applied to reduce the particular class of foreign income to which they relate, with any 'excess' expenditure being carried forward for deduction in future years when there may be sufficient income of that class to absorb them. Consistent with that measure, the fringe benefits tax law is being amended by this clause to preclude a reduction in the taxable value of a loan fringe benefit where interest, incurred by an employee in deriving foreign source income, would otherwise have been deductible by the employer for income tax purposes but for the quarantining provisions of the foreign tax credit system.

Paragraph (a) achieves this by inserting the excluding words",not being a foreign source deduction," in subparagraph 19(1)(b)(i) of the Principal Act. Paragraph (b) amends sub-subparagraph 19(1)(ba)(ii)(A) to similar effect.

Clause 5: Reduction of taxable value - "otherwise deductible" rule

Clause 5 proposes to amend section 24 of the Principal Act which applies, broadly, to reduce the taxable value of an expense payment fringe benefit to the extent to which the expenditure incurred by the employee would have been deductible to the employee for income tax purposes if it had not been paid or reimbursed by the employer.

Paragraphs (a) and (b) amend section 24 of the Principal Act to preclude the application of the "otherwise deductible" rule in much the same way as its application is affected by clause 4 of this Bill. The relevant expenditure is that which would otherwise reduce the taxable value of an expense payment fringe benefit; for example, commission paid to a collector of foreign rental income.

Paragraph (c) corrects paragraph 24(1)(c) of the Principal Act by replacing the term "expense benefit" with the term "expense payment benefit".

Paragraph (d) of this clause will amend paragraph 24(1)(d) of the Principal Act which applies where the employee's expenditure was incurred in respect of "extended travel", that is, travel outside Australia or travel in Australia in circumstances where the travel was not undertaken exclusively in the course of the employee's employment with the employer and involved the employee being away from home for more than 5 nights.

Presently a precondition for the application of the otherwise deductible rule is that the employee keep a travel diary of a kind required to substantiate deductions under the income tax law for overseas or extended domestic travel. A further requirement is that the diary (or a copy) be supplied to the employer by the time of lodgment of the employer's annual fringe benefits tax return.

The effect of the amendment proposed by this paragraph is that employees in receipt of an "international aircrew expense payment benefit" (see notes on paragraph (c) of clause 15) will not be required to keep a travel diary.

Clause 6: Insertion of new section

Clause 6 inserts new section 58LA in Division 13 of the Principal Act.

Section 58LA: Exempt benefits - compassionate travel

New section 58LA confers an exemption from fringe benefits tax in respect of fringe benefits provided, in any of four specified forms on or after 1 July 1986, in connection with what may be described as compassionate travel. A typical circumstance at which the exemption is directed is where an employee is working away from home and the employer pays the employee's airfare to his or her home city to enable the employee to visit his or her seriously ill spouse. The new section will only exempt compassionate travel, however, where the sole reason for the journey is the serious illness of the employee or of his or her close relative (see the notes on clause 15) or to enable the traveller to attend the funeral of one of those persons. The first three paragraphs in the proposed section contain the pre-requisites for exemption.

First, paragraph (a) sets out the four types of fringe benefit which might be provided as 'compassionate benefits'. In relation to an employee's employment, an employer may provide various benefits relating to the transport of a person (the 'traveller') who must be either the employee or a close relative. Those benefits are:

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a car benefit (subparagraph (i));

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an expense payment benefit in relation to the provision of transport, meals or accommodation for the traveller (subparagraph (ii));

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a property benefit consisting of meals for the traveller (subparagraph (iii)); or

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a residual benefit being the provision of transport or accommodation for the traveller (subparagraph (iv)).

Paragraph (b) looks to whether the reason for the travel is of a kind such as to qualify for the compassionate travel exemption. The condition is that the only reason for the travel is to enable the employee:

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to attend the funeral of his or her close relative (sub-subparagraph (b)(i)(A)); or

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to visit a close relative due to the serious illness of that relative or of the traveller (sub-subparagraph (b)(i)(B)); or

Where the traveller is a close relative of the employee, the sole reason for the journey is to enable the traveller:

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to attend the employee's funeral (sub-subparagraph (b)(ii)(A));

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to visit the employee due to a serious illness of either person (sub-subparagraph (b)(ii)(B));

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to attend the funeral of another close relative of the employee (sub-subparagraph (b)(ii)(C)); or

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to visit another seriously ill close relative, or if the traveller is seriously ill, to visit a close relative, e.g., the case where an employee's seriously ill child is transported, at the employer's expense, from a boarding school to visit his or her mother at home (sub-subparagraph (b)(ii)(D)),

Paragraph (c) adds requirements to those specified in paragraphs (a) and (b). They relate, broadly, to the employee's work location at the time the compassionate travel commenced.

First, by subparagraph (i), the compassionate travel must generally have started when the employee was travelling while performing his or her employment duties. Alternatively, it will suffice (by subparagraph (ii)), if the journey commenced while the employee was required to live away from home so as to carry out his or her employment duties. The compassionate travel may also qualify for exemption if the employee usually lived or worked in an Australian State or internal Territory (sub-subparagraph (iii)(A)) and his or her work location was not in or next to an eligible urban area, i.e., the location was in a remote area (sub-subparagraph (iii)(B)).

Some limitation is placed on the exemption available under sub-subparagraphs (b)(ii)(C) and (D) by paragraph (d) which requires that the travel in the cases falling within those sub-subparagraphs commence in circumstances where the traveller ordinarily resides with the employee.

A safeguard in paragraph (e) is that, where subparagraph (a)(ii) applies - see the earlier notes on that subparagraph - documentary evidence of the expense payment benefit recipient's expenditure on transport, meals and accommodation is to be obtained and supplied to the employer before the due date for lodgment of the employer's next fringe benefits tax return. This requirement mirrors an existing one in paragraph 58L(1)(k) of the Principal Act. To ensure that paragraph (c) has no retrospective operation, it is to apply only to expenditure incurred after the date of introduction of this Bill.

Introductory Note: Changes to the provisions regarding how employers may specify certain details regarding cars used to confer fringe benefits

Many of the amendments made to the Fringe Benefits Tax Assessment Act 1986 by this Bill are of a technical drafting kind. Together with amendments set out in the Schedule they reflect the fact that certain fringe benefits tax matters - associated largely with establishing the taxable value of car fringe benefits - may now be specified in records to be retained by employers rather than requiring to be specified in fringe benefits tax returns.

Clause 7: Reduction of taxable value - remote area holiday transport fringe benefits subject to ceiling

Section 60A of the Principal Act is amended by this clause in two respects. First, paragraphs (a), (b) and (c), make purely technical amendments reflecting the insertion, by clause 15, of definitions of the terms "basic car rate" and "supplementary car rate" in the Principal Act (see the notes on that clause).

Second, there is a widening of the scope of section 60A, which reduces by half (subject to a specified ceiling) the taxable value of certain "remote area holiday transport fringe benefits". That term is defined in section 143 of the Principal Act and refers, broadly, to a benefit that meets the cost of holiday transport (or meals and accommodation en route) and is provided in accordance with an award or industry custom to an employee who works in a remote area. The new paragraphs will ensure that the reduction in the taxable value of remote area holiday transport fringe benefits will be available in cases where the employee's spouse and/or children receive the benefits by way of a cash allowance.

The ceiling on the reduction in taxable value provided for by section 60A limits is an amount equal to half of the "benchmark travel amount". Broadly, that expression (defined in subsection 143(3) of the Principal Act) means the usual cost of return travel between the work locality and the capital city of the State in which the work place is located (this will often be the return economy airfare).

Proposed new paragraphs (a) and (b) set out the pre-conditions to be met before the reduction in taxable value will apply. The relevant benefit is to consist of an allowance to the spouse or child of the employee (paragraph (a)) and spent wholly or partly by the recipient for the purpose for which it was paid, i.e., in obtaining holiday transport, meals or accommodation (paragraph (b)).

If these tests are satisfied, the allowance is treated as an expense payment fringe benefit (paragraph (c)), the amount spent on holiday transport, etc. is deemed to have been spent by the recipient (paragraph (d)) and, to the extent of the amount spent on holiday transport, etc., the allowance is treated as if it were a reimbursement of the deemed expenditure (paragraph (e)). By this drafting device such an allowance may support a reduction in the taxable value of a holiday transport fringe benefit, subject only to the documentary evidence or declaration requirements of subsection 60A(2) of the Principal Act.

Clause 8: Reduction of taxable value - remote area holiday transport fringe benefits not subject to ceiling

This clause amends section 61 of the Principal Act along the same lines as clause 7 - see the notes on that clause. The only substantive difference between sections 60A and 61 of the Principal Act is that the reduction in taxable value permitted by section 60A is subject to a ceiling, as explained in the notes on clause 7. The section 61 reduction calculation is not limited in that way.

Clause 9: Reduction of taxable value - overseas employment holiday transport

This clause amends section 61A of the Principal Act in a purely technical way to reflect the insertion, by clause 15, of new definitions in section 136 of the Principal Act - see the notes on clause 15.

Clause 10: Reduction of taxable value of certain expense payment fringe benefits in respect of relocation transport

This clause makes technical amendments of the Principal Act (in this case, to section 61B) consequent upon the insertion of new definitions in section 136 of the Principal Act by clause 15 - see the notes on that clause.

Clause 11: Reduction of taxable value of certain expense payment fringe benefits in respect of employment interviews or selection tests

A technical amendment of section 61E of the Principal Act is effected by this clause as a consequence of the insertion, in section 136 of the Principal Act, of a definition of "basic car rate" - see the notes on clause 15.

Clause 12: Reduction of taxable value of certain expense payment fringe benefits associated with work-related medical examinations, work-related medical screenings, work-related preventative health care, work-related counselling or migrant language training.

Section 61F of the Principal Act is amended in a consequential manner by this clause. The amendments arise out of new definitions inserted in section 136 of the Principal Act by clause 15 - see the notes on that clause.

Clause 13: Heading to Part X

This clause amends the heading to Part X of the Principal Act to reflect the fact that the subject matter of the Part is being widened by this Bill.

Clause 14: Car records to be completed before declaration date

By this clause a new section, section 123A, is inserted in the Principal Act. As explained in an introductory note, lodgers of fringe benefits tax returns will no longer have to specify in return forms certain matters in relation to cars that constitute fringe benefits. Instead, it will suffice if those matters are specified in "car records" (a defined term - see the notes on that definition in clause 15).

As a safeguard against inadvertent or deliberate error, the Bill requires that matters to be specified in car records be specified before the "declaration date". Subsection 123A(1) is to the effect that a matter is not to be taken to have been specified or nominated in an employer's car records unless it is entered before the due date (or extended due date) for lodgment of the relevant fringe benefits tax return. This subsection applies for all of the purposes of the Principal Act except section 115A related to penalties - see the notes on subclauses 19(6) to 19(9).

Subsection (2) makes it clear that the operation of any other provision of the Principal Act which requires a matter to be treated as if specified in an employer's car records is not to be prejudiced by the operation of subsection (1). An example is the Commissioner's power under section 162D to treat matters as having been specified in car records where an employer inadvertently failed to so specify those matters.

Clause 15: Interpretation

The key interpretation section of the Principal Act, (section 136) is amended by this clause to modify existing definitions and insert new ones to facilitate the drafting of the operative clauses of the Bill.

Paragraph (a) inserts a new paragraph in the definition of "statutory evidentiary document" in subsection 136(1) of the Principal Act. New paragraph 136(1)(aa) will create an extra category of statutory evidentiary document, a term embracing broadly:

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declarations and other documents used to determine the taxable value of fringe benefits; and

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car documents used to support either the calculation of the cost basis of valuing car fringe benefits or a reduction in the taxable value of an expense payment fringe benefit.

The new category of statutory evidentiary document is car records that:

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are maintained by an employer in relation to the current fringe benefits tax year of tax (subparagraph (i)); or

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were kept by an employer and relate to an earlier fringe benefits tax year of tax but are relevant to the present year of tax (subparagraph (ii)). A possible example of this category is prior year log book records used to establish the business percentage use of a car where that percentage is still being adopted.

Paragraph (b) redefines 'eligible incidental travel expense payment benefit'. The term has relevance for the 'otherwise deductible' rule contained in section 24 of the Principal Act.

Subparagraph (a)(i) of the new definition restates the existing definition and relates to expenditure on accommodation, food or drink or incidentals in respect of travel within Australia.

Subparagraph (a)(ii) adds a reference to an expense payment fringe benefit in the nature of a payment or reimbursement of expenses that a person might reasonably be expected to have incurred on food or drink or incidentals - but not accommodation - whilst undertaking travel outside Australia in the course of performing duties as an employee.

Subparagraph (a)(ii), in conjunction with the 'otherwise deductible' rule, will allow the taxable value of an expense payment benefit that is an eligible incidental travel expense payment fringe benefit in respect of travel outside Australia to be reduced if an employee produces documentary evidence of accommodation expenses but dispenses with the need to produce evidence of the cost of food or drink or incidentals. The provision applies both to allowances for food and drink and incidentals only and to allowances that also cover accommodation, as long as the food, drink and incidentals components are reasonable. Where an employee receives an allowance that covers accommodation, and reasonable food, drink and incidentals, the employee will be required to substantiate accommodation expenses but not the cost of the reasonable meals and incidentals.

In addition to requiring an employee to provide documentary evidence of an expense to the employer, the 'otherwise deductible' rule requires an employee to give the employer a declaration, in approved form, setting out details of relevant expenditure (paragraph 24(1)(e) of the Principal Act). The declaration establishes the necessary link between the expenditure and the income-producing activities of the employee.

The requirement to lodge a declaration does not apply to certain benefits excluded by paragraph 24(1)(e) such as 'eligible incidental travel expense payment benefits'.

The effect of the proposed new definition of 'eligible incidental travel expense payment benefit', when read in conjunction with subparagraph 24(1)(c)(ii) and paragraphs 24(1)(d) and 24(1)(e), is that an employee in receipt of such a benefit in respect of overseas travel will not be required to lodge a declaration and will not be required to substantiate expenses by documentary evidence. There will still, however, be a requirement to keep a travel diary in respect of overseas travel.

Paragraph (c) adds new definitions to section 136 of the Principal Act. They will carry the given meaning in that Act unless a contrary intention appears. The newly defined terms and their meanings are:

"basic car rate" means, in relation to a fringe benefits tax ('FBT') year of tax, the rate prescribed for income tax purposes, in accordance with paragraph 82KX(1)(a) of the Income Tax Assessment Act 1936, for the year ending on the 30 June next following the 31 March ending of that FBT year. In practice, this will mean that the cents-per-kilometre rate (for car expenses)to be used for FBT purposes in any FBT year is to be the same rate as that used in the income year having 9 months in common with the FBT year. That is, the rate for the FBT year ended 31 March 1988 is that used for income tax purposes for the income year ending 30 June 1988. This amendment affirms the current administrative practice.

"car records" are those maintained by an employer for the purposes of those provisions of the Principal Act that use that term. For the current and earlier fringe benefits tax years of tax the term includes computer records convertible into written English (paragraph (a) of the definition). For later years of tax, "car records" refers (by paragraph (b)) to records kept by an employer in a form approved by the Commissioner of Taxation.

"close relative" of a person means (by paragraphs (a), (b) and (c)) the spouse, child or parent of that person or the parent of that person's spouse. The definition is relevant to the 'compassionate travel' exemption - see the notes on clause 6 - and confines the benefit of the exemption, where other pre-conditions are satisfied, to the cost of such travel in relation to the serious illness or funeral of a person falling within the scope of the definition.

"foreign source deduction" is defined in paragraph (a) as a deduction relating solely to income derived from a 'foreign source' - a term defined in section 160AFD of the Income Tax Assessment Act 1936 and meaning, broadly, income from a business carried on in a foreign country. Paragraph (b) of the definition incorporates by reference the power of the Commissioner under that section to apportion undisected deductions against foreign source income. The definition is relevant to the operation of the "otherwise deductible" rule explained in the notes on clauses 4 and 5.

"international aircrew expense payment benefit" is an expense payment fringe benefit in the nature of a payment or reimbursement of expenses that a person employed as a crew member of an international flight might reasonably be expected to have incurred on accommodation, food, drink or incidentals whilst undertaking travel outside Australia in the course of performing duties as an employee.

This definition is relevant to the proposed amendment to paragraph 24(1)(d) of the Principal Act outlined in the notes on clause 5.

"supplementary car rate" is defined as the further prescribed rate for car expenses. The calculation of car expenses on a cents-per-kilometre basis is made by reference to two components: the "basic car rate" (see the notes on that definition) and the "supplementary car rate", the latter rate applying where more than one person uses a car. This amendment does not alter the present law but allows it to be expressed more briefly.

Clause 16: Reimbursement etc. of tax not to be regarded as consideration in respect of benefit etc.

Proposed new section 136A of the Principal Act is inserted by this clause. The new section will apply from the date of introduction of this Bill to make it clear that any amount paid thereafter in respect of fringe benefits tax cannot constitute consideration for the provision of a fringe benefit (paragraph (a)) or consideration for other matters (paragraph (b)). This ensures that an employee who bears, directly or otherwise, the whole or a part of an employer's fringe benefits tax liability, has made a "recipients contribution", thereby reducing the taxable value of a fringe benefit. The reference to section 145 also ensures that a payment in kind, i.e., other than in money, may fall within the new provision. A basic premise of the fringe benefits tax is, that payments of fringe benefits tax are not tax deductible. The Amendment makes plain that payments made by someone other than the employer cannot reduce the amount of fringe benefits tax payable by that employer.

Clause 17: Remote area holiday transport

The amendment made by this clause is associated with the amendment effected by clause 7 in relation to remote area holiday transport allowances - see the notes on that clause. Paragraph 143D(d) of the Principal Act is being amended to add words ensuring that an allowance paid to an employee's spouse or children for the cost of obtaining transport, meals or accommodation will qualify as a fringe benefit in respect of remote area holiday transport, if the other conditions of section 143 are satisfied. This will allow the concessions under sections 60A and 61 of the Principal Act to reduce the taxable value of the benefit.

Clause 18: Amendments relating to car records

This clause authorises several drafting amendments of the Principal Act that are set out in the Schedule to the Bill, most being consequent on changes being made as already explained under which employers may specify certain matters - in relation to car fringe benefits - in records to be retained by them rather than in fringe benefits tax returns. A further general explanatory note on the Schedule amendments appears at the end of the notes on clauses.

Clause 19: Application of amendments

This clause, which will not amend the Principal Act, contains application provisions relating to the operation of the various amendments contained in the Bill. For reference purposes, the Principal Act as amended by the Bill is called the "amended Act" (subclause (1)). The general application rule expressed in subclause (2) is that the amendments apply:

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to fringe benefits tax assessments for the transitional and later years of tax (subclause 2(a)); and

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to fringe benefits tax instalments of the transitional year of tax only (subclause 2(b)).

As such, the concessional amendments being introduced by this amending Bill will apply from the date of introduction of the fringe benefits tax law, 1 July 1986. The remaining provisions of clause 19 vary the general application arrangements in specific circumstances.

Subclause 19(3) has the effect that the amendments restricting the application of the "otherwise deductible" rule (see the notes on clause 4 and paragraphs (a) and (b) of clause 5) will apply where the relevant loan was made or the loan recipient's expenditure was incurred, as the case requires, after the date of introduction of the Bill.

By the operation of subclause 19(4), conditions specified in paragraphs 60A(2)(b) or 61(b) or (c) (as the case requires) of the amended Act in relation to the furnishing of documentary evidence of remote area holiday transport expenditure, or of a declaration about that expenditure, are to be taken as satisfied where the relevant fringe benefit was provided on or before the date of introduction of the Bill. The subclause ensures that requirements consequent upon the amendments made by clauses 7 and 8 of the Bill apply prospectively.

By subclause 19(5), the amendment made by clause 16 of the Bill in relation to the appropriate classification of reimbursements, etc. of fringe benefits tax applies to amounts paid after the date of introduction of the Bill.

Subclause 19(6) limits the scope of operation of a penalty section of the Principal Act, section 115A, in relation to the specification in fringe benefits tax returns of a business use percentage for a car. The subclause deems section 115A never to have applied to such a percentage but is subject to the operation of subclauses (7) to (9) inclusive.

Subclause 19(7) ensures that section 115A operates only in appropriate circumstances. Before its amendment by this Bill, that section imposed penalty tax if an employer's fringe benefits tax return overestimated the business-use percentage applicable to a car used both for business purposes and to confer a car fringe benefit. The concessional amendments made by this Bill to allow employers to specify certain matters (including car business-use percentages) in car records retained by them rather than in fringe benefits tax return forms apply with effect from 1 July 1986.

The subclause provides that section 115A penalty can only apply in relation to the specification of matters in car records retained by employers where:

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the specification occurs after the commencement of this clause, (i.e. after the date of Royal Assent) even if subclause 19(8) deems that specification to have been made before then (paragraph (a));

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the business-use percentage is deemed by subclause 19(9) to have been specified in the car records (paragraph (b)); or

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section 162 of the Principal Act as proposed to be amended by this Bill deems the business-use percentage to have been specified in the car records (paragraph (c)).

Subclause 19(8) allows employers one month after the commencement of clause 19 (i.e., one month after the day of Royal Assent) to specify or nominate a particular in car records of a fringe benefits tax year that ended before that date and be treated as if they had specified or nominated it before the fringe benefits tax return for that year of tax was due for lodgment. This gives employers time to take advantage of the opportunity to specify relevant matters in car records relating to a past fringe benefits tax year or years.

Subclause 19(9) preserves the exposure of employers to penalty under section 115A of the Principal Act in relation to business-use-of-car percentages specified in returns lodged before the commencement of clause 19, i.e., one month after the day of the Royal Assent. Subclause 19(9) applies only for the purposes of section 115A.

Clause 20: Amendment of assessments

Clause 20 will give the Commissioner of Taxation authority to re-open a fringe benefits 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 III - AMENDMENT OF THE INCOME TAX ASSESSMENT ACT 1936

Clause 21: Principal Act

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

Clause 22: Reimbursement etc. in respect of fringe benefits tax not assessable income

New section 23M is inserted in the Principal Act by this clause to confer an exemption from income tax on amounts derived by a taxpayer by way of a reimbursement of fringe benefits tax. The exemption is to be available where subsection 51(4A) of the Principal Act applies to deny an income tax deduction to the person incurring the expenditure. Subsection 51(4A) denies a subsection 51(1) deduction in respect of tax imposed by the Fringe Benefits Tax Act 1986. Its wording is expressed widely so as to cover direct and indirect payments of the tax. The terms of the new exemption section make it clear that the availability of the exemption does not depend on whether the person incurring the expenditure would be entitled, apart from subsection 51(4A), to a subsection 51(1) deduction.

Clause 23: Deductions not allowable for entertainment expenses

An amendment is effected by this clause consequential upon the insertion of new section 58LA in the Fringe Benefits Tax Assessment Act 1986. The new section adds to the list of provisions specified in paragraph 51AE(5A)(d) of the Principal Act. That paragraph effectively permits the cost of certain meals to be an allowable income tax deduction, notwithstanding the general prohibition in the Principal Act on deductions for entertainment expenses. In this context, there is included meals which, but for new section 58LA of the Fringe Benefits Tax Assessment Act 1986, would constitute a fringe benefit under that Act.

Clause 24: Interpretation

Section 82KT of the Principal Act defines certain terms necessary for the interpretation of the substantiation provisions.

This clause contains a number of amendments to, omissions of, and additions to definitions necessary to give effect to the amendments proposed by this Bill.

Paragraph (a) amends the definition of "applicable log book period". This amendment is consequential upon the removal of the term "rental log book car" proposed by paragraph (h).

Paragraph (b) amends the definition of car by deleting the bracketed reference to four wheel drive vehicles. The amendment is consequential upon the insertion of the definition of "motor vehicle" proposed by paragraph (j) which term includes a car. This amendment does not affect the status of vehicles currently considered to be cars. A four-wheel-drive vehicle will still be a "car" if it satisfies the criteria set out in paragraphs (a) or (b) of the definition of "car".

Paragraph (c) a further amends the definition of "car" to exclude a taxi taken on hire and hire cars. The amendment give effect to the proposal that hire car expenses be excluded from the car expense substantiation rules and that they be substantiated instead either as employment-related expenses or, if a hire car is used for overseas travel or extended travel within Australia, as travel expenses.

Paragraphs (d) and (e) amend the definition of "odometer records" to allow fuel and oil expenses for vehicles other than cars, as defined, to be verified by a record of total kilometres travelled rather than by actual receipts.

Paragraph (f) amends the definition of "retention period'' in recognition of the fact that the Bill proposes that motor vehicle fuel and oil expenses incurred in a year of income, and not simply car fuel and oil expenses as was previously the case, may be substantiated by odometer records rather than by receipts. The amended definition retains the essence of the existing definition, that is, where odometer records are being used to evidence fuel or oil expenses the retention period begins on the date when opening odometer readings are required to be recorded. Generally, this will be from the commencement of the relevant year of income or, if the car was first used for income producing purposes during the year, the time of that first use.

Paragraph (g) substitutes a new definition of "long-term log book car" reflecting the omission of "rental log book car" proposed by paragraph (h).

Paragraph (h) omits the definition of "rental log book car" which had relevance for such matters as the definition of "long-term log book car" and for determining whether there had been an increase in the number of log book cars in a year of income. The amendment is a consequence of hire car expenses not being treated as car expenses for the purposes of the substantiation provisions but being instead treated as employment-related or travel expenses where relevant.

Paragraph (j) inserts a definition of the term "motor vehicle". The definition is wide enough to include both cars and certain kinds of vehicles that are not cars for the purposes of the Principal Act. For example the term will embrace vehicles such as motor cycles and road vehicles with a load capacity of greater than one tonne.

Clause 25: Repeal of sections and substitution of new sections

Section 82KTA: Holding of car or motor vehicle

Existing section 82KTA specifies what is meant whenever a car is described as being held by a taxpayer. It means the car is owned or leased by the taxpayer during a period when it is for use in the course of producing the taxpayer's assessable income. If a taxpayer commences a business or employment activity part way through a year of income and commences to use his or her existing car in that business or activity, the car will commence to be held within the meaning of section 82KTA from that date.

In other amendments proposed by this Bill - for example the amendment to the definition of "odometer records" proposed by paragraphs (d) and (e) of clause 24 - the term "motor vehicle" replaces the term "car". The term motor vehicle includes a car and although it is often appropriate to replace a reference to a car with a reference to a motor vehicle that is not always so.

This clause replaces existing section 82KTA with a new section 82KTA. The new section 82KTA repeats the references to the holding of a car and adds references to the holding of a motor vehicle. The effect is to ensure that taxpayers claim car expenses under the car expense rules but not expenses such as the expenses of running a motor cycle. For example, taxpayers who use a motor cycle for business purposes are not required to keep log books to establish a business travel pattern nor entitled to claim deductions under one of the arbitrary methods of deducting car expenses.

Section 82KTB: Holding period of car or motor vehicle

Existing section 82KTB makes clear that any reference in Subdivision F of the Principal Act to a period in a year during which a taxpayer held a car (see notes on new section 82KTA) is a reference to the total period during the year that it was so held. Subdivision F is the Subdivision that sets out the substantiation rules.

New section 82KTB repeats the existing reference to the holding period of a car and adds a reference to the holding period of a motor vehicle.

As explained in the notes on new section 82KTA it is not always appropriate to replace references to a car with a wider reference to a motor vehicle. There are instances when the narrower term "car" is necessary to ensure that expenses are subject to the car expense substantiation rules and that expenses of running a motor vehicle that is not a car, such as a motor cycle, are not subject to the car substantiation rules.

The terms "holding of a car" and "holding period" are relevant to the car substantiation rules. They are also relevant to provisions that enable a taxpayer to verify motor vehicle fuel and oil expenses by odometer records. This section therefore duplicates references to the holding period of a car or motor vehicle.

Clause 26: Deemed specification of matters in odometer records

This clause makes consequential amendments to section 82KTD of the Principal Act. Section 82KTD provides that, if a taxpayer inadvertently omits certain details from odometer records, that failure will not lead to denial of an income tax deduction if the relevant details are written in a document lodged with and accepted by the Commissioner. The amendments proposed reflect changes to the definitions of 'car' and 'odometer records' as proposed by clause 24.

Clause 27: Log book year of income

Section 82KTG has relevance for taxpayers who choose to substantiate car expenses under the actual business expenses or "log book" method. The section sets out the circumstances in which a year of income will be a log book year of income.

This clause omits references to a rental log book car and is consequential upon the removal of that term from the interpretation section proposed by paragraph (h) of clause 24.

The amendment does not change the operation of the section.

Clause 28: Deductions not allowable for car expenses incurred in a log book year of income unless log book records and odometer records etc. are maintained

Section 82KUB specifies requirements that must be satisfied for car expense deductions to be allowable under the log book method in a case where the year of income is a log book year of income.

This clause omits references to a rental log book car and is consequential upon the removal of that term from the interpretation section.

Again the substantive operation of section 82KUB is unaffected.

Clause 29: Other expenses

This clause proposes a number of amendments to section 82KZ of the Principal Act.

Subsection 82KZ is the primary operative provision of the income tax substantiation rules. It denies a deduction in respect of an expense in relation to a meal allowance or travel allowance, an employment-related expense or a travel expense (terms defined in subsection 82KT(1)) unless documentary evidence of the expense is obtained by or on behalf of the taxpayer. The term 'documentary evidence' is explained in section 82KU.

Paragraph (a) proposes to amend subsection 82KZ(1) so that a deduction will not be allowable for fuel or oil expenses for a motor vehicle unless either documentary evidence of the expenses is maintained or odometer records are maintained. The definition of "odometer records" is amended by paragraphs (d) and (e) of clause 24.

Paragraph (b) amends section 82KZ by adding two new subsections.

New subsection 82KZ(5) excludes from the substantiation provisions certain expenses of overseas travel by employees.

The exclusion will apply when:

•

the taxpayer is in receipt of a travel allowance (paragraph (a));

•

the allowance relates solely or principally to overseas travel (paragraph (b));

•

the Commissioner of Taxation considers that the amount of the allowance is, in respect of food and drink and expenditure incidental to the travel, reasonable having regard to the kind of expenditure that the employee is expected to meet from the allowance (paragraph (c)); and

•

the taxpayer's claimed expenses in respect of food, drink and incidentals do not exceed the amount of the allowance (paragraph (d)).

If the conditions set out in paragraphs (a) to (d) are satisfied, paragraph (e) operates so that the requirement contained in subsection 82KZ(1) to obtain documentary evidence of an expense does not apply to claimed expenses not in excess of a reasonable allowance for food, drink and other expenses incidental to overseas travel. By deeming subsection 82KZ(1) never to have applied, paragraph (e) has effect retrospectively to the commencement of the substantiation provisions on 1 July 1986. In other words, it removes the requirement to obtain documentary evidence of reasonable meals and incidentals expenses.

Paragraph (f) modifies the requirements of section 82KZA for the purposes of new subsections 82KZ(5) and (6). Section 82KZA contains the rules that require documentary evidence of expenses to be retained for specified periods and to be produced if required.

Subparagraph 82KZ(5)(f)(i) deletes the requirement to retain documentary evidence of an expense in respect of food, drink or incidentals. Note that the requirement to retain a travel diary is left undisturbed by these amendments. The travel diary requirement is, however, removed for international aircrew by new subsection 82KZ(6) (see notes on that subsection).

For the purposes of subsection 82KZ(5), subparagraph 82KZ(5)(f)(ii) replaces the operation of existing subsections 82KZA(2) and 82KZA(3). The effect is that the Commissioner may, by written notice, require a taxpayer to produce within a period of not less than 28 days the travel diary relating to the overseas travel in respect of which the taxpayer has claimed to have incurred reasonable meals and incidental expenses. If the retention period (i.e., the period for which taxpayers must retain travel diaries) has not expired and the taxpayer does not produce the diary the Commissioner may disallow the deduction for the expenses.

The reference to new subsection 82KZ(6) means that a crew member of an international flight cannot be required to provide a travel diary (see notes on new subsection 82KZ(6)).

Subparagraph 82KZ(5)(f)(iii) omits reference to subsection 82KZA(6) which applies where documentary evidence of an expense is lost or destroyed. Subsection 82KZA(6) can have no relevance where there is no requirement to keep documentary evidence.

Subparagraph 82KZ(5)(f)(iv) amends paragraph 82KZA(7)(g) of the Principal Act with the effect that the retention and production requirements will cease to apply in relation to a travel diary if the diary is lost or destroyed due to circumstances beyond the control of the taxpayer and reasonable precautions against loss had been taken. In simple terms, this means that a taxpayer will not lose entitlement to a deduction in respect of reasonable meals and incidentals if the travel diary has been lost and destroyed in circumstances beyond his or her control.

Paragraph (g) modifies section 82KZBB which provides relief from the substantiation requirements in circumstances where a taxpayer intended to rely on a specified exclusion from the substantiation requirements but, because of an unanticipated change in circumstances, the exclusion does not apply. This amendment is purely of a technical nature.

New subsection 82KZ(6) provides that the requirement to keep a travel diary does not apply to a member of the crew of an international flight who receives a travel allowance in respect of overseas travel.

The new subsection, when read in conjunction with new subsection 82KZ(5), has the effect that crew members of an international flight will not have to substantiate expenses up to the amount of reasonable meals and incidentals in respect of overseas travel and will not have to keep a travel diary. Crew members who incur overseas accommodation expenses will be required to substantiate those expenses by receipts or other documentary evidence.

New subsections 82KZ(5) and (6) have effect from the date of commencement of the substantiation provisions, 1 July 1986 (see notes on subclause 52(4)).

Clause 30: Retention and production of documents

Section 82KZA of the Principal Act contains the rules that require documentary evidence of expenses to be retained for specified periods and be produced when required in order to satisfy the substantiation requirements.

The amendments made by this clause are technical in nature consequent on the relaxed requirements that, in order to substantiate vehicle fuel and oil expenses and not simply car fuel and oil expenses as was previously the case, a taxpayer may either obtain documentary evidence or keep odometer records for the period to which the expenses relate.

Clause 31: Relief from certain substantiation requirements where taxpayer had a reasonable expectation that substantiation would not be required

Section 82KZBB relaxes the substantiation requirements in circumstances where a taxpayer intended to rely on a specified exclusion from the substantiation requirements but, because of an unanticipated change in circumstances, the exclusion does not apply.

This clause also makes drafting changes to the section as a consequence of the change to allow motor vehicle fuel and oil expenses to be substantiated by odometer records.

Rollover Relief for Capital Gains Tax Purposes

Introductory Note

Clauses 32 to 51 of the Bill propose the extension of capital gains tax rollover relief in a number circumstances including for additional kinds of business reorganisations.

The existing rollover relief provisions apply to a number of situations which, in many respects, are similar to the further situations in which rollover relief will be provided by the amendments contained in this Bill. Accordingly, the structure of some of the amendments proposed in this Bill follows that of existing provisions. Examples of these similarities include:

•

the rollover relief presently given to the reorganisation of a company is, on a parallel basis, to be extended to the reorganisation of a unit trust;

•

the rollover relief for share splits and share consolidations is to be extended to cover splits and consolidations of company issued rights or options to acquire shares; and

•

rights to acquire new units in a unit trust, will be treated in the same manner as rights to acquire shares in a company.

Clause 32: Other interpretive provisions

Section 160K of the Principal Act defines for the purposes of Part IIIA, dealing with capital gains and capital losses, certain terms used in the Part. By paragraph (a) of clause 32, subsection 160K(1) is to be amended by the insertion of a definition "Crown lease". The term is used in proposed new section 160ZWA which relates to the provision of rollover relief on the expiry or surrender of one or more existing Crown leases (clause 37) and will be inserted in existing sections 160ZZK, 160ZZL and 160ZZQ by clauses 44, 45 and 51, respectively.

"Crown lease" is defined to mean a lease of land granted by the Crown under a statutory law of the Commonwealth, a State or a Territory (paragraph (a)) or a similar lease granted under a statutory law of a foreign country (paragraph (b)).

For this purpose, definitions of "statutory law" and "law" (when used in relation to a foreign country) are also inserted in subsection 160K(1) by clause 32. "Statutory law" is defined widely to mean a law which is a statutory instrument (e.g., an Act of Parliament or an Ordinance) and modifies the scope of the term "Crown lease" by limiting its meaning to include only leases of land granted by the Crown under a statutory law. For example, leases granted by the Crown under a specific law which relates to the leasing of Crown lands. A lease granted by the Crown under an ordinary commercial contract would not, therefore, fall within the definition of "Crown lease".

The term "law" is defined in relation to a foreign country to include not only a law made by the central government of that country, but also a law made by any part of, or place in, that country. For example, a law made by the government of a state or a city in that country.

Paragraph (b) of clause 32 proposes a technical amendment to subsection 160K(2), consequential on the insertion of new section 160ZZMA in the Principal Act by clause 46. Subsection 160K(2) has the general effect, for the purposes of Part IIIA, of including within the meaning of the term "spouse", the de facto spouse of a person. However, the subsection does not apply in relation to existing section 160ZZM nor, as a result of the amendment proposed by paragraph (b), will it apply in relation to proposed section 160ZZMA. Both of these sections deal with the transfer of an asset upon the breakdown of a marriage.

Clause 33: Composite Assets

Clause 33 proposes a number of amendments to section 160P of the Principal Act. Section 160P provides, inter alia, that where a major capital improvement is made on or after 20 September 1985 to an asset acquired before that date, a capital gains liability attributable to the improvement may arise on the subsequent disposal of the asset. The section treats the improvement as an asset separate from the asset to which the improvement was made if, subject to section 160Q, the indexed cost base to the taxpayer of the improvement would exceed $50,000 and the amount of the indexed cost base of the improvement exceeds 5 per cent of the consideration in respect of the disposal of the asset to which the improvement was made. Section 160Q provides for the indexation of the indexed cost base limit of $50,000.

The amendments to be made by clause 33 will ensure that section 160P operates in relation to a capital improvement made to a "periodic roll-over asset" acquired before 20 September 1985. A periodic roll-over asset is a Crown lease of land, a mining asset or a statutory licence to which any of sections 160ZWA, 160ZZF or 160ZZPE (to be inserted in the Principal Act by this Bill) applies. The terms "Crown lease", "mining asset" and "statutory licence" are defined in the relevant sections (see notes on section 160ZWA, 160ZZF and 160ZZPE).

Clause 33 proposes to insert a new subsection 160P(6A) in the Principal Act. The subsection specifies the circumstances in which a capital improvement made to a periodic rollover asset acquired before 20 September 1985 will be treated as an asset subject to the provisions of Part IIIA. Broadly, this will occur where:

•

a periodic rollover asset acquired by a taxpayer before 20 September 1985 is disposed of on or after that date (paragraph (a));

•

taking that asset and any of its antecedent assets together as a single asset (the "overall asset"), an act or thing done in relation to the periodic rollover asset or its antecedents ("predecessors") after being acquired by the taxpayer would constitute an improvement of a capital nature to the overall asset (paragraph (b));

•

if that improvement was a separate asset:

• .

it would be taken for the purposes of Part IIIA to have been acquired on or after 20 September 1985 (subparagraph (c)(i)); and

• .

the indexed cost base to the taxpayer of the improvement would exceed the amount applicable for the purposes of subparagraph (6)(c)(ii), (i.e., the $50,000 statutory amount in section 160Q (as indexed)) in relation to the year of income in which the periodic rollover asset was disposed of (subparagraph (c)(ii)); and

•

the amount of the indexed cost base referred to in subparagraph (c)(ii) exceeds 5 per cent of the consideration in respect of the disposal (paragraph (d)).

In these circumstances the improvement will be taken for the purposes of Part IIIA to be a separate asset.

By paragraph 160P(9)(a) an asset is a predecessor of another asset if the latter replaced it in certain circumstances where rollover relief has been provided (see notes on subsection 160P(10)). Paragraph 160P(9)(b) stipulates that where there is a series of acquisitions of assets such that each asset replaced a previous asset in rollover circumstances, each of the assets in the series (excluding the last asset acquired) is a predecessor of the last asset acquired.

Subsection 160P(10) defines the term "periodic roll-over asset" to mean an asset to which a "periodic roll-over provision" applies, that is, sections 160ZWA, 160ZZF and 160ZZPE that are to be inserted in the Principal Act by this Bill.

The amendments by this clause are as a consequence of the amendments proposed to be made by clauses 37, 43 and 50 that will allow certain assets acquired before 20 September 1985 to remain outside the operation of Part IIIA.

The amendments apply for improvements taken to have been acquired on or after 20 September 1985 and will, by subclause 52(2) of this Bill, apply to assessments in respect of income of the income year in which 20 September 1985 occurred and of all subsequent years.

Clause 34: Indexation of indexed cost base limit

This clause corrects a minor drafting error in paragraph 160Q(10)(a) of the Principal Act. Section 160Q sets out the basis of indexation of the statutory limit applied to improvements for the purposes of the operation of section 160P.

Clause 35: Disposal of taxable Australian assets

Section 160T of the Principal Act details those circumstances in which the disposal of an asset is deemed, for the purposes of Part IIIA of the Principal Act, to have been the disposal of a "taxable Australian asset". The section is relevant for the operation of subsection 160L(2) of the Principal Act which extends the scope of Part IIIA to non-resident persons or persons in the capacity of a trustee of a non-resident trust estate or unit trust upon disposal by them of taxable Australian assets.

Paragraph (a) of clause 35 is a drafting measure consequent upon the inclusion of a new paragraph (j) in section 160T.

Paragraph (b) of clause 35 will add new paragraphs (j) and (k) to section 160T. Paragraph (j) will ensure that where rollover relief is available under existing sections 160ZZN or 160ZZO of the Principal Act for the disposal, after 28 January 1988, of a taxable Australian asset by a non-resident taxpayer or a trustee of a trust estate or a unit trust that is not a resident trust estate or a resident unit trust to a non-resident company, an asset received as consideration for the disposal comprising a share in, or security of, the company is a taxable Australian asset.

Broadly stated, section 160ZZN allows rollover relief for transfers of assets to a company where the sole consideration consists of shares or securities of the same company and where, after the transfer, the transferor holds beneficially all of the share capital of the company. Section 160ZZO allows rollover relief for the transfer of assets between companies in the same group, provided the companies share 100 per cent common ownership.

Paragraph (k) will ensure that where a taxable Australian asset is transferred, after 28 January 1988 and on or before the date of introduction of the Bill, by a non-resident taxpayer or a trustee of a trust estate or unit trust that is not a resident trust estate or resident unit trust to a non-resident company in circumstances where rollover relief is available under existing sections 160ZZN and 160ZZO, the asset transferred will constitute a taxable Australian asset in the hands of the non-resident transferee company. This amendment accords with an announcement of 28 January 1988 by the Treasurer. Where such transfers occur after the date of introduction of the Bill, the amendments proposed in clauses 47 and 48 to sections 160ZZN and 160ZZO will ensure that rollover relief is only available if, immediately after the transfer, the asset is a taxable Australian asset to the non-resident transferee company.

Clause 36: Acquisition by lessee of reversionary interest of lessor

Section 160ZW of the Principal Act applies to determine the capital gains tax position where a lessee acquires the reversionary interest of the lessor in land that the lessee has leased. Clause 36 proposes to omit existing subsection 160ZW(1) and substitute a new subsection so that the section will not apply where a lessee under a lease of land acquires the reversionary interest of the lessor in the land and section 160ZWA applies in respect of the acquisition (see following notes).

Clause 37: Crown leases

Introductory Note

Clause 37 proposes the insertion of a new division (Division 5A - Crown leases) in Part IIIA of the Principal Act, to allow rollover relief (that is, the deferral of tax liability on a capital gain) following the expiry or surrender of one or more Crown leases of land and their replacement with one or more new Crown leases or freehold interests. The term "Crown lease" is defined in subsection 160K(1) - refer to notes on clause 32 - and the term "freehold interest" in subsection (14) of section 160ZWA, the new section to be inserted by this clause.

Rollover relief will be given when the purpose for which the land the subject of a Crown lease is changed, a Crown lease is converted to freehold or to a lease in perpetuity, or is renewed, extended in term, reduced or expanded in size, or subdivided or consolidated with another Crown lease held by the taxpayer. Relief is to apply for conversions on or after 20 September 1985 and will not require any election. The proposed amendments will ensure that the capital gains tax exempt status of a Crown lease of land granted before 20 September 1985 is preserved. In the case of a lease acquired after 19 September 1985, expiry or surrender of the lease, where rollover relief is available, will not be treated as a disposal for capital gains tax purposes. The cost base, indexed cost base or reduced cost base of the new lease will adopt that of the old lease. This will ensure that capital gains will not apply until a Crown lease is disposed of to a third party or is brought to an end in some other way.

Division 5A comprises new section 160ZWA and notes on the section are set out below.

Section 160ZWA: Roll-over or conversion of Crown leases

Subsection 160ZWA(1) describes the circumstances in which section 160ZWA will apply to effect the rollover of a Crown lease of land. By paragraph (1)(a), the section will apply on the expiry or surrender of one or more existing Crown leases (referred to in the section as the 'original Crown leases') owned by a taxpayer. In addition, paragraph (1)(b) requires the grant of one or more new Crown leases or the grant of one or more freehold interests (or both) to the taxpayer in circumstances where:

•

the original Crown lease (or leases) is renewed and the renewal is (whether by law, custom or otherwise) wholly or principally attributable to the taxpayer's prior ownership of the original Crown lease (subparagraph (1)(b)(i));

•

the term of the original Crown lease is extended and the extension is (whether by law, custom or otherwise) wholly or principally attributable to the taxpayer's ownership of the original Crown lease (subparagraph (1)(b)(ii));

•

the purpose for which the land to which the original Crown lease related may be used is changed (subparagraph (1)(b)(iii);

•

the original Crown lease is converted to a Crown lease granted in perpetuity (subparagraph (1)(b)(iv));

•

the original Crown lease is converted to freehold (subparagraph (1)(b)(v));

•

the original Crown leases are consolidated, or consolidated and divided (subparagraph (1)(b)(vi));

•

the original Crown leases are subdivided (subparagraph (1)(b)(vii));

•

part of the area of the land to which the original Crown leases related is excised or relinquished (that part of the area is referred to as the 'excised area') (subparagraph (1)(b)(viii)); or

•

the area of land to which the original Crown leases related is expanded (subparagraph (1)(b)(ix).

In addition, where the original Crown lease or leases were held by a taxpayer in the capacity of a trustee of a trust estate, the effect of paragraph (1)(c) is that section 160ZWA will only apply where, immediately after the grant of the new Crown lease or leases or freehold interests, the taxpayer holds those new interests upon the same trusts as were held the original Crown lease or leases.

Where the land under an original Crown lease is comprised in the new lease or freehold interest, rollover relief will apply in respect of that land. Any consideration received for land that is not covered by the new lease or freehold interest, i.e., the excised area, will be subject to the operation of Part IIIA.

Where the conditions for the operation of section 160ZWA as specified in subsection 160ZWA(1) have been satisfied, and subject to the operation of subsection 160ZWA(4), new subsection 160ZWA(2) states that Part IIIA, other than section 160ZWA, does not apply in relation to the expiry or surrender of the original Crown lease or leases. In effect, in circumstances where section 160ZWA applies, no taxable capital gain or allowable capital loss can arise in respect of the expiry or surrender, except as it relates to an excised area as provided for in subsection 160ZWA(4) (refer to notes below on that subsection). Part IIIA will apply, subject to any further operation of section 160ZWA, to the expiry, surrender or other disposal of the new interests.

Paragraph (a) of subsection 160ZWA(3) is an interpretative provision and specifies that for the purposes of the section an original Crown lease that was acquired by a taxpayer before 20 September 1985 is to be taken to be a "pre-20 September 1985 original Crown lease". Paragraph (3)(b) is expressed in similar terms so that any other original Crown lease, that is, a lease acquired on or after 20 September 1985, is to be taken to be a "post-20 September 1985 original Crown lease".

Subsection 160ZWA(4) applies where a taxpayer received (or was entitled to receive) consideration in respect of the expiry or surrender of a lease acquired on or after 20 September 1985 that related, in whole or in part, to the excised area referred to in subparagraph 160ZWA(1)(b)(viii). The excised area is that part of an original lease of land held by a taxpayer that is not included in a fresh lease or freehold interest granted to the taxpayer. It modifies the general rule contained in subsection 160ZWA(2) that the expiry or surrender of an original Crown lease, in circumstances where rollover relief is to apply, does not constitute the disposal of an asset for the purposes of Part IIIA.

Accordingly, an original Crown lease acquired on or after 20 September 1985 which wholly related to the excised area is to be taken to have been disposed of (paragraph (4)(a)), and a taxable capital gain or allowable capital loss for the purposes of Part IIIA calculated on that basis. In other cases where the original Crown lease related only in part to the excised area, by paragraph (4)(b) the taxpayer is to be taken to have disposed of that part of the lease that is attributable to the excised area and the taxable capital gain or allowable capital loss for the purposes of Part IIIA calculated having regard to the provisions of section 160ZI.

Where a new Crown lease or freehold interest relates wholly to a pre-20 September 1985 original Crown lease as defined in subsection (3), the new Crown lease or freehold interest is to be taken to have been acquired before 20 September 1985 (subsection 160ZWA(5)) for the purposes of Part IIIA, and there will be no capital gains consequences on its disposal. Any other new Crown lease or freehold interest will, in whole or in part, remain subject to the operation of Part IIIA having regard to the remaining subsections of section 160ZWA.

If a new Crown lease relates wholly to an original Crown lease acquired on or after 20 September 1985, it will be taken to be a Crown lease acquired on or after that date for the purposes of the section (subsection 160ZWA(6)). On disposal the new lease will be subject to the operation of Part IIIA and the taxable capital gain or capital loss incurred on disposal will be determined having regard to the operation of subsections (11), (12), or (13).

Correspondingly, if a new freehold interest relates wholly to an original Crown lease acquired on or after 20 September 1985, it will be taken to be a freehold interest acquired on or after that date for the purposes of the section (subsection 160ZWA(7)) and subject to the operation of Part IIIA on disposal.

Subsection 160ZWA(8) applies where the new Crown lease acquired by a taxpayer comprises an interest in land and the land relates to any two or more of the following:

(a)

land held under a Crown lease that was acquired by the taxpayer before 20 September 1985 and has expired or been surrendered (paragraph (8)(a));

(b)

land held under a Crown lease that was acquired on or after 20 September 1985 and has expired or been surrendered (paragraph (8)(b)); and

(c)

any other land (paragraph (8)(c)).

It will operate to determine the part of the new Crown lease that relates to land that had been held under a Crown lease acquired by the taxpayer before 20 September 1985 and before being dealt with as listed in paragraph (1)(b) to create the new Crown lease. That part of the new Crown lease is to be taken to be a separate lease and not subject to the operation of Part IIIA when the new Crown lease is disposed of.

Similarly, the land that had been held under a Crown lease acquired on or after 20 September 1985 is to be taken to be a separate lease for the purposes of determining the cost base, the indexed cost base or the reduced cost base to apply in calculating any capital gains tax consequences on disposal.

The new Crown lease is taken to comprise separate new Crown leases, as follows:

•

a new lease to the extent to which it relates to land subject to a Crown lease acquired by the taxpayer before 20 September 1985 and dealt with in the circumstances outlined in subsection (1) (subparagraph (8)(d)(i));

•

a new lease to the extent to which it relates to land subject to a Crown lease acquired by the taxpayer on or after 20 September 1985 and dealt with in the circumstances outlined in subsection (1) (subparagraph (8)(d)(ii)); and

•

a new lease to the extent to which it relates to other land (subparagraph (8)(d)(iii)).

The new Crown lease referred to in subparagraph (8)(d)(i) is to be treated as if it had been acquired before 20 September 1985 for the purposes of Part IIIA and therefore not subject to any capital gains tax consequences on disposal (paragraph (8)(e)). By paragraph (8)(f) the new Crown lease referred to in subparagraph (8)(d)(ii) is to be taken to have been acquired on or after 20 September 1985 and therefore subject to the operation of Part IIIA on disposal.

Paragraph (8)(g) applies at the time of disposal of the actual new Crown lease that relates to the land referred to in paragraphs (8)(a), (b) and (c) and provides for the apportionment of the consideration paid in respect of that disposal between the separate Crown leases that, by paragraph (8)(d), the actual new Crown lease is taken to comprise.

Subsection 160ZWA(9)(1) applies where a particular freehold interest relates partly to any two or more of the following:

•

land held under a Crown lease that was acquired by the taxpayer before 20 September 1985 and has expired or been surrendered (paragraph (9)(a)),

•

land held under a Crown lease that was acquired by the taxpayer on or after 20 September 1985 and has expired or been surrendered (paragraph (9)(b)); and

•

other land (paragraph (9)(c)).

Similarly to subsection (8), the freehold interest is taken to comprise either 2 or 3 separate freehold interests (paragraph 9(d)) and will be treated under paragraphs 9(e) and (f) in the same manner as paragraphs (8)(e) and (f) operate.

Paragraph (9)(g) applies at the time of disposal of the actual freehold interest and provides for the apportionment of the consideration paid in respect of that disposal between the separate freehold interests that, by paragraph (9)(d), the actual freehold interest is taken to comprise.

Subsection 160ZWA(10) is a drafting measure defining the term "post-20 September 1985 land asset" for the purposes of subsections 160ZWA(11) and (12) (refer to notes below on these subsections).

Where a taxpayer acquires a post-20 September 1985 land asset (that is, a new Crown lease or a freehold interest in land that relates to land to which an original Crown lease acquired on or after 20 September 1985 related), subsection (11) applies to determine the amount that the taxpayer is taken to have paid or given as consideration in respect of the acquisition of that asset. That amount would then be included in the asset's indexed cost base or reduced cost base, as the case may be, under existing section 160ZH for the purposes of ascertaining whether a capital gain accrued to, or a capital loss was incurred by, the taxpayer in the event of a subsequent disposal of the asset.

Paragraph (11)(a) applies for the purposes of ascertaining whether a capital gain has accrued to the taxpayer in the event of a subsequent disposal of a land asset. It requires the consideration taken to have been paid in respect of the acquisition of a particular post-20 September 1985 land asset to be calculated in accordance with the formula:

(ICB of post CGT orig. leases) * (MV of land asset)/(MV of post CGT land assets)


where:

ICB of post CGT orig. leases is an amount being the sum of the amounts that would have been the indexed cost bases to the taxpayer, for the purposes of Part IIIA, of the post-20 September 1985 original Crown leases (that is, the leases taken to have been acquired on or after 20 September 1985 that are the subject of the rollover relief) if the expiry or surrender of those leases had been the disposal of an asset for the purposes of Part IIIA. That amount is reduced by the part of the indexed cost bases which is attributable to the excised area of any of the post-20 September 1985 original Crown leases determined under subsection 160ZWA(4);

MV of land asset is the market value of the particular new land asset immediately following its acquisition by the taxpayer; and

MV of post CGT land assets is the market value of the post-20 September 1985 land assets immediately following their acquisition by the taxpayer.

Paragraph (11)(b) applies for the purposes of ascertaining whether the taxpayer has incurred a capital loss in the event of a subsequent disposal of a land asset. In these circumstances, the consideration taken to have been paid in respect of the acquisition of a particular post-20 September 1985 land asset will be calculated in accordance with the formula:

(RCB of post CGT orig. leases) * (MV of land asset)/(MV of post CGT land assets)


where:

RCB of post CGT orig. leases is an amount being the sum of the amounts that would have been the reduced cost bases to the taxpayer, for the purposes of Part IIIA, of the post-20 September 1985 original Crown leases if the expiry or surrender of those leases had been the disposal of an asset for the purposes of Part IIIA. The amount is reduced by that part of the reduced cost bases which is attributable to the excised area (determined under subsection 160ZWA(4)) of any of the post-20 September 1985 original Crown leases;

MV of land asset is the market value of the particular land asset immediately following its acquisition by the taxpayer; and

MV of post CGT land assets is the market value of the post-20 September 1985 land assets immediately following their acquisition by the taxpayer.

Subsection 160ZWA(12) applies where a post-20 September 1985 land asset is disposed of within 12 months of the earliest day (provided that it is a day after 19 September 1985) on which any of the post-20 September 1985 original Crown leases were acquired by the taxpayer. In these circumstances, the reference in paragraph 160ZWA(11)(a) to the indexed cost bases of the post-20 September 1985 original Crown leases is substituted by a reference to the cost bases of those original Crown leases. This has the effect of denying the benefit of indexation in respect of the cost bases of the original Crown leases, but only where each of those leases had been held for less than 12 months at the time of disposal.

Subsection 160ZWA(13) operates to simplify the operation of section 160ZWA in certain circumstances where the area of the land (referred to in the subsection as the 'original area') to which the original Crown leases related is different from the area (referred to in the subsection as the 'new area') subject to the new Crown leases or freehold interests (paragraph (13)(a)).

In applying the subsection, the Commissioner is required by paragraph (13)(b) to consider all the circumstances relevant to the disposal of the original Crown leases and the acquisition of the new Crown leases or freehold interests. These circumstances include:

•

a difference in size between the original area and the new area (subparagraph (13)(b)(i));

•

a difference between the market value of the new Crown leases or freehold interests (sub-subparagraph (13)(b)(ii)(A)) and the amount that would have been the market value of the new Crown leases or freehold interests if they had related to the original area rather than the new area (sub-subparagraph (13)(b)(ii)(B)), immediately after the grant of the new Crown leases or freehold interests to the taxpayer; and

•

in the case of new Crown leases granted to the taxpayer, whether or not the new Crown leases were granted in order to correct errors or omissions (subparagraph (13)(b)(iii)).

Following the consideration of all the relevant circumstances, subsection 160ZWA(13) allows the Commissioner to treat a new Crown lease or freehold interest as relating (in whole or in part) to the land to which a particular original Crown lease related, for the purposes of subsections 160ZWA(5) to (9). This is so notwithstanding that the respective areas may not be identical. The practical effect is that it is not necessary to make the adjustments otherwise required in the application of section 160ZWA where the area of land of the original Crown lease differs marginally from that of the new Crown lease or freehold interest but does not significantly alter the market value of the respective assets.

Subsection 160ZWA(14) defines the term "freehold interest" to mean an estate in fee simple.

By subclause 52(2) of the Bill the amendments made by this clause apply to assessments in respect of income of the income year in which 20 September 1985 occurred and of all subsequent years.

Clause 38: Division 10A - Rights to acquire units in a unit trust

Clause 38 will insert a new Division 10A in Part IIIA of the Principal Act. This Division is similar in operation to Division 10 of Part IIIA and will operate so that rights (or rights to acquire an option) to take up new units in a unit trust will have the same capital gains tax consequences as apply to rights to take up shares in a company.

Division 10A applies where a trustee of a unit trust issues rights to acquire units or an option to acquire units in the trust to existing unitholders or convertible noteholders. Generally, the date of acquisition of such rights will be taken to be the date on which the taxpayer acquired the original units or convertible notes. However, where the rights are exercised, the units or option acquired will be taken to have been acquired at the time of exercise. The Division also specifies the rules for determining the acquisition cost of the units or option and applies to taxpayers who purchase rights from the unitholders or convertible noteholders to whom the rights were issued.

Section 160ZYQA: Application

By section 160ZYQA, the provisions of Division 10A are to apply where, after 28 January 1988, the trustee of a unit trust issues rights to acquire units or rights to acquire an option to acquire units in the unit trust to a unitholder, and the unitholder did not pay or give any consideration in respect of the acquisition of the rights.

Section 160ZYQB: Exercise of rights not to constitute disposal

Section 160ZYQB declares that the exercise of rights is not a disposal of the rights by the trustee. Upon the exercise of rights there will be no liability to pay tax on any capital gain which may have accrued in the value of the rights between the time when they were issued or purchased and the time when they were exercised.

Section 160ZYQC: Time of acquisition of rights

By section 160ZYQC, the rights issued to a unitholder will be deemed, for the purposes of Part IIIA, to have been acquired by the unitholder at the same time as the unitholder acquired the units in the unit trust that were held at the time the rights were issued. In the case of a person who purchased rights from a unitholder the general timing rules set out in existing section 160U of the Principal Act apply.

Section 160ZYQD: Unitholder not to be deemed to have paid or given consideration for rights

By section 160ZYQD a unitholder who has been issued rights in the terms of section 160ZYQA will not be deemed to have paid or given any consideration for the acquisition of the rights.

Section 160ZYQE: Exercise of rights

Section 160ZYQE sets out the rules for determining the acquisition date and cost of the units or option acquired as a result of the exercise of rights.

By subsection 160ZYQE(1) the time at which the new units or option is taken to have been acquired will, for the purposes of Part IIIA, be the time when the rights were exercised. This applies to the unitholder who was originally issued the rights as well as to any person who acquired the rights from that unitholder.

Subject to subsection 160ZYQE(4), where the unitholder exercises the rights, the consideration for acquiring the new units or the option will be deemed, for the purposes of Part IIIA, by virtue of subsection 160ZYYQE(2), to be the amount paid in the exercise of the rights.

Subsection 160ZYQE(3) applies where a person purchases the rights following disposal of those rights by a unitholder who was issued with them and the purchaser exercises the rights. In these circumstances, the purchaser is to be taken to have paid or given as consideration for the acquisition of the new units or the option, the sum of the amount paid for the acquisition of the rights and the amount paid in the exercise of the rights.

Subsection 160ZYQE(4) overrides subsection 160ZYQE(2) where rights which were acquired or deemed to have been acquired before 20 September 1985 are exercised by the unitholder. This would occur where the unitholder acquired the original units before that date. In this situation the cost of acquisition of the new units or the option is to be the sum of the market value of the rights at the time of their exercise (thus freeing from tax any gain that had accrued in the value of the rights up to the date of their exercise) and any amount paid in the exercise of those rights.

Section 160ZYQF: Application of Division to holders of convertible notes

Section 160ZYQF will extend the operation of Division 10A to holders of convertible notes (within the meaning of new Division 12A of Part IIIA of the Principal Act - see notes on that Division) where rights are issued to convertible noteholders by the trustee of a unit trust in the same circumstances as rights are issued to unitholders. Section 160ZYQF provides that Division 10A is to apply as if the reference in paragraph 160ZYQA(a) to a person who holds units in a unit trust were a reference to a person who holds convertible notes issued by the trustee of the unit trust, and the references to unitholders and original units were references to the convertible noteholder and the convertible notes held by the person.

Clause 39: Division 11A - Unit Trust - Issued options to unitholders to acquire unissued units

Clause 39 will insert new Division 11A in Part IIIA of the Principal Act. This Division is similar in operation to Division 11 of Part IIIA and will operate so that options issued to unitholders in a unit trust to acquire other units in the trust will have the same capital gains tax consequences as for options to take up shares in a company.

Division 11A sets out the rules for determining the acquisition cost and the time of acquisition of the option and of units acquired on exercise of the option by the trustee.

Section 160ZYXA: Application

By section 160ZYXA the provisions of Division 11A apply where, after 28 January 1988, the trustee of a unit trust issues to a unitholder an option to acquire other units ("new units") in the unit trust and the unitholder did not pay or give any consideration in respect of the acquisition of the option.

Section 160ZYXB: Exercise of option not to constitute disposal

Section 160ZYXB declares that the exercise of the option will not be taken to be a disposal of the option. This means that upon the exercise of the option there will be no liability to pay tax on any capital gain which may have accrued in the value of the option between the time when it was issued or purchased and the time when it was exercised.

Section 160ZYXC: Time of acquisition of option

Section 160ZYXC has the effect of deeming any option to acquire units in a unit trust that is issued to a unitholder to have been acquired by the unitholder at the same time as the unitholder acquired the units that were held at the time the option was issued. In the case of a person who purchased an option from a unitholder the general timing rules set out in section 160U apply.

Section 160ZYXD: Unitholder not to be deemed to have paid or given consideration for option

Where a unitholder has been issued an option to acquire units in a unit trust and the unitholder has not paid or given any consideration in respect of the acquisition of that option, section 160ZYXD ensures that the unitholder is not deemed to have paid or given any consideration for the acquisition of the option.

Section 160ZYXE: Exercise of option

Section 160ZYXE sets out the rules for determining the acquisition date and cost of units acquired as a result of the exercise of an option.

Subsection 160ZYXE(1) has the effect that the time at which the new units are taken, for the purposes of Part IIIA, to have been acquired is the time when the option was exercised. This applies to the unitholder to whom the option was issued, as well as to any person who acquired the option from the unitholder.

Subject to subsection 160ZYXE(4), where the unitholder exercises the option the consideration for acquiring the new units will, by virtue of subsection 160ZYXE(2), be taken to be the amount paid on exercise of the option.

Subsection 160ZYXE(3) applies where a person purchases and exercises an option following disposal of the option by the unitholder to whom it was issued. In these circumstances, the purchaser is to be taken to have paid or given as consideration for the acquisition of the new units, the sum of the amount paid for the acquisition of the option and the amount paid on exercise.

Subsection 160ZYXE(4) overrides subsection 160ZYXE(2) where an option which was acquired or deemed to have been acquired before 20 September 1985 is exercised on or after that date. This would occur where the unitholder acquired the original unitholding before that date. In this situation the cost of acquisition of the new units is to be the sum of the market value of the option at the time of its exercise (so freeing from tax any gain that accrued on the value of the option up to the date of exercise) and any amount paid in the exercise of the option.

Section 160ZYXF: Application of Division to holders of convertible notes

Section 160ZYXF will extend the operation of Division 11A to holders of convertible notes within the meaning of Division 12A of Part IIIA of the Principal Act, where options are issued to convertible noteholders by the trustee of a unit trust in the same circumstances as options are issued to unitholders. Section 160ZYXF is to the effect that Division 11A is to apply as if the reference in paragraph 160ZYXA(a) to a person who holds units in a unit trust were a reference to a person who holds convertible notes issued by the trustee of the unit trust, and references to the unitholder and to the original units were references to the convertible noteholder and the convertible notes held by that person.

Clause 40: Heading to Division 12 of Part IIIA

Clause 40 will amend the heading to Division 12 of Part IIIA of the Principal Act to include the word "Companies". Division 12 specifies the capital gains tax treatment applying on conversion of a convertible note to a company share. A new Division 12A is to be inserted into the Principal Act dealing with conversion of convertible notes into units in a unit trust.

Clause 41: Convertible notes - unit trusts

Clause 41 will insert in the Principal Act new Division 12A of Part IIIA. The new Division will extend rollover relief to convertible notes issued after 28 January 1988 by trustees of unit trusts on the same basis as for comparable transactions by companies. The conversion into units of a convertible note issued by a trustee of a unit trust will not be a disposal giving rise to a capital gains tax liability at that time; rather, any liability will arise on the disposal of the units obtained by the conversion. The units will be deemed to have been acquired by the taxpayer when the conversion took place for a consideration equal to the value of the consideration paid or given by the taxpayer in respect of the acquisition of the convertible note and, if applicable, any consideration paid by the taxpayer in respect of the conversion of the convertible note.

Clause 41 will insert the following Division in the Principal Act:

Division 12A - Convertible Notes - Unit Trusts

Details of the sections comprising the new Division 12A are as follows:

Section 160ZZBA: Definition of convertible note

Section 160ZZBA defines the meaning of the term "convertible note" used in Division 12A. The broad meaning of the term is a note issued after 28 January 1988 by the trustee of a unit trust that may be exchanged for units in the trust. Generally, the note must be such that if the unit trust were a company, the note would qualify as a convertible note issued by the company.

Section 160ZZBB: Conversion of note not to constitute disposal

By section 160ZZBB the conversion of a note into units is not to be taken as a disposal of the note. Therefore, any gain made or loss incurred will only be subject to the capital gains provisions on subsequent disposal of the units for which the convertible note was exchanged.

Section 160ZZBC: Time of acquisition of units

Section 160ZZBC stipulates that any units acquired by a taxpayer by the conversion of a convertible note are to be deemed to have been acquired when the conversion took place.

Section 160ZZBD: Consideration in respect of acquisition

Section 160ZZBD determines for capital gains tax purposes the consideration a taxpayer who acquired units by the conversion of a convertible note is to be taken to have paid to acquire the units. The consideration will comprise the amount paid for the conversion and the consideration paid or given to acquire the note.

Clause 42: Options

Clause 42 substitutes a reference to "Division 10, 10A, 11 or 11A" for "Division 10 or 11" in subsection (1). Section 160ZZC is part of Division 14 of Part IIIA which sets out the rules for the treatment of options. Section 160ZZC will not apply to options to which new Divisions 10A (rights to acquire units in a unit trust) and 11A (unit trust - issued options to acquire unissued units) apply.

Clause 43: Roll-over of prospecting rights and mining rights

Clause 43 proposes a number of amendments to existing Division 15 - Prospecting and Mining Rights - in Part IIIA of the Principal Act, which provides rollover relief (that is, the deferral of tax liability on a capital gain) in certain circumstances where a mining or prospecting right would otherwise be taken to have been disposed of for the purposes of the Part.

Paragraph (a) of clause 43 amends the definitions of the terms "mining right" and "prospecting right" contained in existing subsection 160ZZF(1). At present, those terms refer to rights granted by the Commonwealth, a State or a Territory. The amendment made by paragraph (a) will extend the meaning of those terms to include a right granted under a law of a foreign country. The term "law", in relation to a foreign country, is defined in an amendment proposed by paragraph (a) of clause 32 (refer to notes above on that clause) to subsection 160K(1) of the Principal Act, to include a law of any part of, or place in, a country.

Paragraph (b) of clause 43 includes in subsection 160ZZF(1) a definition of the term "mining asset" for the purposes of the section. That term means a "mining right" (paragraph (a)) or a "prospecting right" (paragraph (b)), as defined elsewhere in the subsection.

Paragraph (c) of clause 43 proposes to omit existing subsection 160ZZF(2), and substitute new subsections 160ZZF(2) to (11) inclusive.

New subsection 160ZZF(2) describes the circumstances in which section 160ZZF will apply to effect the rollover of a mining asset. By paragraph (2)(a), the section will only apply on the expiry or surrender of one or more existing mining assets (referred to in the section as the 'original mining assets') owned by a taxpayer. In addition, paragraph (2)(b) requires the grant of one or more new mining assets to the taxpayer. Paragraph (2)(b) also specifies the circumstances in which the grant of a new mining asset must take place, i.e., where:

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the original mining assets are renewed and the renewal is (whether by law, custom or otherwise) wholly or principally attributable to the taxpayer's prior ownership of the original mining assets (subparagraph (2)(b)(i));

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the term of the original mining assets is extended and the extension is (whether by law, custom or otherwise) wholly or principally attributable to the taxpayer's prior ownership of the original mining assets (subparagraph (2)(b)(ii));

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the original mining assets are consolidated or consolidated and divided (subparagraph (2)(b)(iii));

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the original mining assets are subdivided (subparagraph (2)(b)(iv));

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the conversion of mining rights to prospecting rights (subparagraph (2)(b)(v));

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the conversion of prospecting rights to mining rights (subparagraph (2)(b)(vi));

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part of the area of the land to which the original mining assets related is excised or relinquished (that part of the area is referred to as the 'excised area') (subparagraph (2)(b)(vii)); and

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the area of land to which the original mining assets related is expanded (subparagraph (2)(b)(viii).

In addition, where the original mining assets were held by a taxpayer in the capacity of a trustee of a trust estate, the effect of paragraph (2)(c) is that section 160ZZF will only apply where, immediately after the grant of the new mining assets, the taxpayer holds those new mining assets upon the same trust as the taxpayer held the original mining assets.

Where the mining assets that expired or were surrendered are comprised within the new mining assets, rollover relief will be available. Where part of the area to which the mining assets that expired or were surrendered related is not included in the new mining assets, i.e., the excised area, any consideration received on the expiry or surrender will be subject to the operation of Part IIIA.

Where the conditions for the application of section 160ZZF as specified in subsection 160ZZF(2) have been satisfied, new subsection 160ZZF(3) provides that Part IIIA does not apply in respect to the expiry or surrender of the original mining assets. In effect, in circumstances where section 160ZZF applies, no taxable capital gain or allowable capital loss can arise in respect of that expiry or surrender, except as it relates to an excised area as provided for in subsection 160ZZF(5) (refer to notes below on that subsection). Part IIIA would apply, subject to any further operation of section 160ZZF, on the expiry, surrender or other disposal of the new mining assets.

Paragraph (a) of subsection 160ZZF(4) is an interpretative provision and specifies for the purposes of the section that an original mining asset that was acquired by a taxpayer before 20 September 1985 is to be taken to be a "pre-20 September 1985 original mining asset." Paragraph (4)(b), expressed in similar terms, specifies that any other original mining asset, that is, an asset acquired on or after 20 September 1985, is to be taken to be a "post-20 September 1985 original mining asset".

Subsection 160ZZF(5) applies where a taxpayer received (or was entitled to receive) consideration in respect of the expiry or surrender of a mining asset acquired on or after 20 September 1985, that related in whole or in part, to the excised area referred to in subparagraph 160ZZF(2)(b)(vii). It modifies the general rule contained in subsection 160ZZF(3) that the surrender or expiry of an original mining asset in circumstances where rollover relief is to apply does not constitute the disposal of an asset for the purposes of Part IIIA.

Accordingly, an original mining asset acquired on or after 20 September 1985 which wholly related to the excised area is to be taken to have been disposed of for the purposes of Part IIIA (paragraph (5)(a)), and a taxable capital gain or allowable capital loss will be calculated on that basis. In other cases where the original mining asset related only in part to the excised area, by paragraph (5)(b) the taxpayer is to be taken to have disposed of that part of the mining asset that is attributable to the excised area for the purposes of Part IIIA and the taxable capital gain or allowable capital loss calculated having regard to the provisions of existing section 160ZI.

Where a new mining asset relates wholly to land to which an original mining asset acquired by the taxpayer before 20 September 1985 related, the new mining asset is to be taken to have been acquired before 20 September 1985 (subsection 160ZZF(6)) for the purposes of Part IIIA and there will be no capital gains tax consequences on its disposal. Any other new mining asset will, in whole or in part, remain subject to the operation of Part IIIA having regard to the remaining subsections of section 160ZZF.

If a new mining asset relates wholly to an original mining asset acquired on or after 20 September 1985, it will be taken to be a mining asset acquired on or after that date for the purposes of the section (subsection 160ZZF(7)). On disposal, the new mining asset will be subject to the operation of Part IIIA and the taxable capital gain or the capital loss incurred on disposal will be determined having regard to the operation of subsections (9),(10) and (11).

Subsection 160ZZF(8) applies where a new mining asset relates partly to any two or more of the following:

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land subject to a pre-20 September 1985 original mining asset (paragraph (8)(a));

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land subject to a post-20 September 1985 original mining asset (paragraph(8)(b)); and

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partly to other land (paragraph (8)(c)).

In these circumstances, the new mining asset is taken to comprise either 2 or 3 separate new mining assets, as follows:

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a new mining asset to the extent to which it relates to land subject to an original mining asset acquired by the taxpayer before 20 September 1985 and dealt with in the manner outlined in subsection (1) (subparagraph (8)(d)(i));

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a new mining asset to the extent to which it relates to land subject to an original mining asset acquired by the taxpayer on or after 20 September 1985 and dealt with in the manner outlined in subsection (1) (subparagraph (8)(d)(ii)); and

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a new mining asset to the extent to which it relates to other land (subparagraph (8)(d)(iii)).

The new mining asset referred to in subparagraph (8)(d)(i) is to be treated as if it had been acquired before 20 September 1985 for the purposes of Part IIIA and not subject to any capital gains tax consequences on disposal (paragraph (8)(e)) whereas, by paragraph (8)(f), the new mining asset referred to in subparagraph (8)(d)(ii) is to be taken to have been acquired on or after 20 September 1985 and subject to the operation of Part IIIA on disposal. The new mining asset that relates to other land (subparagraph 8(d)(iii)) will also be subject to the operation of Part IIIA on disposal.

Paragraph (8)(g) applies at the time of disposal of a new mining asset that relates to land referred to in paragraphs (8)(a), (b) and (c) and provides for the apportionment of the consideration received in respect of that disposal between the separate mining assets that, by paragraph (8)(d), the actual new mining asset is taken to comprise.

Where a taxpayer acquires a post-20 September 1985 mining asset, including a new mining asset which is taken to be a separate mining asset under subparagraph 160ZZF(8)(d)(ii), subsection 160ZZF(9) applies to determine the amount that the taxpayer is taken to have paid or given as consideration in respect of the acquisition of that asset. That amount would then be included in the asset's indexed cost base or reduced cost base, as the case may be, under existing section 160ZH for the purpose of ascertaining whether a capital gain accrued, or a capital loss was incurred, by a taxpayer in the event of a subsequent disposal of the mining asset.

Paragraph (9)(a) applies for the purpose of ascertaining whether a capital gain has accrued to the taxpayer in the event of a subsequent disposal of a post-20 September 1985 new mining asset. It requires the consideration deemed to have been paid to be calculated in accordance with the formula:

(ICB of post CGT orig. assets) * (MV of new asset)/(MV of post CGT new assets)


where:

ICB of post CGT orig. assets is an amount being the sum of the amounts that would have been the indexed cost bases to the taxpayer, for the purposes of Part IIIA, of the post-20 September 1985 original mining assets (that is, the mining assets taken to have been acquired on or after 20 September 1985 that are the subject of the rollover relief) if the expiry or surrender of those assets had been the disposal for the purposes of Part IIIA. That amount is reduced by that part of the indexed cost bases which is attributable to the excised area of any of the post-20 September 1985 original mining assets referred to in subsection 160ZZF(5);

MV of new asset is the market value of the particular new mining asset immediately following its acquisition by the taxpayer; and

MV of post CGT new assets is the market value of the post-20 September 1985 new mining assets immediately following their acquisition by the taxpayer.

Paragraph (9)(b) applies for the purpose of ascertaining whether the taxpayer has incurred a capital loss in the event of a subsequent disposal of a new mining asset. In these circumstances, consideration will be taken to have been paid in respect of the acquisition of a particular new post-20 September 1985 mining asset, calculated in accordance with the formula:

(RCB of post CGT orig. assets) * (MV of new assets)/(MV of post CGT new assets)


where:

RCB of post CGT orig. assets is an amount being the sum of the amounts that would have been the reduced cost bases to the taxpayer, for the purposes of Part IIIA, of the post-20 September 1985 original mining assets if the expiry or surrender of those assets had been a disposal of an asset for the purposes of Part IIIA. That amount is then reduced by that part of the reduced cost bases which is attributable to the excised area (referred to in subsection 160ZZF(5)) of any of the post-20 September 1985 original mining assets;

MV of new asset is the market value of the particular mining asset immediately following its acquisition by the taxpayer; and

MV of post CGT new assets is the market value of the post-20 September 1985 new mining assets immediately following their acquisition by the taxpayer.

Subsection 160ZZF(10) applies where a post-20 September 1985 mining asset is disposed of within 12 months of the earliest day (provided that it is a day after 19 September 1985) on which any of the post-20 September 1985 mining assets were acquired by the taxpayer. In these circumstances, the reference in paragraph 160ZZF(9)(a) to the indexed cost bases of the post-20 September 1985 original mining assets is substituted by a reference to the cost bases of those assets. This has the effect of denying the benefit of indexation in respect of the cost bases of the original mining assets, but only where each of those assets had been acquired less than 12 months before the time of disposal of the new mining asset.

Subsection 160ZZF(11) operates to simplify the operation of section 160ZZF in certain circumstances where the area of the land (referred to in the subsection as the 'original area') to which the original mining assets related differs from the area (referred to in the subsection as the 'new area') subject to the new mining assets.

The Commissioner is required by paragraph (11)(b) to consider all the circumstances relevant to the disposal of the original mining assets and the acquisition of the new mining assets and to form an opinion that it would be unreasonable not to apply the subsection. These circumstances include:

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a difference in size between the original area and the new area (subparagraph (11)(b)(i));

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a difference between the market value of the new mining assets (sub-subparagraph (11)(b)(ii)(A)) and the amount that would have been the market value of the new mining assets if they had related to the original area rather than the new area (sub-subparagraph (11)(b)(ii)(B)), immediately after the grant of the new mining assets to the taxpayer; and

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whether or not the new mining assets were granted in order to correct errors or omissions (subparagraph (11)(b)(iii)).

Following the consideration of all the relevant circumstances, subsection 160ZZF(11) authorises the Commissioner to treat a new mining asset as relating (in whole or in part) to the area of the land to which a particular original mining asset related. This is so notwithstanding that the respective areas may be different in some respect. The practical effect of the exercise of the discretion will be that it is not necessary to make the adjustments otherwise required in the application of section 160ZZF where the area of land of the original mining assets differs from that of the new mining asset. Specific situations in which it is intended that the subsection, would apply include where minor adjustments are made to the area of the original mining assets and where the changes made do not significantly alter the market value of the respective assets.

By subclause 52(2) of the Bill the amendment made by this clause will apply to assessments in respect of income of the income year in which 20 September 1985 occurred and of all subsequent years.

Clause 44: Involuntary disposal

Clause 44 will, with effect from 20 September 1985, amend section 160ZZK of the Principal Act, which provides for rollover relief on the involuntary disposal of an asset and the deferral of any liability to tax on capital gains until there is a disposal of the replacement asset. The proposed amendments will ensure that:

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where an amount is received for the loss or destruction of an asset, the time of disposal of the asset for the purposes of subsection 160ZZK(5) is when the loss or destruction occurred;

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rollover relief under section 160ZZK is available on the expiry of a Crown lease of land where a new lease is not granted in substitution; and

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rollover relief will be available where a government or government authority has given notice of its intention to acquire an asset, but the asset is disposed of to the government or government authority under voluntary agreement, rather than by compulsory acquisition processes.

Paragraph (a) of the clause will omit existing subsection 160ZZK(2) of the Principal Act which defines "compulsory acquisition" for the purposes of subparagraph 160ZZK(1)(a)(i). The term will now be defined for the purpose of section 160ZZK in proposed subsection 160ZZK(7C), which is to be inserted by paragraph (c) of clause 44 - see notes on that proposed subsection.

Paragraph (b) of the clause will insert new subsection 160ZZK(5A) in the Principal Act. Under this subsection, and notwithstanding subsection 160U(9) of the Principal Act, where an asset is taken to have been disposed of because of the loss or destruction of the asset, the time of disposal is to be taken for the purposes of subsection 160ZZK(5) to be when the loss or destruction occurred. In contrast, paragraph 160U(9)(a) stipulates that, in the case of the loss or destruction of an asset where an amount or an asset is received in respect of the loss or destruction, the time of disposal of the asset dates from when the first amount or asset is received.

The new subsection (5A) is relevant for the operation of existing subsection 160ZZK(5) which states that a replacement asset is not to be taken to be an asset acquired before 20 September 1985, for the purposes of the operation of subsection 160ZZK(4), if the consideration in respect of the acquisition of the replacement asset exceeds the market value of the original asset immediately before its disposal by more than 20 per cent.

The combined effect of paragraph 160U(9)(a) and subsection 160ZZK(5) is that if the consideration in respect of the acquisition of the replacement asset exceeds by more than 20 per cent the market value of the original asset in its damaged or destroyed state, rollover relief is not available. New subsection 160ZZK(5A) will ensure that the time of disposal of the original asset is when the loss or destruction occurred. Accordingly, a replacement asset in respect of an original asset acquired before 20 September 1985 will be taken to have been acquired before that date if its acquisition cost does not exceed 120 per cent of the market value of the original asset immediately before its loss or destruction.

Paragraph (c) of the clause will insert new subsections 160ZZK(7A), (7B), (7C) and (7D) in the Principal Act.

Under proposed subsection 160ZZK(7A), where all three conditions outlined in paragraphs (a) to (c) have been satisfied, an amount of money received by the taxpayer as compensation for the non-renewal of a Crown lease of land is to be treated as if it were received as compensation for the compulsory acquisition of the Crown lease. The conditions that have to be satisfied are that an Australian Crown lease owned by a taxpayer expires (paragraph (a)), the Crown lease is capable of being renewed (paragraph (b)) and the Crown lease is not renewed (paragraph (c)). The term "Australian Crown lease" is defined in proposed subsection 160ZZK(7D) - see notes on that proposed subsection.

Subsection 160ZZK(7B) will operate to allow rollover relief under section 160ZZK where an Australian government or Australian government authority has given notice of its intention to acquire an asset, but the asset is disposed of to the government or government authority under voluntary agreement, rather than by the compulsory acquisition processes. Where the conditions outlined in paragraphs (a) and (b) of the proposed subsection have been satisfied, an amount of money received by the taxpayer in respect of the disposal of the asset to the government or authority is to be treated as if it were received by the taxpayer as compensation for the compulsory acquisition of the asset.

Paragraph (a) requires that a notice be served on a taxpayer by or on behalf of an "Australian government" or "Australian government authority". (Both of these terms are defined in proposed subsection 160ZZK(7D) - see notes on that proposed subsection.) The notice must, first, invite the taxpayer to negotiate with the government or authority with a view to the government or authority acquiring by agreement an asset (subparagraph (i)) and, secondly, inform the taxpayer that the asset will be compulsorily acquired by the government or authority if those negotiations are unsuccessful (subparagraph (ii)). Paragraph (b) requires that the asset be acquired by the government or authority as a result of those negotiations.

Subsection 160ZZK(7C) defines "compulsory acquisition" for the purposes of section 160ZZK as the compulsory acquisition of an asset by an "Australian government" or an "Australian government authority". (Both of these terms are defined in proposed subsection 160ZZK(7D) - see notes on that proposed subsection.) This excludes from the scope of the rollover provisions shares compulsorily acquired in a company takeover situation.

Subsection 160ZZK(7D) defines certain terms used in section 160ZZK, as amended:

"Australian Crown lease" is defined to mean a lease of the kind referred to in paragraph (a) of the definition of "Crown lease" in subsection 160K(1), namely, a lease of land granted by the Crown under a statutory law of the Commonwealth, of a State or of a Territory.

"Australian government" is defined to mean the Commonwealth, a State or a Territory.

"Australian government authority" is defined to mean an authority of the Commonwealth, of a State or of a Territory. A local government body would be an example of such an authority.

The amendments made by this clause will apply, as a consequence of subclause 52(2) of the Bill, to assessments in respect of income of the income year in which 20 September 1985 occurred and of all subsequent years.

Clause 45: Asset received as a result of involuntary disposal

Clause 45 will, with effect from 20 September 1985, amend section 160ZZL of the Principal Act, which provides for rollover relief where a replacement asset is received rather than money by way of compensation as a result of an involuntary disposal of another asset. Any liability to tax on capital gains is deferred until a disposal occurs of the replacement asset. The proposed amendments will ensure that:

•

rollover relief under section 160ZZL is available on expiry of a Crown lease of land where a new lease is not granted in substitution; and

•

rollover relief will be available where an Australian government or Australian government authority has given notice of its intention to acquire an asset, but the asset is disposed of to the government or government authority under voluntary agreement, rather than by the compulsory acquisition processes.

Paragraph (a) of the clause will omit existing subsection 160ZZL(5) of the Principal Act which defines "compulsory acquisition" for the purposes of subparagraph 160ZZL(1)(a)(i). The term will now be defined for the purpose of section 160ZZL in proposed subsection 160ZZL(9), which is to be inserted by paragraph (b) of clause 45 of the Bill - see notes on that proposed subsection.

Paragraph (b) of the clause will insert new subsections 160ZZL(7), (8), (9) and (10) in the Principal Act.

Subsection 160ZZL(7) provides that where all three conditions outlined in paragraphs (a) to (c) of the proposed subsection have been satisfied, any asset received by the taxpayer as compensation for the non-renewal of a Crown lease of land is to be treated as if it were received as compensation for the compulsory acquisition of the Crown lease. The conditions are that an Australian Crown lease (as defined) owned by a taxpayer expires, the Crown lease is capable of being renewed but is not renewed.

Under subsection 160ZZL(8) rollover relief will be available where an Australian government or Australian government authority has given notice of its intention to acquire an asset, but the asset is disposed of to the government or government authority under voluntary agreement, rather than by the compulsory acquisition processes. Where the conditions outlined in paragraphs (a) and (b) of the proposed subsection have been satisfied, an asset received by the taxpayer in respect of the disposal of the asset to the government or authority is to be treated as if it were received by the taxpayer as compensation for the compulsory acquisition of the asset.

Paragraph (a) requires that a notice be served on a taxpayer by or on behalf of an "Australian government" or "Australian government authority". (As defined in proposed subsection 160ZZL(10).) The notice referred to is one that invites the taxpayer to negotiate with the government or authority with a view to the government or authority acquiring by agreement an asset (subparagraph (i)) and, informs the taxpayer that the asset will be compulsorily acquired by the government or authority if those negotiations are unsuccessful (subparagraph (ii)). Paragraph (b) requires that the asset be acquired by the government or authority as a result of those negotiations.

Subsection 160ZZL(9) defines "compulsory acquisition" for the purposes of section 160ZZL as the compulsory acquisition of an asset by an "Australian government" or an "Australian government authority". (Both of these terms are defined in proposed subsection 160ZZL(10) - see notes on that proposed subsection.) This excludes from the scope of the rollover provisions shares compulsorily acquired in a company takeover situation.

Subsection 160ZZL(10) defines certain terms used in section 160ZZL, as amended:

"Australian Crown lease" is defined to mean a lease of the kind referred to in paragraph (a) of the definition of "Crown lease" in subsection 160K(1) (namely, a lease of land granted by the Crown under a statutory law of the Commonwealth, of a State or of a Territory).

"Australian government" is defined to mean the Commonwealth, a State or a Territory.

"Australian government authority" is defined to mean an authority of the Commonwealth, of a State or of a Territory. A local government body would be an example of such an authority.

The amendments made by this clause will apply, as a consequence of subclause 52(2) of the Bill, to assessments in respect of income of the income year in which 20 September 1985 occurred and of all subsequent years.

Clause 46: Transfer of asset from company or trust to spouse upon breakdown of marriage

Clause 46 proposes to insert new section 160ZZMA in Division 17 of Part IIIA of the Principal Act. Section 160ZZMA will complement existing section 160ZZM, which affords automatic rollover relief to asset transfers between spouses upon the breakdown of their marriage where the transfer is effected pursuant to an order of a court under the Family Law Act 1975, or a maintenance agreement approved by a court under section 75 of that Act. The disposal may also be one pursuant to a court order or maintenance agreement under a corresponding law of a foreign country.

Section 160ZZMA will extend the rollover relief applying to the transfer of assets between spouses to court-directed or court-sanctioned transfers of assets between a company or trustee of a trust estate and a spouse. The extension of relief will apply to assets transferred after 28 January 1988.

Any capital-gains-tax-exempt status of an asset acquired in these circumstances will be retained in the hands of the transferee. This means that no capital gains tax will be payable on the subsequent disposal of an asset which a spouse acquires in those circumstances if the original asset was acquired by the company or trustee before 20 September 1985. In other cases, payment of any accrual of capital gains tax liability in respect of the asset transferred to the spouse is deferred until the time of actual disposal of that asset.

Where rollover relief is given by section 160ZZMA on the transfer of an asset between a company or trustee of a trust estate and a spouse, provision is made to reduce the cost base, indexed cost base or reduced cost base of interests owned by the spouse or other taxpayers in the company or trust (e.g., shares, units and loans, whether held by the taxpayers directly or through one or more interposed entities). This reduction is made in respect of assets acquired by a taxpayer after 19 September 1985 and is broadly intended to reflect the reduction in value of those assets resulting from the transfer to the spouse of an asset previously owned by the company or trustee.

The amount by which the cost base, indexed cost base or reduced cost base of a particular asset is to be reduced is, in turn, reduced by any amount included in the assessable income of the owner of that particular asset, in respect of the disposal of the matrimonial asset by the company or trustee to the spouse, by a provision of the Principal Act other than Part IIIA.

In general terms, the reduction in the cost base, indexed cost base or reduced cost base of a particular asset is made by reference to the market value of an asset transferred to the spouse which was acquired by the company or trustee before 20 September 1985, or by reference to the indexed cost base or reduced cost base of transferred assets acquired by the company or trustee on or after that date.

For the purposes of determining a capital gain realised on the subsequent disposal of the particular asset, in calculating the amount by which its cost base, indexed cost base or reduced cost base is to be reduced at the time of that disposal, the section provides for indexation of the various amounts by reference to which that reduction is made. In effect, those amounts are determined at the time when the other asset is transferred from the company or trustee to the spouse. Therefore, when the asset in respect of which the reduction is made is disposed of at a later time, the indexation of those amounts means that the indexed cost base or reduced cost base of the particular asset is the same as it would have been, if the amounts in respect of which the reduction is made had ceased to be included in the particular asset's cost base at the time of transfer of the other asset between the company or trustee and the spouse.

Subsection 160ZZMA(1) sets out the conditions which must be satisfied for rollover relief to be available for the transfer of an asset from a company or trustee to a spouse upon breakdown of a marriage.

Paragraph (a) requires that after 28 January 1988 a company or a trustee of a trust estate dispose of an asset (referred to in the subsection as the 'roll-over asset') to a person's present or former spouse (referred to as the "spouse").

By paragraph (b) the disposal of the roll-over asset is required to have resulted from an order of a court under the Family Law Act 1975 (subparagraph (i)) or a maintenance agreement approved by that court under that Act (subparagraph (ii)). An order or maintenance agreement approved by a court under a corresponding law of a foreign country also qualifies for relief.

Subsection 160ZZMA(2) is the operative provision and sets out the consequences of such asset transfers for the purpose of the tax on capital gains.

Paragraph (a) deems a roll-over asset acquired by the company or trustee before 20 September 1985 to have been acquired by the recipient spouse before that date and not subject to capital gains on subsequent disposal.

Paragraph (b) deals with roll-over assets acquired by the company or trustee on or after 20 September 1985. A recipient spouse will be taken to have paid as consideration for the acquisition of the roll-over asset an amount equal to:

•

for the purpose of ascertaining whether a capital gain accrued to the spouse on a subsequent disposal of the roll-over asset - the amount that would have been the indexed cost base to the company or trustee of the roll-over asset for the purposes of Part IIIA if it had applied to the disposal of the roll-over asset to the spouse (sub-subparagraph (b)(i)(A)); or

•

for the purpose of ascertaining whether the spouse incurred a capital loss in the event of a subsequent disposal of the roll-over asset - the amount that would have been the reduced cost base to the company or trustee of the roll-over asset if Part IIIA had applied to the disposal of the roll-over asset by the taxpayer to the spouse (sub-subparagraph (b)(i)(B)).

Where the asset was a personal-use asset of the company or trustee it will also be a personal-use asset of the spouse (subparagraph (b)(ii)).

Subsection 160ZZMA(3) modifies the operation of paragraph (2)(b) where a roll-over asset is disposed of by a recipient spouse within 12 months after the day on which the asset was acquired by the company or trustee. It requires that a reference in paragraph (2)(b) to the indexed cost base to the company or trustee of the asset be taken as a reference to the cost base.

In circumstances where rollover relief is provided on the transfer of an asset from a company or trustee (referred to as the "first taxpayer") to the spouse, subsection 160ZZMA(4) applies to reduce the cost base, indexed cost base or reduced cost base of certain other assets relevant to the company or trust estate, the value of which broadly relates (in whole or in part) to the roll-over asset transferred. This will reflect the reduction in the value of the asset backing of the entity following the transfer of the roll-over asset.

The subsection applies where, immediately before the disposal of the roll-over asset by the first taxpayer (i.e., the company or trustee) to the spouse, another taxpayer, whether or not the spouse and referred to as the 'second taxpayer', held another asset that is, in effect, an interest in the first taxpayer. Where the first taxpayer is a company, paragraph (4)(a) provides that the subsection will apply where that other asset, acquired by the second taxpayer after 19 September 1985, is:

•

a share in the company (subparagraph (a)(i));

•

a loan to the company (subparagraph (a)(ii)); or

•

an underlying interest in a share in, or in a loan to, the company (subparagraph (a)(iii)). (The meaning of "underlying interest" is defined in subsection 160ZZMA(6) (refer to notes below on that subsection) and will include, for example, an interest held through the ownership of shares in another company or an interest or units in a trust estate which, in turn, owns shares in the first taxpayer.)

Paragraph (4)(b) is expressed in similar terms to paragraph (4)(a) but applies where the first taxpayer is a trustee of a trust estate. The effect of paragraph (4)(b) is that subsection (4) will apply to an asset, acquired by the second taxpayer after 19 September 1985, being:

•

an interest or unit in the trust estate (subparagraph (b)(i));

•

a loan to the trustee (subparagraph (b)(ii)); or

•

an underlying interest in an interest or unit in the trust estate, or in a loan made, to the trustee (subparagraph (b)(iii)).

A share, interest, unit or loan referred to in either of paragraphs (4)(a) or (4)(b) is to be called the 'second taxpayer's asset' for the purpose of section 160ZZMA.

Paragraph (4)(c) operates at the time of disposal of the second taxpayer's asset (as described in paragraph (4)(a) or (4)(b)), to reduce the indexed cost base of that asset for the purposes of ascertaining whether a capital gain accrued to the second taxpayer (the person with an interest in the company or trust estate from which an asset was transferred to a spouse) in respect of its disposal.

Subparagraph (c)(i) sets out the method for calculating the amount by which the indexed cost base of the second taxpayer's asset will be reduced, to ascertain whether a capital gain accrued on its disposal, where the rollover asset was acquired by the first taxpayer (the company or trust estate) before 20 September 1985. This reduction will be calculated by the formula:

(Adjusted MV) - (Adjusted assessable amount)


where:

Adjusted MV is so much of the adjusted market value (referred to in subsection 160ZZMA(9) - see notes below) of the roll-over asset as, immediately before the disposal of the roll-over asset by the first taxpayer (the company or trustee), could reasonably be regarded as being represented in the adjusted market value of the second taxpayer's asset at that time; and

Adjusted assessable amount (if any) is the assessable amount defined in subsection 160ZZMA(12) (refer to notes below on that subsection) as modified by the application of subsection 160ZZMA(9).

In effect, the adjusted market value of an asset is the market value of the asset at the time of the transfer of the rollover asset to the spouse, indexed having regard to changes in specified Consumer Price Index numbers between the time of that disposal and the disposal of the second taxpayer's asset.

Subparagraph (c)(ii) operates in a similar fashion to subparagraph (c)(i) to reduce the indexed cost base of the second taxpayer's asset where the rollover asset was acquired by the first taxpayer on or after 20 September 1985. In these circumstances, the amount of the reduction is calculated in accordance with the formula:

(Adjusted ICB) - (Adjusted assessable amount)


where:

Adjusted ICB is so much of the adjusted indexed cost base (referred to in subsection 160ZZMA(9) - see notes below) to the first taxpayer (the company or trustee) of the rollover asset as, immediately before the disposal of the rollover asset by the first taxpayer, could reasonably be regarded as being represented in the adjusted market value of the second taxpayer's asset at that time; and

Adjusted assessable amount is the assessable amount defined in subsection 160ZZMA(12) (refer to notes below on that subsection) as modified by the application of subsection 160ZZMA(9).

Paragraph (4)(d) applies at the time of disposal of the second taxpayer's asset (the share, loan or underlying interest), and operates to reduce the reduced cost base of that asset for the purposes of ascertaining any capital loss incurred by the second taxpayer in respect of its disposal.

Subparagraph (d)(i) applies in circumstances where subparagraph (d)(iii) (refer to notes below on that subparagraph) does not apply and sets out the method for calculating the amount by which the reduced cost base of the second taxpayer's asset will be reduced where the roll-over asset was acquired by the first taxpayer before 20 September 1985. This reduction will be calculated by the formula:

MV - (Assessable amount)


where:

MV is so much of the market value of the rollover asset as, immediately before its disposal by the first taxpayer, could reasonably be regarded as being represented in the market value of the second taxpayer's asset at that time; and

Assessable amount is the amount (if any) which is an assessable amount as defined in subsection 160ZZMA(12) (refer to notes below on that subsection).

Subparagraph (d)(ii) operates in a similar fashion to subparagraph (d)(i) in circumstances where subparagraph (d)(iii) does not apply (refer to notes below on that subparagraph) to reduce the reduced cost base of the second taxpayer's asset where the rollover asset was acquired by the first taxpayer on or after 20 September 1985. In these circumstances, the amount of the reduction is calculated in accordance with the formula:

RCB - (Assessable amount)


where:

RCB is so much of the reduced cost base of the rollover asset as, immediately before its disposal by the first taxpayer, could reasonably be regarded as being represented in the market value of the second taxpayer's asset at that time; and

Assessable amount is the amount (if any) which is an assessable amount as defined in subsection 160ZZMA(12) (refer to notes below on that subsection).

Subparagraph (4)(d)(iii) overrides subparagraphs (4)(d)(i) and (4)(d)(ii) in circumstances where the reduced cost base of the second taxpayer's asset, as reduced by the operation of those subparagraphs, would exceed the indexed cost base of the second taxpayer's asset as reduced by subparagraph (4)(c)(i) or (4)(c)(ii), and provides that the indexed cost base as so reduced is to be taken to be the reduced cost base of the second taxpayer's asset.

Subsection 160ZZMA(5) operates where the second taxpayer's asset is disposed of within twelve months of the date of acquisition of the rollover asset by the first taxpayer. In these circumstances, indexation is not provided in respect of the various amounts by reference to which the reduction of the indexed cost base of the second taxpayer's asset is determined by paragraph 160ZZMA(4)(c), for the period between the date of disposal of the rollover asset and the date of disposal of the second taxpayer's asset. Accordingly, the subsection provides that:

•

a reference to the adjusted market value in subparagraph (4)(c)(i) is to be read as a reference to the market value (paragraph (5)(a));

•

a reference to the adjusted indexed cost base in subparagraph (4)(c)(ii) is to be read as a reference to the cost base (paragraph (5)(b)); and

•

a reference to the adjusted assessable amount in paragraph (4)(c) is to be read as a reference to the assessable amount (paragraph (5)(c)).

Subsection 160ZZMA(6) refers to the circumstances in which, for the purposes of the section, an asset held by a taxpayer will be taken to be an underlying interest in particular property (e.g., a share, unit or interest in, or a loan made to, a particular entity). This will be where, as a result of the asset held, the taxpayer holds an interest in the particular property, whether directly or through one or more interposed companies, partnerships or trusts.

Subsections 160ZZMA(7) to (11) inclusive provide for the indexation of the various amounts by reference to which the reduction of the indexed cost base of the second taxpayer's asset is determined by paragraph 160ZZMA(4)(c).

Subsection 160ZZMA(7) provides that if the Australian Statistician has published or publishes before or after the commencement of this section an index number in respect of a quarter in substitution for an index number previously published, the publication of the later index number is to be disregarded, subject to subsection (8).

Subsection 160ZZMA(8) will apply if the Australian Statistician changes the reference base for the Consumer Price Index. For the purposes of the application of section 160ZZMA only the index numbers published in terms of the new reference base will be taken into account after the change takes place.

Subsection 160ZZMA(9) is the operative provision by which various amounts are adjusted for the purposes of paragraph (4)(c).

Subsection 160ZZMA(9) declares that a reference in section 160ZZMA to the adjusted market value of an asset, to the adjusted indexed cost base of an asset, or to the adjusted assessable amount is a reference to the market value, the indexed cost base or the assessable amount, as the case may be, multiplied by the factor determined in accordance with the provisions of subsections 160ZZMA(10) and (11), if that factor is greater than 1. In any other case, it is a reference to the market value, the indexed cost base or the assessable amount, as the case may be.

The factor determined in accordance with subsections 160ZZMA(10) and (11) is the number (calculated to 3 decimal places) ascertained by dividing the index number in respect of the quarter of the year in which the second taxpayer's asset was disposed of by the second taxpayer by the index number in respect of the quarter of the year in which the rollover asset was disposed of by the first taxpayer.

Subsection 160ZZMA(11) provides that the indexation factor is to be rounded to the nearest third decimal place.

Subsection 160ZZMA(12) defines "assessable amount" and "index number" for the purposes of section 160ZZMA.

The term "assessable amount", in relation to the disposal of the rollover asset by the first taxpayer means any amount that is included in the assessable income of the second taxpayer as a result of that disposal, by virtue of a provision of the Principal Act other than Part IIIA.

Subsection 160ZZMA(12) also defines "index number" in relation to a quarter as the All Groups Consumer Price Index number, being the weighted average of the 8 capital cities, published by the Australian Statistician in respect of that quarter.

Clause 47: Transfer of asset to wholly-owned company

Clause 47 proposes an amendment to section 160ZZN of Part IIIA of the Principal Act. Broadly, section 160ZZN permits rollover relief in circumstances where an individual, partnership or trust transfers an asset (other than a personal-use asset) to a company solely in exchange for shares or securities of the company and immediately after the transfer beneficially owns 100 per cent of all the shares in the company. In the case of a partnership the partner must own shares in the company in the same proportion as their interests in the partnership immediately before the disposal.

The rollover relief provided in section 160ZZN extends to the transfer of a 'taxable Australian asset' (defined in section 160T) by a taxpayer (whether a resident or non-resident) to a non-resident company. The rationale for allowing relief in these circumstances is that a taxable Australian asset is subject to the capital gains and capital losses provisions on a later disposal by the non-resident company.

An argument has been raised that in some situations the taxable Australian asset the subject of the rollover may not be such an asset in the hands of the non-resident transferee company and therefore not subject to Part IIIA on disposal. The amendments proposed by clause 47 will ensure that rollover relief will be available only where the transferred asset is a taxable Australian asset in the hands of the non-resident transferee company. The amendments will apply to assets disposed of after the date of introduction of the Bill.

Another amendment proposed by clause 47 will remove the restriction, effective for a disposal after 28 January 1988, that rollover relief is only available on the incorporation of a partnership where one of the partners is a natural person.

Paragraph (a) of clause 47 is a drafting measure consequential upon the substitution by paragraph (b) of new subparagraphs (iii) and (iv) in paragraph 160ZZN(2)(a) to include the additional requirement which must be satisfied for rollover relief to be available to a taxpayer (other than a company or a taxpayer in the capacity of a trustee) on the disposal of a taxable Australian asset, after the introduction date of the Bill, to a non-resident company. New subparagraph (2)(a)(iii) restates the existing subparagraph (iii) but so that it only applies for disposals on or before the date of introduction of the Bill. New subparagraph (iv) applies for disposals after the date of introduction of the Bill so that rollover relief is only available for the asset disposed of to a non-resident company where immediately after disposal the asset is a taxable Australian asset of that company.

Paragraph (c) of clause 47 is a drafting measure consequential upon the insertion by paragraph (d) of a new subparagraph (2)(ca) in section 160ZZN. Subparagraph (ca) will operate to replace the existing subsection (6) that applies for the disposal of an asset by a partnership. Subsection (6) restricts rollover relief for disposal by a partnership to the case where one partner is a natural person. That restriction is being removed. New subparagraph (ca) will require that for rollover relief to be available under subsection (2), where a taxpayer disposes of an asset to a company after 28 January 1988 and the taxpayer is a partnership:

•

if one or more of the partners is a trustee of a trust estate, immediately after the disposal each such partner must hold the shares in the company upon the same trust, and in the same proportions, as the partner held the partner's interests in the partnership immediately before the disposal; and

•

if one or more of the partners is not a trustee of a trust estate, immediately after the disposal each such partner must beneficially own the shares in the company in the same proportions as the partner held the partner's interests in the partnership immediately before the disposal.

Paragraph (e) of clause 47 is also a drafting measure consequential upon the substitution of new subparagraphs (iii) and (iv) in subsection 160ZZN(4). Subsection 160ZZN(4) applies where a taxable Australian asset held by a taxpayer in the capacity of a trustee of a trust estate or a unit trust is disposed of to a non-resident company in circumstances that parallel those to which subsection (2) applies. New subparagraph (4)(a)(iii) restates the existing subparagraph (iii) but so that it only applies for disposals on or before the date of introduction of the Bill. New subparagraph (iv) applies for disposals after the date of introduction of the Bill by a trustee so that rollover relief is only available for the asset disposed of to a non-resident company where immediately after disposal the asset is a taxable Australian asset of that company.

By paragraph (g) of clause 47 a new subsection (6A) is to be inserted in section 160ZZN and will apply so that subsection (6), which sets out the requirements for rollover relief where an asset is being disposed of by a partnership to a company, does not apply to a disposal that took place after 28 January 1988. This is consequential upon the removal of the restriction that for rollover relief to apply one member of a partnership must be a natural person and the insertion of the new paragraph (2)(ca) - see notes above.

Clause 48: Transfer of asset between companies in the same group

Clause 48 proposes amendments to section 160ZZO which parallel the proposed amendments to section 160ZZN in clause 47 to ensure that rollover relief will be available only where the transferred asset is a taxable Australian asset in the hands of the non-resident recipient company.

Subsection 160ZZO permits a rollover for asset transfers between companies provided they share 100 per cent common ownership. Clause 48 amends subsection 160ZZO(1) to include a further condition which must be satisfied in order for rollover relief to be available to a company (the transferor) on the disposal of a taxable Australian asset, after the introduction date of the Bill, to a non-resident company.

Paragraph (a) of clause 48 proposes to amend subparagraphs (1)(a)(i) and (ii) to make changes in drafting style. Paragraph (b) is consequential upon the omission by paragraph (c) of existing subparagraph 160ZZO(1)(a)(iii) and the substitution of two new subparagraphs (1)(a)(iii) and (iv).

New subparagraph (1)(a)(iii) restates the existing subparagraph (iii) but so that it only applies for disposals on or before the date of introduction of the Bill. New subparagraph (iv) applies for disposals after the date of introduction of the Bill so that rollover relief is only available for the taxable Australian asset disposed of to a non-resident company where immediately after disposal the asset is a taxable Australian asset of that company.

Clause 49: Insertion of new sections

Clause 49 proposes to insert three new sections - 160ZZPAA, 160ZZPAB and 160ZZPAC - in Division 17 of Part IIIA of the Principal Act.

The new sections will extend rollover relief to three situations, namely,

•

the reorganisation of the capital of a unit trust where, as part of the reorganisation, the trustee of the unit trust redeems or cancels after 28 January 1988 all of the units of a particular class and issues other units in substitution for the original units for no other consideration;

•

transactions after 28 January 1988 involving splits or consolidations of rights or options to acquire shares consequential on a reorganisation of share capital within a company; and

•

transactions after 28 January 1988 involving splits or consolidations of rights or options to acquire units consequential on a reorganisation of the capital within a unit trust.

Section 160ZZPAA - Exchange of units in the same unit trust

Section 160ZZPAA provides rollover relief for a reorganisation of capital within a unit trust where, as part of the reorganisation, a trustee of a unit trust redeems or cancels after 28 January 1988 all the units of a particular class and a resident taxpayer who holds units of that class in the trust receives other units in substitution for the original units. This category of rollover deals with transactions that may, broadly, be described as unit splits and unit consolidations. The effect of the rollover is that new units issued in substitution for original units acquired before 20 September 1985 retain the pre-20 September 1985 acquisition date for the purposes of Part IIIA. In other cases, the rollover provides for the cost base, indexed cost base, or reduced cost base of the original units to be transferred to the new units.

Subsection 160ZZPAA(1) sets out the requirements that must be satisfied before rollover relief is available to a taxpayer. The requirements are:

•

after 28 January 1988 the trustee of a unit trust redeems or cancels all of the units of a particular class in the unit trust (paragraph (a));

•

the taxpayer holds units of that class in the unit trust (the "original units") (paragraph (b));

•

the taxpayer is a resident of Australia or the redemption or cancellation constitutes a disposal of a taxable Australian asset (paragraph (c));

•

the trustee of the unit trust issues to the taxpayer other units in the unit trust (the "new units") in substitution for the original units (paragraph (d));

•

the market value of the new units immediately after their issue is not less than the market value of the original units immediately before their redemption or cancellation (paragraph (e));

•

the taxpayer did not receive any consideration other than the new units because of the redemption or cancellation (paragraph (f)); and

•

the taxpayer has elected that this section apply in respect of the redemption or cancellation (paragraph(g)).

Subsection 160ZZPAA(2) specifies the consequences of a valid election made by the taxpayer. If the units being surrendered were acquired by the taxpayer before 20 September 1985 and the conditions set out in subsection (1) are met, the taxpayer is taken to have acquired the new units before that date (paragraph (a)). Accordingly, a subsequent disposal of the new units by the taxpayer would not be subject to tax, by virtue of Part IIIA, on any capital gain.

Paragraph (2)(b) applies where the units given up in exchange were acquired by the taxpayer on or after 20 September 1985. For the purpose of ascertaining whether a capital gain accrued to the taxpayer on a subsequent disposal of the new units by the taxpayer, the taxpayer will be taken, by subparagraph (b)(i), to have paid as consideration in respect of the acquisition of the new units, an amount equal to the indexed cost base to the taxpayer of the asset, as if Part IIIA had applied to the disposal (that is, the redemption or cancellation) of the original units by the taxpayer.

Similarly, for the purpose of ascertaining whether a capital loss was incurred when the taxpayer disposes of the new units, the taxpayer is deemed by subparagraph (b)(ii) to have acquired the units for consideration equal to the reduced cost base to the taxpayer of the original units, again determined as if the disposal of the original units by the taxpayer had been a disposal to which this Part applies.

Subsection 160ZZPAA(3) modifies the operation of paragraph (2)(b) where the new units are disposed of by the taxpayer within 12 months of acquisition. In this case, a reference to the indexed cost base of the original units is to be taken as a reference to the cost base of the original units.

Subsection 160ZZPAA(4) requires that the election under subsection (1) be made by notice in writing given to the Commissioner of Taxation on or before the date of lodgment of the return of income of the taxpayer for the year of income in which the redemption or cancellation takes place, or within such further period as the Commissioner allows.

Section 160ZZPAB - Options and rights to acquire unissued shares affected by share splits or share consolidations

Section 160ZZPAB proposes to allow rollover relief for transactions involving splits or consolidations of rights or of options to acquire shares made consequential on a reorganisation of share capital within a company. The effect of the rollover is that new rights or options issued in substitution for original rights or options acquired before 20 September 1985, retain a pre-20 September 1985 acquisition date for the purposes of Part IIIA. In other cases, the section provides that the relevant indexed cost base, cost base or reduced cost base of the original rights or options to acquire shares is transferred to the new rights or options to acquire shares.

Subsection 160ZZPAB(1) sets out the requirements that must be satisfied before rollover relief is available to a taxpayer. Those requirements are:

•

a taxpayer owns rights (the "original rights") issued by a company to acquire shares (the "original shares'') in the company or to acquire an option to acquire shares (also the "original shares'') in the company (subparagraph (a)(i)); or a taxpayer owns an option (the "original option") to acquire shares (also the "original shares") in the company (subparagraph (a)(ii));

•

the original shares are either consolidated and divided into shares (the "new shares'') of larger amount, or subdivided into shares (also the "new shares") of smaller amount (paragraph (b));

•

after 28 January 1988, and as a result of the consolidation or subdivision, the original rights or the original option (as the case may be) is or are cancelled (paragraph (c));

•

the taxpayer is a resident of Australia or the cancellation constituted a disposal of a taxable Australian asset (paragraph (d));

•

the company issues to the taxpayer:

-

other rights (the "new rights") relating to the new shares in substitution for the original rights (subparagraph (e)(i)); or

-

another option (the "new option") relating to the new shares in substitution for the original option (subparagraph (e)(ii));

•

the market value of the new rights or of the new option immediately after their issue is not less than the market value of the original rights or of the original option immediately before their cancellation (paragraph (f));

•

the taxpayer receives no consideration other than the new rights or the new option because of the cancellation of the original rights or the original option (paragraph (g));

•

the taxpayer elects that this section applies in respect of the cancellation of the original rights or the original option (paragraph (h));

Subsection 160ZZPAB(2) declares the consequences of a valid election made by the taxpayer. If the original rights or the original option being surrendered by the taxpayer was or were acquired by the taxpayer before 20 September 1985, and the conditions set out in subsection (1) are satisfied, the taxpayer is deemed to have acquired the new rights or the new option before that date (paragraph (a)).

Paragraph (2)(b) applies where the rights or the options given up in exchange were acquired by a taxpayer on or after 20 September 1985. In this regard, subparagraph (b)(i) applies for the purpose of ascertaining whether a capital gain accrued to the taxpayer on a subsequent disposal of the new rights, the new option or the shares or option to which the new rights or the new option relates. A taxpayer will be taken by that subparagraph to have paid as consideration for the acquisition of the new rights or the new option, an amount equal to the indexed cost base to the taxpayer of the original rights or the original option as if Part IIIA had applied to the disposal of the original rights or the original option by the taxpayer.

Similarly, subparagraph (b)(ii) applies for the purpose of ascertaining whether a capital loss was incurred when a taxpayer disposes of the new rights or new option, or the shares or option to which the new rights or the new option relates. A taxpayer will be taken by that subparagraph to have acquired the new rights or the new option for consideration equal to the reduced cost base to the taxpayer of the original rights or the original option, again determined as if the disposal of the original rights or the original option by the taxpayer had been a disposal to which Part IIIA applies.

Subsection 160ZZPAB(3) modifies the operation of paragraph (2)(b) where:

•

the new rights or the new option was or were disposed of by the taxpayer within 12 months after the acquisition of the original rights or the original option; or

•

the shares or option to which the new rights or the new option relates was or were disposed of by the taxpayer within 12 months after the acquisition of the shares or the option.

In this case, a reference in paragraph (2)(b) to the indexed cost base of the original rights or the original option is to be taken as a reference to the cost base of the original rights or the original option respectively.

Subsection 160ZZPAB(4) requires that the election under subsection (1) be made by notice in writing given to the Commissioner of Taxation on or before the date of lodgment of the return of income of the taxpayer for the year of income in which the cancellation of the original rights or the original option takes place, or within such further period as the Commissioner allows.

Section 160ZZPAC - Options and rights to acquire unissued units affected by unit splits or unit consolidations

Section 160ZZPAC proposes to allow rollover relief for transactions involving splits or consolidations of rights or of options to acquire units in a unit trust made in consequence of a reorganisation of capital within a unit trust. The effect of the rollover is that new rights or options issued in substitution for original rights or options acquired before 20 September 1985, retain a pre-20 September 1985 acquisition date for the purposes of Part IIIA. In other cases, the section provides that the relevant indexed cost base, cost base or reduced cost base of the original rights or options to acquire units is transferred to the new rights or options to acquire units.

Subsection 160ZZPAB(1) sets out the requirements that must be satisfied before rollover relief is available to a taxpayer. Those requirements are:

•

a taxpayer owns rights (the "original rights") issued by the trustee of a unit trust to acquire units (the "original units") in the unit trust or to acquire an option to acquire units (also the "original units") in the unit trust (subparagraph (a)(i)); or a taxpayer owns an option (the "original option") to acquire units (also the "original units") in the unit trust (subparagraph (a)(ii));

•

the original units are either consolidated and divided into units (the "new units") of larger amount, or subdivided into units (also the "new units") of smaller amount (paragraph (b));

•

after 28 January 1988, and as a result of the consolidation or subdivision, the original rights or the original option (as the case may be) is or are cancelled (paragraph (c));

•

the taxpayer is a resident of Australia or the cancellation constituted a disposal of a taxable Australian asset (paragraph (d));

•

the trustee of the unit trust issues to the taxpayer:

-

other rights (the "new rights") relating to the new units in substitution for the original rights (subparagraph (e)(i)); or

-

another option (the "new option") relating to the new units in substitution for the original option (subparagraph (e)(ii));

•

the market value of the new rights or of the new option immediately after their issue is not less than the market value of the original rights of the original option immediately before their cancellation (paragraph (f));

•

the taxpayer receives no consideration other than the new rights or the new option because of the cancellation of the original rights or the original option (paragraph (g));

•

the taxpayer elects that this section applies in respect of the cancellation of the original rights or the original option (paragraph (h)).

Subsection 160ZZPAC(2) declares the consequences of a valid election made by the taxpayer. If the original rights or the original option being surrended by the taxpayer was or were acquired by the taxpayer before 20 September 1985, and the conditions set out in subsection (1) are satisfied, the taxpayer is deemed to have acquired the new rights or the new option before that date (paragraph (a)).

Paragraph (2)(b) applies where the rights or the option given up in exchange were acquired by a taxpayer on or after 20 September 1985. In this regard, subparagraph (b)(i) applies for the purpose of ascertaining whether a capital gain accrued to the taxpayer on a subsequent disposal of the new rights, the new option or the units or option to which the new rights or the new option relates. A taxpayer will be taken by that subparagraph to have paid as consideration for the acquisition of the new rights or the new option, an amount equal to the indexed cost base to the taxpayer of the original rights or the original option as if Part IIIA had applied to the disposal of the original rights or the original option by the taxpayer.

Similarly, subparagraph (b)(ii) applies for the purpose of ascertaining whether a capital loss was incurred when a taxpayer disposes of the new rights, the new option or the units or option to which the new rights or new option relates. A taxpayer is deemed by that subparagraph to have acquired the rights or the option for consideration equal to the reduced cost base to the taxpayer of the original rights or the original option, again determined as if the disposal of the original rights or the original option by the taxpayer had been a disposal to which Part IIIA applies.

Subsection 160ZZPAC(3) modifies the operation of paragraph (2)(b) where:

•

the new rights or the new option was or were disposed of by the taxpayer within 12 months after the acquisition of the original rights or the original;

•

the units or option to which the new rights or the new option relates was or were disposed of by the taxpayer within 12 months after the acquisition of the units or the option.

In this case, a reference to the indexed cost base of the original rights or the original option is to be taken as a reference to the cost base of the original rights or the original option respectively.

Subsection 160ZZPAC(4) requires that the election under subsection (1) be made by notice in writing given to the Commissioner of Taxation on or before the date of lodgment of the return of income of the taxpayer for the year of income in which the cancellation of the original rights or the original option takes place, or within such further period as the Commissioner allows.

Clause 50: Company schemes of arrangement - exchange of shares in original company for shares in interposed company, redemption or cancellation of shares in original company in exchange for shares in interposed company, renewal or extension of statutory licence and in specie distribution of shares by trustee of public trading trust

Clause 50 proposes to insert four new sections - sections 160ZZPC, 160ZZPD, 160ZZPC and 160ZZPF - in Division 17 of Part IIIA of the Principal Act.

Proposed sections 160ZZPC and 160ZZPD will extend rollover relief where a resident company (not acting in the capacity of a trustee of a trust estate) is interposed between shareholders and an existing resident company, and the shareholders dispose of their holdings of shares in the original company solely in exchange for non-redeemable shares in the interposed company. The amendments allow for the reorganisation to be carried out either by a direct exchange of shares in the original company for shares in the interposed company or by the redemption or cancellation of shares in the original company and an issue of shares in the interposed company.

Section 160ZZPC: Company schemes of arrangement - exchange of shares in original company for shares in interposed company

Proposed section 160ZZPC will extend roll-over relief to a reorganisation entered into or commenced after 28 January 1988 in which a resident company (not being a company in the capacity of a trustee of a trust estate) is interposed between shareholders and an existing resident company (referred to in the subsection as the 'original company'), the shareholders exchanging their shares in the original company solely for shares obtained in the interposed company.

Section 160ZZPC does not specify the rules by which eligibility for rollover relief in these circumstances will be determined. Rather, it modifies the application of existing section 160ZZPA (which applies to a scheme for a reorganisation of the affairs of a unit trust) to also apply to similar schemes for the reorganisation of the affairs of a company. For these purposes, section 160ZZPC provides that certain references in section 160ZZPA are to be read in relation to the reorganisation of a company (called the original company) as follows:

•

references to the unit trust or to the trustee of the unit trust as references to the original company (paragraph (a)); and

•

references to units in the unit trust as references to shares in the original company (paragraph (b))

In addition, paragraph 160ZZPC(c) replaces the requirements in paragraph 160ZZPA(1)(g) and (h), which apply in relation to a unit trust reorganisation. The new requirements are that both the original company and the interposed company be Australian-resident taxpayers at the completion time (as defined) of the reorganisation and that, where disposals of shares in the original company by its shareholders to the interposed company take place at different times, both companies are Australian-resident taxpayers throughout the period from the time of the first of these disposals to the completion time.

The relevant notes in relation to section 160ZZPA, contained in an Explanatory Memorandum circulated at the time of introduction to the Parliament of the Taxation Laws Amendment Act 1988 (No.11 of 1988), may be referred to in conjunction with these notes in understanding the extended application of section 160ZZPA to additional kinds of company reorganisations by new section 160ZZPC.

Similarly, the notes in relation to section 160ZZPB contained in the Explanatory Memorandum on the Tax Laws Amendment Act 1988 may be referred to in relation to its modification by section 160ZZPD.

Section 160ZZPD: Company schemes of arrangement - redemption or cancellation of shares in original company in exchange for shares in interposed company

New section 160ZZPD, like proposed section 160ZZPC, allows rollover relief to be granted in the case of a reorganisation entered into or commenced after 28 January 1988 under which a resident company (not being a company in the capacity of a trustee of a trust estate) is interposed between shareholders and an existing resident company. The effect of the two sections is virtually identical except that section 160ZZPD modifies section 160ZZPB so that it applies where there is a redemption or cancellation of the shares in the original company with an issue of shares to the former shareholders in the original company and a new issue of shares in the original company to the interposed company. Section 160ZZPC modifies section 160ZZPA so that it applies where the shares in the original company are disposed of to the interposed company.

The changes made by section 160ZZPD to the applications of section 160ZZPB correspond to those made by section 160ZZPC to section 160ZZPA.

Section 160ZZPE: Renewal or extension of statutory licence

Clause 50 also proposes the insertion of new section 160ZZPE in the Principal Act. By section 160ZZPE provides rollover relief will be allowed where a statutory licence expires or is surrendered and a fresh licence is granted to the taxpayer by way of the removal or extension of the term of the original licence as a consequence of the taxpayer's ownership of the original licence. A statutory licence means, broadly, an authority, licence or permit granted under a law of Australia or a foreign country but does not include a lease or a mining asset within the meaning of section 160ZZF. Where a statutory licence was acquired by the taxpayer before 20 September 1985, the new licence will also be taken to have been acquired before that date. Where the original licence was acquired on or after 20 September 1985, the expiry or surrender of the original licence will not constitute the disposal of an asset for the purposes of Part IIIA and the indexed cost base, cost base or reduced cost base of the new licence will be that of the original licence at the time of its expiry.

Licences and similar assets granted by or on behalf of a government or government authority, where the rights attaching to the grant of the licence or asset are subject to periodic renewal or extension, are given rollover relief on renewal or extension of their term. Examples of assets which fall within the definition of statutory licence and qualify for rollover relief are radio and television broadcasting licences, taxi licences and import and export quotas.

Subsection 160ZZPE(1) sets out the requirements that must be satisfied before rollover relief is available on the issue of a new statutory licence following the expiry or surrender of another. The requirements are:

•

a statutory licence (the "original licence") owned by the taxpayer expires or is surrendered (paragraph (a));

•

a new statutory licence is granted to the taxpayer by way of renewal or extension of the term of the original licence , where the renewal or extension is (by law, custom or otherwise) wholly or principally attributable to the taxpayer's ownership of the original statutory licence (paragraph (b));

•

in the case of a taxpayer in the capacity of a trustee of a trust estate, immediately after the grant of the new licence, the taxpayer holds that licence upon the same trust as the taxpayer held the original licence (paragraph (c)).

Subsection 160ZZPE(2) provides that, where the conditions of subsection (1) are met, Part IIIA (other than section 160ZZPE) will not apply to the expiry or surrender of the original licence. If the original licence was acquired by the taxpayer before 20 September 1985, the taxpayer is deemed to have acquired the new licence before that date (paragraph (a)). Accordingly, a subsequent disposal of that licence by the taxpayer will not be subject to tax on any capital gain.

Paragraph (b) applies where the original licence which expired or was surrendered was acquired by the taxpayer on or after 20 September 1985. For the purpose of ascertaining whether a capital gain accrued to the taxpayer on a subsequent disposal of the new licence the taxpayer will be deemed, by subparagraph (b)(i), to have paid as consideration in respect of the acquisition of the new licence, an amount equal to the sum of:

•

the indexed cost base to the taxpayer of the original licence determined as if the expiry or surrender of the original licence by the taxpayer had been a disposal to which this Part applied (sub-subparagraph (b)(i)(A)); and

•

any amount paid by the taxpayer to acquire the fresh licence (sub-subparagraph (b)(i)(B)).

Similarly, for the purpose of ascertaining whether a capital loss was incurred when the taxpayer disposes of the new licence, the taxpayer is deemed, by subparagraph (b)(ii), to have acquired the licence for consideration equal to the sum of:

•

the reduced cost base to the taxpayer of the original licence, again determined as if the expiry or surrender of the original licence by the taxpayer had been a disposal to which this Part applied (sub-subparagraph (b)(ii)(A)); and

•

any amount paid by the taxpayer to acquire the new licence (sub-subparagraph (b)(ii)(B)).

Subsection 160ZZPE(3) modifies the operation of paragraph 2(b) where the new licence is disposed of by the taxpayer within 12 months after the day on which the original licence was acquired by the taxpayer. In this case, a reference to the indexed cost base of the original licence is to be taken as a reference to the cost base of the original licence.

Subsection 160ZZPE(4) defines the term "statutory licence" to mean an authority, licence or permit granted by or on behalf of a government or a government authority under a statutory law of the Commonwealth, of a State, of a Territory or of a foreign country. The definition excludes a lease or a mining asset within the meaning of section 160ZZF.

Section 160ZZPF: In specie distribution of shares by trustee of a public trading trust

Clause 50 will also insert new section 160ZZPF in the Principal Act to provide rollover relief for a type of reorganisation under which the trustee of a unit trust that is a public trading trust makes a proportionate distribution in specie to its unitholders of shares held by the trustee in a company where the shares were acquired before 20 September 1985.

Changes made to the income tax treatment of public trading trusts contained in Division 6C of Part III of the Principal Act generally apply from the financial year commencing 1 July 1988 for trading trusts established before 20 September 1985. Broadly speaking, a unit trust is a public trading trust if it is operating a trade or business and its units are listed on a stock exchange, are held by 50 or more persons or are available for investment by the public. Division 6C provides for the trustee of such a trust to be taxed as a company.

The amendments to extend rollover relief will apply to disposals of shares after 28 January 1988 (the date of announcement) and before 1 July 1988 or the commencement date of a substituted accounting period, in lieu of the financial year commencing on 1 July 1988, that commences before 1 July 1988.

Where the necessary requirements have been satisfied, a unitholder will be able to elect for rollover relief to apply. The result of a valid election will be that the unitholder will be taken to have acquired the shares before 20 September 1985 if the units were acquired before that date. This means that a later disposal of these shares by the unitholder will not fall within the capital gains and capital losses provisions. If the unitholder acquired only some of the units before 20 September 1985, an equivalent proportion of the shares received will be taken to have been acquired before that date.

The conditions that need to be satisfied before a unitholder can make a valid election are set out in proposed subsection 160ZZPF(1). The requirements of both paragraphs (a) and (b) of the subsection must be satisfied.

Paragraph (a) of subsection 160ZZPF(1) details the conditions that must be satisfied in relation to the disposal of particular shares in a company by the trustee of a unit trust. The shares must have been acquired by the trustee before 20 September 1985 (subparagraph (i)) and must have been disposed of by the trustee to two or more unitholders in the unit trust (referred to in section 160ZZPF as "unitholding taxpayers") (subparagraph (ii)).

Subparagraph (iii) requires that each of the disposals be in satisfaction of an entitlement in respect of one or more units in the unit trust (referred to in section 160ZZPF as the "unitholding taxpayer's entitlement units") held by each unitholding taxpayer.

Subparagraph (iv) specifies that the disposals must have occurred after 28 January 1988 and before 1 July 1988 (sub-subparagraph (A)) and, during a year of income of the unit trust earlier than the year of income commencing on 1 July 1988 (sub-subparagraph (B)). In other words, the disposals must occur before 1 July 1988 and before the commencement of any substituted accounting period of the trust that is in lieu of the financial year commencing on 1 July 1988.

By subparagraph (v), it will be a requirement that the unit trust was established, within the meaning of section 102R of the Principal Act, before 20 September 1985. Section 102R determines whether a unit trust is a public trading trust for the purposes of Division 6C of Part III of the Principal Act.

Subparagraph (vi) requires that the unit trust would have been a public trading trust for the purposes of Division 6C of Part III of the Principal Act if it had been established after 19 September 1985. This requirement must be satisfied in relation to each year of income of the unit trust in which one of the disposals occurred.

The operation of subparagraph (vi) will ensure that rollover relief for the distribution in specie by the trustee of a public unit trust will only be available where the unit trust qualifies as a public trading trust in each income year in which a disposal of shares occurred, even though, because the unit trust was established before 20 September 1985, it is not a public trading trust for the purposes of section 102R until the 1988-89 year of income.

Paragraph (b) of subsection 160ZZPF(1) details the conditions that must be satisfied in relation to a particular unitholding taxpayer. Subparagraph (i) requires that at least one of the unitholding taxpayer's entitlement units was acquired before 20 September 1985. Subparagraph (ii) requires that the unitholding taxpayer elect for section 160ZZPF to apply in respect of all the shares that were acquired from the trust and in respect of which the conditions specified in paragraph 160ZZPF(1)(a) (see notes on that paragraph) are satisfied. The formal requirements of the election are set out in subsection 160ZZPF(3).

Where the conditions of subsection (1) are satisfied subsection 160ZZPF(2) has the following effects in relation to a unitholding taxpayer.

Paragraph (a) applies where all the unitholding taxpayer's entitlement units were acquired before 20 September 1985. In these circumstances, the unitholder will be deemed also to have acquired the shares before that date.

Where paragraph (b) applies, the unitholding taxpayer will be taken to have acquired some of the shares before 20 September 1985. This is where some, but not all, of the entitlement units were acquired before 20 September 1985 (subparagraph (i)). The notice of election will need to specify which of the shares acquired are those to be taken as shares acquired before 20 September 1985 (subparagraph (ii)).

Subparagraph (2)(b)(iii) requires that the number of shares acquired by the unitholding taxpayer nominated in the election does not exceed the number calculated in accordance with the formula:

Shares * (Pre CGT units)/(Total units)


where:

Shares is the number of shares acquired by the unitholding taxpayer;

Pre CGT units is the number of entitlement units acquired by the unitholding taxpayer before 20 September 1985; and

Total units is the number of unitholding taxpayer's entitlement units held by the unitholding taxpayer.

If the requirement is met the unitholding taxpayer will be taken, for the purposes of Part IIIA of the Principal Act, to have acquired the nominated shares before 20 September 1985.

Subsection 160ZZPF(3) sets out the formal requirements for the election by a unitholding taxpayer, under subsection 160ZZPF(1), that rollover relief apply. The election must be by notice in writing given to the Commissioner of Taxation on or before the date of lodgment of the return of income of the unitholding taxpayer for the year of income in which the acquisition of the shares concerned takes place, or within such further period as the Commissioner allows.

Clause 51: Exemption of principal residence

Clause 51 proposes two amendments to Division 18 - Principal Residence - in Part IIIA of the Principal Act. This Division sets out the rules for determining any capital gains tax liability that arises in connection with the disposal of a taxpayer's sole or principal residence.

The first amendment applies where a dwelling acquired by a company or trustee of a trust estate is transferred to a spouse in accordance with section 160ZZMA (ie, the asset is transferred pursuant to a court order or approved maintenance agreement under the Family Law Act 1975 or equivalent overseas legislation - see clause 46) and the dwelling becomes the spouse's sole or principal residence. In these circumstances the exemption for a taxpayer's sole or principal residence is only available in respect of the period after the dwelling's transfer to the spouse. The second amendment extends the principal residence exemption to dwellings situated on land held under a Crown lease. At present the exemption is only available in respect of a dwelling situated on land which is held by a taxpayer as an estate in fee simple or under a lease in perpetuity or for a term of at least 99 years.

By paragraph (a) of clause 51, subsection (1A) is to be inserted in section 160ZZQ.

The provisions of subsection (1A) will have effect where:

(a)

an asset, acquired by a company or trustee of a trust estate on or after 20 September 1985, was disposed of to a taxpayer (paragraphs (a) and (b)); and

(b)

because of section 160ZZMA (transfer of asset by company or trust to a spouse upon marriage breakdown) Part IIIA does not apply in respect of the disposal (paragraph (c)).

In these circumstances the taxpayer is to be treated as having owned the asset at all times when the company or trustee held the asset (paragraph (d)). In addition, the dwelling to which the asset relates is not to be treated as the sole or principal residence of the taxpayer during the period in which it was held by the company or trustee (paragraph (e)).

In effect, because of the terms of proposed section 160ZZMA (clause 46) this amendment will apply only for an asset acquired by a taxpayer from a company or trustee on or after 28 January 1988.

By paragraph (b) of clause 51, subsection 160ZZQ(2) is amended by the insertion of the term "Crown lease" in paragraph (a) and subparagraph (b)(ii). The effect of the amendment is to make available, from 20 September 1985, the principal residence exemption in circumstances where a dwelling is situated on land held under a Crown lease.

By subclause 52(4) of the Bill the amendment made by paragraph (b) applies to assessments in respect of income of all the income years in which 20 September 1985 occurred and of all subsequent years.

Clause 52: Application of amendments

This clause, which will not amend the Principal Act, contains provisions that specify the date on which, or the year of income for which, certain of the amendments proposed in Part III of the Bill will apply.

By subclause 52(1) the amendment proposed by clause 22 to confer an exemption from income tax on amounts received by a taxpayer by way of a reimbursement of fringe benefits tax will apply to assessments in respect of income of the year of income commencing on 1 July 1986 and of all subsequent years of income.

By subclause 52(2) the amendments proposed by:

•

clause 23 to permit the cost of certain meals to be an allowable income tax deduction; and

•

clauses 32 to 51 (inclusive) to extend capital gains tax rollover relief in a number of circumstances including for additional kinds of business reorganisatons,

will apply to assessments in respect of income of the year of income in which 20 September 1985 (the day that the capital gains tax provisions commenced to operate) occurred and of all subsequent years of income.

By subclause 52(3) the amendments made by paragraphs 24(a), (c), (g), (h) and sections 27 and 28 (to treat hire car expenses as either travel or employment-related expenses) are to apply from the year of income that commences on or after 1 July 1988. The amendments have a prospective date of commencement to ensure that taxpayers who have been substantiating hire car expenses as car expenses are not disadvantaged by the change.

Subclause 52(4) allows that the concessional amendments made by paragraphs 24(b), (d), (e), (f), and (j) and sections 25, 26, 29, 30 and 31 (to exclude certain overseas travel allowances and motor vehicle fuel and oil expenses from the income tax substantiation provisions) to apply from the year of income that commenced on or after 1 July 1986 - the date from which the substantiation provisions commenced.

Clause 53: Amendment of assessments

Clause 53 will give the Commissioner of Taxation authority 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.

SCHEDULE

AMENDMENTS OF THE FRINGE BENEFITS TAX ASSESSMENT ACT 1986 RELATING TO CAR RECORDS

Changes being made to the fringe benefits tax provisions regarding the specification of certain matters in employers' car records, rather than in fringe benefits tax returns, are proposed in the Schedule to this Bill. The changes consist almost entirely of the omission of certain shorthand expressions from sections of the Principal Act and their replacement by other drafting expressions to ensure that the Principal Act operates as intended in relation to the changed arrangements for specifying those matters.

Two changes proposed by the Schedule amendments which fall outside the pattern of the changes just mentioned are the repeal of subparagraph 106(1)(aa)(iv) of the Principal Act and the associated repeal of section 162D of that Act and its replacement with a new section 162D.

Subparagraph 106(1)(aa)(iv) provided that certain documents could be included in a later year return of tax. As the repeal of section 162D proposed by this Bill makes the paragraph redundant, it is being omitted.

Section 162D broadly, permits employers who inadvertently failed to specify, in their fringe benefits tax returns, matters relating to the car log book rules to be treated as having so specified those matters if they include them in a later document lodged with the Commissioner of Taxation.

Proposed new section 162D contains procedures along similar lines to the section it replaces and additionally allows the Commissioner to treat a relevant 'period, nomination, particular or percentage' specified by the employer in a document lodged with the Commissioner, as if it had been specified in the employer's car records. The matters particularly addressed are:

•

an applicable log book period of the kind referred to in subsection 162H(1) or (2) of the Principal Act (paragraph (a));

•

a nomination (or particulars thereof) under subsection 162K(2) or 162L(2) of the Principal Act of one car as a replacement for another (paragraph b); or

•

a business-use-of-car percentage of the type mentioned in sections 10A, 10B, 65E or 65F of the Principal Act.

These concessional rules will benefit fringe benefits tax employers who, by oversight, fail to comply with certain provisions of the law.