Explanatory Memorandum
(Circulated by the authority of the Treasurer the Hon Ralph Willis, M.P.)Chapter 10 - Capital Gains Tax - Assets used by non-residents in Australian permanent establishments - Subdivision G of Division 3 (Part 3) of the Bill.
Overview
10.1 The Bill will amend the Income Tax Assessment Act 1936 (the Act) so that a capital gain or capital loss arising to a non-resident on the disposal of a taxable Australian asset used by the non-resident in carrying on a trade or business wholly or partly at or through a permanent establishment in Australia is to be calculated by reference only to the total period during which it is used in that way.
Summary of proposed amendments
10.2 The amendment will provide a more equitable CGT treatment in cases where, under the current law, CGT is payable upon gains which have accrued over the whole period of ownership of the asset, despite the fact that the asset may only have been used at a permanent establishment in Australia for a portion of the total period of ownership [Clause 54].
10.3 The amendments will apply to disposals which take place after 12:00 midday Eastern Summer time 12 January 1994 [Clause 56].
Background to the legislation
10.4 Subsections 160L (1) and (2) provide that the capital gains tax (CGT) provisions may apply upon the disposal of any asset by a resident, or upon the disposal of a taxable Australian asset by a non-resident. There is no actual definition of 'taxable Australian asset' within the Act. However, subsection 160T(1) deems that certain disposals are disposals of taxable Australian assets in particular circumstances. The disposal itself is still by way of a change of ownership as provided for in section 160M.
10.5 Paragraph 160T(1)(b) deems that a disposal of an asset is a disposal of a taxable Australian asset if the asset has at any time been used by the taxpayer in carrying on a trade or business wholly or partly at or through a permanent establishment in Australia. When such an asset is disposed of, the capital gains tax provisions apply based on the cost base of the asset at the time of acquisition and the consideration upon disposal (even though the asset may not have been used at a permanent establishment throughout the whole period from its acquisition to its disposal).
10.6 The use of the term 'at any time' means that CGT will be payable upon gains which have accrued over the whole period of ownership of the asset, despite the fact that the asset may only have been used at a permanent establishment in Australia for a portion of the total period of ownership. Similarly, any capital loss made over the entire period of ownership may be fully utilised when calculating a net capital gain, even though much of the loss may be attributable to a period when the asset was not being used at a permanent establishment.
Explanation of amendments
10.7 Paragraph 160T(1)(b) currently deems a disposal to be a disposal of a taxable Australian asset if the asset has at any time been used in carrying on a trade or business at or through a permanent establishment in Australia.
10.8 The Bill will subject to CGT a capital gain (or allow a capital loss) on the disposal of an asset, that has been used by a non-resident in carrying on a business or trade at or through a permanent establishment in Australia, by reference to the period of such use [Clause 55 - new section 160ZAA].
10.9 This treatment will apply only to an asset that is covered by paragraph 160T(1)(b) and, at the same time, not covered by any of the other paragraphs of subsection 160T(1). The current rules would continue to apply to the asset if it falls also within a paragraph of subsection 160T(1) other than paragraph (b) [Clause 55 - new paragraph 160ZAA(a)].
10.10 The capital gain or capital loss on the disposal of an asset referred to in paragraph 160T(1)(b), not being an asset referred to in any of the other paragraphs of subsection 160T(1), is to be reduced in proportion to the total period during which it is used by the taxpayer in carrying on a trade or business wholly or partly at or through a permanent establishment in Australia, as a proportion of the period between the taxpayer acquiring the asset and disposing of it.
10.11 The capital gain or capital loss on the disposal of that asset calculated under the current provisions of Part IIIA is to be reduced to the proportion of the gain or loss that the number of days during which it is used by the taxpayer in carrying on a trade or business at or through a permanent establishment in Australia bears to the number of days during the period by reference to which the capital gain or loss has been calculated.
10.12 A non-resident taxpayer acquires a machine on 1 February 1994, for $21,000. On 1 June 1994, the machine is first used by the taxpayer in carrying on a business at his permanent establishment in Australia. The taxpayer sells the asset on 10 November 1994 for $30,000.
10.13 A capital gain of $9,000 has accrued in respect of the disposal, as calculated under Part IIIA. There will be no indexation of the cost base as the asset was owned for less than 12 months.
10.14 The number of days in the ownership period is 283 days. The number of days the asset was used in the way described in paragraph 160T(1)(b) is 163 days.
10.15 The $9,000 capital gain is reduced to reflect the period in which the asset was actually used in the way described in paragraph 160T(1)(b). Therefore, the amount of the taxpayer's capital gain is taken to be $5184
[$9,000 * 163/283 = $5184].
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