Senate

Explanatory Memorandum

(Circulated by the authority of the Treasurer the Hon Ralph Willis, M.P.)

Chapter 13 - Capital Gains Tax - Amendment of assessments - Subdivision F of Division 3 (Part 3) of the Bill

Overview

13.1 The Bill will amend the Income Tax Assessment Act 1936 (the Act) to ensure that nothing in section 170 of the Act prevents the amendment of an assessment for capital gains tax purposes to:

(a)

give effect to subsection 160U(3) or 160U(8) of the Act; or

(b)

treat the disposal or acquisition of an asset as never having happened if the contract is later found to have been a nullity from the beginning.

Summary of proposed amendments

Purpose of amendments

13.2 The purpose of the amendments to the law is to ensure that the time limits imposed by section 170 of the Act for the making of amended assessments do not prevent necessary amendments for capital gains tax purposes [Clause 50].

Date of effect

13.3 Generally, the amendments to the law will apply to assessments made at any time. This date of effect is subject to the exception that the amendments to the law do not permit the amendment of an assessment if the amendment would increase a taxpayer's liability and the Commissioner of Taxation was prevented by section 170 from amending the assessment as at the end of 11 January 1994 (the day before the date of the Assistant Treasurer's announcement foreshadowing the amendments) [Clause 53].

Background to the legislation

13.4 Section 170 of the Act imposes time limits on the amendment of assessments. Section 160U of the Act provides for the time of acquisition or disposal for capital gains tax purposes.

Subsection 160U(3)

13.5 Subsection 160U(3) of the Act provides that if an asset was acquired or disposed of under a contract, the time of acquisition or disposal is to be taken to have been the time of the making of the contract. In some cases, there is no change in ownership under a contract until the time at which the contract is completed.

13.6 For example, for capital gains tax purposes, a change in the ownership of land occurs at the completion of the contract under which the land is sold. Completion of an ordinary contract for the sale of land normally takes place at the time of settlement. However, in accordance with subsection 160U(3), the time of disposal by the seller and of acquisition by the buyer are taken to be the time of the making of the contract. In other words, when an actual change in ownership occurs on completion of the contract, the disposal and acquisition then relate back to the time of the making of the contract.

13.7 At present, the time limits imposed by section 170 can prevent necessary amended assessments to give effect to subsection 160U(3). The proposed amendments to the law will correct this situation.

Subsection 160U(8)

13.8 Subsection 160U(8) of the Act provides that if an asset was disposed of as a result of the exercise of a power of compulsory acquisition conferred by a law, the time of disposal is to be taken to be the time at which the earliest of certain specified events occurred (for example, when the person acquiring the asset became its owner). In some cases, an asset that has been compulsorily acquired is treated as having been disposed of some time before the consideration for the disposal of the asset (for example, any compensation payable) can be determined.

13.9 At present, the time limits imposed by section 170 can prevent necessary amended assessments to give effect to subsection 160U(8). The proposed amendments to the law will correct this situation.

Contract void from the beginning

13.10 In some exceptional cases, a contract can fall through after completion for reasons that render the contract void ab initio (from the beginning); that is, the contract is treated in law as having never existed. An example is where a contract is set aside because fraud of one of the parties is discovered after completion of the contract. The capital gains tax position is that a change in the ownership of the asset is taken never to have occurred since the purported contract for sale was at law a nullity from the beginning.

13.11 At present, the time limits imposed by section 170 can prevent necessary amended assessments to reflect the fact that there has actually been no change in the ownership of an asset because a purported contract has been found to have been a nullity from the beginning. The proposed amendments to the law will correct this situation.

Explanation of amendments

13.12 The Bill will ensure that section 170 does not prevent the amendment of an assessment if, after the assessment was made, an acquisition or a disposal is taken, under subsection 160U(3) or 160U(8), to have happened before the assessment [Clause 51 - new subsection 160U(10)].

13.13 The Bill will ensure that section 170 does not prevent the amendment of an assessment if the amendment is made, in relation to a contract that is found to be void ab initio (that is, void from the beginning), to ensure that the capital gains tax provisions of Part IIIA are taken always to have applied as if the contract had never been made [Clause 52; new subsection 170(9D)].

Application of amendments

13.14 Generally, the amendments to the law apply to assessments made at any time. However, a transitional provision ensures that the amendments to the law do not permit the amendment of an assessment if the amended assessment would increase a taxpayer's liability and the Commissioner of Taxation was prevented by section 170 from amending the assessment as at the end of 11 January 1994 (that is, the day before the date of the Assistant Treasurer's announcement foreshadowing the statutory amendments) [Clause 53].

13.15 The reason for including the transitional provision is to ensure that if the door had already closed before 12 January 1994 on the making of an amended assessment that increased a taxpayer's liability, the proposed statutory amendments did not reopen that door. However, if the door was still open on 12 January 1994, the statutory amendments are intended to apply to keep the door open.