Senate

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)

CHANGE OF TITLE - TAX LAW IMPROVEMENT BILL (No. 1) 1998 - SENATE - Explanatory Memorandum.

Chapter 2.5 - Entity making the gain or loss

Overview

This segment covers the special rules in Division 106 for identifying the entity that makes a capital gain or loss in circumstances where more than one entity is involved in a CGT event.

Part A summarises these rules.

Part B explains the changes to the 1936 Act.

A. Summary of the new law

Division 106: Entity making the gain or loss

What the division does

In some cases, although an entity is involved in the CGT event, it is another entity which accounts for the capital gain or loss. Division 106 identifies which particular entity is accountable for the capital gain or loss.

It covers:

•

partnerships;

•

backruptcy trustees;

•

company liquidators;

•

trustees, shere there is an absolutely entitled beneficiary; and

•

security holders.

Partnerships

The provisions make it clear that it is the partners who make a capital gain or loss from a CGT event and not the partnership. In the case of each partner, their capital gain or loss is determined either by the partnership agreement or, where no agreement exists or is silent on the point, by partnership law. [section 106-5]

Retirement or admission of partner

Where a partner leaves the partnership, a continuing partner acquires separate CGT assets to the extent that they acquire a share of the departing partners interest in the partnership assets. [subsection 106-5 (3)]

Where a partner is admitted to a partnership, the original partners each dispose of a part of their interest in the partnership assets to the new partner to the extent that the new partner has acquired it . [subsection 106-5 (4)]

Bankruptcy

The vesting of a persons CGT assets in a trustee under a bankruptcy law does not trigger any immediate CGT consequences. The CGT provisions apply as if acts done in relation to the bankrupts assets by the trustee are acts of the bankrupt. [section 106-30]

Company liquidation

The CGT provisions apply as if an act of the liquidator of a company is an act of the company. [section 106-35]

Absolutely entitled beneficiaries

Acts by a trustee in relation to an asset that a beneficiary is absolutely entitled to are treated for CGT purposes as if the beneficiary had taken the action. [section 106-50]

Security holders

Where a security holder acts to give effect to its security over an asset, the CGT provisions apply as if the owner of the asset had taken the action. [section 106-60]

B. Discussion of changes

Section 106-5 Partnerships

This section applies so that a capital gain or loss from the happening of a CGT event is made by the individual partners and not the partnership.

Change

Specify the CGT consequences of a change in the membership of a partnership.

Explanation

The 1936 Act is silent on this matter. However, the definition of asset in section 160A of that Act implies that a partner has an interest in each partnership asset. The rewritten provision clarifies the law by making this explicit for partners entering or leaving a partnership. This is consistent with the longstanding administrative practice.

Section 106-10 Modification of cost base for partnerships

This section sets out the modifications to the cost base rules in Division 110 for partnerships.

Change

Reduce a partners cost base for an interest in a CGT asset of the partnership by any amount of expenditure that the partnership has deducted, or can deduct, in relation to that CGT asset.

Explanation

It is not clear in the 1936 Act whether partners are required to reduce the cost base of their interest in a partnership asset if the partnership has claimed deductions for expenditure. The rewritten provision clarifies that they are.

Section 106-30 Effect of bankruptcy

This section deals with where an individuals assets are vested in a trustee under a bankruptcy law.

Change

State expressly that the act of vesting assets in a trustee under a bankruptcy law is ignored for CGT purposes.

Explanation

It is implicit in the 1936 Act that the vesting of assets in a trustee in bankruptcy does not, of itself, have CGT consequences. In the rewritten law, it is expressly stated that any acts of the trustee in relation to vested CGT assets are taken to be the bankrupts acts.