Senate

Supplementary Explanatory Memorandum

Amendments, requests for amendments and new item to be moved on behalf of the Government(Circulated by authority of the Treasurer,the Hon Ralph Willis, MP)

Capital gains tax - amendments relating to value shifting

Amendments 1 to 5

Request for amendments 1 to 7

Purpose of the amendment

1.1 The Bill proposes amendments to Division 19A of Part IIIA of the Income Tax Assessment Act 1936 which deals with value shifting between commonly owned companies. The proposed amendments and requests for amendments introduce a number of technical corrections to the Bill. Consistent with paragraph 53(3) of the Constitution, amendments and requests for amendments are contained in separate documents, however they are discussed together in this explanatory memorandum. Whether measures are contained in the amendments or the request for amendments document is indicated in the text.

Background to the legislation

1.2 Division 19A of Part IIIA applies where an asset is transferred between commonly owned companies and, as a consequence of the transfer, a value shift is taken to have occurred. Generally, a value shift will be taken to have occurred where the consideration for the transfer of an asset is less than the indexed cost base or the market value of the asset. The rules are modified in relation to assets acquired prior to the time that the transferor and transferee companies came to be commonly owned.

1.3 Amendments proposed by the Bill are designed to simplify and clarify the operation of Division 19A and thereby reduce taxpayer compliance costs, particularly in relation to transfers of depreciable assets and grouping of assets for the purpose of determining cost base adjustments to shares and loans in transferor and transferee companies.

Explanation of the amendments

Cost base of certain assets

1.4 The Bill proposes new section 160ZZRBA which will deem the cost base of an asset which is deemed to have been created and disposed of by subsection 160M(6) of the Act to be equal to the market value of the asset. Therefore where the consideration for the transfer of an asset to which subsection 160M(6) applies is less than the market value of the asset a value shift will be taken to have occurred for the purposes of Division 19A.

1.5 Section 160ZZRBA also refers to assets which are deemed to have been created and disposed of by subsection 160M(7). Request for amendment 1 proposes the removal of the reference to subsection 160M(7). Division 19A will therefore apply in relation to assets which are deemed to have been created and disposed of under subsection 160M(6) only.

Grouped assets - 'indexed threshold amount'

1.6 The Bill proposes new Subdivision C of Division 19A which provides that assets may be 'grouped' for the purpose of determining the application of Division 19A. Assets are grouped according to whether they are depreciable assets (section 160ZZRDF) or, in the case of assets other than depreciable assets, whether they were acquired before or after the date on which the transferor and transferee companies came under common ownership (new sections 160ZZRDG and 160ZZRDH). All assets in a group are treated for the purposes of Division 19A as though they were a single asset. Division 19A will apply where the consideration for the transfer of a post CGT, post common ownership asset is less than the lesser of the indexed cost base or market value of the asset. This amount is the 'indexed threshold amount'. A group of post CGT, post common ownership assets is therefore deemed to be a single asset with an indexed threshold amount equal to the sum of the indexed threshold amounts of all of the assets in the group.

1.7 Technical amendments to new subsections 160ZZRDH(2) and 160ZZRDH(3) are proposed so that they refer to the 'indexed threshold amount' and the 'reduced threshold amount' of assets rather than the cost bases, market values and written down values of the assets. [Amendment 1, requests for amendments 2 and 3]

Depreciable assets

1.8 In relation to transfers of depreciable assets, the cost bases of shares and loans are adjusted by reference to new formulae which are set out at new sections 160ZZRDJ and 160ZZRDM. The formulae are modified where there are shares of different classes in the transferor company (section 160ZZRDK - which applies in substitution of section 160ZZRDJ) or more than one loan in the transferor (section 160ZZRDN). Cost base reductions to loans in a transferor are only undertaken when the cost bases of any post CGT shares have been reduced to nil, or where there are no post CGT shares in the company (new subsection 160ZZRDL(4)). An amendment to paragraph 160ZZRDL(4)(a) is proposed so that it refers to circumstances where the cost bases of shares have been reduced to nil under both sections 160ZZRDJ and 160ZZRDK. [Request for amendment 4]

1.9 A similar amendment is also proposed to new paragraph 160ZZRDM(4)(a), which provides the formula for cost base reductions to loans. That paragraph presently calculates the reduction only by reference to the excess remaining after cost base adjustments to shares under section 160ZZRDJ have been taken into consideration. Paragraph 160ZZRDM(7)(a), by which the 'total excess share reduction (capital loss) amount' is determined, is also amended correspondingly. [Request for amendment 5 and amendment 2]

1.10 New subsections 160ZZRDM(5) to (7) apply where a capital loss is subsequently realised on the disposal of a loan in a transferor company. Subsection 160ZZRDM(5), which refers to the excess remaining after the indexed cost bases of shares in the company have been reduced to nil, is amended to refer to the excess remaining following reduction of the reduced cost bases of the shares. [Request for amendment 6]

1.11 New paragraph 160ZZRDM(7)(a) is also amended to refer to the reduced, rather than the indexed, cost bases of the shares [request for amendment 7] . The reference to subsection 160ZZRDL(3) is also removed and replaced with a reference to subsection 160ZZRDJ(4) and section 160ZZRDK. The subsection will correctly relate to amounts remaining following reductions to the cost bases of shares in the transferor company [amendment 2] .

1.12 Where a value shift has occurred in relation to the transfer of a depreciable asset, the cost bases of shares and loans in the transferor company are reduced by reference to the difference between the consideration for the transfer of the asset and the written down value of the asset (new section 160ZZRDJ). In relation to loans on which a capital loss is subsequently realised, the reference in subsection 160ZZRDM(7) is to the 'reduced cost base' of the transferred asset. To align the two provisions, the reference to 'reduced cost base' is amended to refer to the 'written down value' of the asset. [Amendment 3]

Default provisions

1.13 The Bill contains general 'default' provisions which apply where, in relation to the transfer of a depreciable asset, the application of the formula to reduce the cost bases of shares of different classes, or more than one loan, would be unreasonable (new sections 160ZZRDK and 160ZZRDN). The amendments propose a further default provision so that cost base adjustments to post CGT loans can be made on a reasonable basis where there are both pre CGT shares and post CGT loans in the transferor company. [Amendment 4]

1.14 Items 10 and 11 of the Bill propose amendments to sub-subparagraphs 160ZZRE(6)(b)(ii)(A) and (B) of the Act which relate to post CGT assets, other than depreciable assets, acquired after the transferor and transferee companies came under common ownership. Previously, cost base adjustments to shares and loans could be made on a reasonable basis only where pre and post CGT shares, shares of different classes or more than one loan were held by the same taxpayer. The Bill amends these provisions so that, in relation to shares of different classes and loans, it is no longer a requirement that the shares and loans are held by the same taxpayer. Amendments to subparagraph 160ZZRE(6)(b)(i) of the Act are also proposed so that cost base adjustments can also be made on a reasonable basis where pre and post CGT shares are held by different taxpayers. [Amendment 5]