TAX LAWS AMENDMENT (2009 MEASURES NO. 6) BILL 2010 Explanatory Memorandum
TAX LAWS AMENDMENT (2009 MEASURES NO. 6) BILL 2010
2008-2009
THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA
HOUSE OF REPRESENTATIVES
Tax Laws Amendment (2009 Measures No. 6) Bill 2009
EXPLANATORY MEMORANDUM
(Circulated by the authority of the
Treasurer, the Hon Wayne Swan MP)
Table of contents
Glossary 5
General outline and financial impact 7
Chapter 1 Removal of capital gains tax trust cloning exception and
provision of limited fixed trust roll-over 11
Chapter 2 Loss relief for merging superannuation funds 39
Chapter 3 Exempt annuity business of life insurance companies 67
Chapter 4 Deductible gift recipients 77
Chapter 5 Income Recovery Subsidy for the North Western Queensland
floods 79
Chapter 6 Excise manufacture and spirits 83
Index 87
Glossary
The following abbreviations and acronyms are used throughout this
explanatory memorandum.
|Abbreviation |Definition |
|APRA |Australian Prudential |
| |Regulation Authority |
|ADF |approved deposit fund |
|CGT |capital gains tax |
|Commissioner |Commissioner of Taxation |
|DGRs |deductible gift recipients |
|Excise Act |Excise Act 1901 |
|Excise Tariff |Excise Tariff Act 1921 |
|FHSA |First Home Saver Account |
|GST |goods and services tax |
|ITAA 1936 |Income Tax Assessment Act |
| |1936 |
|ITAA 1997 |Income Tax Assessment Act |
| |1997 |
|IT(TP)A 1997 |Income Tax (Transitional |
| |Provisions) Act 1997 |
|MIT |managed investment trust |
|PSTs |pooled superannuation trusts |
|SIS Act 1993 |Superannuation Industry |
| |(Supervision) Act 1993 |
|SIS Regulations 1994|Superannuation Industry |
| |(Supervision) Regulations |
| |1994 |
|SMSFs |self-managed superannuation |
| |funds |
General outline and financial impact
Removal of capital gains tax trust cloning exception and provision of
limited fixed trust roll-over
Schedule 1 to this Bill amends the Income Tax Assessment Act 1997
(ITAA 1997) to repeal the exception to capital gains tax (CGT)
events E1 and E2 widely known as the 'trust cloning' exception.
Schedule 1 also provides a limited CGT roll-over for the transfer
of assets between trusts with the same beneficiaries each of which
has the same interests in each trust.
Schedule 1 clarifies that a mere change of the trustee of a trust
does not change the entity that is the trustee for the purposes of
the ITAA 1997 and the A New Tax System (Goods and Services Tax) Act
1999.
Date of effect: The amendments apply to CGT events happening on or
after 1 November 2008.
Proposal announced: The then Assistant Treasurer and Minister for
Competition Policy and Consumer Affairs announced the repeal of the
trust cloning exception in Media Release No. 092 of 31 October
2008. He subsequently announced in Media Release No. 048 of 12 May
2009 that the Government would provide a limited CGT roll-over for
fixed trusts.
Financial impact: Unquantifiable, but expected to be small.
Compliance cost impact: Low.
Loss relief for merging superannuation funds
Schedule 2 to this Bill removes significant income tax impediments
to mergers between complying superannuation funds by permitting the
roll-over of capital losses and transfer of revenue losses
(including losses realised under the merger and previously realised
losses). The loss relief will be available for complying
superannuation funds and approved deposit funds that merge with a
complying superannuation fund with five or more members. The loss
transfer and asset roll-over will preserve the offsetting value of
the losses, thereby removing a potential barrier to superannuation
fund consolidation.
Date of effect: This measure is available for mergers that occur
on or after 24 December 2008 and before 1 July 2011.
Proposal announced: These amendments were announced in the then
Minister for Superannuation and Corporate Law's Media Release
No. 101, 'Optional CGT Loss Roll Over for Complying Super Funds' on
23 December 2008 and Media Release No. 042, 'Expansion of the
Optional CGT Loss Roll Over for Complying Super Funds that Merge'
on 29 April 2009.
Financial impact: This measure will have an unquantifiable but
small revenue cost.
Compliance cost impact: This measure is expected to have a low
overall compliance cost impact, comprised of a low implementation
impact and a low decrease in ongoing compliance costs.
Exempt annuity business of life insurance companies
Schedule 3 to this Bill amends the Income Tax Assessment Act 1997
to clarify the circumstances in which income derived by life
insurance companies in respect of immediate annuity business
qualifies as non-assessable non-exempt income.
Date of effect: The amendments to rewrite the annuity conditions
apply from 1 July 2000. The amendments to ensure that the annuity
conditions do not apply to immediate annuity policies that provide
for superannuation income streams apply from the 2007-08 income
year.
Proposal announced: These amendments were announced in the then
Assistant Treasurer and Minister for Competition Policy and
Consumer Affairs' Media Release No. 048 of 12 May 2009.
Financial impact: These amendments are expected to have a small
but unquantifiable revenue impact.
Compliance cost impact: Low.
Deductible gift recipients
Schedule 4 to this Bill amends the Income Tax Assessment Act 1997
to update the list of deductible gift recipients (DGRs) to include
two new organisations and change the name of one organisation.
Tax deductions are provided to donors to organisations that are
endorsed as DGRs, subject to certain conditions. Organisations
which do not fall under the general DGR categories may seek
specific listing in the income tax law.
Date of effect: The dates of effect for these amendments are
listed in Table 4.1 and Table 4.2.
Proposal announced: These amendments were announced in the Mid-
Year Economic and Fiscal Outlook 2009-10.
Financial impact: This measure will have the following revenue
implications.
|Organisation|2009-10 |2010-11 |2011-12 |2012-13 |
|The Green |-$15,000 |-$30,000 |-$45,000 |-$60,000 |
|Institute | | | | |
|Limited | | | | |
|United |-$1,500,0|-1,537,50|-$1,575,9|-$1,615,3|
|States |00 |0 |38 |36 |
|Studies | | | | |
|Centre | | | | |
|Limited | | | | |
|Total |-$1,515,0|-$1,567,5|-$1,620,9|-$1,675,3|
| |00 |00 |38 |36 |
Compliance cost impact: Negligible.
Income Recovery Subsidy for the North Western Queensland floods
Schedule 5 to this Bill amends the Income Tax Assessment Act 1997
to ensure that the Income Recovery Subsidy for the North Western
Queensland floods is not subject to income tax.
Date of effect: This measure applies retrospectively to amounts
received in the 2008-09 income year. The payment could be claimed
after 24 February 2009.
Proposal announced: The payment was announced as an emergency
measure by the Minister for Families, Housing, Community Services
and Indigenous Affairs in Parliament on 25 February 2009. The
measure was announced in the Mid-Year Economic and Fiscal Outlook
2009-10.
Financial impact: Nil.
Compliance cost impact: Low.
Excise manufacture and spirits
Schedule 6 to this Bill amends the Excise Act 1901 (the Excise Act)
to deem the blending of spirits to produce spirit as excise
manufacture for the purposes of the Excise Act. This is necessary
for imported high strength neutral spirit, as it currently derives
its concessional duty treatment (that is, a 'free' rate of excise
duty) from being blended with domestic high strength neutral spirit
and entering the excise system. These amendments will preserve the
status quo for the concessional spirits regime.
Date of effect: This legislation will apply from the date of Royal
Assent.
Proposal announced: This measure was announced in the Mid-Year
Economic and Fiscal Outlook 2009-10 statement released on
2 November 2009.
Financial impact: Nil.
Compliance cost impact: Nil.
Chapter 1
Removal of capital gains tax trust cloning exception and provision of
limited fixed trust roll-over
Outline of chapter
1. Schedule 1 to this Bill amends the Income Tax Assessment Act 1997
(ITAA 1997) to repeal the exception to capital gains tax (CGT)
events E1 and E2 widely known as the 'trust cloning' exception.
Schedule 1 also provides a limited CGT roll-over for the transfer
of assets between trusts with the same beneficiaries each of which
has the same interests in each trust. These amendments apply to
CGT events that happen after 31 October 2008.
2. Schedule 1 clarifies that a mere change of the trustee of a trust
does not change the entity that is the trustee for the purposes of
the ITAA 1997 and the A New Tax System (Goods and Services Tax)
Act 1999 (GST Act).
3. All references to legislative provisions in this chapter are
references to the ITAA 1997 unless otherwise stated.
Context of amendments
4. The trust cloning exception allows the creation of a trust over a
CGT asset or the transfer of a CGT asset to an existing trust
without triggering a CGT taxing point, provided the beneficiaries
and terms of both trusts are the same.
5. However, this can be used to change ownership of an asset without a
CGT taxing point. It potentially allows taxpayers to eliminate tax
liabilities on accrued capital gains, undermining equity and the
integrity of the tax system.
6. The repeal of the trust cloning exception is consistent with the
policy principle of taxing capital gains that arise where there is
a change in ownership of an asset.
7. The CGT regime may provide a CGT roll-over where there is a change
in legal ownership of a CGT asset but no change in its underlying
ownership. Nevertheless, roll-over is not always provided where
there is no change in underlying ownership. Other considerations
are important, such as ensuring tax system integrity and the
existence of alternatives in the income tax laws.
8. Providing a limited CGT roll-over for the transfer of assets
between certain trusts with the same beneficiaries is consistent
with that approach. This roll-over will ensure that CGT
considerations are not an undue impediment to the restructure of
those trusts, whilst ensuring that subsequent changes to the manner
and extent to which beneficiaries can benefit from the trusts are
subject to appropriate tax consequences.
Summary of new law
9. Part 1 of Schedule 1 amends the ITAA 1997 by repealing the CGT
trust cloning exception.
10. Part 2 of Schedule 1 inserts Subdivision 126-G into the ITAA 1997
to provide a limited CGT roll-over for the transfer of assets
between certain trusts. Broadly, the effect of the roll-over is to
defer the making of any capital gain or capital loss in respect of
the asset transfer. The cost base of beneficiaries' interests in
the transferring trust is apportioned across their interests in
both trusts.
11. To be eligible, both trusts must have the same beneficiaries with
the same entitlements and no material discretionary elements.
Further, the receiving trust must be an 'empty trust', meaning:
. a newly created trust; or
. a trust with no CGT assets other than a small amount of
cash or debt.
12. Part 3 of Schedule 1 clarifies that a mere change of trustee of a
trust does not change the entity that is the trustee for the
purpose of the ITAA 1997 and the GST Act.
Comparison of key features of new law and current law
|New law |Current law |
|The transfer of an asset |The transfer of an asset |
|from one trust to a new |from one trust to a new |
|or existing trust will |or existing trust that |
|trigger a CGT event. |has the same |
| |beneficiaries and terms |
| |does not trigger a CGT |
| |event. |
|Roll-over may be chosen |The transfer of an asset |
|to disregard any capital |to a trust typically |
|gain or capital loss |triggers CGT |
|arising from the transfer|consequences, unless both|
|of an asset from a trust |trusts have the same |
|(the 'transferring |beneficiaries and terms. |
|trust') to a new or | |
|existing trust (the | |
|'receiving trust'), | |
|provided: | |
|both trusts have the same| |
|beneficiaries with the | |
|same entitlements; | |
|both trusts have no | |
|material discretionary | |
|elements; | |
|the receiving trust is an| |
|'empty trust'; and | |
|no exceptions apply. | |
Detailed explanation of new law
Abolishing the trust cloning exception
13. The trust cloning exception provides an exception to CGT events E1
and E2.
. CGT event E1 happens where a trust is created over a CGT
asset by declaration or settlement.
- The trust cloning exception to CGT event E1 applies
where the trust was created by transferring the asset
from another trust and the beneficiaries and terms of
both trusts are the same.
. CGT event E2 happens where a CGT asset is transferred to
an existing trust.
- The trust cloning exception to CGT event E2 applies
where the asset was transferred from another trust and
the beneficiaries and terms of both trusts are the same.
14. Schedule 1 repeals the trust cloning exception to CGT events E1 and
E2. The other exception to CGT events E1 and E2 (that may apply
when an asset is transferred to a relevant trust by a sole
beneficiary of the trust that is absolutely entitled to the asset)
will be retained. [Schedule 1, item 1, subsection 104-55(5) and
item 2, subsection 104-60(5)]
The 'trustee entity' provision
15. Subsection 960-100(2) states that the trustee of a trust is taken
to be an 'entity' consisting of the person who is the trustee, or
persons who are the trustees, at any given time. An identical
definition exists in subsection 184-1(2) of the GST Act.
16. As part of the Tax Law Improvement Project, the Joint Committee of
Public Accounts and Audit in An Advisory Report on the Tax Law
Improvement Bill No. 2 1997 (Report 356 of 1998) stated that the
interaction of the proposed subsection 104-10(2) with the 'entity'
provision in subsection 960-100(2) was unclear - that it was
possible that a mere change of trustee of a trust was technically a
'disposal' and thus a CGT taxing point. The Committee recommended
'clarification by way of amendment or the addition of guide
material' to the proposed subsection 104-10(2). An amendment was
subsequently provided in paragraph 104-10(2)(b).
17. In AXA Asia Pacific Holdings Limited v Commissioner of Taxation
[2008] FCA 1834, Justice Lindgren, in interpreting subsection 184-
1(2) of the GST Act, noted that '[t]his provision is concerned with
continuity irrespective of changes that may occur in the identity
of the trustee or trustees from time to time. Under the
provisions, a change in the identity of a trustee of a trust does
not mark a change in the entity, which is the 'trustee of [the]
trust'.'
18. The amendments reflect Justice Lindgren's interpretation by adding
a note to each of the 'entity' definitions that confirm that a mere
change in the person who is the trustee does not mean there is a
new trustee entity for tax purposes. That is, the trustee is still
the same entity even if there is a change in the person who holds
the office of trustee. [Schedule 1, items 14 and 15,
subsection 184-1(2) of the GST Act; and items 19 and 20, subsection
960-100(2)]
19. Additional notes in CGT events A1, E1 and E2 explain that a mere
change of trustee of a trust does not trigger a CGT event. This
follows because the entity that is the trustee does not change for
tax purposes and so does not give rise to any of these CGT events.
. The definition of disposal for CGT event A1 in
subsection 104-10(2) is updated to remove the unnecessary
exclusion of a mere change of trustee.
[Schedule 1, item 16, subsection 104-10(2), item 17, subsection 104-
55(1) and item 18, subsection 104-60(1)]
1.
Steven and Amanda are the joint trustees of a trust. Steven
and Amanda retire and Lachlan is appointed as the
replacement trustee. Subsequently, Mikayla Pty Ltd is
appointed as an additional trustee to Lachlan. No other
changes are made and the property continues to be held on
the same trust.
Although there is a change in legal ownership of the trust
assets from Steven and Amanda to Lachlan, and then to
Lachlan and Mikayla Pty Ltd as joint owners, no CGT event
happens in respect of either transaction because there is no
change in the entity that is the trustee of the trust for
tax purposes.
Limited CGT roll-over for certain trusts
20. Schedule 1 also provides an optional CGT roll-over that permits
deferral of a capital gain or capital loss made on the transfer of
an asset from one trust (the transferring trust) to another trust
(the receiving trust).
21. The objective of this roll-over is to ensure that CGT
considerations are not an undue impediment to the restructure of
trusts, whilst ensuring that subsequent changes to the manner and
extent to which beneficiaries can benefit from the trusts are
subject to appropriate tax consequences. [Schedule 1, item 9,
section 126-220]
22. If the CGT roll-over is chosen, there is also roll-over for any
balancing adjustment that arises from the transfer of a
depreciating asset (see paragraphs 1.81 to 1.84).
23. The CGT roll-over is available if these conditions are met:
. both trusts are eligible (paragraphs 1.26 to 1.41);
. the same beneficiaries have the same interests in both
trusts (paragraphs 1.42 to 1.47); and
. no exception applies (paragraphs 1.48 to 1.65).
[Schedule 1, item 9, subsection 126-225(1)]
24. These conditions aim to ensure that the asset transfer does not
change the underlying ownership of the asset, that subsequent
changes in ownership are subject to appropriate tax consequences,
and that the roll-over cannot be used to undermine the integrity of
the tax system.
25. This part of the explanatory memorandum discusses these conditions,
as well as the consequences for the trustees and beneficiaries if
the roll-over applies.
Conditions for roll-over
Trusts eligible for the roll-over
26. The trustee of the transferring trust and the trustee of the
receiving trust must both choose the roll-over in order for it to
apply. [Schedule 1, item 9, subsection 126-225(3)]
27. For the trustees to choose the roll-over, the beneficiaries'
interests in each trust must satisfy a number of requirements.
Trusts that satisfy these requirements are sometimes referred to as
'fixed trusts'.
. However, the conditions for this roll-over do not employ
the existing definition of 'fixed trust' in Schedule 2F to
the Income Tax Assessment Act 1936 (ITAA 1936).
. Furthermore, unlike the trust cloning exception, the roll-
over does not require the terms of the two trusts to be
precisely the same. However, any differences in terms
that result in a significant difference in the nature or
extent of beneficiaries' interests will prevent the roll-
over applying.
CGT event E4 capable of happening to interests
28. CGT event E4 must be capable of happening to all the units or
interests in each of the trusts. [Schedule 1, item 9,
subsection 126-230(2)]
29. This requirement ensures that so-called discretionary trusts cannot
access the roll-over. This is because it is difficult to
establish, with any degree of certainty, the real underlying
ownership of the assets of a discretionary trust. Therefore, it is
equally difficult to test whether that ownership has been
maintained.
30. An example of a discretionary trust is one where the trustee has a
power to appoint the income or capital of the trust to any one of
the listed beneficiaries as the trustee sees fit.
Beneficiaries' entitlements not discretionary
31. The manner or extent to which each beneficiary of each trust can
benefit from the trust must not be capable of being significantly
affected by the exercise, or non-exercise, of a power. [Schedule
1, item 9, subsection 126-230(3)]
. The requirement must be satisfied by each of the
beneficiaries of each of the trusts in respect of each of
their membership interests.
. Each beneficiary of the trust must have an interest in the
trust that is of a sufficiently definable quality and
extent as to be capable of measurement without the
exercise or non-exercise of a power (in the sense
discussed in Gartside v Inland Revenue Commissioners
[1968] 2 WLR 277).
. The quality or extent of each beneficiary's interest
should not be capable of being defeated or substantively
altered by the exercise, or non-exercise, of a power.
. The requirement has regard to the exercise, or non-
exercise, of a power by any entity, and not just the
trustee of the trust.
. For these purposes, a power includes both trust powers
(that is, powers that must be exercised but which allow
discretion as to when or how they are exercised) and mere
powers (that is, discretions), but does not include
trustees' duties. A trustee duty is a thing a trustee
must do as prescribed, or refrain from doing, to avoid
being in breach of trust (refer discussion in Jacobs' Law
of Trusts in Australia, 7th ed., Heydon and Leeming at
[1606]).
32. In effect, beneficiaries' interests should be 'fixed'.
33. This requirement is consistent with the objective of ensuring that
subsequent changes in 'effective ownership' are subject to
appropriate tax consequences. These consequences could be a CGT
taxing point (such as on the disposal of an interest) or cost base
adjustments (for example, as a result of the value shifting rules
applying).
34. The following are examples of powers that may, depending on their
context, be capable of significantly affecting the manner and
extent to which a beneficiary can benefit from a trust:
. a power to appoint the beneficiary's interest in the
income or capital to another beneficiary;
. a power to characterise receipts or expenses as income or
capital, or to accumulate trust income to capital (unless
those otherwise entitled to the income have the same
interests in the capital);
. a power to add new beneficiaries (other than by issuing
new units or interests in a way that does not
significantly affect the value of existing interests);
. a power to appoint any part of the trust property to a new
trust with different beneficiaries;
. a power to issue new interests with rights attached that
significantly alter the rights or the value of the rights
attached to existing interests; and
. a power to amend the trust deed to include a power capable
of materially altering a beneficiary's membership
interest(s).
35. Powers such as the following that merely facilitate the
administration of the trust are not regarded as significantly
affecting the manner and extent to which a beneficiary can benefit:
. a power to round distributions or other amounts to whole
cents per unit or interest;
. a power to alter the manner in which beneficiary
entitlements are paid, for example, to determine that they
be credited directly to beneficiaries' bank accounts; and
. a power to pay beneficiary entitlements at any time within
a prescribed period.
36. Similarly, a trustee's right to be reimbursed or exonerated out of
the trust property in respect of liabilities and expenses properly
incurred in the administration of the trust (see Chief Commissioner
of Stamp Duties for New South Wales v Buckle (1998) 192 CLR 226)
would not be viewed as a power to significantly affect the manner
and extent to which beneficiaries can benefit from the trust. Such
a right, supported by a lien over the trust assets, simply
represents an interest in the trust assets that ranks ahead of the
claims of beneficiaries.
1.
A trust has $1 billion in assets and has annual income of
around $100 million.
Under the terms of the trust deed, the trustee has the power
to issue new units - at an issue price, to persons, and with
rights and obligations as determined by resolution. The
power could be used, for example, to issue 'preference'
units that entitle unitholders to the first $100 million of
income of the trust.
This would significantly undermine the value of existing
units. Therefore, the extent to which each beneficiary can
benefit from the trust is capable of being significantly
affected by the exercise, or non-exercise, of a power.
Disregard certain powers if their existence does not affect market
value
37. A trust that is a managed investment trust (MIT) may be eligible
for the roll-over notwithstanding that the manner or extent to
which a beneficiary can benefit from the trust is capable of being
significantly affected by the exercise, or non-exercise, of a
power.
38. This 'saving clause' applies only if the transferring and receiving
trusts are both MITs. The savings clause applies if the market
value of all of the interests in the MIT would not be significantly
different if it were hypothesised that the power did not exist.
[Schedule 1, item 9, subsection 126-230(4)]
39. In other words, beneficiaries' interests are effectively 'fixed' if
a hypothetical buyer, acting at arm's length in an open market and
with reasonable knowledge of the facts, would not discount the
value of the interests because of the existence of a discretionary
power. In that case, the MIT may be eligible for the roll-over
notwithstanding the existence of the power.
40. For example, the market value of interests in a MIT might not be
significantly affected by the existence of a power that apparently
could significantly change the value of the interest, where:
. prudential or market forces effectively prevent the power
from being used in a way that would significantly devalue
any existing interests;
. the power can only be exercised with the consent of all,
or almost all, of the beneficiaries of the trust and there
is no particular beneficiary (or group of associated
beneficiaries) who control the voting power; and/or
. more generally, there is little or no likelihood that the
power will be exercised in a way that significantly
reduces the value of each existing interest.
41. If the total market value of all of the interests in a MIT is
substantially the same as the net value of the trust, this may
suggest that the existence of 'discretionary' powers in the trust
does not significantly affect the market value of interests in the
MIT.
1.
Further to Example 1.2, the trust is a MIT that is listed on
the Australian Securities Exchange. There has only ever
been one class of units on issue.
Various prudential and regulatory forces prevent the trustee
from exercising powers in a way that is detrimental to
existing unitholders. Furthermore, the total market value
of units in the trust is approximately equal to the net
value of the trust.
The trust meets the roll-over condition in section 126-230
because the existence of the power does not significantly
affect the market value of interests in the trust.
Additional requirements for receiving trust
42. The receiving trust must have no CGT assets, other than a small
amount of cash or debt, just before the transfer time. [Schedule
1, item 9, paragraph 126-225(1)(b)]
. If the transfer is part of a series of roll-overs under an
arrangement (see paragraphs 1.66 to 1.72), this condition
only applies to the first transfer time.
43. This 'empty trust' requirement is important to ensure that the roll-
over cannot be used to marry gain and loss assets or else 'share'
losses in a way that would not otherwise be permitted under the
income tax laws.
44. If the receiving trust has any revenue or capital losses just after
the (first) transfer time, they are effectively extinguished (that
is, they cannot be used). This is an automatic consequence of
choosing roll-over and is discussed in paragraphs 1.78 to 1.80.
45. This approach increases the flexibility of the roll-over by not
requiring the receiving trust to be a newly created trust, whilst
maintaining the integrity of the tax system.
The same beneficiaries must have the same interests in both trusts
46. Both trusts must have the same 'direct' beneficiaries. In other
words, the same entities, acting in the same capacities, must be
beneficiaries of both trusts. It is not sufficient that the
'indirect' or ultimate beneficiaries of both trusts are the same.
[Schedule 1, item 9, subparagraph 126-225(1)(c)(i)]
47. Further, both trusts must have the same classes of membership
interests. [Schedule 1, item 9, subparagraph 126-225(1)(c)(ii)]
. Membership interests constitute a class if they have the
same, or substantially the same, rights. [Schedule 1,
item 10, subsection 995-1(1)]
Beneficiaries must have the same interests - the market value test
48. The market value test determines whether beneficiaries have the
same proportionate membership interests before and after the
transfer.
49. Under this test, the total market value of each beneficiary's
interests in the transferring trust of a particular class and their
interests of the matching class in the receiving trust must be
substantially the same just before and just after the transfer
time. [Schedule 1, item 9, subparagraph 126-225(1)(c)(iii)]
1.
TrustOne is an eligible trust with two beneficiaries:
Sheila and Peter. There are two classes of units in the
trust:
. Class A units entitle the holder to a share of the rental
income from properties held by the trust; and
. Class B units entitle the holder to a share of the capital
value of the properties held by the trust.
TrustTwo is also an eligible trust with the same
beneficiaries. TrustTwo has two classes of units labelled
Class 1 and Class 2, which have the same rights as Classes A
and B respectively.
For each beneficiary, the number and market value of units
in TrustOne is shown in Table 1.1. Just before the transfer
time, the market value of all units in TrustTwo is
effectively zero.
1. : Number and value of units in TrustOne
|Beneficiary |Number of |Market value|Total market|
|/ Unit |units |of each unit|value |
|Sheila | | | |
|Class A |1,000 |$100 |$100,000 |
|units |1,000 |$1,000 |$1,000,000 |
|Class B | | | |
|units | | | |
|Peter | | | |
|Class A |500 |$100 |$50,000 |
|units |Nil |Nil |Nil |
|Class B | | | |
|units | | | |
The trustee of TrustOne transfers two of its properties to
the trustee of TrustTwo for no consideration. As a result,
the market values of Class A and Class B units fall and the
market values of Class 1 and Class 2 units increase. The
trustee of TrustOne incurs fees in the transfer of $2,000,
and is reimbursed from the capital of TrustOne.
2. : Market value (MV) of units after the transfer
|Beneficiary |MV of units |MV of units |Total market|
|/ Unit |in TrustOne |in TrustTwo |value |
|Sheila | | | |
|Class A / 1 |$80,000 |$20,000 |$100,000 |
|Class B / 2 |$898,000 |$100,000 |$998,000 |
|Peter | | | |
|Class A / 1 |$40,000 |$10,000 |$50,000 |
|Class B / 2 |Nil |Nil |Nil |
Roll-over is available because the total market value of the
interests within each pair of the matching classes of units
is substantially the same before and after the transfer
time.
Exceptions to roll-over
50. In certain situations, roll-over is not available.
Foreign trust and not taxable Australian property
51. Roll-over is not available if the receiving trust is a foreign
trust for CGT purposes and the transferred asset is not taxable
Australian property. Permitting roll-over in these circumstances
would effectively allow a CGT exemption for any accrued capital
gain, rather than a deferral. [Schedule 1, item 9, subsection 126-
235(1)]
Trusts taxed like companies
52. Roll-over is not available if either trust is a corporate unit
trust or a public trading trust at any time in the income year that
the transfer occurs. Companies are not eligible to choose this
roll-over and, on that basis, trusts that are taxed like companies
also cannot choose the roll-over. [Schedule 1, item 9, subsection
126-235(2)]
. In order to transfer assets between related companies
without immediate CGT consequences, companies are able to
form (and head) a consolidated group.
Trusts have not made the same tax choices
53. Roll-over is not available unless both trusts have the same tax
choices (or elections) in force just after the transfer. This
applies to any choice made under the tax laws where the absence of
the same choice in the other trust would or could have an ongoing
impact on the calculation of any entity's net income (worked out
under sections 90 or 95 of the ITAA 1936) or taxable income.
[Schedule 1, item 9, subsection 126-235(3)]
54. This requirement is important to ensure that trusts cannot use the
roll-over to circumvent the conditions in the primary provisions
that govern when, why and how the choice can be made, or unmade.
1.
Further to Example 1.4, the trustee of TrustOne has made a
family trust election. The individual specified in the
election is Sheila.
To be able to choose the roll-over, the trustee of TrustTwo
must also make a family trust election with Sheila as the
test individual.
55. It does not matter whether the presence of the original choice in
one trust may have an ongoing impact on the calculation of that
trust's net income (or any other entity's net income or taxable
income). What matters is whether the absence of the mirror choice
in the 'other trust' has an ongoing impact on any entity's net
income or taxable income. [Schedule 1, item 9, paragraph 126-
235(3)(c)]
1.
Further to Example 1.5, in a previous income year, the
trustee of TrustOne chose a CGT roll-over (under Subdivision
124-B) when a property of the trust was destroyed. The
trustee of TrustOne purchased a replacement property with an
insurance payout.
The trustee of TrustTwo does not need to make a 'mirror
choice' of the Subdivision 124-B roll-over. This is because
the absence of such a choice will not affect the calculation
of TrustTwo's net income (nor the net income or taxable
income of any other entity).
That is, the Subdivision 124-B choice affects the tax
position of TrustOne (because it determines the cost base of
the replacement asset in the hands of the trustee of
TrustOne). The impact of the choice is confined to TrustOne
and its absence in TrustTwo has no bearing on TrustTwo's net
income (or the net income or taxable income of any other
entity).
This will be the case even if the replacement asset is one
of the transferred assets in respect of which the trusts now
seek to apply the limited fixed trust roll-over.
Timing of making a mirror choice
56. Generally, mirror choices (if required) must be in force just after
the transfer time. However, the roll-over will still be available
if:
. the trustee makes the mirror choice before the first time
the choice matters for tax purposes; or
. it would not be reasonable to require the making of the
mirror choice.
[Schedule 1, item 9, subsection 126-235(4)]
57. The purpose of this reasonableness test is to provide limited
flexibility where a trustee cannot make the mirror choice, and the
absence of the choice would or could have only an immaterial effect
on any entity's net income or taxable income.
1.
MarketTrust is a MIT. The trustee of MarketTrust makes the
deemed capital account election (proposed but not yet
enacted).
In September of the following income year, the trustee of
MarketTrust transfers a commercial property to a newly
created trust, PropertyTrust. Both trusts are eligible for
the roll-over, and have the same beneficiaries with the same
proportionate membership interests.
The trustee of PropertyTrust buys and sells 10 commercial
properties between September and June.
Before lodging an income tax return for that income year,
the trustee of PropertyTrust makes the deemed capital
account election.
As the lodgement of the tax return is the first time the
election matters for tax purposes, both trusts can choose
the roll-over.
However, if the trustee of PropertyTrust did not (or could
not) make the capital account election, then roll-over is
not available in respect of the property transferred from
MarketTrust.
58. Where it is necessary for a trustee to make a mirror choice to be
able to choose this roll-over, the trustee must still be able to
make the choice under the primary provisions that govern when, why
and how the choice can be made. Nothing in this roll-over
(including the transitional provisions) allows a trustee to make a
choice they could not otherwise have made.
59. If it is not possible to make the mirror choice, then the roll-over
will not be available, unless it would be unreasonable to require
that a mirror choice be made (see paragraph 1.56). Denial of the
roll-over does not in itself make it unreasonable to require the
making of the mirror choice.
Consequences of making a mirror choice
60. Any restrictions or conditions that apply to the original choice
(or first choice) will apply in a corresponding way to the mirror
choice. If, just after the transfer time, the trustee that made
the first choice cannot revoke or vary that choice, a trustee that
makes a mirror choice also cannot revoke or vary that choice.
Alternatively, if the first choice can be revoked or varied, but
there are tax consequences in doing so, then those consequences
will apply if the mirror choice is revoked or varied. [Schedule 1,
item 9, subsection 126-235(5)]
61. This will be the case regardless of whether the circumstances might
otherwise have allowed the mirror choice to be revoked or varied;
or have allowed it to be revoked or varied without attracting the
tax consequences relevant to the first choice.
62. The restrictions or conditions to which this rule applies are those
that apply to the first choice just after the transfer time. If
either choice only becomes irrevocable or unchangeable because of
events that occur after the transfer time, this has no effect on
the other choice.
63. Alternatively, if tax consequences for revoking or varying either
choice only arise because of events that occur after the transfer
time, this has no effect on the other choice.
64. In other words, where the trustee revoking or varying the choice is
the trustee that made the first choice, the consequences depend on
the history of that trust before and after the transfer time.
65. However, where the trustee revoking or varying the choice is the
trustee that made the mirror choice, the consequences depend on:
. the history of that trust, after the time of the transfer;
and
. the history of the other trust, up until the time of the
transfer.
1.
Further to Example 1.5, assume that the trustee of TrustOne
cannot revoke the family trust election, because it has
previously relied on the family trust election to carry
forward and deduct tax losses.
As a result, the trustee of TrustTwo cannot revoke the
family trust election, even if it has never used or relied
upon the election.
Application of the roll-over to multiple assets
66. The roll-over applies on an asset-by-asset basis, which is
consistent with the CGT provisions. However, there are special
rules to ensure that the roll-over can apply to multiple assets
transferred as part of an arrangement.
67. If assets were transferred at different times, then in the absence
of these special rules, it would be effectively impossible to
satisfy the 'empty trust' requirement (paragraphs 1.42 to 1.45) at
the second and later transfer times. These special rules also
avoid any uncertainty that assets transferred simultaneously - say
in the sense of being transferred under a single transfer agreement
- are, in effect, transferred sequentially and therefore at
different times.
68. Therefore, the 'empty trust' requirement does not apply to the
second and later transfer times, provided:
. each asset is transferred from the same transferring trust
to the same receiving trust under an arrangement (as
defined in subsection 995-1(1));
. the asset was an asset of the transferring trust at the
start of the arrangement; and
. the asset is transferred in the same income year of the
transferring trust as the first transfer time.
[Schedule 1, item 9, subsection 126-225(2)]
69. If these conditions are met, the loss cancellation rules do not
apply to the second and later transfer times (see paragraphs 1.78
to 1.80). [Schedule 1, item 9, subsection 126-240(3)]
70. The requirement that CGT event E4 must be capable of happening to
all the membership interests of both trusts and that beneficiaries'
entitlements cannot be discretionary must be met at all times
during the period of the arrangement - that is, at all times from
the first asset transfer to the last asset transfer. [Schedule 1,
item 9, subsection 126-230(1)]
71. However, the requirements that each trust has the same
beneficiaries with the same proportional interests need only be met
at the transfer time of each asset under the arrangement. The
exceptions also apply at each transfer time.
72. If the roll-over does not apply to one or more assets transferred
under an arrangement, this does not invalidate previous successful
roll-overs. It also does not necessarily prevent the roll-over
from applying to future transfers under the arrangement, provided
the conditions of the roll-over are satisfied at that time.
1.
Further to Example 1.4, assume that the trustees of TrustOne
and TrustTwo made an arrangement to transfer a total of five
properties. All of the properties were assets of TrustOne
at the time. All of the events in this example occurred
during the same income year in which the arrangement was
made.
Two properties were rolled over at the first transfer time.
The receiving trust satisfied the 'empty trust' requirement
at that time.
The trustee of TrustOne transfers another property to
TrustTwo. Although TrustTwo has significant CGT assets (two
properties), the trustees can still choose the roll-over if
all of the other conditions are met. (The losses of
TrustTwo are not extinguished - see paragraph 1.80.)
Before the transfer of the fourth property, Peter sells his
interest in TrustOne to Graeme. When the property is
transferred, roll-over is not available because the
beneficiaries of both trusts are not the same.
Peter sells his interest in TrustTwo to Graeme before the
transfer of the fifth property. As the beneficiaries of
both trusts are the same, the roll-over may be chosen for
the fifth property if all the conditions (other than the
'empty trust' requirement) are met.
Suppose that the trustee of TrustOne sold one of the
original five properties and purchased a replacement
property. The roll-over cannot be chosen for that
replacement property because it was not an asset of TrustOne
when the arrangement was made.
Consequences of roll-over for the trustees
73. There are consequences for the trustee of the transferring trust
(in respect of any capital gain or capital loss arising from the
asset transfer). There are also consequences for the trustee of
the receiving trust (in respect of tax attributes relevant to the
transferred asset in its hands).
Capital gain or capital loss disregarded
74. If both trustees choose the roll-over, any capital gain or capital
loss made by the trustee of the transferring trust in respect of
the transferred asset is disregarded. [Schedule 1, item 9,
subsection 126-240(1)]
Asset's cost base and reduced cost base
75. The first element of the cost base and reduced cost base of the
asset in the hands of the trustee of the receiving trust is equal
to the cost base and reduced cost base of the asset in the hands of
the trustee of the transferring trust just before the transfer
time. [Schedule 1, item 9, subsection 126-240(2)]
Asset's date of acquisition
76. If the trustee of the transferring trust acquired the asset before
20 September 1985, the trustee of the receiving trust is taken to
have acquired the asset before that date. [Schedule 1, item 9,
subsection 126-240(4)]
77. Otherwise, the general acquisition rules in Subdivision 109-A apply
- that is, the receiving trust acquires the roll-over asset when
the trust is created or the asset is transferred. However, for the
purposes of the CGT discount, the ownership period of the
transferred asset in the receiving trust includes the period of
ownership by the trustee of the transferring trust (see
paragraph 1.111).
1.
To return to Example 1.2, the trustees of both trusts choose
the roll-over. The two properties transferred were called
Beachside (acquired in 1991) and Bayside (acquired before 20
September 1985). The cost base and reduced cost base of
Beachside in the hands of the trustee of TrustOne was
$20,000.
The trustee of TrustOne disregards any capital gain or
capital loss made on the transfer of Beachside and Bayside
to the trustee of TrustTwo.
The first element of the cost base and reduced cost base of
Beachside in the hands of the trustee of TrustTwo is
$20,000. The trustee of TrustTwo is also taken to have
acquired Bayside before 20 September 1985.
Losses extinguished
78. If the receiving trust has carried forward any net capital losses
or tax losses made in an income year that ends before the transfer
time, they cannot be used to reduce the trust's capital gains or
its assessable income after the transfer. The losses are
effectively extinguished. [Schedule 1, item 9, subsection 126-
240(3)]
. This ensures the roll-over cannot be used to marry gains
and losses. For example, it cannot be used to transfer
gain assets under cover of the roll-over to a trust with
capital or revenue losses.
79. For the income year that includes the transfer time, the trustee of
the receiving trust makes a notional calculation as to whether it
would have had a net capital loss or a tax loss if the income year
had ended just before the transfer time.
. If there would have been a net capital loss, that amount
is effectively extinguished by reducing the sum of capital
losses at the end of the year by that amount (whether or
not the trust is otherwise in a net capital gain or
capital loss position).
. If there would have been a tax loss, that amount is
effectively extinguished by reducing the sum of deductions
at the end of the year by that amount (whether or not the
trust is otherwise in a taxable income or a tax loss
position).
80. As noted earlier, if multiple assets are rolled over as part of an
arrangement, the extinguishment of losses only applies at the first
transfer time. [Schedule 1, item 9, subsection 126-240(3)]
Consequences of the roll-over for depreciating assets
81. The transfer of a depreciating asset from the transferring trust to
the receiving trust will cause a balancing adjustment event (as
defined by section 40-295).
82. Where there is a difference between the asset's termination value
(the final sale price) and its adjustable value (the original cost
less the decline in value while the taxpayer held it), a balancing
adjustment may occur.
83. The trustee of the transferring trust will be eligible for roll-
over under section 40-340 if three conditions are satisfied:
. there is a balancing adjustment event caused by the
disposal of a depreciating asset;
. the disposal involves a CGT event; and
. the limited fixed trust CGT roll-over is chosen.
[Schedule 1, item 4, subsection 40-340(1)]
84. As a result of the roll-over, the consequences of the balancing
adjustment are deferred until a subsequent balancing adjustment
event. The trustee of the receiving trust can continue to claim
deductions for the depreciating asset in the same way as the
trustee of the transferring trust could.
Consequences for beneficiaries
85. Beneficiaries are required to adjust the cost base and reduced cost
base of their interests in both trusts.
. Although there is no disposal of membership interests in
the transferring trust, there may be a transfer of value
from interests in the transferring trust to interests in
the receiving trust.
. Consistent with the approach for other CGT roll-overs and
the 'empty trust' requirement, the acquisition date of
beneficiaries' interests in the receiving trust will also
change.
86. Cost base adjustments are done on an interest-by-interest basis.
However, because adjustments are made on a reasonable basis, there
may be an opportunity for beneficiaries to reduce their compliance
costs by grouping relevant membership interests (for example, where
they have common tax attributes). This is explained further in
Example 1.11.
87. The general rule is that beneficiaries must make these adjustments
in respect of each asset transfer (paragraphs 1.88 to 1.94).
Alternatively, beneficiaries may be permitted to make a single
adjustment covering multiple asset transfers (paragraphs 1.98 to
1.100). [Schedule 1, item 9, subsection 126-245(1)]
Adjusting cost bases and reduced cost bases
88. The first element of the cost base and reduced cost base of each
membership interest in the transferring trust after the transfer
time is a proportion of the cost base of that interest, just before
the transfer time. [Schedule 1, item 9, subsections 126-245(2) and
(4)]
. The proportion is what is reasonable having regard to the
market value of that interest (or a reasonable
approximation of its market value), just before and just
after the transfer time.
. The effect of the adjustment is to reduce the other
elements of the cost base and reduced cost base to zero.
This ensures that elements of the cost base are not double-
counted in this roll-over.
89. The following formula is a reasonable basis for calculating the
first element of the cost base of each interest in the transferring
trust:
[pic]
90. The first element of the cost base and reduced cost base of each
membership interest in the receiving trust is an amount such that
the total cost base of that interest and the cost base of the
corresponding interest(s) or proportion of interest in the
transferring trust, just after the transfer time, reasonably
approximates the total cost base of those interests just before the
transfer time. [Schedule 1, item 9, subsections 126-245(3) and
(4)]
. In other words, the increase in cost bases of interests in
the receiving trust matches the decrease in cost bases of
corresponding interests in the transferring trust.
91. The following formula can be used to calculate a reasonable
approximation of the first element of the cost base of each
interest in the receiving trust (which is in bold):
[pic]
where CB is the cost base; the interest(s) or proportion of
interest in the transferring trust corresponds to the interest in
the receiving trust; and, the time is just before and just after
the transfer time.
92. One interest of a particular class in the receiving trust may
correspond to more than, less than or exactly one interest of the
matching class in the transferring trust.
. For example, a beneficiary may have two Class A units in
the receiving trust for each Class A interest in the
transferring trust, as well as one Class B unit in the
receiving trust for every five Class B units in the
transferring trust.
. However, the proportion of interests of a particular class
that a beneficiary has in the receiving trust (for
example, 10 per cent of all the Class A units on issue)
will be the same proportion of the matching class of units
in the transferring trust held by that beneficiary.
93. The trustee of the transferring trust must provide beneficiaries
with sufficient information to make these calculations (see
paragraphs 1.101 to 1.105).
94. If a beneficiary adjusts the cost base and reduced cost base of
their interests in both trusts as a result of the roll-over, no
other adjustments can be made under the ITAA 1997 or the ITAA 1936
because of something that happens in relation to the asset transfer
from the transferring trust to the receiving trust. [Schedule 1,
item 9, section 126-255]
1.
Further to Example 1.9, assume that Sheila's Class A units
in TrustOne have different cost bases as a result of her
purchasing them at two different prices. The cost bases of
these units and the corresponding units in TrustTwo are
shown in Table 1.3.
1. : Corresponding units for each original unit
|Original units|Cost |New units |Cost base |
| |base | | |
|600 Class A |$10 |300 Class 1 |$0 |
|units |each |units | |
|400 Class A |$20 |200 Class 1 |$0 |
|units |each |units | |
|1,000 Class B |$200 |100 Class 2 |$10 each |
|units |each |units | |
Sheila adjusts the cost base of her units in the
transferring trust on a reasonable basis, having regard to
the market value of the interests just before and just after
the transfer time. Given the difference in cost base of the
two groups of Class A units, it would not be reasonable for
Sheila to adjust the units as a single group.
The market value of Class A units just before the transfer
was $100 and just after the transfer was $80 (see Tables 1.1
and 1.2). The market value of Class B units before the
transfer was $1,000 and after the transfer was $898. These
are relevant in determining the first element of the cost
base of each unit in the TrustOne (the first three rows of
Table 1.4).
For example, the cost base of each of the 600 Class A units
just before the transfer was $10. A reasonable proportion
of that cost base is the market value after the transfer
($80) divided by the market value before the transfer
($100). Multiplying $10 by ($80 / $100) equals $8, the
first element of the cost base of those interests after the
transfer.
Using these cost bases, Sheila calculates the first element
of the cost base of interests in TrustTwo, such that the sum
of the cost bases of corresponding units in both trusts is
the same before and after the transfer time (the last three
rows of Table 1.4).
For example, just before the transfer, the total cost base
of one Class 1 unit and the corresponding two Class A units
was $20 (2 ( $10 + 0). Just after the transfer, the cost
base of the two Class A units is $16 (2 ( $8). Therefore,
the first element of the cost base of the Class 1 unit is $4
using the formula in paragraph 1.91.
2. : Calculating the cost base of each unit
|Membership |Cost base |
|interest | |
|600 Class A units|$8 - $10 ( (80 / 100) |
|400 Class A units|$16 - $20 ( (80 / 100) |
|1,000 Class B |$180 - $200 ( (898 / 1,000) |
|units |(approx) |
|300 Class 1 units|$4 - $4 + (2 ( $8) = $0 + (2 ( |
| |$10) |
|200 Class 1 units|$8 - $8 + (2 ( $16) = $0 + (2 ( |
| |$20) |
|100 Class 2 units|$210 - $210 + (10 ( $180) = $10 +|
| |(10 ( $200) |
Assume that each unit had the same cost base and reduced
cost base before the transfer. Therefore, the amount worked
out above as the first element of the cost base of each unit
will also become the first element of the reduced cost base
of each unit.
Deemed acquisition date of interests in receiving trust
95. Beneficiaries are deemed to have acquired their interests in the
receiving trust at the transfer time. This is consistent with the
general approach for CGT roll-overs. It is also consistent with
the 'empty trust' approach. Furthermore, it prevents the potential
avoidance of tax, such as by receiving trusts with pre-CGT
interests being loaded with post-CGT assets and the beneficiaries
disposing of their pre-CGT interests (instead of the receiving
trust disposing of its post-CGT assets). [Schedule 1, item 9,
subsection 126-245(5)]
96. There is one exception. Interests in the receiving trust will be
taken to have been acquired before 20 September 1985 if
corresponding interests in the transferring trust were acquired
before that date. [Schedule 1, item 9, subsection 126-245(6)]
97. For the purposes of the CGT discount, the ownership period of
membership interests in the receiving trust includes the period of
ownership of membership interests in the transferring trust (see
paragraph 1.112)
1.
Further to Example 1.11, suppose that Sheila also has 1,000
Class A units that she acquired before 20 September 1985.
She still has only 500 Class 1 units in the receiving trust.
Taking this into account, the new allocation of units in
TrustTwo is shown in Table 1.5.
1. : Corresponding units for each original parcel
|Original units|Cost |Corresponding |Cost base |
| |base |units | |
|600 Class A |$10 |150 Class 1 |$0 |
|units |each |units | |
|400 Class A |$20 |100 Class 1 |$0 |
|units |each |units | |
|1,000 Class A |Nil |250 Class 1 |$0 |
|units | |units | |
Because half of Sheila's Class A units in TrustOne were
acquired before 20 September 1985, she is deemed to have
acquired half (250) of the corresponding Class 1 units in
TrustTwo before that date.
The cost bases of the Class A units (before and after the
adjustment) do not change from Example 1.11. However, a
reasonable calculation of the cost base of each of the
Class 1 units taken to have been acquired at the transfer
time does change, because now one Class 1 unit in TrustTwo
corresponds to four Class A units in TrustOne instead of
two.
For example, just before the transfer, the total cost base
of one Class 1 unit and the corresponding four Class A units
was $40 (4 ( $10 + 0). Just after the transfer, the cost
base of the four Class A units is $32 (4 ( $8). Therefore,
the first element of the cost base of the Class 1 unit is
$8.
Similarly, the first element of the cost base of the other
100 Class 1 units is $16. Using the formula explained in
paragraph 1.91, the calculation is as follows: $16 + (4 (
$16) = $0 + (4 ( $20).
Other approach for making adjustments covering multiple transfers
98. If there is a series of roll-overs for assets transferred under an
arrangement and a beneficiary continuously owns interests in the
transferring trust over a period of time that covers multiple
transfers, the beneficiary can choose to make the necessary cost
base and acquisition date adjustments only once for those
interests. [Schedule 1, item 9, section 126-250]
99. A beneficiary that chooses this approach adjusts the cost bases of
interests in the transferring trust based on the market value (or a
reasonable approximation of market value) of those interests just
before the first transfer, and just after the last transfer.
. Similarly, the beneficiary adjusts the cost bases of the
corresponding interests in the receiving trust such that
the total cost base of the corresponding interests in both
trusts, just after the last transfer, reasonably
approximates the total cost base just before the first
transfer.
. The acquisition date of those interests in the receiving
trust is treated as having been acquired just after the
transfer time of the last transfer in the chosen series.
. Note that whilst the condition for applying this approach
is couched in terms of continuing ownership of interests
in the transferring trust, the beneficiary must also
continuously own corresponding interests in the receiving
trust for the roll-over to apply.
[Schedule 1, item 9, subsection 126-250(3)]
100. If a beneficiary disposes of their interests in either trust part
way through an arrangement, they must adjust the cost bases and
relevant acquisition dates of those interests based on the most
recent transfer time before the disposal. This is because the
beneficiary will not be able to choose the multiple-transfer
approach for a subsequent roll-over in respect of those interests,
or the corresponding interests in the 'other trust'.
1.
To return to Example 1.9, because Sheila continuously held
her interests in both trusts throughout the period, she
could choose to adjust the cost base and reduced cost base
of her interests based on the market value of her interests
just before the first transfer, and just after the transfer
of the fifth property.
Because Peter sold his interest in the transferring trust
after the second transfer time, he must adjust the cost base
and reduced cost base of the interest based on the market
value of the interest just after the second transfer time.
He also adjusts the cost base, reduced cost base and
acquisition date of his corresponding interest in the
receiving trust. (Alternatively, Peter can choose to make
the necessary adjustments at the first and second transfer
time using the transfer-by-transfer approach.)
As Graeme is only involved in one successful roll-over, he
adjusts the cost bases and acquisition dates of his
interests using the transfer-by-transfer approach.
Trustee must give relevant information to beneficiaries
101. The trustee of the transferring trust must send written notice
containing certain information to each of its beneficiaries (as at
the transfer time) within three months of the end of the income
year in which the transfer occurs. [Schedule 1, item 9, subsection
126-260(1)]
. The trustee may send the notice by post to the
beneficiary's most recently notified address, or by any
other means chosen by the beneficiary for receiving
correspondence.
. Beneficiaries need this information to be able to comply
with their obligations under the income tax laws - for
example, to determine the consequences of the roll-over
for their membership interests in the transferring and
receiving trusts.
102. The following information must be included in the notice given to
each beneficiary (other information may also be included):
. the transfer time;
. the market value of each of the beneficiary's membership
interests in the transferring trust, both just before and
just after the transfer time; and
. sufficient information to allow beneficiaries to work out
which interests in the receiving trust correspond to each
of the beneficiary's interests in the transferring trust.
This effectively requires the beneficiary to know:
- the class of interests in the receiving trust that
matches each class of interests in the transferring
trust; and
- for each matching class, the number of interests in the
receiving trust that equals one matching interest in the
transferring trust.
[Schedule 1, item 9, subsection 126-260(2)]
103. Failure to comply with this requirement is a strict liability
offence, punishable by 30 penalty units. The purpose of this
offence is to place trustees on notice against contravening the
requirement to give beneficiaries the information they need to meet
their obligations. [Schedule 1, item 9, subsections 126-260(3) and
(4)]
104. If there are two or more trustees, each trustee is liable, although
any trustee can discharge the obligation for all of the trustees.
[Schedule 1, item 9, subsection 126-260(5)]
105. However, it is a defence if the trustee being prosecuted proves
that the trustee did not in any way contribute to the failure to
provide the necessary information to beneficiaries, by act or
omission. The reversal of the burden of proof is necessary given
that the offence is one of strict liability, and that beneficiaries
need the information to meet their obligations. [Schedule 1, item
9, subsection 126-260(6)]
Roll-over consequences still apply for beneficiary if no notice
given
106. The consequences for beneficiaries explained in paragraphs 1.85
to 1.100 still apply even if the trustee of the transferring trust
fails to comply with the requirement to give notice. That is, the
obligation on the trustee of the transferring trust does not
relieve a beneficiary of its obligation to make cost base and other
adjustments in respect of its membership interests. [Schedule 1,
item 9, subsection 126-260(7)]
Application and transitional provisions
107. These amendments will apply to CGT events happening on or after
1 November 2008. [Schedule 1, items 3 and 11]
Additional time for trustees making tax choices
108. Trustees will have six months from the date of Royal Assent to make
the mirror tax choices discussed in paragraph 1.53, notwithstanding
that the absence of the election impacted on the assessment of the
trust's or any other entity's income.
. However, a mirror choice may only be made under this
transitional rule if it otherwise meets the requirements
of the relevant choice provision and is within the time
permitted by that provision.
. The Commissioner of Taxation can extend the six-month
period.
[Schedule 1, item 12]
Transitional time for penalty provision
109. To avoid any retrospective penalties from the failure of a trustee
to provide beneficiaries with relevant information for a roll-over
that occurs in the 2008-09 income year, the trustee will have six
months from the date of Royal Assent to comply with the requirement
to give information. [Schedule 1, item 13]
Consequential amendments
110. Consequential amendments will be made to the guide material in
Subdivision 112-B to direct readers to the modified cost base rules
in Subdivision 126-G. Subdivision 112-B lists situations when the
general cost base and reduced cost base rules may be modified.
[Schedule 1, item 6, section 112-54A]
111. Consequential amendments will also be made to include the roll-over
of the asset at the trust level in the table of same-asset roll-
overs in Subdivision 112-D. This will ensure that, for the
purposes of the CGT discount, the ownership period of the roll-over
asset in the hands of the trustee of the receiving trust includes
the period of ownership by the trustee of the transferring trust.
[Schedule 1, item 7, section 112-150]
112. Consequential amendments will also be made to the table in
subsection 115-30(1). This will ensure that, for the purposes of
the CGT discount, the ownership period of membership interests in
the receiving trust includes the period of ownership of the
corresponding membership interests in the transferring trust.
[Schedule 1, item 8, subsection 115-30(1)]
113. Amendments will be made to the guide material in Subdivision 109-B
to direct readers to this modified acquisition rule in section 115-
30. [Schedule 1, item 5, section 109-55]
Chapter 2
Loss relief for merging superannuation funds
Outline of chapter
114. Schedule 2 to this Bill removes significant income tax impediments
to mergers between complying superannuation funds by permitting the
roll-over of capital losses and transfer of revenue losses
(including losses realised under the merger and previously realised
losses). This loss relief will be available for complying
superannuation funds and approved deposit funds (ADFs) that merge
with a complying superannuation fund with five or more members.
The loss transfer and asset roll-over will preserve the offsetting
value of the losses, thereby removing a potential barrier to
superannuation fund consolidation.
Context of amendments
115. Capital gains tax (CGT) is the primary code for calculating gains
or losses of complying superannuation funds. There are certain
gains and losses that are treated on revenue account, such as those
from a debenture stock or bond (see section 295-85 of the Income
Tax Assessment Act 1997 (ITAA 1997)).
116. The transfer of assets from one superannuation fund to another,
under a merger between the two funds, will typically trigger
CGT event A1 (about disposals of a CGT asset - section 104-10 of
the ITAA 1997) or may trigger CGT event E2 (about transferring a
CGT asset to a trust - section 104-60 of the ITAA 1997).
Therefore, the asset transfer will lead to the realisation of
capital gains and/or capital losses for the transferring fund.
Following this asset transfer and the transfer of members' accounts
to the receiving fund, the transferring fund will typically be
wound up.
117. Capital losses are extinguished on the ending of an entity. As
capital losses can be used to offset present and future capital
gains, they carry some value - the value of the tax liability that
would otherwise be payable on the reduced capital gains. This
value is extinguished on the winding up of the transferring
superannuation fund.
118. Similarly, revenue losses, such as foreign exchange losses, are
also extinguished on the ending of an entity. Revenue losses also
have a value as they can be offset against current year income, or
carried forward where the entity continues to exist. However,
where there is a merger and the transferring entity ceases to
exist, the value of the revenue losses is also extinguished.
119. In the absence of the optional loss relief provided by the
amendments, where the tax benefits of unrealised net capital losses
or revenue losses have been included in the valuation of members'
superannuation interests, then the merger of their superannuation
fund with another fund will lead to a reduction in the value of
their superannuation interests. This can act as an obstacle to the
superannuation fund merging with another fund because the trustee
has to take this reduction into account when considering such a
merger. The trustee may decide to abandon any merger plans where
there is a significant negative impact on members' benefits. The
optional loss relief provided by the amendments removes the
impediment to eligible funds merging that the extinguishment of the
losses would otherwise impose.
120. This loss relief encompasses transfers to and from pooled
superannuation trusts (PSTs) and life insurance companies as well
as superannuation funds and ADFs. Providing the loss relief to
superannuation fund mergers involving these kinds of entities
recognises the commercial reality that a significant amount of
superannuation is invested via PSTs and life insurance companies
rather than being directly invested by the superannuation fund.
121. In light of the uncertain conditions in the global economy and
recent global financial market turmoil, it is important that
potential barriers to a robust and efficient superannuation
industry are minimised. This measure will enhance the efficiency
and robustness of the superannuation system in response to these
uncertainties.
122. Capital gains do not have the same disincentive impact on mergers
of superannuation funds as capital losses. Superannuation funds
typically include the tax cost of any unrealised capital gains when
they calculate the value of their members' interests. The tax cost
of the realisation of the unrealised capital gains has already been
proportionally included in that value. This means that when the
merger takes place, the CGT that is paid on the net capital gain of
the merging fund does not lead to a reduction in member benefits.
Summary of new law
123. Schedule 2 amends the ITAA 1997 by inserting Division 310. This
Division allows a complying superannuation fund or a complying ADF
to choose to roll-over capital losses and revenue losses arising
from an arrangement to merge the fund with a complying
superannuation fund with five or more members. This is achieved
through the provision of a loss transfer and an asset roll-over.
The transferring fund may also transfer previously realised capital
losses and revenue losses, including its prior year losses.
124. The Division allows for two options for the asset roll-over
depending on the net capital gain or loss position of the entity in
relation to the transferred assets. If an entity is in a net
capital loss position in relation to the transferred assets for the
current year, it may choose either the global asset approach or the
individual asset approach. If the entity is not in that position,
it can only choose the individual asset approach.
125. Subdivision 310-B sets out what entities are eligible for the loss
relief and Subdivisions 310-C to 310-E set out the consequences of
choosing the loss transfer or asset roll-over for these entities.
Comparison of key features of new law and current law
|New law |Current law |
|Previously realised |Previously realised |
|capital losses and |capital losses and |
|revenue losses may be |revenue losses cannot be |
|transferred under a |transferred under a |
|merger of complying |merger of complying |
|superannuation funds |superannuation funds. |
|where certain eligibility| |
|conditions are met. | |
|Capital losses and |Capital losses and |
|revenue losses realised |revenue losses realised |
|under an arrangement to |from a merger of |
|merge a complying |superannuation funds |
|superannuation fund or a |cannot be transferred and|
|complying ADF with a |are lost when the |
|complying superannuation |transferring |
|fund with five or more |superannuation fund is |
|members may be rolled |wound up. |
|over under the merger. | |
Detailed explanation of new law
When an entity may choose the loss transfer and asset roll-over
126. New provisions are inserted into the ITAA 1997 to specify the
conditions necessary for the trustees of certain entities to be
eligible to choose the optional loss transfer and asset roll-over
when there is an arrangement to merge complying superannuation
funds. The broad term 'arrangement' is used in these provisions as
it is not intended to limit the manner in which superannuation
entities may merge. [Schedule 2, Part 1, item 1, Division 310]
127. The satisfaction by the transferring superannuation fund of the
eligibility rules for the loss relief does not of itself authorise
the particular merger or transfer transaction. The trustees of the
relevant funds would need to consider the applicable governing
trust deeds and legislation. This may include relevant prudential
regulatory requirements for the proposed transaction. For example,
the requirements of the Superannuation Industry (Supervision) Act
1993 (SIS Act 1993) and the Superannuation Industry (Supervision)
Regulations 1994 (SIS Reg 1994), such as the rules protecting
member entitlements in the continuing superannuation entity, may
need to be considered.
128. The measure does not impose any additional record-keeping
requirements on the parties to the merger arrangement. However,
the ordinary record-keeping provisions of the income tax law will
apply to these arrangements. The parties to the merger arrangement
should prepare sufficient documentation to satisfy the applicable
income tax requirements.
129. An eligible entity with an arrangement to merge superannuation
funds may choose:
. a loss transfer only;
. an asset roll-over only; or
. a combination of the loss transfer and the asset roll-
over,
where the relevant conditions are satisfied. [Schedule 2, Part 1,
item 1, subsections 310-10(1), 310-15(1), 310-20(1) and 310-45(1)]
130. Eligibility for the asset roll-over is conditional on an entity
being eligible for the loss transfer, but will not be dependent on
the entity actually choosing the loss transfer. This will permit
an arrangement to merge superannuation funds to occur in the
following ways:
. the transfer of cash only following the disposal of all
the transferring entity's assets;
. the transfer of assets only; or
. a combination of cash and asset transfers.
[Schedule 2, Part 1, item 1, paragraph 310-45(1)(a)]
131. The detail of the asset roll-over mechanism is explained in
paragraphs 2.58 to 2.105. Rules to specify the consequences for
the various types of losses and assets for each entity that is a
party to an arrangement to merge superannuation funds are described
in paragraphs 2.45 to 2.57 and paragraphs 2.84 to 2.107.
132. The conditions that must exist for an entity to choose the loss
transfer and the asset roll-over in respect of an arrangement to
merge superannuation funds are specified separately for the
different ways in which a complying superannuation fund or ADF may
hold assets. Assets may be held directly, through a PST or though
a policy with a life insurance company. [Schedule 2, Part 1, item
1, sections 310-10, 310-15, 310-20 and 310-45]
Original fund's assets extend beyond life insurance policies and
units in pooled superannuation trusts
The first condition - assets held by a fund
133. The first condition for the loss transfer is that the assets must
be held by a complying superannuation fund or a complying ADF (the
transferring fund) just before the arrangement to merge was made.
. A 'complying superannuation fund' is defined in section 41
of the SIS Act 1993.
. An 'ADF' is defined in section 10 of the SIS Act 1993.
[Schedule 2, Part 1, item 1, subsections 310-10(1) and (2)]
134. Although the transferring fund is required to have held the assets
just before the arrangement was made, it is not required to
transfer these assets to the continuing fund in order to access the
loss transfer. This allows for the possibility of an arrangement
under which the transferring fund, for example, liquidates its
assets and then transfers cash and realised losses to the
continuing fund. [Schedule 2, Part 1, item 1, subsection 310-10(2)
and section 310-30]
The second condition - fund ceases to have members
135. The second condition for the loss transfer is that the transferring
fund ceases to have any members and the individuals who cease to be
members become members of one of more complying superannuation
funds(s) (the continuing fund(s)). The time that this occurs is
the completion time for the merger arrangement for the purposes of
the loss relief. [Schedule 2, Part 1, item 1, subsection 310-
10(3)]
136. This condition ensures that the loss relief is only available in
circumstances where funds are merging with each other for the
purpose of superannuation industry consolidation. Where the
transfer of members under an arrangement to merge funds that meets
the conditions for the loss relief takes place in more than one
transaction, the loss relief will be available. However, the loss
transfer is not available for routine transfers of members between
funds where the transferring fund continues to have members (apart
from members who cannot be transferred due to a legal impediment as
discussed below).
137. There is a limited exception to the requirement that the
transferring superannuation fund must have no members at the
completion of the transfer of assets. This exception recognises
that there may be circumstances beyond the control of the trustee
of a superannuation fund that will not allow the trustee to
transfer some of the fund's members to the continuing fund.
[Schedule 2, Part 1, item 1, subsection 310-10(5)]
138. These circumstances may include:
. Family Court orders;
. an unsettled insurance claim for death or disability with
the transferring fund; or
. extant legal proceedings that relate to a member of the
transferring fund which mean that the member retains
rights against the trustee of the transferring fund.
139. This exception allows funds that merge to obtain the loss relief
even though they cannot fully satisfy the requirement that all
members be transferred to the continuing entity due to legal
impediments beyond the control of the trustee. [Schedule 2, Part
1, item 1, subsection 310-10(5)]
1.
Warm Super is a complying superannuation fund with 150
members. The trustee of Warm Super decides to merge with
and transfer its members to Hot Super, a complying
superannuation fund with 1,000 members. Hot Super holds
units in the Jalapeno PST.
Under the merger, Warm Super disposes of all its assets and
gives the proceeds to Hot Super which uses the proceeds to
purchase additional units in the Jalapeno PST. Warm Super
would qualify for the loss transfer if it ceases to hold all
its assets and ceases to have any members just after the
transfer.
2.
Silver Super is a complying superannuation fund with
12,000 members. Its trustee decides on a merger with Gold
Super, a complying superannuation fund with 200,000 members.
Silver Super transfers it assets, losses and members to Gold
Super. However, Silver Super has a member who cannot be
transferred to Gold Super because the trustee of Silver
Super has an unresolved insurance claim for disability in
relation to that member. As this insurance claim is a
circumstance beyond the control of the trustee of Silver
Super, this member is exempt from the requirement that
Silver Super transfer all its members to Gold Super.
The third condition - number of members of the continuing entity
140. The third condition of the loss transfer concerns the minimum
number of members that the continuing fund or funds must have just
before the arrangement to merge the funds was made.
141. The general principle is that the continuing fund must not be a
small superannuation fund. A small superannuation fund is defined
in subsection 995-1(1) of the ITAA 1997 as being a complying
superannuation fund with four or fewer members.
142. Small superannuation funds include self-managed superannuation
funds (SMSFs) and small Australian Prudential Regulation Authority
(APRA) regulated funds. Small APRA regulated superannuation funds
are APRA regulated superannuation funds with less than five members
that are managed by an independent trustee. Consequently, a large
(non-small) complying superannuation fund is a complying
superannuation fund with at least five members.
143. Consistent with the objective of removing impediments to the
consolidation of the superannuation industry, the continuing fund
must not be a small fund. [Schedule 2, Part 1, item 1,
paragraph 310-10(4)(a)]
144. The loss relief may be available in circumstances where a SMSF
merges with a non-small APRA regulated superannuation fund.
However, it will not be available where the two funds are SMSFs
before the merger or where a SMSF merges with a small APRA
regulated fund. The continuing superannuation fund must be a
complying large APRA regulated fund immediately before the transfer
of assets. [Schedule 2, Part 1, item 1, paragraph 310-10(4)(a)]
1.
Miser Trust and Prudent Trust are two SMSFs. Miser has two
members and Prudent has four members. The trustees of the
two funds wish to merge the two funds with one another. As
neither of the funds is a complying superannuation entity
with at least five members before the arrangement is made,
the merger arrangement will not satisfy all the conditions
for the loss relief and therefore will not be eligible for
the relief.
145. However, there is a limited exception to these general rules. A
rule is inserted to ensure that the loss transfer is available in
circumstances where two or more superannuation funds merge under an
arrangement whereby a new superannuation fund is created. In these
cases it will be necessary for at least one of the funds that is
merging into the new entity to not be a small superannuation fund
just before the arrangement was made. It will also be necessary
for the continuing entity to not be a small superannuation fund
just after the earliest time when both the other fund and the
transferring fund cease to have any members. [Schedule 2, Part 1,
item 1, paragraph 310-10(4)(b]
Original fund's assets include a life insurance policy
146. An eligible complying superannuation fund or ADF may hold assets
via a complying superannuation/first home saver account (FHSA) life
insurance policy. The transferring superannuation fund may, as
part of its merger with the continuing fund, transfer its policy to
the continuing fund or request the insurance company to transfer
the value of the assets that supported its policy to the continuing
fund, PST or another life insurance company.
147. The life insurance company may be able to use the loss transfer
upon cancellation of the life insurance policy, in relation to
those of its assets reasonably attributable to and reflected in the
value of the policy. Given the type of life insurance policy to
which this aspect of the relief applies, the policy would be
supported by assets in the complying superannuation/FHSA asset pool
of the life insurance company, in terms of the life insurance
company taxation rules in Division 320 of the ITAA 1997. The
complying superannuation/FHSA asset pool comprises the assets of a
life insurance company that are segregated from other assets for
the purpose of discharging its complying superannuation/FHSA
liabilities. The loss relief will preserve the value of losses
associated with assets having the necessary relationship with the
policy held by the superannuation fund.
148. Where the asset is a life insurance policy, it is the life
insurance company that may choose the loss transfer. [Schedule 2,
Part 1, item 1, subsection 310-15(1)]
149. Provisions are inserted to specify relevantly the same conditions
and exceptions for the loss transfer where assets are held in a
life insurance company as the conditions and exceptions for assets
other than life insurance policies or units in a PST held by a
complying superannuation fund or ADF. [Schedule 2, Part 1, item 1,
subsections 310-15(2) to (5)]
150. Where appropriate the conditions are modified to reflect that the
superannuation fund holds assets via a complying
superannuation/FHSA life insurance policy. For example, the first
condition for the life insurance company to be eligible to choose
the loss transfer is framed from the perspective of the life
insurance company and a life insurance policy to reflect the
characteristics of this form of holding superannuation fund assets.
[Schedule 2, Part 1, item 1, subsection 310-15(2)]
1.
JOH Ltd is the trustee of Yellow Super, a complying
superannuation fund. The trustee invests in a complying
superannuation/FHSA life insurance policy with Bountiful
Life. JOH Ltd transfers all the members of Yellow Super to
Mauve Super, another complying superannuation fund.
The trustee of Mauve Super does not intend to have a policy
with Bountiful Life. However, as part of the transfer Mauve
Super has agreed to accept losses and assets of Bountiful
Life which were attributable to the policy with Yellow
Super.
If Yellow Super, Mauve Super and Bountiful Life satisfy the
requirements of the loss transfer, Bountiful Life will be
able to obtain the loss transfer and transfer capital losses
and revenue losses having the necessary relationship with
the Yellow Super policy to Mauve Super.
151. The cancellation, novation or transfer of the relevant life
insurance policy to the continuing superannuation fund may receive
CGT relief for the transferring superannuation fund through the
operation of section 118-300 of the ITAA 1997, which disregards
certain capital gains or capital losses that arise from CGT events
happening in relation to interests in life insurance policies.
Original fund's assets include units in a pooled superannuation
trust
152. Where assets of an eligible superannuation fund or ADF are held via
units in a PST, the trustee of the PST will be able to qualify for
the loss relief. PSTs may be used by superannuation funds to
indirectly hold the investment assets from which their members
derive benefits. This permits the superannuation funds to allocate
the assets supporting superannuation account holders between
different investment types to reflect the risk and investment
preferences of particular account holders.
153. Superannuation funds may hold units of a PST which reflect a
percentage of the underlying value of the PST's pooled assets that
are attributable to the superannuation fund's members' accounts.
Upon deciding to merge with another fund, a superannuation fund may
choose to transfer its units in the PST to the continuing fund, or
the PST may transfer the assets attributable to the units in the
PST to the continuing superannuation fund, another PST or a life
insurance company.
154. Where the asset is a unit in a PST, it is the trustee of the PST
that may choose the loss transfer. [Schedule 2, Part 1, item 1,
subsection 310-20(1)]
155. Again, provisions are inserted to specify relevantly the same
conditions and exceptions for the loss transfer where assets are
held in a PST as for assets other than life insurance policies or
units in a PST held by a complying superannuation fund or ADF.
[Schedule 2, Part 1, item 1, subsections 310-20(2) to (5)]
156. Where appropriate the conditions are again modified to reflect that
the superannuation fund holds assets via units in a PST. For
example, the first condition for the PST to be eligible to choose
the loss transfer is framed from the perspective of the trustee of
the PST and with reference to PST units to reflect the
characteristics of this form of holding superannuation fund assets.
[Schedule 2, Part 1, item 1, subsection 310-20(2)]
157. The transfer of units held by a superannuation fund in a PST to
another superannuation fund receives CGT relief at the fund level
through the operation of section 118-350 of the ITAA 1997, which
disregards a capital gain or a capital loss that arises from such
transactions.
Consequence of choosing to transfer losses
158. An entity that is eligible for and chooses the loss transfer may
choose to transfer certain types of losses to the continuing
entity. The transfer of these losses prevents the value of the
losses being extinguished upon the winding up of the transferring
superannuation fund and allows accompanying members' benefits to
remain intact.
159. The losses may be transferred to one or more of the following
entities, called receiving entities:
. a continuing fund for the loss relief;
. a PST in which the units are held by a continuing fund for
the loss relief just after the completion time of the
arrangement to merge the funds; and/or
. a life insurance company which has issued a complying
superannuation/FHSA life insurance policy that is held by
a continuing fund for the loss relief just after the
completion time.
[Schedule 2, Part 1, item 1, section 310-25]
160. The ability for losses to be transferred to one or more entities
caters for circumstances where the transferring fund wishes to
match an investment with the member preferences or for differing
fund entitlements. For example, this will allow losses to be
transferred to different continuing entities that provide for
members with accumulation plans or defined benefit plans.
Losses that may be transferred
161. The losses that may be transferred are capital losses and revenue
losses realised before the merger, specifically:
. net capital losses for earlier income years than the
transfer year to the extent that they were not utilised
before the completion time;
. net capital losses for the transfer year, worked out as if
the transfer year ended at the completion time;
. tax losses for earlier income years than the transfer year
to the extent that they were not utilised before the
completion time; and
. tax losses incurred for the transfer year, worked out as
if the transfer year ended at the completion time.
[Schedule 2, Part 1, item 1, subsection 310-30(1)]
162. Where the loss transfer is chosen by a life insurance company in
relation to a complying superannuation/FHSA life insurance policy,
the losses related to the policy are those determined by reference
to capital gains, capital losses, assessable income and deductions
from assets of the complying superannuation/FHSA asset pool to the
extent that the assets are reasonably attributable to the policy.
An asset realised in the past may still be reasonably attributable
to a policy, albeit indirectly, if for example the realised asset
was previously reasonably attributable to the policy and an income
tax loss it generated is still reasonably attributable to the
policy. [Schedule 2, Part 1, item 1, subsection 310-30(2)]
163. Similarly, where assets include units in a PST and the loss
transfer is chosen, the losses are determined by reference to the
assets of the PST that are reasonably attributable to the units in
the transferring superannuation fund. [Schedule 2, Part 1, item 1,
subsection 310-30(3)]
Effect of transferring a capital loss
164. The previously realised net capital loss for an income year that is
not the transfer year will be taken, if it is transferred, not to
have been made by the transferring entity and an amount equal to
the loss will be taken to have been made by the continuing entity
for that income year. [Schedule 2, Part 1, item 1, subsection 310-
35(1)]
165. If the continuing entity that is receiving the net capital loss is
a life insurance company, the transferred loss is taken to be a net
capital loss from complying superannuation/FHSA assets. [Schedule
2, Part 1, item 1, subparagraph 310-35(1)(b)(i)]
166. A transferring entity can transfer net capital losses from the
transfer income year to a continuing entity by reducing these
capital losses by the amount transferred. [Schedule 2, Part 1,
item 1, paragraph 310-35(2)(b)]
167. If the transferring entity is a life insurance company its capital
losses from its complying superannuation/FHSA assets are reduced by
the amount transferred to the continuing entity. Likewise, if the
receiving entity is a life insurance company, the transferred
amount of net capital losses from the transfer income year is taken
to be a capital loss from complying superannuation/FHSA assets.
[Schedule 2, Part 1, item 1, paragraphs 310-35(2)(a) and (c)]
Effect of transferring a tax loss
168. Similar to capital losses, an earlier year tax loss can be
transferred to a continuing entity by the transferring entity. As
a result, the transferring entity will be taken not to have
incurred the loss for that year and an amount equal to the loss
will be taken to have been made by the continuing entity for that
earlier income year. If the continuing entity is a life insurance
company, the tax loss that was transferred is taken to be a tax
loss of the complying superannuation/FHSA class of that earlier
income year. [Schedule 2, Part 1, item 1, subsection 310-40(1)]
169. Tax losses of the transfer income year can be transferred to a
continuing entity and the transferring entity must reduce their
transfer year deductions by an amount equal to the transferred
amount of losses. An amount equal to the transferred tax loss
amount is taken to be a tax loss for the continuing entity for the
transfer year. [Schedule 2, Part 1, item 1, subsection 310-40(2)].
170. Life insurance companies transferring transfer year tax losses to a
receiving entity must reduce deductions covered by subsection 320-
137(4) of the ITAA 1997 by an amount equal to the tax loss
transferred to the continuing entity. If a life insurance company
is receiving a transfer year tax loss, then the tax loss is a tax
loss of the complying superannuation/FHSA class for the transfer
year. [Schedule 2, Part 1, item 1, paragraphs 310-40(2)(a) and
(c)]
1.
Small Super superannuation fund has net assets of $2
million, a carried forward net capital loss from an earlier
income year of $100,000 and tax losses for earlier income
years (treated on revenue account) of $25,000. Small Super
enters into a deed of arrangement to transfer all assets and
members to Best Super superannuation fund, a large APRA
regulated superannuation fund, on 1 April 2009.
Small Super elects to transfer its losses. The $100,000
carried forward capital loss and the $25,000 revenue loss
are transferred to Best Super. The losses are excluded from
the calculation of Small Super's taxable income for the
current year or any future income year. Best Super may
include the losses in determining its taxable income for the
2008-09 income year or may carry the losses forward to
future years.
Roll-over for assets
171. Superannuation funds, ADFs, PSTs and life insurance companies that
meet the eligibility conditions for the loss transfer may also
choose a roll-over for assets that are to be transferred from the
transferring entity to another entity (the receiving entity) under
the arrangement to merge superannuation funds provided certain
additional conditions are satisfied. [Schedule 2, Part 1, item 1,
subsection 310-45(1)]
172. There are three additional conditions for the asset roll-over that
must be satisfied.
The first condition - one or more CGT events happen to the CGT
assets
173. The first condition is that under the arrangement one or more CGT
events (transfer events) happen resulting in the transferring
entity ceasing to hold the specified assets (the original assets).
The provision does not specify the particular CGT events that may
happen, but refers to CGT events generally. This ensures that the
rules accommodate the wide range of transactions and CGT events
that may occur. [Schedule 2, Part 1, item 1, subsection 310-45(2)]
174. The original assets of the transferring entity are described
separately for the ways in which a superannuation fund may hold
assets, with reference to the losses choice under the loss
transfer:
. for the transferring superannuation fund or ADF, all its
CGT assets for a losses choice;
. for a life insurance company, all its CGT assets
reasonably attributable to the complying
superannuation/FHSA life insurance policy held by the
transferring superannuation fund for a losses choice just
before the arrangement was made; or
. for a PST, all its CGT assets reasonably attributable to
the units in that entity held by the transferring
superannuation fund for a losses choice just before the
arrangement was made.
[Schedule 2, Part 1, item 1, subsection 310-45(2)]
The second condition - transfer events all happen in the transfer
year
175. The second condition is that the transfer events all happen in the
year that is the transfer year for the purposes of the loss relief.
That year is the income year for the transferring entity that
includes the completion time for the losses choice (see paragraph
2.22 for a discussion of the completion time). [Schedule 2, Part
1, item 1, subsection 310-45(3)]
176. The second condition significantly simplifies the operation of the
amendments and minimises complexity by providing that the benefits
of the loss relief are only available to entities that complete
their asset roll-over within a single income year. The arrangement
to merge funds covers the transactions under which the assets and
members are transferred between the merging funds. It does not
include the planning stage, negotiations between the trustees of
the funds and preparatory work to implement the arrangement.
177. It is expected that in most cases the transfer of members and
assets will take place on a nominated effective date, or over a
relatively short timeframe. The nomination of the income year as
being that of the transferring entity means that the income years
of the transferring entity and the continuing entities do not need
to align, catering for substituted accounting periods.
178. In practice the transfer of assets may take place in a number of
transactions within a single income year. The asset roll-over will
be available in these cases provided the other conditions for the
loss relief are satisfied.
179. The amendments do not provide a roll-over for the fund members in
respect of the exchange of their interests in the transferring fund
for interests in the continuing fund because of the exemption
already provided for in the existing CGT provisions. Section 118-
305 of the ITAA 1997 provides an exemption for certain capital
gains or capital losses in respect of members' interests in a
superannuation fund.
1.
Prince Super is a complying superannuation fund with 9,500
members. The trustee of Prince Super decides to merge the
fund with Princess Super, a complying superannuation fund
with 300,000 members.
On 6 April 2010, staff of Prince Super and Princess Super
begin the preparatory work for the arrangement of the
transfer of losses, assets and members from Prince Super to
Princess Super. The preparatory work is finished on
10 January 2011.
The losses, assets and members of Prince Super are
transferred to Princess Super in 3 tranches between 21
January 2011 and 24 February 2011. Because the transfer of
assets and members occurs in a single income year it may be
eligible for the loss relief.
The third condition - CGT assets become assets of another complying
superannuation fund, pooled superannuation trust or life insurance
company
180. The third condition is that the CGT assets become assets of another
complying superannuation fund, a PST or a life insurance company
with which a continuing fund holds a complying superannuation/FHSA
policy because the transferring entity ceased to hold the CGT
assets. [Schedule 2, Part 1, item 1, subsection 310-45(4)]
181. The roll-over does not have a provision relating to keeping the pre-
CGT status of CGT assets. An asset has pre-CGT status if acquired
before 20 September 1985. There is no need for such a provision as
section 295-90 of the ITAA 1997 treats the trustee of a complying
superannuation fund as having acquired on 30 June 1988 any assets
it already owned on that day. An equivalent rule applies to life
insurance companies (section 320-45 of the ITAA 1997) in relation
to complying superannuation/FHSA assets.
182. The transferring entity that chooses to obtain the roll-over must
cease to hold all the CGT assets held for the benefit of its
members, except for those assets retained to pay expected debts and
for the entitlements of members that cannot be transferred to the
continuing fund. [Schedule 2, Part 1, item 1, subsection 310-
45(5)]
183. In circumstances where an entity eligible for the loss transfer
chooses not to transfer losses but chooses the asset roll-over:
. the original fund for the losses choice means the fund
that would have been the original fund had the loss
transfer been chosen;
. the completion time for the losses choice means the time
that would have been the completion time had the loss
transfer been chosen; and
. the continuing fund for the losses choice means the fund
that would have been the continuing fund had the loss
transfer been chosen.
[Schedule 2, Part 1, item 1, subsections 310-45(2) to (4)]
Transfer of assets held by a life insurance company
184. A life insurance company choosing the asset roll-over must cease to
hold all the assets reasonably attributable to a complying
superannuation/FHSA life insurance policy held by the
superannuation fund that is transferring its members to the
continuing fund. [Schedule 2, Part 1, item 1, paragraph 310-
45(2)(b)]
185. Such assets must be transferred to the continuing superannuation
fund, another PST or life insurance company. [Schedule 2, Part 1,
item 1, subsection 310-45(4)]
186. The nature of a life insurance policy will mean that it may not be
possible to directly attribute particular assets in a life
insurance company to any one particular life insurance policy held
by a superannuation fund. To overcome this problem, the assets
subject to the asset roll-over (the original assets) are described
as the assets of the life insurance company reasonably attributable
to the relevant complying superannuation/FHSA life insurance policy
of the superannuation fund and reflected in its value. To
distinguish such assets, it is expected that a portion of the
assets of the life insurance company's complying
superannuation/FHSA asset pool could be identified, including by
reference to normal industry practice, as being reasonably
attributable to a particular policy and reflected in its value. In
addition there are provisions in the superannuation industry
supervision law that require member benefits to be protected where
there is a merger of superannuation entities, for example SIS Reg
1994, Regulation 6.29. This protection would ensure in these
circumstances that an appropriate portion of the assets of the life
insurance company would be transferred under the merger. [Schedule
2, Part 1, item 1,
paragraph 310-45(2)(b)]
187. The transferring life insurance company may retain assets that it
requires to pay existing or expected debts relating to the transfer
of assets and to meet its liabilities in respect of individuals who
have remained members of the original fund because of circumstances
outside the control of the trustee of the fund. [Schedule 2, Part
1, item 1, subsection 310-45(5)]
Transfer of assets held by a pooled superannuation trust
188. The asset roll-over will allow for the assets held within a PST
whose value is reasonably attributable to units of the original
fund to be transferred to the continuing fund, another PST or life
insurance company without extinguishing the losses associated with
those assets. [Schedule 2, Part 1, item 1, paragraph 310-45(2)(c)
and subsection 310-45(4)]
189. The nature of a pooled investment will mean that it will not be
possible to directly attribute particular assets in the pool to the
interest of a particular superannuation fund. To overcome this
problem, the assets subject to the asset roll-over are the assets
in the pool that are reasonably attributable to the investment of
the superannuation fund. To distinguish such assets, it is
expected that a portion of the PST's assets could be identified,
including by reference to ordinary industry practice, as reasonably
attributable to a particular fund's interest in the PST.
[Schedule 2, Part 1, item 1, paragraph 310-45(2)(c)]
190. A PST choosing the asset roll-over must cease to hold all the
assets whose value is reasonably attributable to the units of the
original complying superannuation fund that is transferring its
members to the continuing superannuation fund. [Schedule 2, Part
1, item 1, paragraph 310-45(2)(c)]
191. Such assets must be transferred to the continuing superannuation
fund, another PST or life insurance company. [Schedule 2, item 1,
subsection 310-45(4)]
192. The transferring PST may retain assets that it requires to pay
existing or expected debts relating to the transfer of assets and
to meet its liabilities in respect of individuals who have remained
members of the original fund because of circumstances outside the
control of the trustee of the fund. [Schedule 2, Part 1, item 1,
subsection 310-45(5)]
Choosing the form of the asset roll-over
193. An entity that is eligible for the asset roll-over may, depending
on its circumstances, be able to choose between the two methods for
executing the roll-over. These two methods provide flexibility and
minimise compliance costs for such entities. The consequences for
both the transferring entity and continuing entity of each of these
methods are specified in paragraphs 2.84 to 2.87 and paragraphs
2.88 to 2.92 respectively.
194. If an entity is in a net capital loss position in relation to the
transferred assets for the current year, it may choose either the
global asset approach or the individual asset approach. This net
capital loss position of the entity is determined by subtracting
the capital gains on the assets from the capital losses on the
assets. Where the result exceeds zero, the entity has a net
capital loss position on those assets. [Schedule 2, Part 1,
item 1, subsection 310-50(1)].
195. If the entity is not in a net capital loss position in relation to
transferred assets it can only choose the individual asset
approach. [Schedule 2, Part 1, item 1, subsection 310-50(1)]
196. An entity that can choose either the global asset approach or
individual asset approach to transfer its CGT assets must use one
method only in relation to all its transferred assets. The entity
cannot use the individual asset approach in relation to some of the
transferred assets and the global asset approach in relation to the
remaining transferred assets. [Schedule 2, Part 1, item 1,
subsection 310-50(1)]
1.
Brown Super is eligible for the loss relief and wants to
transfer its assets to Orange Super. In doing so, Brown
Super wants to take advantage of the asset roll-over in
order to preserve the value of unrealised losses in its CGT
assets.
Brown Super holds four different types of assets:
. 20,000 shares in Shelley Co, each of which has a reduced
cost base of $25 and a current market value of $17;
. 40,000 shares in Big Mining Co, each of which has a reduced
cost base of $40 and a current market value of $29;
. 80,000 shares in Little Mining Co, each of which has a cost
base of $9 and a current market value of $15; and
. 5,000 units in Great Property Trust, each of which has a
reduced cost base of $30 and a current market value of $26.
In order to work out whether Brown Super can choose the
global asset approach or the individual asset approach,
Brown Super adds up any capital loses it would have for the
transferred assets and subtracts any capital gains it would
have for the transferred assets.
Brown Super would have total capital losses of $620,000 and
total capital gains of $480,000.
Subtracting the capital gains from the capital losses
results in $140,000 - a result more than zero. This means
that Brown Super can choose either the global asset approach
or the individual asset approach for the transfer of its
assets.
However, Brown Super cannot choose the global asset approach
to apply to some of its assets and the individual asset
approach to apply to the rest.
Consequences for CGT assets - global asset approach
197. A superannuation fund that qualifies for the global asset approach
may elect to treat those assets subject to the asset roll-over as
being transferred (or disposed of) to the continuing entity by
treating:
. the assets that would otherwise realise a capital gain as
being transferred at their cost base; and
. the assets that would otherwise realise a capital loss as
being transferred at their reduced cost base.
[Schedule 2, Part 1, item 1, subsection 310-55(1)]
198. The effect of these rules is that the transferred CGT assets will
have neither a capital gain nor a capital loss on their transfer.
199. For the continuing entity, the first element of the cost base and
reduced cost base of the transferred asset in its hands is taken to
be equal to the cost base and the reduced cost base respectively of
the asset just before its transfer (when it was still held by the
transferring entity). [Schedule 2, Part 1, item 1, subsections 310-
55(2) and (3)]
1.
Effort Super is a complying superannuation fund with 10
members. Effort Super enters into a deed of arrangement to
transfer all of its assets and members to Big Super, a
complying superannuation fund with 1,000 members.
At the time of the transfer of assets, Effort Super has
shares in Beagle Co whose total market value exceeds their
total cost base by $25,000; and shares in Rufus Co whose
total market value exceeds their total cost base by $50,000.
Effort Super also has shares in Ugly Duckling with an
unrealised loss of $100,000.
Because Effort Super's unrealised capital losses exceed its
unrealised capital gains, it can choose to roll over all the
capital gains and the capital losses on its shares to Big
Super. In effect, Effort Super will roll over a net
unrealised loss of $25,000 to Big Super.
200. The rules for the transfer of revenue assets are explained in
paragraphs 2.93 to 2.100.
Consequences for CGT assets - individual asset approach
201. The other method that a superannuation fund may use if it is in a
net capital loss position and it chooses not to use the global
asset approach is the individual asset approach. However, a fund
must use the individual asset approach if it is not in a net
capital loss position in relation to transferred assets. Under
this approach, the transferring entity may disregard all the
capital losses it realises, or it may choose to disregard some or
none of its capital losses. The choice as to what losses to
disregard is a matter for the transferring fund. Any capital gains
realised on transferred assets are not disregarded. [Schedule 2,
Part 1, item 1, subsection 310-60(1)]
. For example, the fund may choose not to disregard some
realised capital losses when these losses could be used to
offset any capital gains that may also be realised under
the merger. The fund could choose to disregard any
remaining capital losses that are realised under the
merger and transfer the attributes of those assets to the
receiving fund.
202. If the transferring fund uses the individual asset approach, the
capital proceeds received on the disposal or transfer of the assets
to the continuing entity that are subject to the roll-over will be
taken to be equal to the reduced cost base of the asset in the
hands of the transferring fund. [Schedule 2, Part 1, item 1,
subsections 310-60(2) to (4)]
1.
Green Super is a complying superannuation fund with
10,000 members. It holds various assets, some of which have
unrealised capital gains while others have unrealised
capital losses. The trustee of Green Super considers
merging with Yellow Super members. This merger would be
achieved by Green Super transferring its assets and 10,000
members to Yellow Super before being wound up.
Among its assets, Green Super owns 50,000 shares in Bull
Ltd, acquired on 18 July 2004.
The cost base for each of these shares is $2 (total cost
base of $100,000) and at the time of the transfer the shares
in Bull Ltd are each worth $5. The transfer of these shares
would therefore realise a capital gain of $150,000 for Green
Super.
. Total capital proceeds less total cost base equals total
capital gain.
. (50,000 shares × $5 capital proceeds) - (50,000 shares × $2
cost base) = $150,000 capital gain.
Green Super also owns 100,000 shares in Bear Ltd. These
shares were acquired on 28 September 2007. The reduced cost
base for each of these shares is $10 (total reduced cost
base of $1 million) and at the time of the transfer they are
worth $5 each. The transfer of these shares would therefore
realise a capital loss of $500,000 for Green Super.
. Total reduced cost base less total capital proceeds equals
total capital loss.
. (100,000 shares × $10 reduced cost base) - (100,000 shares ×
$5 notional capital proceeds) = $500,000 capital loss.
Green Super subsequently transfers its assets and members'
accounts to Yellow Super and is wound up.
The trustee of Green Super may choose either the global
asset approach or the individual asset approach as the fund
is in a net loss position ($350,000). The trustee chooses
the individual asset approach.
The trustee now has the choice either to transfer all or
realise some of the capital losses applicable to its Bear
Ltd shares. Suppose the trustee decides to realise some of
these losses to eliminate the capital gains arising on the
transfer of the Bull Ltd shares. The trustee would
therefore choose to realise the capital losses on 30,000
Bear Ltd shares by not choosing the roll-over for each of
these shares, which would produce a total capital loss of
$150,000. This would eliminate the $150,000 capital gain on
the Bull Ltd shares.
The trustee of Green Super would transfer the remaining
70,000 Bear Ltd shares to the trustee of Yellow Super and
choose the asset roll-over in relation to each of these
shares. Under the asset roll-over rules, the trustee of
Green Super is taken to receive capital proceeds for each of
these 70,000 shares equal to their reduced cost base of $10.
In this way, the trustee of Green Super has avoided any
capital gains on assets transferred as part of the merger by
not choosing the roll-over on some of the capital loss
assets. The trustee of Green Super chose the roll-over in
relation to the remaining capital loss assets to preserve
their losses under the merger - with the total capital
losses preserved being $350,000.
203. If the asset roll-over is chosen by the transferring superannuation
fund, the first element of the cost base and reduced cost base of
the corresponding received asset in the hands of the receiving
entity is taken to be an amount equal to the cost base and reduced
cost base, respectively, of the original asset in the hands of the
transferring fund just before the transfer of assets. [Schedule 2,
Part 1, item 1, subsections 310-60(4) and (5)]
204. A consequential amendment is made to ensure that, for CGT assets
transferred from the transferring entity to the continuing entity
that benefit from the roll-over, the 12 month ownership period
requirement for the CGT discount will commence from the date when
the transferring entity acquired such assets (see paragraph 2.118).
1.
Further to Example 2.9, for Yellow Super the first element
of the reduced cost base of the shares in Bear Ltd
transferred to Yellow Super would be $10. Suppose the cost
base of each of the shares in Bear Ltd that were transferred
to Yellow Super was $12 just before the transfer. For
Yellow Super, the first element of the cost base of each of
the Bear Ltd shares transferred to it would be $12.
As the capital gains on the shares in Bull Ltd were realised
under the merger, the first element of the cost base and
reduced cost base of each of the Bull Ltd shares transferred
to Yellow Super would be determined under Division 110 of
the ITAA 1997 as modified by Division 112 of the ITAA 1997.
Yellow Super will be taken to have acquired the shares in
Bear Ltd on 28 September 2007. The shares in Bull Ltd will
be acquired by Yellow Super on the day of their transfer
because they were not subject to the roll-over.
205. If the asset roll-over is not chosen by the transferring
superannuation fund, the fund will realise an overall loss on the
disposal of the assets. This loss may be able to be transferred to
the continuing fund under the loss transfer rules.
1.
Further to Example 2.10, Green Super may choose to dispose
of all its shares in Bull Ltd and Bear Ltd. In this case
Green Super would have a realised net loss on the assets to
be transferred equal to $350,000. Under the arrangement to
merge the funds, Green Super may transfer the $350,000 loss
to Yellow Super.
Consequences of the roll-over for revenue assets
206. CGT assets that are revenue assets may be transferred under an
arrangement that is eligible for the loss roll-over. A revenue
asset is defined in section 977-50 of the ITAA 1997 as an asset for
which a profit or loss on disposal or ceasing to own the asset is
taken into account in calculating assessable income other than as a
capital gain or loss and is neither trading stock nor a
depreciating asset.
207. The transferring fund will be able to choose the global asset
approach or the individual asset approach for the transfer of
revenue assets if the entity is in a net loss position in respect
of those assets. This choice reduces the compliance impact for the
transferring superannuation fund. [Schedule 2, Part 1, item 1,
subsection 310-50(2)]
208. The tax loss is worked out as if the current year ended at the
completion time of the transfer. The net loss position in respect
of CGT assets that are revenue assets is determined by subtracting
the amounts that would be included in the transferring fund's
assessable income as a result of the transfer from the amounts that
the entity would be able to deduct as a result of the transfer.
Where the result exceeds zero, the fund has a net loss on those
assets and may choose the global asset approach. [Schedule 2, Part
1, item 1, subsection 310-50(2)]
Global approach for revenue assets
209. Under the global asset approach, the transferring fund's gross
proceeds for the transfer of each revenue asset will be taken to be
the amount, the deemed proceeds, it would need to have received to
have no profit or loss from the transfer. This rule means that
there is no gain or loss for the transferring fund. [Schedule 2,
Part 1, item 1, subsection 310-65(1)]
210. The continuing fund will be taken to have paid an amount equal to
the deemed proceeds for the transferring fund for each revenue
asset received. These rules together provide the roll-over for
transferred revenue assets. [Schedule 2, Part 1, item 1,
subsection 310-65(2)]
1.
Further to Example 2.8, suppose Effort Super has bonds
issued by Beagle Co. The total market value of these bonds
is $245,000 and the total cost is $220,000, producing an
unrealised net gain of $25,000.
Effort Super also has a loan to Rufus Co. The market value
of the loan is $95,000 and its cost is $145,000, producing
an unrealised net loss of $50,000.
As there is a net revenue loss, Effort Super may elect to
roll-over the bonds and the loan asset under the global
asset approach to Big Super thereby rolling over its net
revenue loss of $25,000.
Big Super will be taken to have acquired the loan asset for
$145,000 and each bond for $220,000 divided by the number of
bonds (because all the bonds had been purchased by Effort
Super for the same cost).
Individual asset approach for revenue assets
211. Where the transferring fund is not in a net loss position in
respect of the transferred revenue assets, the fund must use the
individual asset approach, which has particular consequences for
the transferring entity and the continuing entity. [Schedule 2,
Part 1, item 1, subsections 310-50(2) and 310-70(1)]
212. The transferring entity may choose to disregard any tax loss
arising from the transfer event. In these cases, the transferring
entity's gross proceeds for the transfer event are taken to be the
amount (deemed proceeds) the transferring entity would need to have
received to have a nil profit and a nil loss for the event.
[Schedule 2, Part 1, item 1, subsections 310-70(1) and (2)]
213. The consequences for the continuing entity are that the entity is
taken to have paid an amount for the received asset at the time of
the transfer equal to the deemed proceeds of the transferring
entity. This rule effectively transfers the asset to the
continuing entity with its cost attributes from the transferring
entity. The deemed proceeds will then be the cost from which any
subsequent gain or loss to the continuing entity will be
calculated. [Schedule 2, Part 1, item 1, subsection 310-70(2)]
1.
Further to Example 2.12, Effort Super chooses the individual
asset approach rather than the global asset approach in
respect of the assets it transfers to Big Super.
Effort Super has a choice to roll over the unrealised loss
on the loan to Rufus Co. If Effort Super chooses to do so,
the loan asset would be taken to be transferred for an
amount equal to its cost of $145,000, thereby ensuring there
is a nil profit and a nil loss for Effort Super for the
transfer.
Big Super is taken to have paid an amount for the loan asset
equal to the amount deemed to have been received by Effort
Super for the asset (that is, $145,000). This rolls over
the unrealised revenue loss of $50,000 on the loan asset.
The bonds issued by Beagle Co that Effort Super owns would
be realised under the merger with Big Super so that Effort
Super would realise a capital gain of $25,000.
Further consequences for a transferring entity or receiving entity that is
a life insurance company
214. Where a complying superannuation/FHSA asset is transferred from a
life insurance company, or an asset (in relation to a complying
superannuation policy) is transferred to a life insurance company,
it is necessary to consider not just the tax consequences of the
transfer between separate entities, but also any deemed sales of
assets for market value under section 320-200 of the ITAA 1997.
These may arise when assets are transferred to and from the
complying superannuation/FHSA asset pools of life insurance
companies.
215. The amendments will provide that section 320-200 does not apply in
relation to asset realisations subject to the asset roll-over.
This is to ensure that the effect of the roll-over is not
unintentionally overridden by a deemed market value sale of the
asset. [Schedule 2, Part 1, item 1, subsection 310-75(1)]
216. Similarly, where the receiving entity is a life insurance company,
the relevant received assets will be taken to be complying
superannuation/FHSA assets of the company, and not be a life
insurance premium. This latter rule, which broadly resembles
sections 320-315 and 320-320 of the ITAA 1997 that apply to life
insurance business transfers, is to ensure that the Division 320
life insurance business taxation provisions do not override the
loss relief that these amendments provide. [Schedule 2, Part 1,
item 1, subsection 310-75(2)]
217. These modifications to the life insurance taxation rules ensure
that they apply appropriately in respect of rolled-over assets.
They will apply only to assets which are actually rolled over to
the life insurance company, and not to other transferred assets.
218. The combined effect of the two rules is to preserve the effect of
the roll-over, to ensure that assets with unrealised gains and
losses that accrued in a 15 per cent tax rate environment in the
transferring entity are rolled into the equivalently taxed
complying superannuation/FHSA asset pool of the recipient entity,
and to enable the rolled-over assets to be appropriately recognised
by the fee and charge mechanisms of Division 320 of the ITAA 1997.
Method for making the choice to transfer loss or roll-over asset
219. The transferring entity's choice to use a particular method for
calculating the losses transferred or assets subject to the roll-
over will be evidenced by the manner in which it completes its
income tax return for the income year in which the transfer occurs.
The choice of roll-over by the transferring entity will have
specific consequences for the continuing entity. However, both
parties to the transaction are not required to elect the roll-over.
Rather, it is expected that the eligibility for the loss relief
and the consequences for the continuing entity would be considered
by both parties during the negotiation of the transfer. [Schedule
2, Part 1, item 1, section 310-85]
220. Section 103-25 provides the mechanism for making elections in
respect of the CGT provisions. These rules will apply to the new
loss transfer and asset roll-over arrangements.
Consequences of the roll-over for depreciating assets
221. Superannuation funds may also hold assets that are depreciating
assets. The disposal of a depreciating asset (that is, the asset
is transferred to the continuing entity) will cause a balancing
adjustment event (as defined by section 40-295 of the ITAA 1997) to
occur. A balancing adjustment event may require the taxpayer
disposing of the depreciating asset to adjust their taxable income.
222. Where there is a difference between the asset's termination value
(that is, the final sale price) and its adjustable value (that is,
the original cost less the decline in value while it was held by
the taxpayer), a balancing adjustment may be assessable or
deductible under section 40-285 of the ITAA 1997. However, section
40-285 will not apply if the roll-over provided by section 40-340
of the ITAA 1997 applies. No balancing adjustment is required if
the section 40-340 roll-over applies.
223. An entity will be eligible for the section 40-340 roll-over if it
satisfies three conditions. These conditions are:
. there is a balancing adjustment event caused by the
disposal of a depreciating asset;
. the disposal involves a CGT event; and
. one of the CGT roll-overs listed in the table in
subsection 40-340(1) of the ITAA 1997 is chosen or
automatically applies.
224. The roll-over provided in section 40-340 allows the entity to defer
the balancing adjustment until a further balancing adjustment
event. This permits the continuing entity to claim deductions for
the depreciating asset which has been transferred to it. This
means that the transfer of the asset from the transferring entity
to the continuing entity will not extinguish the value of future
depreciation deductions already built into the value of members'
interests.
225. An amendment will be made to subsection 40-340(1) of the ITAA 1997
so that the transfer of a depreciating asset from the transferring
entity to the continuing entity under an arrangement to merge
superannuation funds for which loss relief is chosen qualifies for
the roll-over provided by section 40-340 of the ITAA 1997.
[Schedule 2, Part 2, item 2]
Application and transitional provisions
226. The amendments apply in relation to transfer events that happen on
or after 24 December 2008 and before 1 July 2011. [Schedule 2,
Part 3, item 11]
Repeals and savings provisions
Repeals
227. These amendments end on 30 June 2011. An automatic repeal
provision is included for these amendments. The repeal will occur
two years after the end date of the legislation. [Schedule 2, Part
4, items 12 to 21]
Savings provisions
228. These amendments will operate for a limited time and are then
automatically repealed. Savings provisions are inserted into the
amending law to ensure that the full legal and administrative
consequences are preserved for the period of its operation after
the provisions are repealed. [Schedule 2, Part 5, items 22 to 26]
Consequential amendments
229. A number of consequential amendments are made to ensure that the
new loss relief provisions interact appropriately with the existing
law.
230. The list of provisions which modify the cost base of a CGT asset is
amended to include the new CGT loss relief provisions. [Schedule
2, Part 2, item 3]
231. This Bill amends subsection 115-30(1) (special rules about
acquisition times for the CGT discount) of the ITAA 1997. This
amendment ensures that, for CGT assets transferred from the
transferring entity to the continuing entity for a roll-over under
Division 310, the 12-month ownership period requirement for the CGT
discount commences from the date when the transferring entity
acquired the asset. [Schedule 2, Part 2, item 4]
232. The general provisions which specify the capital proceeds for CGT
events A1, C2 and E2 are modified in respect of transactions
arising from the transfer of assets covered by the CGT loss roll-
over, as the roll-over rules specify the capital proceeds in those
cases. [Schedule 2, Part 2, items 5 to 8]
233. The provisions which specify the notice requirements to enable a
member in a fund to obtain a deduction for a personal contribution
are amended so that a member of a fund that has merged with a
continuing fund may provide the necessary notice. The rules which
provide for the variation of the notice are also amended.
[Schedule 2, Part 2, items 9 and 10]
Chapter 3
Exempt annuity business of life insurance companies
Outline of chapter
234. Schedule 3 to this Bill amends the Income Tax Assessment Act 1997
(ITAA 1997) to clarify the circumstances in which income derived by
life insurance companies in respect of immediate annuity business
qualifies as non-assessable non-exempt income.
Context of amendments
235. The income derived by life insurance companies in respect of
immediate annuity business is non-assessable non-exempt income.
Immediate annuity business is business that supports life insurance
policies that provide for an annuity that is currently payable.
This includes immediate annuity policies that are purchased with
rolled-over superannuation benefits.
236. The rationale for exempting life insurance companies in relation to
immediate annuity business is to prevent double taxation. That is,
as the policyholder is taxable on the annuity income received, the
life insurance company is exempt from tax.
237. The exemption for immediate annuity business applies only to income
that relates to immediate annuities that meet certain conditions
(the annuity conditions). The purpose of the annuity conditions is
to prevent the excessive deferral of tax on income derived by life
insurance companies that relates to immediate annuity policies.
238. The annuity conditions were transferred from the Income Tax
Assessment Act 1936 (ITAA 1936) to the ITAA 1997 in 2000. The
intention of the rewrite was to replicate the annuity conditions.
However, concerns have been raised that anomalies arise because of
modifications to the wording of the annuity conditions as a result
of that rewrite.
239. These concerns were compounded when the annuity conditions were
modified to reflect the Simplified Superannuation changes, which
commenced from the 2007-08 income year. One of those changes was
to make superannuation income streams exempt from tax in most
cases. Superannuation income streams are regulated under the
Superannuation Industry (Supervision) Act 1993. In these
circumstances, it is not appropriate to continue to apply the
annuity conditions to immediate annuity policies that provide for
superannuation income streams.
Summary of new law
240. The amendments will clarify the circumstances in which income
derived by life insurance companies in respect of immediate annuity
business qualifies as non-assessable non-exempt income.
241. First, from 1 July 2000, the amendments will ensure that the
annuity conditions in the ITAA 1997 are consistent with the former
annuity conditions in the ITAA 1936. To achieve this, the annuity
conditions have been rewritten to make the law clearer and to
clarify the circumstances in which the annuity conditions apply.
242. Second, from the 2007-08 income year, the amendments:
. ensure that the annuity conditions do not apply to
immediate annuity policies that provide for superannuation
income streams; and
. modify the annuity conditions to update terminology as a
consequence of the Simplified Superannuation changes.
Comparison of key features of new law and current law
|New law |Current law |
|With effect from |The income derived by |
|1 July 2000, the annuity |life insurance companies |
|conditions will be, |in respect of immediate |
|broadly, that: |annuity policies that |
|the annuity contract does|satisfy the annuity |
|not permit the residual |conditions is |
|capital value of the |non-assessable non-exempt|
|annuity to exceed, |income. |
|broadly, its purchase |The annuity conditions |
|price; |apply, broadly, to: |
|if the annuity contract |an annuity purchased with|
|provides that the annuity|a rolled-over |
|is payable until the end |superannuation benefit |
|of a term of years |before 10 December 1987; |
|certain, then the |and |
|contract does not permit |any annuity (including an|
|the total commutation |annuity that provides for|
|payments to exceed, |a superannuation income |
|broadly, the remaining |stream) purchased after |
|amount of the annuity's |9 December 1987. |
|purchase price; |The current annuity |
|if the annuity contact: |conditions are, broadly, |
|provides that the annuity|that: |
|is payable until the |the annuity must be |
|death of a person (or of |payable until the later |
|the death of the last of |of the death of a person |
|two or more persons to |(or of the death of the |
|die) or until the end of |last of two or more |
|a term of years certain; |persons to die) and the |
|and |end of a fixed term; |
|permits one of more |the annuity contract does|
|commutation payments to |not permit the total |
|become payable before the|commutation payments to |
|end of a term of years |exceed, broadly, the |
|certain, |remaining amount of the |
|then the contract does |annuity's purchase price;|
|not permit the total of | |
|those commutation |the annuity contract does|
|payments to exceed, |not permit the residual |
|broadly, the remaining |capital value of the |
|amount of the annuity's |annuity to exceed, |
|purchase price; and |broadly, its purchase |
|there is no unreasonable |price; and |
|deferral of payments of |there is no unreasonable |
|annuity income to |deferral of payments of |
|policyholders, having |annuity income to |
|regard to certain |policyholders, having |
|specified matters. |regard to certain |
|With effect from the |specified matters. |
|2007-08 income year, the | |
|annuity conditions will | |
|not apply to immediate | |
|annuity policies that | |
|provide for | |
|superannuation income | |
|streams. | |
Detailed explanation of new law
243. The income derived by life insurance companies in respect of
immediate annuity policies that satisfy the annuity conditions is
non-assessable non-exempt income.
244. The annuity conditions apply, broadly, to:
. an annuity purchased with a rolled-over superannuation
benefit before 10 December 1987; and
. any annuity (including an annuity that provides for a
superannuation income stream) purchased after
9 December 1987.
245. The amendments:
. from 1 July 2000, clarify the operation of the annuity
conditions; and
. from the 2007-08 income year:
- ensure that the annuity conditions do not apply to
immediate annuity policies that provide for
superannuation income streams; and
- modify the annuity conditions to update terminology as a
consequence of the Simplified Superannuation changes.
Clarify the operation of the annuity conditions (from 1 July 2000)
246. The annuity conditions are being rewritten, with effect from
1 July 2000, to clarify their operation and ensure that they are
consistent with the former annuity conditions in the ITAA 1936.
247. These changes are a rewrite of the former annuity conditions in the
ITAA 1936. Changes to the wording or style used in the rewritten
provisions are not intended to change the law as it operated prior
to 1 July 2000.
Annuity condition 1
248. The first annuity condition applies if there is a residual capital
value in relation to an immediate annuity. [Schedule 3, items 1
and 2, subparagraphs 320-246(1)(e)(ii) and (iii) and item 1 in the
table in subsection 320-246(3)]
249. The term 'residual capital value' was formerly defined in
section 27A of the ITAA 1936 to mean, broadly, the amount that is
payable under an annuity contract when the annuity contract is
terminated or comes to an end.
250. The condition is that the contract under which the annuity is
payable does not permit the residual capital value to exceed the
annuity's purchase price. [Schedule 3, item 2, item 1 in the table
in subsection 320-246(3)]
Annuity condition 2
251. The second annuity condition applies if the contract under which
the annuity is payable provides that the annuity is payable until
the end of a term of years certain - that is, broadly, for the
fixed term. [Schedule 3, items 1 and 2, subparagraphs 320-
246(1)(e)(ii) and (iii) and item 2 in the table in subsection 320-
246(3)]
252. The condition is that the contract does not permit the total of the
amounts paid for the annuity's commutation (whether in whole or in
part) to exceed the annuity's reduced purchase price. [Schedule 3,
item 2, item 2 in the table in subsection 320-246(3)]
253. A commutation is essentially the process of converting an annuity
into a lump sum.
254. The term 'reduced purchase price' was formerly defined in
section 27A of the ITAA 1936 to mean, broadly, the purchase price
of the annuity to the extent that it has not been treated for
income tax purposes as having been effectively returned to the
policyholder in annuity payments that have been paid.
Annuity condition 3
255. The third annuity condition applies if the contract under which the
annuity is payable:
. provides that the annuity is payable until the later of:
- the death of a person (or of the death of the last of
two or more persons to die); or
- the end of a term of years certain; and
. permits one or more commutation payments to become payable
before the end of a term of years certain for the
annuity's commutation (whether in whole or in part).
[Schedule 3, items 1 and 2, subparagraphs 320-246(1)(e)(ii) and
(iii) and item 3 in the table in subsection 320-246(3)]
256. The condition is that the contract does not permit the total of the
commutation payments that may become payable before the end of the
term of years certain (broadly, before the end of the fixed term
period of the annuity) to exceed the annuity's reduced purchase
price. [Schedule 3, item 2, item 3 in the table in subsection 320-
246(3)]
Annuity condition 4
257. The fourth annuity condition applies to all immediate annuity
contracts which are subject to the annuity conditions.
[Schedule 3, items 1 and 2, subparagraphs 320-246(1)(e)(ii) and
(iii) and item 4 in the table in subsection 320-246(3)]
258. The condition is that there is no unreasonable deferral of the
payments of the immediate annuity, having regard to:
. to the extent to which the payments depend on the returns
of the investment of the assets of the life insurance
company paying the annuity - when the payments are made
and when those returns are derived;
. to the extent to which the payments do not depend on those
returns - the relative sizes of the annual totals of the
payments from year to year; and
. any other relevant factors.
[Schedule 3, item 2, item 4 in the table in subsection 320-246(3)]
Annuity conditions do not apply to superannuation income streams (from the
2007-08 income year)
259. The purpose of the annuity conditions is to prevent the excessive
deferral of tax on income derived by life insurance companies that
relates to immediate annuity policies.
260. As a result of the Simplified Superannuation changes,
superannuation income streams are exempt from tax in most cases.
Superannuation income streams are regulated under the
Superannuation Industry (Supervision) Act 1993.
261. In these circumstances the annuity conditions will cease to apply
to immediate annuity policies that provide for superannuation
income streams.
262. Therefore, with effect from the 2007-08 income year, an exempt life
insurance policy will include, so far as is relevant, a life
insurance policy that provides for an immediate annuity that:
. was purchased on or before 9 December 1987;
. is a superannuation income stream; or
. satisfies the relevant approved annuity conditions.
[Schedule 3, items 4 and 5, paragraph 320-246(1)(e)]
Update terminology to reflect the Simplified Superannuation changes (from
the 2007-08 income year)
263. A number of terms which are used in the annuity conditions were
modified when the Simplified Superannuation changes were
introduced.
264. Therefore, with effect from the 2007-08 income year, the annuity
conditions are modified to reflect these changes in terminology.
That is:
. in item 1 in the table in subsection 320-246(3), the
reference to section 27A of the ITAA 1936 is changed to
section 27H of the ITAA 1936; and
. in items 2 and 3 in the table in subsection 320-246(3),
the references to reduced purchase price (within the
meaning of section 27A of the ITAA 1936) are changed to
purchase price (within the meaning of section 27H of the
ITAA 1936), reduced by the sum of the deductible amounts
excluded from assessable income under that section.
[Schedule 3, items 6 to 8, subsection 320-246(3)]
Application and transitional provisions
Amendments which apply from 1 July 2000
265. The amendments to rewrite the annuity conditions to clarify their
operation and ensure that they are consistent with the former
annuity conditions in the ITAA 1936 commence from 1 July 2000 -
that is, from the commencement of the new taxation regime for
taxing life insurance companies.
266. These amendments are beneficial to life insurance companies that
conduct immediate annuity business and to immediate annuity
policyholders as they address concerns that unintended anomalies
could arise under the current wording of the annuity conditions.
During the consultation process on these amendments, key
stakeholders sought for the amendments to commence from 1 July 2000
primarily to reduce compliance costs.
Amendments which apply from the 2007-08 income year
Annuity conditions do not apply to superannuation income streams
267. The amendments to ensure that the annuity conditions do not apply
to immediate annuity policies that provide for superannuation
income streams apply from the 2007-08 income year - that is, from
the commencement of the Simplified Superannuation changes.
[Schedule 3, item 11]
268. These amendments are beneficial to life insurance companies that
conduct immediate annuity business and to policyholders who receive
superannuation income streams as they remove an additional layer of
rules that need to be complied with.
Update terminology to reflect the Simplified Superannuation changes
269. The amendments to modify the annuity conditions to update
terminology as a consequence of the Simplified Superannuation
changes apply from the 2007-08 income year - that is, from the
commencement of the Simplified Superannuation changes.
[Schedule 3, item 11]
270. These amendments are of a minor technical nature to ensure that the
income tax law operates effectively.
Consequential amendments
271. Consequential amendments will repeal the following amendments:
. a technical correction that was made in 2006 to
paragraph 320-246(5)(a);
. amendments that were made in 2007 as part of the
Simplified Superannuation changes to:
- modify paragraph 320-246(1)(e) (including an amendment
that inserted subparagraph 320-246(1)(e)(iv));
- modify paragraph 320-246(4)(a); and
- insert section 320-246 in the Income Tax (Transitional
Provisions) Act 1997.
[Schedule 3, items 3, 9 and 10]
Chapter 4
Deductible gift recipients
Outline of chapter
272. Schedule 4 to this Bill amends the Income Tax Assessment Act 1997
(ITAA 1997) to update the list of deductible gift recipients (DGRs)
to include two new entities, and change the name of one entity.
Context of amendments
273. The income tax law allows taxpayers who make gifts of $2 or more to
DGRs to claim income tax deductions. To be a DGR, an organisation
must fall within one of the general categories set out in Division
30 of the ITAA 1997, or be listed by name under that Division.
274. DGR status assists eligible funds and organisations to attract
public support for their activities.
Summary of new law
275. The amendments add two organisations to the list of specifically
listed DGRs, and change the name of one. Gifts of $2 or more that
are made to organisations that are specifically listed, are tax
deductible.
Detailed explanation of new law
276. Schedule 4 allows deductions for gifts to the organisations listed
in Table 4.1. [Schedule 4, item 3, items 3.2.12 and 3.2.13 in the
table in subsection 30-40(2)]
1.
|Name of Fund |Date of effect |Special conditions|
|The Green |24 June 2009 |Gifts to this fund|
|Institute | |can be made after |
|Limited | |23 June 2009. |
|United States |27 July 2009 |Gifts to this fund|
|Studies Centre | |can be made after |
|Limited | |26 July 2009. |
277. The Green Institute Limited provides a forum for education,
exchange, research and debate on the principles of environment,
social justice, non-violence and democracy. The key aim of the
Green Institute is to promote those principles through training,
networking, and research and policy development.
278. The United States Studies Centre Limited was established to promote
friendship, cooperation and understanding between the peoples of
the United States, Australia and New Zealand; and strengthen
relations between these countries through creating a better
understanding of their cultures and societies. It aims to
research, debate and create new knowledge on American political,
economic, social and cultural issues.
279. Schedule 4 changes the name of the organisation listed in
table 4.2. [Schedule 4, item 1, item 2.2.21 in the table in
subsection 30-25(2)]
1.
|Current name of |New name of fund |Date of effect |
|fund | | |
|Dymocks Literacy |Dymocks |4 June 2009 |
|Foundation |Children's | |
|Limited |Charities Limited| |
Application and transitional provisions
280. The amendments listing the organisations named in Table 4.1 apply
from the dates of effect shown in the table.
Consequential amendments
281. A number of changes have been made to update the index to include
the new entities. [Schedule 4, items 2, 4 and 5, section 30-315]
Chapter 5
Income Recovery Subsidy for the North Western Queensland floods
Outline of chapter
282. Schedule 5 to this Bill amends the Income Tax Assessment Act 1997
(ITAA 1997) to ensure that the Income Recovery Subsidy for the
North Western Queensland floods is exempt from income tax and to
ensure the Subsidy is not included in 'separate net income' for the
purposes of calculating an entitlement to certain tax offsets.
Context of amendments
283. The Income Recovery Subsidy for the North Western Queensland floods
was announced as an emergency measure by the Minister for Families,
Housing, Community Services and Indigenous Affairs in Parliament on
25 February 2009.
284. The Income Recovery Subsidy is available to Australian residents
over 16 years of age, who have experienced a loss of income as a
direct result of the North Western Queensland Floods.
285. The Subsidy will compliment the range of services, payments and
assistance already available to those affected by these floods.
286. This measure will retrospectively exempt from income tax, payments
made in the 2008-09 income year. The payment could be claimed
after 24 February 2009.
287. Such payments would also normally be included in the calculation of
'separate net income'. The calculation of separate net income can
affect a taxpayer's eligibility for certain tax offsets.
288. Exempting these payments from income tax and separate net income
will lessen the financial hardship experienced by those individuals
and communities affected by the North Western Queensland floods of
January and February 2009.
Summary of new law
289. This measure provides that no income tax will be paid by recipients
on the receipt of the Income Recovery Subsidy in respect to the
North Western Queensland Floods. This measure will apply
retrospectively for the 2008-09 income year.
290. This measure amends:
. subsection 159J(6) of the Income Tax Assessment Act 1936
(ITAA 1936) (as it existed prior to 1 July 2009) to
exclude the Income Recovery Subsidy from the definition of
'separate net income'; and
. section 51-30 of the ITAA 1997 to list the Income Recovery
Subsidy as exempt from income tax.
Comparison of key features of new law and current law
|New law |Current law |
|The Income Recovery |Under the current law, |
|Subsidy for the North |payments made to |
|Western Queensland floods|recipients of the Income |
|is expressly exempt from |Recovery Subsidy for the |
|income tax. |North Western Queensland |
| |floods may be subject to |
| |income tax. |
Detailed explanation of new law
Exclude the Income Recovery Subsidy from the definition of separate net
income
291. Section 159J of the ITAA 1936 (as it existed prior to 1 July 2009)
provides that a taxpayer may be eligible to an offset of tax when
they contribute to the maintenance of a dependant person, but that
the amount of that offset will be reduced as a dependant's separate
net income increases.
292. The amendment to subsection 159J(6) of the ITAA 1936 will exclude
the Income Recovery Subsidy from the definition of separate net
income. [Schedule 5, item 1]
293. The amendment will mean that an individual otherwise entitled to an
offset under section 159J of the ITAA 1936, will still be entitled
to the same offset, despite any Income Recovery Subsidy received by
their dependants.
Exempt the Income Recovery Subsidy from income tax
294. Section 51-30 of the ITAA 1997 lists welfare recipients and
payments that are exempt from income tax.
295. The amendment to section 51-30 of the ITAA 1997 will make the
Income Recovery Subsidy exempt from income tax. [Schedule 5, item
3, item 5.4 in the table in section 51-30]
296. Section 11-15 of the ITAA 1997 is an index of income which is
exempt from income tax only if it is derived by certain entities.
This index will be amended to include the Income Recovery Subsidy
as an exempt payment. [Schedule 5, item 2, section 11-15]
Application and transitional provisions
297. This measure applies retrospectively for the 2008-09 income year.
298. As such, these payments will be subject to the provisions of the
ITAA 1997 dealing with amounts of exempt income.
Chapter 6
Excise manufacture and spirits
Outline of chapter
299. Schedule 6 to this Bill amends the Excise Act 1901 (the Excise Act)
to specifically deem the blending of spirits to produce spirit as
excise manufacture for the purposes of the Excise Act.
300. This is necessary for imported high strength neutral spirit, as it
currently derives its concessional duty treatment (that is, a
'free' rate of excise duty) from being blended with domestic high
strength neutral spirit and entering the excise system.
Context of amendments
301. 'Excise manufacture' is the production or manufacture in Australia,
of goods specified in the Schedule to the Excise Tariff Act 1921
(Excise Tariff). 'Manufacture' is taken to include a process that
involved the provision of knowledge, the application of skills,
experiences or services of labour which results in the conversion
of materials into a saleable commodity. The commodity must be
different from the inputs which went into making it.
302. The concessional spirits regime is a mechanism under the Excise
Tariff which allows domestic high strength neutral spirit to be
delivered into the domestic market at a 'free' rate of duty. This
is generally high strength neutral spirit for 'a specified
industrial, manufacturing, scientific, medical, veterinary or
educational purpose'. There is no mechanism which allows imported
high strength neutral spirit to be directly delivered into the
domestic market without payment of duty.
303. Currently, importers of high strength neutral spirit blend or mix
imported product with domestic excisable high strength neutral
spirit. In the case of imported high strength neutral spirit, this
blending results in its transfer into the excise system and the
extinguishment of any customs liability other than any ad valorem
component that must be paid. The entirety of the excisable high
strength neutral spirit blend, which includes the imported
component, is then delivered into the domestic market at a 'free'
rate of duty under the concessional spirit regime.
304. There are provisions in the Excise Act which specifically deem the
blending of fuel to constitute excise manufacture. However, there
is no explicit provision in the Excise Act to ensure that blending
spirits to produce spirit is excise manufacture. This Bill amends
the Excise Act by inserting an equivalent provision to ensure that
blending spirits, including imported and domestic high strength
neutral spirit, to produce spirit constitutes excise manufacture.
Summary of new law
305. The new subsections 77FM(1) and (4) of the Excise Act have a
similar effect to section 77G, which relates to fuel blending, and
deems spirit blending to produce spirit to constitute manufacture.
This will mean blending which results in an item that is
classifiable to item 3 of the Excise Tariff (spirits) is excise
manufacture. This will cover the blending of spirits for an
industrial, manufacturing, scientific, medical, veterinary or
educational purpose.
306. The new subsections 77FM(2) and (3) have a similar effect to
subsections 77H(3) and (4), relating to fuel blending exemptions,
and allows the Commissioner of Taxation (Commissioner) to make
determinations by legislative instrument that exempt certain
activities from constituting excise manufacture.
Comparison of current and new law
|New law |Current law |
|Subsections 77FM(1) and |There is no equivalent |
|(4) specifically deem the|provision in the Excise |
|blending of spirits to |Act for spirits. |
|produce spirit to | |
|constitute excise | |
|manufacture. | |
|Subsections 77FM(2) and |There is no equivalent |
|(3) allow the |provision in the Excise |
|Commissioner to exclude |Act for spirits. |
|certain activities from | |
|constituting excise | |
|manufacture by | |
|legislative instrument. | |
Detailed explanation of new law
307. The new subsections 77FM(1) and (4) deem spirit blending to produce
spirit to constitute manufacture. This means that blending
resulting in a spirit that is classifiable to item 3 of the Excise
Tariff is excise manufacture. This includes spirits for an
industrial, manufacturing, scientific, medical, veterinary or
educational purpose. This will maintain the status quo for the
concessional spirits regime and ensure that blending of spirits to
produce spirits for industrial, manufacturing, scientific, medical,
veterinary or educational purposes is delivered into the domestic
market at a 'free' rate of duty.
308. The new subsections 77FM(2) and (3) allow the Commissioner to make
determinations by legislative instrument that exempt certain
activities from constituting excise manufacture. Any determination
made will be a legislative instrument under the Legislative
Instruments Act 2003. Excluding blending operations via a
legislative instrument prevents the Excise Act from becoming
unnecessarily complex. Making a determination will ensure that
certain approved end users of spirits will not fall into the excise
system and then be subject to licensing requirements. The sorts of
blending that could be covered by the determination include where
incidental or remnant blending occurs in a tank or container.
Application and transitional provisions
309. The amendments commence from the date of Royal Assent.
Index
Schedule 1: Abolishing trust cloning and providing a CGT roll-over for
certain trusts
|Bill reference |Paragraph |
| |number |
|Item 1, subsection 104-55(5) and item 2, |1.14 |
|subsection 104-60(5) | |
|Items 3 and 11 |1.107 |
|Item 4, subsection 40-340(1) |1.83 |
|Item 5, section 109-55 |1.113 |
|Item 6, section 112-54A |1.110 |
|Item 7, section 112-150 |1.111 |
|Item 8, subsection 115-30(1) |1.112 |
|Item 9, section 126-220 |1.21 |
|Item 9, subsection 126-225(1) |1.23 |
|Item 9, paragraph 126-225(1)(b) |1.42 |
|Item 9, subparagraph 126-225(1)(c)(i) |1.46 |
|Item 9, subparagraph 126-225(1)(c)(ii) |1.47 |
|Item 9, subparagraph 126-225(1)(c)(iii) |1.49 |
|Item 9, subsection 126-225(2) |1.68 |
|Item 9, subsection 126-225(3) |1.26 |
|Item 9, subsection 126-230(1) |1.70 |
|Item 9, subsection 126-230(2) |1.28 |
|Item 9, subsection 126-230(3) |1.31 |
|Item 9, subsection 126-230(4) |1.38 |
|Item 9, subsection 126-235(1) |1.51 |
|Item 9, subsection 126-235(2) |1.52 |
|Item 9, subsection 126-235(3) |1.53 |
|Item 9, paragraph 126-235(3)(c) |1.55 |
|Item 9, subsection 126-235(4) |1.56 |
|Item 9, subsection 126-235(5) |1.60 |
|Item 9, subsection 126-240(1) |1.74 |
|Item 9, subsection 126-240(2) |1.75 |
|Item 9, subsection 126-240(3) |1.69, 1.78, |
| |1.80 |
|Item 9, subsection 126-240(4) |1.76 |
|Item 9, subsection 126-245(1) |1.87 |
|Item 9, subsections 126-245(2) and (4) |1.88 |
|Item 9, subsections 126-245(3) and (4) |1.90 |
|Item 9, subsection 126-245(5) |1.95 |
|Item 9, subsection 126-245(6) |1.96 |
|Item 9, section 126-250 |1.98 |
|Item 9, subsection 126-250(3) |1.99 |
|Item 9, section 126-255 |1.94 |
|Item 9, subsection 126-260(1) |1.101 |
|Item 9, subsection 126-260(2) |1.102 |
|Item 9, subsections 126-260(3) and (4) |1.103 |
|Item 9, subsection 126-260(5) |1.104 |
|Item 9, subsection 126-260(6) |1.105 |
|Item 9, subsection 126-260(7) |1.106 |
|Item 10, subsection 995-1(1) |1.47 |
|Item 12 |1.108 |
|Item 13 |1.109 |
|Items 14 and 15, subsection 184-1(2) of the |1.18 |
|GST Act; and items 19 and 20, subsection | |
|960-100(2) | |
|Item 16, subsection 104-10(2), item 17, |1.18 |
|subsection 104-55(1) and item 18, subsection| |
|104-60(1) | |
Schedule 2: Loss relief for merging superannuation funds
|Bill reference |Paragraph |
| |number |
|Part 1, item 1, Division 310 |2.13 |
|Part 1, item 1, sections 310-10, 310-15, |2.19 |
|310-20 and 310-45 | |
|Part 1, item 1, subsections 310-10(1) and |2.20 |
|(2) | |
|Part 1, item 1, subsections 310-10(1), |2.16 |
|310-15(1), 310-20(1) and 310-45(1) | |
|Part 1, item 1, subsection 310-10(2) and |2.21 |
|section 310-30 | |
|Part 1, item 1, subsection 310-10(3) |2.22 |
|Part 1, item 1, subsection 310-10(5) |2.24, 2.26 |
|Part 1, item 1, subsection 310-15(1) |2.35 |
|Part 1, item 1, subsection 310-15(2) |2.37 |
|Part 1, item 1, subsections 310-15(2) to (5)|2.36 |
|Part 1, item 1, subsection 310-20(1) |2.41 |
|Part 1, item 1, subsection 310-20(2) |2.43 |
|Part 1, item 1, subsections 310-20(2) to (5)|2.42 |
|Part 1, item 1, section 310-25 |2.46 |
|Part 1, item 1, subsection 310-30(1) |2.48 |
|Part 1, item 1, subsection 310-30(2) |2.49 |
|Part 1, item 1, subsection 310-30(3) |2.50 |
|Part 1, item 1, subsection 310-35(1) |2.51 |
|Part 1, item 1, subparagraph 310-35(1)(b)(i)|2.52 |
|Part 1, item 1, paragraphs 310-35(2)(a) and |2.54 |
|(c) | |
|Part 1, item 1, paragraph 310-35(2)(b) |2.53 |
|Part 1, item 1, subsection 310-40(1) |2.55 |
|Part 1, item 1, subsection 310-40(2) |2.56 |
|Part 1, item 1, paragraphs 310-40(2)(a) and |2.57 |
|(c) | |
|Part 1, item 1, subsection 310-45(1) |2.58 |
|Part 1, item 1, paragraph 310-45(1)(a) |2.17 |
|Part 1, item 1, subsection 310-45(2) |2.60, 2.61 |
|Part 1, item 1, subsections 310-45(2) to (4)|2.70 |
|Part 1, item 1, paragraph 310-45(2)(b) |2.71, 2.73 |
|Part 1, item 1, paragraph 310-45(2)(c) |2.76, 2.77 |
|Part 1, item 1, paragraph 310-45(2)(c) and |2.75 |
|subsection 310-45(4) | |
|Part 1, item 1, subsection 310-45(3) |2.62 |
|Part 1, item 1, subsection 310-45(4) |2.67, 2.72 |
|Part 1, item 1, subsection 310-45(5) |2.69, 2.74, |
| |2.79 |
|Part 1, item 1, subsection 310-50(1) |2.81, 2.82, |
| |2.83 |
|Part 1, item 1, subsection 310-50(2) |2.94, 2.95 |
|Part 1, item 1, subsections 310-50(2) and |2.98 |
|310-70(1) | |
|Part 1, item 1, subsection 310-55(1) |2.84 |
|Part 1, item 1, subsections 310-55(2) and |2.86 |
|(3) | |
|Part 1, item 1, subsection 310-60(1) |2.88 |
|Part 1, item 1, subsections 310-60(2) to (4)|2.89 |
|Part 1, item 1, subsections 310-60(4) and |2.90 |
|(5) | |
|Part 1, item 1, subsection 310-65(1) |2.96 |
|Part 1, item 1, subsection 310-65(2) |2.97 |
|Part 1, item 1, subsections 310-70(1) and |2.99 |
|(2) | |
|Part 1, item 1, subsection 310-70(2) |2.100 |
|Part 1, item 1, subsection 310-75(1) |2.102 |
|Part 1, item 1, subsection 310-75(2) |2.103 |
|Part 1, item 1, section 310-85 |2.106 |
|Item 1, subsection 310-45(4) |2.78 |
|Part 2, item 2 |2.112 |
|Part 2, item 3 |2.117 |
|Part 2, item 4 |2.118 |
|Part 2, items 5 to 8 |2.119 |
|Part 2, items 9 and 10 |2.120 |
|Part 3, item 11 |2.113 |
|Part 4, items 12 to 21 |2.114 |
|Part 5, items 22 to 26 |2.115 |
Schedule 3: Exempt annuity business of life insurance companies
|Bill reference |Paragraph |
| |number |
|Items 1 and 2, |3.15 |
|subparagraphs 320-246(1)(e)(ii) and (iii) | |
|and item 1 in the table in | |
|subsection 320-246(3) | |
|Items 1 and 2, |3.18 |
|subparagraphs 320-246(1)(e)(ii) and (iii) | |
|and item 2 in the table in subsection | |
|320-246(3) | |
|Items 1 and 2, |3.22 |
|subparagraphs 320-246(1)(e)(ii) and (iii) | |
|and item 3 in the table in subsection | |
|320-246(3) | |
|Items 1 and 2, |3.24 |
|subparagraphs 320-246(1)(e)(ii) and (iii) | |
|and item 4 in the table in | |
|subsection 320-246(3) | |
|Item 2, item 1 in the table in subsection |3.17 |
|320-246(3) | |
|Item 2, item 2 in the table in subsection |3.19 |
|320-246(3) | |
|Item 2, item 3 in the table in subsection |3.23 |
|320-246(3) | |
|Item 2, item 4 in the table in subsection |3.25 |
|320-246(3) | |
|Items 3, 9 and 10 |3.38 |
|Items 4 and 5, paragraph 320-246(1)(e) |3.29 |
|Items 6 to 8, subsection 320-246(3) |3.31 |
|Item 12 |3.34, 3.36 |
Schedule 4: Deductible gift recipients
|Bill reference |Paragraph |
| |number |
|Item 5 |4.8 |
|Items 10, 20 and 25 |4.10 |
|Items 15, 20 and 25 |4.5 |
Schedule 5: North Western Queensland floods
|Bill reference |Paragraph |
| |number |
|Item 1 |5.11 |
|Item 2 |5.15 |
|Item 3 |5.14 |
