Changes to strengthen the equity and fairness of the capital gains tax (CGT) law were announced today by the Minister for Revenue and Assistant Treasurer, Senator Helen Coonan.
“The changes will increase access to the concessional treatment of certain capital gains and will particularly benefit investors, small businesses and charities”, Senator Coonan said.
The first change will improve access to the small business CGT concessions.
“In 1999 the Government simplified, streamlined and extended the small business CGT concessions. These concessions recognise the vital role of small business in creating jobs for Australia’s future by providing small business people with access to funds for expansion or retirement,” Senator Coonan said.
The change will ensure that small businesses operating through discretionary trusts can more readily benefit from the CGT concessions.
Currently, when tax exempt entities or deductible gift recipients are potential beneficiaries of the trust, the assets of the beneficiary are taken to belong to the small business. If the total of the assets controlled by the business exceeds $5 million, it cannot access the small business CGT concessions.
“Many small businesses that operate through a discretionary trust include charitable organisations as a beneficiary,” Senator Coonan said.
“The changes will ensure those businesses are not prevented from accessing the CGT concessions simply because of the assets held by that charity. This will encourage small businesses to continue to include charities as beneficiaries”, Senator Coonan said.
The second change will improve the operation of the CGT law as it relates to business restructuring.
Currently a CGT roll-over exists to ensure that tax considerations are not an impediment to restructuring a business by demerging. The roll-over aims to preserve the pre-CGT status of ownership interests in entities that demerge. The change will ensure the preservation of the pre-CGT treatment of interests received as a result of a demerger.
The final change will ensure investors who receive shares in certain friendly societies that demutualise get the same benefits of a CGT roll-over as other taxpayers in similar circumstances.
“The amendments will overcome concerns raised by the tax profession and industry. This approach demonstrates, in a practical way, the Government’s responsiveness to suggestions directed at improving the tax system. The Government has listened and acted,” Senator Coonan said.
The Government will consult further with the tax profession and industry in developing legislation to implement these changes.
Additional technical detail relating to these changes is attached (see Attachment A).
ATTACHMENT A
Small Business CGT Concessions
There are four small business CGT concessions. These are:
- the small business 15 year exemption;
- the small business 50% active asset reduction;
- the small business retirement exemption; and
- the small business roll-over.
The small business CGT concessions apply only if, among other things, the net value of the CGT assets of an entity and of other entities that it controls is $5 million or less. If a small business entity is treated as controlling a discretionary trust, assets of all beneficiaries of the trust must be taken into account. For example, if a charitable institution is a potential beneficiary of the trust, assets of the charity are taken to belong to the small business entity for this purpose.
The control test for discretionary trusts will be amended with effect from 21 September 1999 – that is, the date from which the simplified, streamlined and extended small business CGT concessions first applied.
Distributions to tax exempt entities and tax deductible gift recipients will now be ignored for the purposes of applying the new control test for discretionary trusts.
Under the new control test, for the 2002-03 and later income years, an entity will be taken to control a discretionary trust only if the distributions made by the trust to the entity and/or its small business CGT associates during the test year are at least 40 per cent of the total distributions of the trust for that year (subject to an existing discretion available to the Commissioner of Taxation where the control percentage is between 40 per cent and 50 per cent).
Consistent with other patterns of distribution tests in the income tax law, the test year will be determined by considering distributions made by the trust to the entity and/or its small business CGT associates in the income year immediately before the year in which the relevant CGT event happened and in each of the three income years before that. The test year will be the income year during which those distributions were the highest.
As a transitional measure, for the 2001-02 and prior income years, an entity will be taken to control a discretionary trust if the distributions made by the trust to the entity and/or its small business CGT associates in the income year in which the relevant CGT event happened are at least 40 per cent of the total distributions of the trust for that year (subject to the Commissioner’s existing discretion where the control percentage is between 40 per cent and 50 per cent).
CGT Roll-Over for Demergers
The CGT roll-over for demergers facilitates the demerging of entities by ensuring that tax considerations are not an impediment to restructuring a business. The roll-over aims to preserve the pre-CGT status of ownership interests in entities that demerge.
The changes being announced today will ensure that CGT event K6 does not apply to interests received as the result of a demerger when it would not have applied to the corresponding interests before the demerger. The changes will ensure that the demerger provisions operate as intended and therefore will apply from the date of commencement of those provisions – that is, from 1 July 2002.
Demutualisation of Friendly Societies that Carry on Life Insurance Business
Special provisions in the income tax law apply to taxpayers who receive shares in insurance companies that demutualise. Broadly, those provisions set a cost base for shares received in the demutualised entity and allow a CGT roll-over until the actual disposal of those shares.
These provisions ensure that tax considerations are not an impediment to mutual insurance companies demutualising. However, as a result of technicalities in the income tax law, friendly societies that principally carry on life insurance business are denied access to these special provisions.
The amendments will ensure that these special provisions apply to taxpayers
who receive shares in connection with the demutualisation of friendly societies
that principally carry on life insurance business and that have never issued
shares. These changes will apply to demutualisations on or after 1 July 2000.
This will ensure that the taxpayers who have received shares in friendly societies
that have already demutualised get the same benefits as other taxpayers in similar
circumstances.