16 October 2007

Changes to Market Value Substitution Rule for Widely Held Entities

The Minister for Revenue and Assistant Treasurer, Peter Dutton, today announced changes to the capital gains tax (CGT) legislation that will reduce compliance costs for taxpayers when an asset, such as a share in a company, is cancelled or otherwise comes to an end.

The market value substitution rule will be amended so that it no longer applies when CGT event C2 (about cancellations and similar endings) occurs in relation to interests in widely held entities.  Under the existing law, the market value substitution rule replaces the capital proceeds actually received with the market value of the asset that has to come to an end, where the capital proceeds are more or less than the asset’s market value. 

The changes will ensure that taxpayers are not taxed on gains that are calculated with respect to an amount not actually received. This can occur, for example, where a share price is set in advance of the share cancellation. 

‘The proposed amendment will simplify arrangements for taxpayers and provide them with a higher degree of certainty than the current rule,’ Mr Dutton said.

The term ‘widely held entity’ will be based on the principles in the scrip for scrip CGT roll‑over provisions and will include appropriate integrity measures.

The changes to the law will apply to CGT events that occur during the 2006‑07 income year and later income years.