16 June 2000

Section 115-45 Capital Gains Tax (CGT) Discount Integrity Measure

The Assistant Treasurer, Senator Rod Kemp, today announced amendments to improve the practical operation of the Capital Gains Tax (CGT) discount integrity measure contained in section 115-45 of the Income Tax Assessment Act 1997.

Section 115-45 seeks to ensure that taxpayers do not circumvent the CGT discount rules by disposing of equity in an entity in circumstances where they would not satisfy the rules if they disposed of the underlying assets directly. It does this by denying the CGT discount for a CGT event happening to a membership interest in an entity if the total of the cost bases of CGT assets acquired by the entity less than 12 months before the CGT event is more than 50% of the total of the cost bases of the CGT assets of the entity at that time. The test applies only in relation to entities with fewer than 300 members.

The Government will amend section 115-45 to:

  • Provide taxpayers with an alternative test (based on net notional capital gain) to the existing cost base test.
    • The alternative test will allow the membership interest holder to be eligible for the CGT discount if the net notional capital gain made on assets held by the relevant entity at the time of the CGT event and acquired within the previous 12 months is 50% or less of the net notional capital gain on all assets held by the entity at that time.
    • Net notional net capital gain is calculated as if the entity had disposed of all its CGT assets for market value just before the membership interest holder's CGT event.
    • This alternative test will ensure that section 115-45 applies appropriately in relation to exempt assets such as pre-CGT assets, cars, trading stock and depreciable plant; to cash and receivables; to internally generated goodwill; and to assets acquired in the 12 months before the CGT event that have already been disposed of.
  • Provide a 10% de minimis rule in relation to the test.
    • Portfolio investors (those investors and their associates with less than a 10% equity interest in an entity) are to be excluded from the operation of the tests.
  • Ensure that the special rules about time of acquisition in section 115-30 apply for the purposes of section 115-45.
  • Ensure that where an entity pays a non-assessable amount to an interest holder, any capital gain arising from that payment should be capable of being a discount capital gain.
    • This will ensure, for example, that a capital gain from CGT event E4 (section 104-70) arising from a non-assessable payment to a trust interest holder exceeding the trust interest's cost base will be a discount capital gain if the original capital gain in the trust were a discount capital gain and the trust interest has been owned for at least 12 months.

These amendments will apply from after 11.45 a.m. Eastern Standard Time, 21 September 1999 (the commencement date for the CGT discount).

Legislation to give effect to the amendments will be introduced as a matter of priority.

 

MELBOURNE
16 June, 2000

Media contacts: Richard Allsop Assistant Treasurers Office (03) 9650 7274

Paul McMahon Treasury (02) 6263 4451