C097/03
16 October 2003
CAPITAL GAINS TAX CHANGES TO BENEFIT INVESTORS, SMALL
BUSINESS AND CHARITIES
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.