Issue 2 : CGT market value substitution rule
At present, the capital proceeds market value substitution rule (sec 116-30 ITAA 1997) will apply where (inter alia) a CGT event occurs and there are capital proceeds but either those proceeds cannot be valued or the proceeds are more or less than the market value and the CGT event is CGT event C2 (cancellation, surrender and similar endings). This is so regardless of whether the parties are dealing with each other at arm’s length. This can result in a taxpayer being subject to CGT on an unrealised gain or being denied some or all of a capital loss, even though all parties are dealing with each other at arm’s length and there is no tax manipulation.
Amendments contained in the Tax Laws Amendment (2008 Measures No 2) Bill 2008 will ensure that the market value substitution rule does not apply where CGT event C2 occurs in relation to a share in a widely held company or a unit in a widely held unit trust, as it is assumed that, in these cases, the parties are dealing with each other at arm’s length.
These amendments are intended to facilitate arrangements where widely held companies or unit trusts, as part of their ongoing capital management strategy, cancel shares or units and agree with their shareholders or unitholders on a cancellation price in advance of the cancellation taking place. Setting a cancellation price in advance provides certainty for management and shareholders or unitholders on the cost or return from the capital reduction.
The amendments are to apply to CGT events that happen during and after the 2006-07 income year.
Disclaimer
The material contained in this publication is of a general nature and is not advice. No representation or warranty is made as to its correctness. Readers must obtain their own professional advice before making any decisions as to their own or their clients’ affairs.
