CGT Newsletter 2009/10 : Issue 1

ln this issue Trust cloning: exposure draft legislation Connected entity: partnership Small business relief amendments Assets used solely for personal use and enjoyment Foreign resident: leasehold interest in land Cost base of shares Disposal of capital interest in trust: CGT event E8 Exercise of put option: market value substitution rule Temporary resident acting as trustee CGT event E1: creating a trust Demutualisation of friendly societies Pre-CGT double tax agreements Extension of capital loss roll-over for complying super fund mergers CGT: limited roll-over for fixed trusts Special disability trusts: main residence exemption Artificial creation of capital losses CGT STATUS REPORT Note: Subscribers should first log in to the Taxation Institute website, before activating links in this newsletter.

» Extension of capital loss roll-over for complying super fund mergers

As a result of a 2009-10 Budget initiative, the optional CGT loss roll-over for complying superannuation fund mergers (that was announced on 23 December 2008) is to be extended by one year to 30 June 2011. The measure will permit merging superannuation entities in a net capital loss position to elect to roll-over assets with accrued capital gains as well as assets with accrued capital losses.

In addition, the roll-over is to be expanded to permit the transferring superannuation entity's previously realised net capital losses to be transferred to the continuing superannuation entity and the roll-over or transfer of revenue losses to the continuing entity.

The measure is also to apply to mergers involving pooled superannuation trusts where the continuing entity has at least five members and to mergers involving the complying superannuation business of life insurance companies.

» CGT: limited roll-over for fixed trusts

The Government announced in the 2009-10 Budget that a limited CGT roll-over for assets transferred between trusts that have the same beneficiaries with the same entitlements and no material discretionary elements (typically referred to as fixed trusts) is to be provided with effect from 1 November 2008.

Typically, the transfer of assets from one trust to another would trigger a CGT taxing point. As a result of this measure, trustees of eligible trusts will be able to defer the CGT consequences of the asset transfer until the receiving trust subsequently deals with the asset. This will allow eligible trusts to restructure without immediate CGT consequences. The measure is to be accompanied by appropriate integrity rules.

Exposure draft legislation to give effect to this proposed change has been released (see earlier item).

» Special disability trusts: main residence exemption

The Government also announced in the 2009-10 Budget that the unexpended income of a special disability trust (as defined for social security purposes) is to be taxed at the relevant beneficiary's personal income tax rates rather than automatically at the top personal tax rate plus Medicare levy. This change is to have effect from the 2008-09 income year.

The CGT main residence exemption is to be extended to include a residence that is owned by a special disability trust and used by the relevant beneficiary as his or her main residence. This extension is to have effect from the 2009-10 income year.

A consultation paper has been issued by the Treasurer on the proposed special disability trust measures.

» Artificial creation of capital losses

A taxpayer alert has been issued in relation to arrangements under which a taxpayer with a current or future capital gain attempts to artificially create an offsetting capital loss by becoming a default beneficiary for a discretionary trust (for no consideration) and then transferring their interest in that trust (for no consideration) (TA 2009/14).

» CGT STATUS REPORT

The following charts set out the stage that amending legislation, appeal cases (to the extent known) and draft rulings and determinations involving CGT have reached. Changes since the last issue of the CGT Newsletter are highlighted in red.

Amending legislation

Amending Bill	CGT issues	Progress
Tax Laws Amendment (2009 Measures No 2) Bill 2009	CGT small business relief amendments. Tax benefits and CGT.	Passed by Parliament on 17 June 2009. Act No 42 of 2009.
Tax Laws Amendment (2009 Measures No 4) Bill 2009	Demutualisation of friendly societies and miscellaneous CGT amendments.	Introduced into House on 25 June 2009. Awaiting second reading.

Cases

Decisions appealed from	CGT issue	Progress
National Mutual Life Association of Australia Ltd v FCT [2008 FCA 1871 (Middleton J)	Whether capital contribution included in reduced cost base of shares under former cost base provisions.	Taxpayer's appeal to Full Federal Court allowed by majority.

Draft rulings and determinations

Draft ruling (TR) or determination (TD)	CGT issue	Progress
TR 2004/D25 (see also Trust Consultation Group Issues Register (Issue 4.0))	Meaning of "absolutely entitled".	ATO consulting with Treasury. Draft ruling not to be finalised or withdrawn while consultation ongoing.
TR 2007/D10	CGT consequences of earnout arrangements.	Final ruling date TBA.
TD 2009/D3	CGT event E8 and taker in default.	Expected final determination date 7 October 2009.

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