Issue 3 - CGT Newsletter 2008/09

ln this issue CGT small business reliefs Tax benefits and CGT Transformation of water rights Optional loss roll-over: complying super funds "Trust cloning" abolished Losses and CGT Sub-committee minutes Cost base of shares Payment by vendor to cancel contract Main residence exemption Foreign residents - staggered sell down arrangements Foreign residents - asset valuations CGT STATUS REPORT Note: Subscribers should first log in to the Taxation Institute website, before activating links in this newsletter.

 

» Foreign residents - asset valuations

A taxpayer alert has been issued in relation to certain arrangements where foreign residents seek to avoid CGT from the indirect disposal of Australian real property under Div 855 ITAA 1997, circumventing the principal asset test by exploiting the valuation of non-taxable Australian real property assets (non-TARP) (TA 2008/20).

The alert applies to arrangements where foreign residents exploit the calculation of the market values of non-TARP assets to exceed the 50% threshold in the principal asset test when determining if they have an indirect real property interest under sec 855-25 ITAA 1997.

These arrangements include the following characteristics:

1. A foreign resident vendor with an existing interest of greater than 10% in Australian real property held indirectly through a chain of interposed entities intends to dispose of some or all of that interest.
2. Prior to the disposal, the vendor attempts to change the ratio of TARP to non-TARP assets through strategies such as:
   
   
   • injecting non-TARP assets into the Australian entities (or those higher in the ownership chain) by:
     
     • the intermediate holding entity (test entity) investing in Redeemable Preference Shares (RPS), issued by its Australian subsidiary, which directly holds the real property;
     • the test entity obtaining a loan from a third party and on-lending the amount to its subsidiary;
     • an inter-company loan (arguing that both the assets injected and the inter-company asset may be counted in calculating the ratio of TARP to non-TARP assets);  or
   • selective valuation of TARP and non-TARP assets, in circumstances where such valuations are within the control of the vendor and could be carried out on a full market value basis.
3. If the market value of TARP assets does not exceed the market value of non-TARP assets, the foreign resident vendor argues that it does not pass the principal asset test, resulting in the interest disposal in the test entity being disregarded.

»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.	Introduced into House on 19 March 2009. Awaiting second reading.
Tax Laws Amendment (2008 Measures No 6) Bill 2008	CGT roll-overs for corporate restructures.	Passed by Parliament on 26 March 2009. Act No 14 of 2009.
Same-Sex Relationships (Equal Treatment in Commonwealth Laws - General Reform) Bill 2008	General amendments to CGT provisions.	Passed by Parliament on 27 November 2008. Act No 144 of 2008.

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 lodged.

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 determination date TBA.
TD 2008/D9	Core consolidation rules and CGT contract rules.	Final determination issued on 17 December 2009 (TD 2008/29).
TD 2008/D10	Operation of consolidation rules where contract to buy a CGT asset not settled at time of joining or leaving consolidated group.	Final determination issued on 17 December 2008 (TD 2008/30).
TD 2008/D11	Operation of consolidation rules where contract to sell a CGT asset not settled at time of joining or leaving consolidated group.	Final determination issued on 17 December 2008 (TD 2008/31).

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