CGT Newsletter 2008/09 Issue 1
» CGT improvement threshold for 2008-09 The improvement threshold is relevant for the purposes of sec 108-70 ITAA 1997 (when a capital improvement to a pre-CGT asset is a separate asset) and sec 108-75 ITAA 1997 (capital improvements to pre-CGT assets for which a roll-over may be available). The improvement threshold is indexed annually. » Marriage breakdown roll-over relief The facts considered in the interpretative decision involved property settlement proceedings which were commenced in the Family Court following the breakdown of a marriage. The former spouse died before completion of the court proceedings and their legal personal representative was substituted as a party to the proceedings. Pursuant to a consent order made under the Family Law Act 1975, the trustee of a discretionary trust was to transfer an asset (which the trustee acquired pre-CGT) to the legal personal representative. Section 126-15(1) ITAA 1997 provides that there are roll-over consequences (under sec 126-5 ITAA 1997) if the trigger event “involves” a trustee and a spouse or former spouse of an individual because of a court order under the Family Law Act 1975. Subsection 126-15(1) ITAA 1997 is a rewrite of sec 160ZZMA(1) ITAA 1936 under which roll-over relief was available if an asset was transferred from a trustee “to” a spouse or former spouse. The explanatory memorandum to the Tax Law Improvement Bill (No 1) 1998 contains no indication that the change of wording from “to” to “involves” was intended to affect the scope of the roll-over. Accordingly, having regard to sec 1-3 ITAA 1997, the issue is merely whether a reference to a spouse or former spouse includes that person’s legal personal representative. The interpretative decision points out that, in Case C84 (71 ATC 378), a Board of Review concluded that, on a proper construction of the section under consideration (in that case), a payment to an executor was not to be treated as if it had been made to the deceased individual. Similarly, it is considered that, in the context of CGT marriage breakdown roll-over relief, “spouse” should not be read as including a legal personal representative. » Compensation received by life tenant capital The life tenant’s claim (for which the compensation was paid) was that the pursuit of the particular investment policy by the trustees of the trusts (which had been established in the 1930s) had not given rise to any exceptional increase in income of the trusts, but had greatly increased the value of the corpus of the trusts and involved significant risk for the beneficiaries of the trusts. That risk was not properly rewarded in the case of the life tenant to the extent that she only had an income interest under the trusts. It was also claimed that, in pursuing the investment policy, the trustees had breached their trust duties to the life tenant, and that a constructive trust had arisen in respect of 80% or more of the beneficial interest in the assets of the trusts. This constituted an advantage to the remainderman of the investment policy having been pursued in lieu of a more appropriate investment policy. There was no dispute that, where a taxpayer provides consideration in the form of the release of a claim, the consideration (that is to say, the release) will ordinarily supply the touchstone for ascertaining whether the receipt is on a revenue account or not. The Administrative Appeals Tribunal (constituted by the President (Downes J)) held that the compensation was of an income nature. The Full Federal Court (Lindgren, Stone and Jacobson JJ), reversing the decision of the AAT, held that the Tribunal erred in failing to characterise properly the nature of the claim that the taxpayer gave up and, therefore, the character (income or not) of the lump sum that she received for giving it up. The taxpayer’s claim was to an accounting for a capital profit or gain made by the remainderman and to an entitlement to a constructive trust over the assets of the trust estate, and she was paid the lump sum in satisfaction of those claims. The lump sum was not income. The Commissioner’s reliance on the reference to the taxpayer’s status as life tenant in the settlement deed was misplaced. That reference merely explained the basis of the existence of the fiduciary duty. What the taxpayer would have received would have been a sum representing the profit or gain made by the remainderman, notwithstanding that she would have had no entitlement to it under the terms of the trust. No CGT issues were raised in this case, presumably because any relevant CGT asset would have been a pre-CGT asset. » Discharge of debt arising from the provision of services The facts considered in this interpretative decision involved an accruals basis taxpayer which carried on a business of providing services to clients. A debt arose (and ordinary income was derived) in respect of the taxpayer’s provision of services to a client which was discharged at a later time. The points made in the interpretative decision are:
accordingly, the capital gain made when CGT event C2 happened on discharge of the taxpayer’s debt was reduced to nil, thus preventing double taxation of the amount included. » Partial main residence exemption A taxpayer who acquired a dwelling in Perth in June 2001, while he was living and working in Kalgoorlie (600 kilometres away), but who did not move into the dwelling as his main residence until September 2003, has been held to be only entitled to a partial CGT main residence exemption (Chapman v FCT [2008] AATA 421; 2008 ATC ¶10-029). Immediately after settlement, the dwelling was rented to the vendors of the property (at their request) for six months. At the end of the six months, the taxpayer rented the property to other tenants. He moved into the dwelling in September 2003 and sold it in August 2004. The AAT found that, while the taxpayer had an intention to move into the property at some time, he only moved into it when it became convenient for him to do so. This fell far short of the requirements of the moving in concession (sec 118-135 ITAA 1997). In the AAT’s view, the words “the time it was first practicable” in the moving in concession should not be read down to mean “the time it was first convenient”. The Commissioner’s imposition of penalty was also upheld.» Deferred purchase agreement warrants Upon the delivery to the investor of the delivery assets, the investor’s ownership of the contractual rights under the deferred purchase agreement warrant (DPA warrant) comes to an end by reason of those rights being discharged or satisfied (sec 104-25(1) ITAA 1997). Further, a “look through” or “underlying asset approach” to the CGT treatment of those rights is not available in the circumstances. The determination gives the following example: Example On 1 January 2001, Chris paid $10,000 to enter into a retail investment product known as a DPA warrant with the EAP Bank. The product entitled Chris to an unspecified number of units in the Happy Unit Trust, deliverable to him on 10 January 2007. Under the terms of the product, the number of units that Chris is entitled to is worked out by:
The nominated share market index increased by 50% between 1 January 2001 and 31 December 2006. Accordingly, the value of the units Chris that is entitled to (as at 31 December 2006) is $15,000 (150% of the initial investment amount). At 31 December 2006, the market price of a unit in the Happy Unit Trust was $1.50. On 10 January 2007, in accordance with the terms of the DPA warrant, EAP Bank transferred 10,000 units ($15,000/$1.50) in the Happy Unit Trust to Chris in satisfaction of its obligations under the DPA warrant. On 10 January 2007, the market value of a unit in the Happy Unit Trust is $1.50. The transfer to Chris of the units caused the ending of his ownership of an intangible CGT asset (his rights under the DPA warrant) by reason of the discharge or satisfaction of those rights. Accordingly, CGT event C2 happens as a result of the transfer. The time at which CGT event C2 happened is when the relevant CGT asset ends. This occurred on 10 January 2007. The first element of Chris’s cost base for the CGT asset comprising his rights under the DPA warrant is the money he paid in respect of its acquisition ($10,000). The capital proceeds from CGT event C2 are the market value of the units worked out at the time of the event, that is, $15,000. Assuming there is no other cost base expenditure, Chris made a capital gain of $5,000 in the income year ending 30 June 2007. Chris’s cost base for each unit acquired is $1.50, equating to its market value at the delivery date. » Consolidation issues: draft determinations
» Demutualisation of private health insurers A key requirement for this relief will, in general, be the Private Health Insurance Administration Council’s approval of the insurer’s conversion under the Private Health Insurance Act 2007. The amendments are contained in a proposed new Div 315 ITAA 1997 and are to apply to demutualisations that occur on or after 1 July 2007. »CGT and Div 6 (ITAA 1936) interaction issues »Shareholder and unitholder rights The amendments, as they affect call options, will ensure that no amount is included in the assessable income of a shareholder in a company (or of a unitholder in a unit trust) as a result of acquiring certain rights issued by the company (or the trustee) to acquire further shares (or units). For put options, the amendments will ensure that an amount that is included in the assessable income of a shareholder as a result of acquiring rights issued by the company to dispose of shares is appropriately reflected in the cost base of the rights. As the issue of rights to dispose of units is not possible for many trustees and is unlikely to arise in practice, rights to dispose of units are not dealt with in the amendments. The amendments are to apply to rights issued on or after 1 July 2001. »First home owner grant issues According to the minutes of the 14 November 2007 NTLG Losses and CGT Tax Subcommittee meeting, the ATO view is that payments received under the first home owner grant scheme are a recoupment of the expenditure to buy or build the relevant home. The payments received are neither ordinary nor statutory income and thus are not included in the recipient’s assessable income. Therefore, under sec 110-45(3) and 110-37(2) ITAA 1997, the amount of the recouped expenditure is never included in the relevant element of the cost base of the relevant CGT asset. » CGT STATUS REPORT Amending legislation
Cases
Draft rulings and determinations
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