CGT Newsletter 2008/09 Issue 2
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» CGT small business reliefs: exposure draft legislation
An exposure draft and explanatory memorandum of proposed amendments to the CGT small business reliefs have been released. The proposed amendments will:
- allow a taxpayer owning a CGT asset that is used in a business by the taxpayer’s affiliate, or an entity connected with the taxpayer, to access the CGT small business reliefs via the $2,000,000 aggregated turnover test (small business entity test); and
- allow partners who own a CGT asset that is used in a partnership business to access the CGT small business reliefs via the small business entity test where the CGT asset is not an “asset of the partnership”.
Importantly, a number of other amendments are proposed to refine and clarify aspects of the existing CGT small business relief provisions.
Full details of the exposure draft amendments are being provided in a “Latest Developments” update to the online version of the CGT Small Business Reliefs Handbook 08-09.
For the text of the exposure draft documents, click here.
» CGT small business reliefs: control of discretionary trust
Two recently issued interpretative decisions consider the trustee control rule and the pattern of distributions control rule that apply to determine whether an entity controls a discretionary trust for the purposes of the CGT small business reliefs.
Trustee reasonable to expect to act control rule
An entity will control a discretionary trust for the purposes of CGT small business relief if a trustee of the trust acts, or could reasonably be expected to act, in accordance with the directions or wishes of the entity, its affiliates or the entity together with its affiliates (sec 328-125(3) ITAA 1997).
The Commissioner takes the view in ID 2008/139 that, if the trust deed of a discretionary trust specifies that the appointor of the trust has the power to remove a trustee and appoint a new trustee, the trustee could reasonably be expected to act in accordance with the directions or wishes of the appointor. In this situation, the appointor will control the discretionary trust.
Pattern of distributions control rule
An entity will control a discretionary trust for an income year if the entity (and/or its affiliates) receives 40% or more of the trust’s income or capital distributions for any of the four preceding income years (sec 328-125(4) ITAA 1997). This is referred to as the pattern of distributions control rule.
The view is taken in ID 2008/138 that, in applying the pattern of distributions control rule, the character of amounts paid or applied by the trustee is to be determined having regard to the character of those amounts in the hands of the trustee. In other words, the “income … paid or applied” by the trustee means that which is received by the trustee in the relevant income year and which, retaining that character, is paid or applied by the trustee for that income year for the benefit of an entity (and/or the entity’s affiliates). This will be the case notwithstanding that the trust deed (or the trustee acting under authority of the deed) determines that for trust purposes “income” is to have a different meaning.
It may be noted that the meaning of “income” in Div 6 ITAA 1936 is an issue in the appeal to the Federal Court from the decision of the AAT in Barmford & FCT ([2008] AATA 322; 2008 ATC ¶10-022).
» Amended assessment out of time
The issue raised for decision in the Metlife Insurance litigation was whether an amended assessment made by the Commissioner outside the usual four-year amendment period and which increased the taxpayer company’s assessable income by a capital gain that was made as a result of the happening of CGT event A1 was authorised by sec 170(10AA) ITAA 1936. At first instance, Emmett J held that the amended assessment was valid ([2008] FCA 568). The Full Federal Court (Spender ACJ, Jessup and Middleton JJ) has now unanimously allowed the taxpayer’s appeal (Metlife Insurance Ltd v FCT [2008] FCAFC 167).
The facts
The taxpayer was an Australian resident company which had adopted an accounting period ending 31 December in lieu of 30 June. Accordingly, the accounting period of the taxpayer for the year ended 30 June 2001 was the 12-month period that ended on 31 December 2000 (“the 2001 income year”). The taxpayer was a full self-assessment taxpayer in respect of that income year.
The taxpayer carried on a life insurance business in Taiwan. On 19 July 2000, the taxpayer and Fubon Life Assurance Co Limited (“Fubon”) entered into a transfer of business agreement under which the taxpayer agreed to sell the business to Fubon. Settlement of the sale occurred during January 2001. The capital proceeds from the sale of the business amounted to $43,359,740 as follows:
- net tangible assets: $1,998,656;
- policy rights: $12,491,602; and
- goodwill: $28,869,482.
On 16 July 2001, the taxpayer lodged its income tax return for the 2001 income year (“the return”). In the return, the taxpayer disclosed that the capital proceeds from the sale of the business were as indicated above. The taxpayer showed its taxable income in the return on the basis that, on the sale of the business, it derived a taxable capital gain of $28,869,482.
The taxpayer company and the Commissioner agreed that:
- the time of the disposal of the business for the purposes of CGT event A1 was 19 July 2000 (sec 104-10(3) ITAA 1936);
- the time of the disposal of the business would otherwise have been January 2001;
- the effect of the full self-assessment provisions was that the return lodged on 16 July 2001 was taken to be a notice of assessment served on the taxpayer on 16 July 200l; and
- the Commissioner was taken to have made an assessment on that day and the tax payable by the taxpayer under the assessment became due and payable on 1 June 2001.
On 15 July 2005, the Commissioner issued to the taxpayer company an amended assessment for the 2001 income year which increased the taxpayer’s assessable income by including, as assessable income, the capital gain attributable to the disposal of policy rights of the business ($12,491,602). The taxpayer company objected to the validity of the amended assessment.
The question
It was common ground that the time within which the Commissioner was empowered to issue an amended assessment to the taxpayer in respect of the 2001 income year expired on 1 June 2005, unless that time was to be determined by the operation of sec 170(10AA) ITAA 1936. The question for decision was whether that provision applied and, more particularly, whether the amendment was made “for the purpose of giving effect to” sec 104-10(3) ITAA 1997. That subsection provides that the time of CGT event A1 is when the contract for the disposal of the asset is entered into (para (a)) or, if there is no contract, when the change in ownership occurs (para (b)).
The contentions
The taxpayer company contended that the power to amend an assessment (conferred by sec 170(10AA) ITAA 1936) to give effect to the provisions listed in the table in the subsection, is triggered only if a subsequent event (in a CGT event A1 case, the actual disposal) occurs after the original assessment is made, so necessitating its amendment. The Commissioner, on the other hand, contended that the amendment power may be exercised regardless of whether the subsequent event occurs before or after the making of the assessment sought to be amended, so long as it occurs after the end of the relevant income year. At first instance, Emmett J upheld the Commissioner’s contentions.
Full Federal Court
The Full Federal Court unanimously upheld the taxpayer company’s appeal.
In a joint judgment, their Honours said that the words “for the purpose of giving effect to” were chosen deliberately to distinguish between a provision which would give indefinite power to amend an assessment where the entering into, and settling of, a contract for the disposal of a CGT asset occurred at different times, and a provision which was necessary in order simply to effect a “backdating” provision which would otherwise be entirely frustrated. If Parliament intended to create a provision which did the former, it could quite easily have done so. It would not have used the term “for the purpose of giving effect to”, but could have drafted laws which gave indefinite power to amend assessments which “concerned” or “related to” or “included” the assessments set out in the table to sec 170(10AA) ITAA 1936. “Giving effect to” a provision cannot mean imbuing that provision with more power than it otherwise would have.
Their Honours went on to say:
“In our view, sec 170(10AA) was not designed to allow for oversight by the Commissioner, but was designed to address new facts after the original assessment, and which could occur at any time, enlivening the operation of sec 104-10(3). In situations where the settlement occurs before the making of the assessment, sec 170(10AA) will generally have no work to do; this is because sec 104-10(3) will already have been taken into account by the Commissioner in his assessment. In other words, where an assessment is made at a time when all relevant events have occurred, no mischief arises and no amendment under sec 170(10AA) is needed to ‘give effect to’ the retrospective consequences of the subsequent event.
As we have set out earlier, the Commissioner contended that the power to amend under sec 170(10AA) ‘at any time’ is not limited to situations where an assessment is made between the time of the making of a contract of sale and the completion of that sale. We are unable to agree. For reasons we have already discussed, we consider that the purpose of sec 170(10AA) was very much to correct any assessment which does not give effect to, in this case, the date deeming provision in sec 104-10(3).
… It is not the case that once a CGT transaction has been backdated by sec 104-10(3), sec 170(10AA) is enlivened and allows amendments generally to the treatment of that CGT transaction by the Commissioner: in our judgment sec 170(10AA) operates only to the extent necessary to backdate the transaction. On the present facts, the Commissioner had four years to correct his oversight concerning the treatment of the policy proceeds. Once those four years had passed, the Commissioner had no further avenue for amendment.”
» Shares issued for assets
The Commissioner has issued a final ruling about the tax consequences for companies of issuing shares for assets or for services (TR 2008/5). Among the issues considered is when and in what circumstances the assets might have a cost base for CGT purposes and the amount of that cost base.
In this regard, the ruling states that, when a company issues shares as consideration for assets, the provision of shares is not money paid, or required to be paid, for the assets and does not involve a liability to pay money. However, the provision of shares is the provision of property given, or required to be given, in respect of acquiring the assets. Therefore, the market value of the shares (that is the property given) is a component of the cost base of the assets so acquired for the purposes of the CGT provisions.
The amount or value at which the shares are recorded in the accounts of the company is not as such the market value of the shares and is not evidence of that market value. The amount or value at which the shares are recorded in the accounts of the company is not as such the cost of the assets acquired for the shares for CGT purposes and is not evidence of that cost.
»Pre-CGT double tax treaties
The Federal Court (Edmonds J) has held that the Swiss double tax agreement which was concluded in 1980 (before the introduction of the CGT provisions into the ITAA 1936) effectively operated to deny Australia the right to tax a capital gain made by a Swiss resident (Virgin Holdings SA v FCT [2008] FCA 1503).
Very briefly, the taxpayer company was a resident of Switzerland and carried on an enterprise for the purposes of the double tax agreement but did not, at any material time, carry on business through a permanent establishment in Australia within the meaning of the double tax agreement. The issue was whether the taxpayer company was assessable on the amount of a net capital gain that was statutory income under the ITAA 1997. Edmonds J concluded that the taxpayer company was not assessable.
Edmonds J held that:
- the term “the Australian income tax” in article 2(1)(a) of the agreement accommodated and encompassed, at the time of the conclusion of the agreement, the taxation of capital gains;
- even if tax on a “net capital gain” is not part of the Australian income tax for the purposes of article 2(1)(a), then it is a substantially similar tax to “the Australian income tax” within the meaning of article 2(2);
- the business profits article (article 7) of the agreement denied Australia the right to tax the amount in question; and
- if article 7 of the agreement did not apply to deny Australia the right to tax the net capital gain, then the alienation of income article (article 13) did.
The Commissioner’s ruling in TR 2001/12 conflicts with the holding of his Honour noted at (1) above.
It will be of interest to see whether the Commissioner appeals from the decision of Edmonds J to the Full Federal Court.
