CGT Newsletter 2009/10 Issue 1
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» Trust cloning: exposure draft legislation
On 2 September
2009 the Assistant Treasurer released exposure draft legislation (and
explanatory material) to implement the proposal to abolish the trust
cloning exception to the happening of CGT events E1 and E2 and the
introduction of a limited CGT roll-over for fixed trusts. The changes
are to apply to CGT events that happen after 31 October 2008.
The exposure draft legislation also contains changes which will clarify that a mere change of the trustee of a trust does not change the entity that is the trustee for the purposes of the ITAA 1997 and the GST legislation.
» Connected entity: partnership
In a decision handed down on 18 August 2009, the Federal Court (Sundberg J) held that a partnership was not an "entity" for the purposes of the CGT small business relief connected entity rules that applied before the amendments made by the Tax Laws Amendment (Small Business) Act 2007 (White v FCT [2009] FCA 880).
This meant that partnerships in which the taxpayer was a partner could not be connected with the taxpayer and that the net value of the CGT assets of the partnerships were not brought into account in determining whether the taxpayer satisfied the maximum net asset value test.
It needs to be noted that the amendments made by the Tax Laws Amendment (Small Business) Act 2007 (which apply in relation to CGT events that happen in the 2007-08 and later income years) make it clear that a partnership may be a connected entity for the purposes of the CGT small business reliefs. There is in fact a specific control rule which refers to the control of a partnership (see sec 328-125(2)(a)(ii) ITAA 1997).
It would not be surprising if the Commissioner were to appeal against the decision of Sundberg J.
Practice point
In the light of the decision in this case, practitioners should examine past transactions of their clients to determine whether in any case the view was taken that a capital gain was not eligible for the CGT small business reliefs because the inclusion of the net value of the CGT assets of a partnership meant that the maximum net asset value test was not met. If that is the case, the decision may mean that the maximum net asset value test is in fact met and an objection against the relevant assessment should be lodged (together with an application to extend the objection period where that period has expired).
Where the relevant CGT event happened before the 2006-07 income year and the taxpayer was a partner in a partnership, the net value of the CGT assets of the partnership could not exceed the then maximum net asset value test threshold where the CGT event happened in relation to a CGT asset of the partnership (former sec 152-15(b) ITAA 1997).
» Small business relief amendments
Extensive changes to the CGT small business relief provision were made by the Tax Laws Amendment (2009 Measures No 2) Act 2009 which received the Royal Assent and became law on 23 June 2009.
Among the changes are the following:
- the provision of increased access to the CGT small business reliefs via the small business entity test in passive asset situations;
- the introduction of a provision under which an individual's spouse or child under 18 years of age will be treated as the individual's affiliate for the purposes of determining whether an entity that uses a CGT asset in its business is an affiliate of, or is connected with, the entity that owns the CGT asset;
- redefining how the main use to derive rent exclusion from the definition of active asset operates;
- the extension of the special deceased estate rule to cover assets of a deceased estate that are disposed of by the trustee (or a beneficiary) of a testamentary trust and an asset acquired by survivorship on the death of a joint tenant;
- a capital gain that is made from the happening of CGT event J5 or J6 is eligible for the CGT small business retirement exemption without the need to satisfy any of the CGT small business relief basic conditions; and
- the exclusion of any possible operation of the deemed dividend provisions of Div 7A and sec 109 ITAA 1936 where a company makes a payment to a CGT concession stakeholder to satisfy the terms of the retirement exemption.
All changes made by the amending Act are reflected in the 2009-10 edition of the CGT Small Business Reliefs Handbook.
Further amendments
The Tax Laws Amendment (2009 Measures No 4) Bill 2009 (which was introduced into Parliament on 25 June 2009) proposes amendments to the CGT small business 15-year exemption to ensure that a change in the underlying beneficial interests of a pre-CGT asset owned by a company or trust that triggers Div 149 ITAA 1997:
- does not affect the ownership period of the company or trust for the purposes of the exemption; and
- does not preclude any capital gain accrued up to the date of the change from being within the scope of the exemption.
» Assets used solely for personal use and enjoyment
Two interpretative decisions have been issued which deal with whether assets are used solely for personal use and enjoyment and are, therefore, excluded when determining the net value of the CGT assets of an individual when applying the maximum net asset value test. The interpretative decisions are to the following effect:
- vacant land owned by an individual on which they intend to construct a dwelling in the future for private use is not being used solely for personal use and enjoyment (ID 2009/34);
- an interest-earning bank account of an individual is not being used solely for personal use and enjoyment (ID 2009/33). This is because the bank account is interest-earning. The fact that the funds in the bank account are used only for personal living expenses does not affect this outcome.
» Foreign resident: leasehold interest in land
A final determination has been issued which is to the effect that a leasehold interest in land in Australia is "real property" and, so, "taxable Australian property" for the purposes of sec 855 ITAA 1997 (TD 2009/18). Accordingly, a capital gain or loss made by a foreign resident, or the trustee of a foreign trust for CGT purposes, from a CGT event that happens in relation to such an asset is not disregarded.
» Cost base of shares
A majority of the Full Federal Court (Finn and Sundberg JJ, Perram J dissenting) has held that a capital contribution to shareholders' funds made by a shareholder formed part of the reduced cost base of CGT shares held by the shareholder which was able to claim a capital loss on the sale of the shares (National Mutual Life Association of Australia Ltd v FCT [2009] FCAFC 96).
The contribution fell within the fourth element of the cost base (as then enacted) in that it was capital expenditure incurred to increase the value of the shares and was reflected in the state or nature of the shares at the time of the CGT event. The majority said:
"The apparent purpose of the second limb, as appears from the Explanatory Memorandum, is to exclude the expenditure where it has dissipated, wasted away or been destroyed by the time of disposal. It does not strain the expression 'state or nature of the asset' to encompass the notion of value. It can hardly be doubted that an asset's value is one of its attributes. We think the draftsman has eschewed repeating the word 'value' in the second limb in favour of the more expansive words 'state' and 'nature' which would include an asset's value as well as other attributes."
As a result of an amendment made by the Tax Laws Amendment (2006 Measures No 1) Act 2006, the fourth element of the cost base of an asset now includes capital expenditure the purpose or the expected effect of which is to increase or preserve the asset's value (sec 110-25(5) ITAA 1997).
» Disposal of capital interest in trust: CGT event E8
A taker in default of trust capital does not have an "interest in the trust capital" of the kind contemplated by CGT event E8 (sec 104-90 ITAA 1997) (TD 2009/D3).
CGT event E8 happens if a beneficiary under a trust (except a unit trust or a trust to which Div 128 ITAA 1997 applies) disposes of their interest in the trust capital. However, the event does not happen if the beneficiary gave any money or property to acquire the interest or if the interest was acquired by way of assignment.
Having regard to the provisions governing the happening of CGT event E8, only those interests which constitute a vested and indefeasible interest in a share of the trust capital fall within the scope of the CGT event. The interest of a taker in default of the trust capital is defeasible because the trustee may resolve to appoint the capital to another beneficiary.
Effectively CGT event E8 operates as if the beneficiary had disposed of "their share" of the net assets of the trust. There is no meaningful sense in which a taker in default can be regarded as having a share of the trust assets, given that their interest in the trust capital may be defeased by the trustee appointing it to other beneficiaries. It is reasonable to infer that where a methodology attributes the full cost base of the trust assets (or a relevant share of it) to a beneficiary's interest in the trust capital then that event is intended to apply only in respect of an interest that is both vested and indefeasible.
However the interest need not be one which is vested in possession. TR 2006/14 makes it clear that CGT event E8 can apply to a remainder interest.
