CGT Newsletter 2009/10 Issue 2
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» Roll-over relief: irrigators and operators
In a joint media release issued on 2 December 2009, the Assistant Treasurer and the Minister for Climate Change and Water announced that the Government will provide a CGT roll-over for water entitlements and water allocations.
The Government previously announced CGT relief for irrigators who transform their entitlement to water under an irrigation right into an individual water entitlement. The new roll-over will apply more broadly to any capital gains or losses arising directly from the ending of an irrigator’s water entitlement and the issuing to the irrigator of a replacement water entitlement. The roll-over will cover a broader range of transactions (including pre-transformation transactions) and will also be available when water entitlements are unbundled.
The roll-over is intended to provide certainty for operators who are making changes to their arrangements with their member irrigators to ensure compliance with the Water Market Rules 2009.
The new roll-over will apply to CGT events that happen after royal assent to the amending Bill. However, taxpayers will also have the option to apply the roll-over to CGT events that happen from the 2005-06 income year to the date of royal assent.
For the text of the media release (which contains additional information), click here.
» Managed investment trusts
The Assistant Treasurer has released for public consultation draft legislation on the proposed changes to the taxation of gains and losses on the disposal of investments by managed investment trusts (MITs).These changes (which were announced in the 2009-10 Budget) will allow an eligible MIT to irrevocably elect capital account treatment for gains and losses on disposal of certain investments with effect from the 2008-09 income year.
The Assistant Treasurer said that this measure builds on the cut to the withholding tax rate for MITs announced in the 2008-09 Budget and the Government's commitment to sweeping reforms to the notoriously complex attribution rules, including the foreign investment fund and foreign controlled company rules.
As a result of consultations, the draft Bill expands the concept of a MIT for the purposes of this measure. These changes will ensure state operated trusts, as well as wholesale trusts, are also able to qualify for the concession. In addition, further certainty is being provided by specifying the assets to be covered by capital account treatment – these are shares, units and certain land investments.
If a MIT does not elect capital account treatment, then the gains and losses on disposals of shares and units will be treated as being on revenue account. Distributions or gains on "carried interest" units in a MIT are to be treated as being on revenue account.
For the text of the Assistant Treasurer's media release (which contains a link to the exposure draft legislation), click here.
» No new trust fund
The Federal Court (Greenwood J) has rejected the Commissioner’s contention that a unit trust was not entitled to deduct a net capital loss of approximately $2.5 million incurred in the 1993 income year from a capital gain of approximately $2 million made in the 2001 income year because there had been an intervening break in the continuity of the trust fund (Clark v FCT [2009] FCA 1401).Intervening events which the Commissioner contended caused a break in the continuity of the trust included the extinguishment of the trustee’s right of indemnity and a change in the unit holders. Greenwood J referred to observations of the High Court in FCT v Commercial Nominees of Australia Ltd ([2001] HCA 33; 2001 ATC 4336) which are to the effect that the three main indicia of continuity for the purposes of the superannuation fund provisions of the ITAA 1936 are the constitution of the trust, the trust property and membership. His Honour said that although these three indicia of continuity were framed "for the purposes of Part IX" ITAA 1936, there was no reason to believe that they did not equally apply to trust estates for the purposes of Div 6 ITAA 1936 and the ITAA 1997.
A submission by the Commissioner that the taxpayer had not established that the capital losses had been incurred, was also rejected by Greenwood J.
The Commissioner has lodged an appeal to the Full Federal Court from the decision of Greenwood J.
» Cancellation of rollover benefit under Part IVA
The Federal Court (Emmett J) has upheld an assessment in which the Commissioner had included a capital gain of $118,128,983 in the taxpayer company's assessable income pursuant to a determination under the general anti-avoidance provisions (Part IVA ITAA 1936) (British American Tobacco Australia Services Ltd v FCT [2009] FCA 1550).In broad terms, the capital gain arose from the divestment by the taxpayer of certain brands (including related intellectual property rights and know how) that became necessary to obtain the approval of the ACCC to the merger of the British American Tobacco group of companies and the Rothmans group of companies. The capital gain was not included in calculating the taxpayer company's net capital gain for the income year because it obtained CGT rollover relief on the disposal (at market value) of the brands to a company that, as a result of the merger, was in the same group. That company then disposed of the brands (and made the capital gain which was offset by net capital losses transferred to it from Rothmans companies).
The taxpayer contended that the tax benefit obtained in relation to a scheme was excluded from the operation of Part IVA because of sec 177C(2A) ITAA 1936; the tax benefit (so it was argued) was attributable to the making of the choice for rollover relief and the scheme consisted solely of the making of the choice.
Emmett J rejected the taxpayer company's contentions. His Honour said that the planning for and implementation of the scheme identified by the Commissioner in relation to the making of the choice by the taxpayer company commenced many months before the actual disposal by the taxpayer of the brands and continued for some time after that disposal. Thus, the scheme consisted of much more than the mere making of the roll-over choice.
In addition, Emmett J held that, overall, the eight factors required to be considered in determining whether it would be concluded that a relevant person or entity carried out the scheme (or any part of the scheme) for the purpose of enabling the taxpayer to obtain a tax benefit in connection with the scheme, pointed strongly to the conclusion that the taxpayer company and the transferee company, both of whom entered into and carried out the scheme, together with other parties, did so for the purpose of enabling the taxpayer company to obtain the tax benefit.
Finally, Emmett J held that the taxpayer company had not made a voluntary disclosure (so that the taxpayer company was not entitled to a reduction in the penalty on that basis).
» Scrip-for-scrip rollover relief
There have been several developments relating to CGT scrip-for-scrip rollover relief.
Proposed amendments
The Assistant Treasurer announced on 6 January 2010 that the Government will introduce legislation to reform the tax law as it relates to the requirements for CGT scrip for scrip rollover in respect of takeovers and mergers approved under the Corporations Act 2001.
The Assistant Treasurer pointed out that a takeover or merger arrangement must satisfy a number of requirements to qualify for the rollover. These requirements are contained in sec 124-780(2) and 124 781(2) ITAA 1997 and they apply to arrangements involving companies and trusts respectively. One of the requirements, which concerns member participation, is that all holders of similar voting interests in the target entity must be able to participate in the arrangement on substantially the same terms.
Under the proposed changes, if the original entity in an arrangement is subject to Chapter 6 of the Corporations Act 2001, then that arrangement will not have to satisfy paragraphs 124-780(2)(b) and (c) or paragraphs 124 781(2)(b) and (c) of the ITAA 1997 to qualify for the rollover. However, the arrangement will still need to satisfy any other relevant conditions for the rollover.
Alternatively, if the arrangement is a scheme of arrangement within the meaning of sec 411 of the Corporations Act 2001 that receives Court approval, then that arrangement will not have to satisfy paragraphs 124-780(2)(b) and (c) of the ITAA 1997 to qualify for the roll-over. The arrangement will still need to satisfy any other relevant conditions for the rollover.
All other arrangements will continue to be subject to the existing requirements in the scrip for scrip rollover.
The proposed changes are to apply to CGT events that happen on or after 6 January 2010.
For the text of the Assistant Treasurer's media release, click here.
Federal Court decision
In a decision handed down on 4 December 2009, the Federal Court (Jessup J) rejected contentions by the Commissioner that the taxpayer company was not entitled to the benefit of CGT scrip-for-scrip rollover relief in respect of the disposal of its shareholding in a wholly-owned subsidiary (AXA Asia Pacific Holdings Ltd v FCT [2009] FCA 1427). In the circumstances the rollover relief could only be used if the taxpayer and the entity which acquired the shares in the subsidiary dealt with each other "at arm's length" within the meaning of sec 124-780(4) ITAA 1997. Jessup J held that the parties were dealing with each other at arm's length.
Jessup J also rejected the Commissioner's reliance on the general anti-avoidance provisions of Part IVA ITAA 1936. His Honour did so on the basis that there was no relevant tax benefit.
The Commissioner has lodged an appeal to the Full Federal Court from the decision of Jessup J.
Delaware limited partnership
An interpretative decision has been issued which concludes that CGT scrip for scrip rollover relief is available for the exchange of interests in a Delaware Limited Partnership (DLP) formed under the Delaware Revised Uniform Limited Partnership Act for interests in another DLP (ID 2010/9).
» No objection decision
The AAT held that it had no jurisdiction to review the Commissioner's decision not to give the taxpayer a further time (under sec 103-25 ITAA 1997) within which to make a choice for CGT small business roll-over relief to apply because there was no relevant objection decision (Phelps & FCT [2009] AATA 780).The Tribunal said that it was plain enough that the exercise of discretion to grant a further period (under sec 103-25 ITAA 1997) was separate and distinct from the process of making an income tax assessment. The default position established by sec 103-25 ITAA 1997 was that the choice was to be made before lodgment of an income tax return for the income year in which the particular CGT event occurred, unless the Commissioner had agreed to extend the time in which the election might be made. The discretion conferred by sec 103-25 ITAA 1997 was not part of the process by which the tax liability of a person was assessed. The discretion concerned the extending of time in which to apply certain concessions within a particular income year, and that was separate and distinct from the making of an assessment of tax liability.
» Trust cloning
An amending Bill (the Tax Laws Amendment (2009 Measures No 6) Bill 2009), which was introduced into Parliament on 25 November 2009, contains the amendments to abolish the so-called trust cloning exception to the happening of CGT events E1 and E2.The amending Bill is also introducing a limited optional CGT roll-over the for the transfer of assets between certain trusts. Broadly, the effect of the roll-over is to defer the making of any capital gain or capital loss in respect of the asset transfer. The cost base of beneficiaries' interests in the transferring trust is apportioned across their interests in both trusts. For the roll-over to be available, both trusts must have the same beneficiaries with the same entitlements and no material discretionary elements. Further, the receiving trust must be an "empty trust", meaning:
- a newly created trust; or
- a trust with no CGT assets other than a small amount of cash or debt.
The amending Bill also clarifies that a mere change of trustee of a trust does not change the entity that is the trustee for the purposes of the ITAA 1997.
For the text of the amending Bill and of the explanatory memorandum click here.
