Chapter 1: Eligibility checklist 1. Chapter 2: Some general CGT issues 5

Transcription

1 vi Contents Preface iii Abbreviations v Chapter 1: Eligibility checklist Determining eligibility for CGT small business relief... 2 Pre-CGT asset... 4 Chapter 2: Some general CGT issues Background CGT asset Pre-CGT assets Special asset rules... 7 (1) Depreciating assets... 7 (2) Trading stock The CGT events... 8 (1) Importance of the time when a CGT event happens... 8 Relevant income year...8 CGT small business reliefs...8 Commencement of amendments...8 (2) More than one CGT event potentially happens Particular CGT events... 9 (1) CGT event A1: disposal of a CGT asset... 9 (2) CGT event C2: cancellation, surrender and similar endings... 9 (3) CGT event D1: creation of contractual or other rights (4) CGT event E4: capital payment for trust interest (5) CGT event G1: capital payment for shares (6) CGT event H1: forfeiture of deposit (7) CGT event H2: receipt for event relating to a CGT asset... 11

2 vii (8) CGT event J2: change in status of small business replacement asset (9) CGT events J5 and J6: failure to satisfy roll-over relief conditions Calculating net capital gain or net capital loss (1) Net capital gain (2) Net capital loss Making choices (1) No choice (2) Change of choice? (3) Executor making choice (4) Extensions of time Chapter 3: The recent and proposed legislative changes Summary of more significant legislative changes (1) Proposed amendments Trusts and connected entity status...16 Direct small business participation percentage...17 (2) Table highlighting changes Practical implications of commencement of changes Practical implications of commencement of changes Chapter 4: Basic conditions to be met Context CGT asset other than share or trust interest (1) Charts illustrating operation of basic conditions Share or trust interest (1) Basic condition (b) (2) Basic condition (d) CGT concession stakeholder...32 (3) The 90% test: share or trust interest held by company or trust CGT event D CGT event K

3 viii Passively held assets (1) Special partner rule (2) Transitional provisions Proposed change: earnout arrangements Case studies (1) Case study Patrick...41 Muriel...41 Gainco Pty Ltd...42 (2) Case study Chapter 5: CGT event in relation to CGT asset The condition Examples Special rule for CGT event D Chapter 6: Maximum net asset value test Context The test (1) Just before the CGT event (2) Partner What is net value of the CGT assets of an entity? (1) CGT assets (2) Market value (3) The statutory definition Disregarded assets: interest in interposed entities Disregarded assets: individuals (1) Asset being used for personal use and enjoyment Being used...55 Solely...57 Affiliate issues...57

4 ix (2) Special main residence rule (3) Superannuation fund (4) Interest-bearing bank account (5) Vacant land Dwellings (1) Exclusion (a) (2) Exclusion (b) (3) Income-producing use of main residence (4) When would interest be partly deductible? (5) Calculation of amount to be included (6) Use by individual (7) Pre CGT events (8) Main residence exemption deeming provisions not relevant (9) Adjacent land (10) Jointly-owned dwelling Summary of dwelling rules Certain assets of affiliates and their connected entities disregarded (1) Chart of operation (2) Disregarding rule operates one way only (3) Only because Amounts that reduce the net value of CGT assets Liabilities and provisions (1) Contingent liabilities (2) Provisions taken into account When does liability relate to CGT asset? General liabilities Case studies (1) Case study (2) Case study (3) Case study (4) Case study (5) Case study (6) Case study

5 x Chapter 7: Small business entity test Context (1) Relevance of small business entity test (2) The present connected entity and affiliate tests Operation of small business entity test Small business entity (1) Business must be carried on (2) Three possible tests What constitutes carrying on a business? (1) Capital asset ventured into business (2) Company or individual (3) Partnership (4) Rental property (5) Winding up business The immediately preceding income year test The actual current year test The likely current year test (1) Likely Aggregated turnover (1) Special rule: passively held assets (2) Transitional provisions Annual turnover (1) GST excluded (2) Sales of retail fuel (3) Regulations In ordinary course of carrying on a business (1) Winding up a business (2) Transactions with associated entities Ordinary income Derived Business not carried on for whole income year... 96

6 xi Dealings with associates Case studies (1) Case study (2) Case study Chapter 8: Active assets and the active asset test Context Active asset definition CGT asset that is not a share or trust interest as an active asset (1) Passively held assets: winding-up rule (2) Intangible assets (3) Earnout right (4) Held ready for use (5) Connected entities (6) Affiliate issues (7) Transitional provision Share or trust interest in non-widely held entity as an active asset (1) Relevant assets (2) Financial instruments and cash (3) Continuing active asset status if reasonable to conclude (4) Temporary breaks (5) Active asset via a further entity Share or trust interest in widely held entity What cannot be an active asset? Financial instruments Assets producing passive income (1) Interest (2) Annuity (3) Rent AAT decision: Carson No business AAT decision: Tingari Village...114

7 xii (4) Examples (5) Royalties (6) Main use Asset rented to connected entity or affiliate Requirements to be met for active asset test The active asset test (1) Interest in asset acquired at different times (2) Cessation of business (3) Acquired Some issues with shares and trust interests (1) Time of CGT event happening Liquidation of company Trust distribution Case studies (1) Case study (2) Case study (3) Case study (4) Case study (5) Case study (6) Case study (7) Case study (8) Case study (9) Case study (10) Case study (11) Case study Chapter 9: Affiliates Context Commencement of operation of definition of affiliate Definition of affiliate (1) Spouse or child under (2) Former definition of small business CGT affiliate (3) Differences

8 xiii Trustee cannot be an affiliate The affairs of the business (1) Affairs Acting in defined manner (1) AAT decisions Spouses and children The special spouse/child under 18 affiliate rule (1) Circumstances in which the special rule applies (2) How the special rule operates (3) Further consequences (4) Spouse and child (5) Some consequences of the rule (6) Scope of the special spouse/child under 18 affiliate rule Affiliate status applies generally Capital gain made by affiliate Does the rule only have a beneficial operation? (7) Application and transitional provisions Whether an affiliate is an affiliate for all purposes Business relationships Business relationship Case studies (1) Case study (2) Case study (3) Case study (4) Case study Pre position Post position (5) Case study CGT event pre CGT event post (6) Case study Pre-2009 amendments Post-2009 amendments (7) Case study

9 xiv Pre-2009 amendments Post-2009 amendments (8) Case study Chapter 10: Connected entities Context Implications of present connected entity rules Connected depends on control Indirect control rule (1) No indirect control through certain public entities Control by affiliates Relevant control rules Control of company (1) The right to distribution control rule (2) The voting power control rule Equity interests carrying right to exercise voting power (3) Rights carried by shares relevant (4) Right to acquire (5) Beneficial ownership Control percentage between 40% and 50% (1) Indirect control (2) Construction of s (6) ITAA (3) Explanatory memorandum (4) ATO Advanced Guide (5) Overriding discretion (6) No application for exercise of discretion needed (7) Negative discretion (8) Review of exercise of discretion (9) Potential effect on active asset status (10) Reform of the discretion? Control of partnership Control of trust

10 xv What is a discretionary trust? Non-discretionary trusts Discretionary trusts (1) Historical context CGT events before Pattern of distributions control rule The trustee reasonable to expect to act control rule The pattern of distributions control rule (1) Exempt entity or deductible gift recipient Pattern of distributions: control percentage between 40% and 50% Example of operation of pattern of distributions control rule Loss year controllers (1) Transitional provisions (2) Example (3) Nomination (4) Precedent Distributions after close of income year Income and capital distributions to be considered separately (1) Distinction between income and capital Some practical aspects of the pattern of distributions control rule (1) Any kind of entity (2) Reasons for utilising the rule (3) Control in what income years? (4) Relevant distribution (5) Distribution resolution Case studies (1) Case study (2) Case study (3) Case study (4) Case study (5) Case study

11 xvi Chapter 11: Significant individuals and CGT concession stakeholders Context The significant individual test Significant individual CGT concession stakeholder Small business participation percentage Direct small business participation percentage: company (1) Redeemable shares (2) Voting power (3) Any dividend, any distribution (4) Company in liquidation (5) Holding legal and equitable interests Holding Legal and equitable interests Direct small business participation percentage: fixed trust Direct small business participation percentage: other trusts (1) Distributions during income year (2) What is a distribution? (3) Operation of a default income provision (4) Some practical points Indirect small business participation percentage Examples from explanatory memorandum Case studies (1) Case study (2) Case study (3) Case study (4) Case study Chapter 12: The 15-year exemption Context

12 xvii (1) Retirement (2) Retirement exemption limit unaffected (3) Capital losses not absorbed (4) Superannuation contributions Conditions to be met for individuals (1) Permanent incapacity (2) Where certain CGT roll-over relief applies Conditions to be met where CGT asset is share or trust interest Conditions to be met for companies and trusts (1) Permanent incapacity (2) More than one significant individual (3) Non-fixed trust: loss year (4) Amendments (5) Where certain CGT roll-over relief applies Ordinary income and other statutory income of company or trust Identifying the relevant asset Interests in CGT asset acquired at different times Change in majority underlying interests In connection with retirement (1) In connection with (2) Retirement (3) CGT event after retirement (4) CGT event before retirement (5) Further ATO examples Permanent incapacity Companies and trusts: flow-through of concession to CGT concession stakeholders Amounts that can qualify for flow-through concession (1) Exempt amount (2) Change in underlying interests in pre-cgt asset How flow-through concession works (1) Extension of two-year period

13 xviii (2) Payment Where distribution is made by a discretionary trust CGT events E4 and G Indirect payments What payments can qualify? Prudent to pay early Case studies (1) Case study (2) Case study Chapter 13: Small business 50% reduction The reduction Other concessions and capital losses The reduction is optional Making the choice Trustee: concession reversed Obtaining benefit of reduction amount Chapter 14: Retirement exemption Context (1) Retirement not necessary (2) Individual (3) Company or trust (4) Choice cannot be altered Changes: and (1) Individuals and retirement exemption (2) Company or trust: no retirement necessary (3) CGT concession stakeholder (4) Actual capital proceeds (5) ETP and RBL

14 xix Actual capital proceeds not required Retirement exemption and CGT events J2, J5 and J How CGT small business retirement exemption operates for individuals When individual taxpayer may choose retirement exemption (1) Amount available for retirement relief (2) Limitation on amount (3) Taxpayer under 55 years of age (4) Taxpayer 55 years of age or more (5) Making the choice (6) Consequences of choice Specifying amount chosen (CGT-exempt amount) (1) Precedent choice and specification CGT retirement exemption limit Capital gain disregarded for individuals Procedure for individuals under 55 years of age (1) Time of contribution (2) Capital proceeds received in instalments (3) Contractual provisions (4) Transfer of real property CGT small business concessions and superannuation contributions (1) Eligible contributions (2) Making the choice (3) CGT cap amount (4) Transitional arrangements How CGT small business retirement exemption operates for companies and trusts When company or trust may choose retirement exemption Individuals for whom retirement exemption can be chosen Specifying CGT-exempt amount and stakeholder percentages (1) Making the choice (2) Precedent choice and specification Capital gain disregarded for companies and trusts

15 xx Special company and trust conditions (1) Company or trust must make a payment (2) Time of making of payment (3) Market value substitution rule (4) Capital proceeds received in instalments (5) Amount of payment (6) Joint or separate payments (7) Nature of payment (8) Stakeholder under 55 years of age (9) No allowable deduction Operation of deemed dividend provisions (1) Section 109 ITAA (2) Division 7A ITAA Chapter 15: Roll-over relief Context (1) amendments (2) Transitional provisions How CGT small business roll-over relief works Choosing roll-over relief (1) Amount available for roll-over (2) Deferring a capital gain (3) Making the choice Retriggering of rolled-over capital gain Replacement asset period (1) Discretion to extend period (2) Increase of capital proceeds Fourth element expenditure CGT event J (1) Share or trust interest: additional requirement (2) Time of event (3) Capital gain (4) Concessions available

16 xxi What can qualify as a replacement asset? CGT event J (1) Time of event (2) Capital gain (3) What CGT concessions are available? CGT event J (1) CGT event J2 and farmer roll-over provisions (2) Share or trust interest (3) Other CGT event may also happen (4) Time of event (5) Capital gain (6) Other concessions Death of individual Small business reliefs and CGT events J2, J5 and J What if the taxpayer ceases to exist during the replacement asset period? How the rolled-over capital gain is applied against replacement assets or expenditure Using roll-over relief as a deferral mechanism (1) Maximum net asset value test/small business entity (2) How a rolled-over capital gain is applied Transitional issues (1) Choosing retirement relief (2) CGT events J2, J5 and J Case studies (1) Case study (2) Case study Chapter 16: Company distributions Context Treatment of non-taxed amount (1) 15-year exempt amount (2) Retirement exemption amount

17 xxii (3) 50% reduction amount (4) Roll-over amount Chapter 17: Trust distributions Context (1) Terminology Capital gain may or may not be reduced to nil (1) Capital gain reduced to a lesser amount Position for and later income years Specific entitlement Adjusted Division 6 percentage Example Position for and earlier income years (2) Capital gain reduced to nil (3) CGT event J2, J5 or J Distribution of 15-year exempt amount Distribution of discount or reduction amount (1) Discretionary trust distribution (2) Unit trust (3) CGT event C (4) CGT event E Circumstances in which CGT event E4 will happen Consequences of CGT event E4 happening Time of CGT event E The non-assessable part CGT event E4 and a reduction amount CGT event E4 capital gain and the CGT concessions CGT event E4 v CGT event C Trustee assessed under s 99A ITAA (1) and later income years (2) and earlier income years (3) Rolled-over capital gain (4) Section 98(3) or 98(4) ITAA

18 xxiii Case study (1) Fred (2) Ticktock Pty Ltd Chapter 18: Partnerships and partners What is a partnership? Some fundamental propositions Is a partnership an entity? (1) Tax law partnership Basic conditions: issues for assets used by partnerships (1) Asset a partnership asset (2) Asset owned by a partner (3) Asset owned by entity that is not a partner (4) Former rule Small business entity issues Active asset issues Affiliate issues Connected entity issues Case studies (1) Case study (2) Case study (3) Case study (4) Case study (5) Case study (6) Case study (7) Case study (8) Case study (9) Case study

19 xxiv Position before the 2009 amendments Position after the 2009 amendments Chapter 19: Deceased estates Context (1) Roll-over relief CGT event within two years of death rule (1) When can the rule operate? (2) How the rule operates (3) Commencement (4) Making choices (5) Devolution to legal personal representative (6) Passing to a beneficiary (7) Testamentary trust (8) Joint tenants (9) What CGT events? (10) CGT event within two years (11) Discretion to extend two-year period (12) Situations where an asset does not pass under will (13) What reliefs? (14) Deceased s position immediately before death (15) Ordinary CGT small business relief rules Asset owned by joint tenants Applying ordinary CGT small business relief rules to deceased estates Some other consequences of death for CGT small business reliefs Case studies (1) Case study (2) Case study (3) Case study (4) Case study (5) Case study (6) Case study (7) Case study

20 Chapter 20: Superannuation funds and members Superannuation funds and CGT small business relief Exclusion from net value of CGT assets Case study xxv Chapter 21: Tips and traps Context Impact of recent changes Existing arrangements must be monitored General anti-avoidance provisions (Pt IVA) (1) Making choices CGT merits of different kinds of entities Active asset test (1) Just before (2) Use or holding ready for use (3) Period of time (4) Connected entity (5) Affiliate (6) Rent-producing use Maximum net asset value test (1) Alternative test (2) Threshold (3) Just before (4) Effect of what has been done in the past (5) Connected entities (6) Exempt assets (7) Dividend (8) Incurring of liability (9) Borrowing to acquire shares or units (10) Entity connected because of affiliate (11) Timing issues involved

21 xxvi Small business entity test (1) Alternative test (2) Small business entity (3) Annual turnover (4) Use of small business entity test Affiliate issues (1) Relevance of affiliate status (2) Definition of affiliate (3) Spouse/child under 18 years of age Connected entity issues (1) Relevance of connected entity rules (2) Control percentage less than 50% (3) Right to distribution control rule (4) Discretionary trusts (5) Control because of affiliates (6) Income and capital Significant individual issues (1) Trusts and small business participation percentage (2) Discretionary trusts (3) Income and capital CGT 15-year small business exemption (1) Company or trust CGT small business 50% reduction (1) Choice for reduction not to apply (2) Individual and discretionary trust (3) Consequence of choice CGT small business retirement exemption (1) Actual proceeds not necessary (2) No actual retirement required (3) Excessive retiring allowance company (4) Under 55 years of age (5) Division 7A ITAA CGT small business roll-over relief (1) Automatic disregarding of capital gain

22 xxvii (2) Replacement asset: kind (3) Replacement asset: share or trust interest (4) Improvements (5) Rolled-over gain remade (6) Retirement exemption or roll-over relief (7) Roll-over of part of gain Deceased estates (1) CGT event within two years of death (2) Ordinary CGT rules (3) Changes resulting from death (4) Joint tenants Company and trust structuring Partnership structuring Passive asset issues (1) Passive asset (2) What tests need to be met (3) Former limited spouse affiliate rule Deferring capital losses Case study Index 377

23