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Bills Digest No. 189  1999-2000New Business Tax System (Capital Gains Tax) Bill 1999


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WARNING:
This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments. This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

CONTENTS

Passage History
Purpose
Background
Main Provisions
Endnotes
Contact Officer & Copyright Details

Passage History

New Business Tax System (Capital Gains Tax) Bill 1999

Date Introduced: 25 November 1999

House: House of Representatives

Portfolio: Treasury

Commencement: Generally, on Royal Assent. However, commencement of Schedule 1 is also tied to the commencement of related legislation.(1)

Purpose

To:

  • streamline existing capital gains tax (CGT) concessions for small businesses and provide for a further concession in certain disposal circumstances

  • provide for CGT roll-over relief for certain shareholders and unitholders in the case of takeovers, and

  • provide for a CGT exemption for certain non-resident tax exempt pension funds on disposal of particular venture capital investments.

The Bill also makes consequential amendments to the Income Tax Assessment Act 1936 and Income Tax Assessment Act 1997.(2)

Background

Passage of the Bill

On 21 September 1999 the Treasurer announced the first stage of the Government's response to the Ralph Review.(3) Key changes in 'stage 1' were aimed at:

  • lowering the company tax rate from 36% to 30%

  • reducing thee compliance burden of small businesses

  • tightening the 13 month 'prepayment' rule

  • implementing the entity tax arrangements outlined in A New Tax System

  • modifying arrangements for life insurers and policy holders in A New Tax System, and

  • introducing an internationally competitive capital gains tax regime.(4)

Along with the New Business Tax System (Integrity and Other Measures) Bill 1999,(5) the New Business Tax System (Income Tax Rates) Bill (No. 1) 1999,(6) New Business Tax System (Income Tax Rates) Bill (No. 2) 1999 and the New Business Tax System (Capital Allowances) Bill 1999,(7) the New Business Tax System (Capital Gains Tax) Bill 1999 was intended to implement stage 1.

The New Business Tax System (Capital Gains Tax) Bill 1999 was introduced into the House of Representatives on 25 November 1999 and was passed by the Senate on 29 November 1999.(8) The Opposition agreed with the Government to expedite the Bill's passage 'because of agreement reached between the Government and the Opposition on the business tax package to enable consideration of the total part of stage 1' in the Senate.(9)

A Competitive Capital Gains Tax Regime

The Bill makes a number of changes to capital gains tax (CGT) arrangements which, according to the Treasurer, are aimed at 'improving incentives to save and invest'.(10) One change aimed at streamlining the existing CGT concessions for small businesses. Two other changes related to CGT treatment of 'scrip-for-scrip' takeovers and venture capital.

Streamlining existing concessions for small business taxpayers(11)

Previously, a small business taxpayer could choose from at least three concessions in respect of dealing with capital gain. S/he could claim only one of the following:

  • a 50% exemption for 'goodwill'(12)

  • a 100% exemption for capital gains rolled over into replacement assets,(13) or

  • a $500,000 exemption for capital gains used to fund retirement.

The amendments allowed the taxpayer to benefit from more than one of these concessions. The 'goodwill' exemption was replaced with a 50% 'active asset' exemption for businesses with net assets of $5m or less. (An 'active asset' is an asset which is used or held ready for use by the small business in the course its business or an intangible asset that is connected with a business activity carried on by the small business.)(14) The rules relating to small business retirement exemption and roll-over relief were streamlined.

Removing impediments for scrip-for-scrip takeovers(15)

In scrip-for-scrip takeovers (or share swap merger transactions) consideration is given at least in part by the transfer of shares from the bidding company to shareholders in the target company. Previously these transactions were treated as disposals for the purposes of CGT ('CGT events'). As a result, while the shareholder in the target company continued their 'equity' through the merged entity, their capital base was diminished by the transfer. In general, this acted as a disincentive to domestic mergers and acquisitions and a temptation for companies to establish overseas. In particular, two clear concerns related to the inequality in the treatment of shareholders in target and bidding companies(16) and the potential impact on specific groups of investors particularly self-funded retirees.(17)

In order to limit the potential for transfers between small related companies, and therefore the scope for tax avoidance, a parliamentary committee suggested that any roll-over relief should be limited to publicly listed companies.(18) The Ralph Review suggested that it be applied more widely to companies where at least one of the entities was widely held, regardless of whether they are listed or unlisted, and to fixed trusts.(19)

Under the new arrangements, where a general offer is made to acquire voting shares in a target company, etc, a target company shareholder receives similar interests in the bidding company, and the bidding entity acquires 80% of the interests in that company, CGT liability is deferred until the asset is sold. It is calculated on the basis of the original tax value (therefore capturing any increase in capital value as a result of the takeover).(20)

Improving incentives for venture capital investments.(21)

The Ralph Review considered that CGT posed a serious threat to overseas and domestic venture capital. It was felt that overseas tax-exempt entities (eg pension funds in the United States) were unwilling, due to the comparatively harsh tax treatment, to invest in high risk, newly established Australian companies. Not only did this diminish the pool of venture capital in Australia, but it restricted the range of knowledge and experience in assessing and undertaking high risk investments.

Under the new arrangements, 'venture capital entities' (tax exempt superannuation funds in Canada, France, Germany, Japan, the UK and the US) are not liable for CGT in respect of disposal of 'venture capital equity' (share in a company or interest in a trust for which the owner bears substantial risk) in a 'resident investment vehicle' (company or fixed trust resident only in Australia). The 'venture capital entity' must be registered with the Pooled Development Fund Registration Board. (22)

Main Provisions

As this Bill has been enacted, there is no discussion of the main provisions. No amendments were proposed during debates in either chamber.

Endnotes

  1. If item 1 of Schedule 9 to the New Business Tax System (Integrity and Other Measures) Act 1999 commences before Royal Assent, then Schedule 1 of this Bill commences immediately after the commencement of that item.
  2. Senate Tabling Office, Bills List (1999 Final Edition-Revised), 1 February 2000, p 88.
  3. Review of Business Taxation, A Tax System Redesigned: More certain, equitable and durable - Report, July 1999 at http://www.rbt.treasury.gov.au/publications/paper4/index.htm [26/04/00].
  4. The Treasurer, 'The New Business Tax System', Press Release (No.058), 21 September 1999 at http://www.treasurer.gov.au/default.asp?main=PressReleases/1999/058.asp [26/04/00]
  5. See Bills Digest no. 80 1999-2000 at
    http://www.aph.gov.au/library/pubs/bd/1999-2000/2000BD080.htm [26/04/00].
  6. See Bills Digest no. 84, 1999-2000 at
    http://www.aph.gov.au/library/pubs/bd/1999-2000/2000BD084.htm [26/04/00].
  7. See Bills Digest no. 85, 1999-2000 at
    http://www.aph.gov.au/library/pubs/bd/1999-2000/2000BD085.htm [26/04/00].
  8. Its passage was expedited by suspension of Senate Standing Order No. 111 which generally requires second reading of bills introduced in the House of Representatives in a give session to commence in the Senate in the following session.
  9. The Hon. Simon Crean, MP, House of Representatives, Debates, 25 November 1999, p. 12717, New Business Tax System (Capital Gains Tax) Bill 1999 Second Reading.
  10. The Treasurer, 'The New Business Tax System', Press Release (No.058), 21 September 1999 at http://www.treasurer.gov.au/default.asp?main=PressReleases/1999/058.asp [26/04/00]
  11. The Treasurer, 'The New Business Tax System', Press Release (No.058), 21 September 1999, Attachment G at http://www.treasurer.gov.au/treasurer/pressreleases/1999/downloads/E.pdf [26/04/00]
  12. Where the net worth of the business's assets was less than $2.3m.
  13. Where the net worth of the business's assets was less than $5m.
  14. Income Tax Assessment Act 1997, s 152-40(1).
  15. The Treasurer, 'The New Business Tax System', Press Release (No.058), 21 September 1999, Attachment G at http://www.treasurer.gov.au/treasurer/pressreleases/1999/downloads/G.pdf [26/04/00]
  16. Parliamentary Joint Committee on Corporations and Securities, para 3.77-3.79. A zipped version of the document is available at http://www.aph.gov.au/senate/committee/corp_sec_ctte/clerpb/clerpb-doc.zip [26/04/00].
  17. Parliamentary Joint Committee on Corporations and Securities, para 3.76.
  18. 'The Committee recommends that, irrespective of progress on other much needed capital gains tax reform, roll over relief from Capital Gains Tax be provided where shares are compulsorily acquired and when a takeover offer for a publicly listed company is accepted on a scrip for scrip basis': Parliamentary Joint Committee on Corporations and Securities, op cit, para 3.82.
  19. Ralph Review, p 617.
  20. Income Tax Assessment Act 1997, Subdivision 124-M.
  21. The Treasurer, 'The New Business Tax System', Press Release (No.058), 21 September 1999, Attachment H at http://www.treasurer.gov.au/treasurer/pressreleases/1999/downloads/H.pdf [26/04/00].
  22. Income Tax Assessment Act 1997, Subdivision 118-G and Pooled Development Funds Act 1992, Part 7A.

Contact Officer and Copyright Details

Nathan Hancock
22 June 2000
Bills Digest Service
Information and Research Services

This paper has been prepared for general distribution to Senators and Members of the Australian Parliament. While great care is taken to ensure that the paper is accurate and balanced, the paper is written using information publicly available at the time of production. The views expressed are those of the author and should not be attributed to the Information and Research Services (IRS). Advice on legislation or legal policy issues contained in this paper is provided for use in parliamentary debate and for related parliamentary purposes. This paper is not professional legal opinion. Readers are reminded that the paper is not an official parliamentary or Australian government document.

IRS staff are available to discuss the paper's contents with Senators and Members
and their staff but not with members of the public.

ISSN 1328-8091
© Commonwealth of Australia 2000

Except to the extent of the uses permitted under the Copyright Act 1968, no part of this publication may be reproduced or transmitted in any form or by any means, including information storage and retrieval systems, without the prior written consent of the Parliamentary Library, other than by Members of the Australian Parliament in the course of their official duties.

Published by the Department of the Parliamentary Library, 2000.

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