Chapter 6: Tax Expenditures, Part 5

Date

Capital Gains Tax

E1 Capital gains tax exemption for valour or brave conduct decorations

Defence ($m)
2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08
.. .. .. .. .. .. .. ..
Tax expenditure type:
Exemption
2003 TES code:
E1
Commencement date:
1985
Expiry date:
 
Legislative reference:
Paragraph 118-5(b) ITAA97

Capital gains or losses arising from the disposal of a decoration awarded for valour or brave conduct are exempt from capital gains tax. This exemption is available unless the owner of the decoration had paid money or given any other property for it.

 

E2 Capital gains tax concessions for conservation covenants

Housing and community amenities ($m)
2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08
- .. .. .. .. .. .. ..
Tax expenditure type:
Exemption
2003 TES code:
E2
Commencement date:
2000
Expiry date:
 
Legislative reference:
Section 104-47 ITAA97

For capital gains tax purposes, perpetual conservation covenants are treated as a part disposal of the land, rather than the creation of a right. This treatment results in a reduced capital gain because a portion of the cost base of the land is taken into account. Previously the capital gain equalled the amount received for the covenant less incidental costs.

Landowners can also benefit from any capital gains tax concession or exemption that may apply to the capital gain. For example, a capital gain from a covenant granted in respect of land owned before 20 September 1985 is exempt. In addition, the capital gains tax discount may now apply if the land has been owned for at least 12 months.

 

E3 Capital gains tax main residence exemption

Housing and community amenities ($m)
2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08
* * * * * * * *
Tax expenditure type:
Exemption
2003 TES code:
E3
Commencement date:
1985
Expiry date:
 
Legislative reference:
Subdivision 118-B ITAA97

Capital gains or losses on the disposal of an individual’s main residence and up to two hectares of adjacent land are exempt from capital gains tax.

 

E4 Capital gains tax exemption for the disposal of assets under the Cultural Bequests and Cultural Gifts programs

Recreation and culture ($m)
2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08
* * * * * * * *
Tax expenditure type:
Exemption
2003 TES code:
E4
Commencement date:
1994, extended in 1998
Expiry date:
 
Legislative reference:
Section 118-60 ITAA97

Capital gains or losses arising from testamentary gifts made under the Cultural Bequests and Cultural Gifts programs are exempt from capital gains tax. The Cultural Bequests and Cultural Gifts programs encourage donations of significant cultural items from private collections to public art galleries, museums and libraries by offering tax benefits to the donor or the donor’s estate.

 

E5 Capital gains tax roll-over relief for worker entitlement funds

Other economic affairs (B) ($m)
2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08
- - - * * * * *
Tax expenditure type:
Deferral
2003 TES code:
E5
Commencement date:
2003
Expiry date:
 
Legislative reference:
Subdivision 126-C ITAA97

Capital gains tax roll-over relief is available for a fund that amends or replaces its trust deed in order to become an approved worker entitlement fund for fringe benefits tax purposes.

 

E6 Capital gains tax concession for carried interests paid to venture capital managers

Other economic affairs (C) ($m)
2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08
- - - 1 6 9 12 13
Tax expenditure type:
Concessional rate
2003 TES code:
E6
Commencement date:
2002
Expiry date:
 
Legislative reference:
Sections 104-255 and 118-21 ITAA97

Venture capital fund managers may be paid a performance-based share of partnership profits by investors. Such performance payments are ‘carried interests’. An entitlement to receive a
carried interest is a capital gains tax event in the hands of individual venture capital fund managers and is not treated as income. Consequently, individual managers are eligible for the 50 per cent discount on their carried interest. This concession is intended to encourage leading international venture capital managers to locate in Australia and facilitate the development of the venture capital industry.

 

E7 Capital gains tax roll-over relief for financial service providers on transition to the Financial Services Reform regime

Other economic affairs (C) ($m)
2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08
- - * * * * - -
Tax expenditure type:
Deferral
2003 TES code:
E7
Commencement date:
2002
Expiry date:
2004
Legislative reference:
Subdivision 124-O ITAA97

Capital gains tax roll-over relief is automatically applied to eligible financial service providers on transition to the Financial Services Reform regime. Financial service providers were provided the relief when, during the Financial Services Reform transitional period:

  • an existing statutory licence, registration or author was replaced with an Australian financial services licence;
  • a qualified Australian financial services licence was replaced with an Australian financial services licence; or
  • an intangible capital gains tax asset was replaced with another intangible capital gains tax asset.

The capital gains tax relief ensured that the capital gain or capital loss that would otherwise be made when the original asset comes to an end is deferred until a capital gains tax event happens to the replacement asset. This tax expenditure was introduced to assist financial service providers in the transition to the Financial Services Reform regime.

 

E8 Capital gains tax exemption for assets acquired before 20 September 1985

Other economic affairs (C) ($m)
2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08
* * * * * * * *
Tax expenditure type:
Exemption
2003 TES code:
E8
Commencement date:
1985
Expiry date:
 
Legislative reference:
Subdivision 104-A ITAA97

Capital gains or losses on assets acquired before 20 September 1985 (the commencement date of the capital gains tax regime) are generally exempt from capital gains tax.

 

E9 Capital gains tax roll-over relief for transfer of assets on marriage breakdown

Other economic affairs (C) ($m)
2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08
* * * * * * * *
Tax expenditure type:
Deferral
2003 TES code:
E9
Commencement date:
1985
Expiry date:
 
Legislative reference:
Subdivision 126-A ITAA97

An automatic roll-over relief is available where a capital gains tax asset is transferred to a spouse or former spouse because of a marriage breakdown.

 

E10 Capital gains tax deferral of liability when taxpayer dies

Other economic affairs (C) ($m)
2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08
* * * * * * * *
Tax expenditure type:
Deferral
2003 TES code:
E10
Commencement date:
1985
Expiry date:
 
Legislative reference:
Division 128 ITAA97

Generally, there is no capital gains tax taxing point when a taxpayer dies. Recognition of the gains or losses accruing during the life of the deceased is deferred until the person inheriting the asset later disposes of it. This can happen for an unlimited number of generations. An exception applies if the capital gains tax asset passes to an exempt entity, the trustee of a complying superannuation entity, or a non-resident of Australia.

 

E11 Capital gains tax exemption of non-portfolio interests in foreign companies with active businesses

Other economic affairs (C) ($m)
2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08
- - - * * * * *
Tax expenditure type:
Exemption
2003 TES code:
E11
Commencement date:
April 2004
Expiry date:
 
Legislative reference:
Subdivision 768-G ITAA97

Capital gains and losses made by Australian companies and controlled foreign companies from certain CGT events related to non-portfolio interests in foreign companies with active businesses are reduced.

 

E12 Capital gains tax exemption for venture capital

Other economic affairs (C) ($m)
2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08
- - - 20 25 30 30 30
Tax expenditure type:
Exemption
2003 TES code:
E12
Commencement date:
1999, extended in 2002
Expiry date:
 
Legislative reference:
Sections 51-54, 51-55 and Subdivisions 118-F, 118-G ITAA97

The concession introduced in 1999 provides an exemption from tax on the disposal of investments in new equity in eligible venture capital investments to non-resident pension funds that are tax exempt in their home jurisdiction (being either Canada, France, Germany, Japan, the United Kingdom, the United States or other approved jurisdictions).

The concession introduced in 2002 provides an exemption on the profits and gains in equity investments made by a venture capital limited partnership to certain non-resident partners in the partnership. The exemption is available to partner who is a tax-exempt resident of Canada, France, Germany, Japan, the United Kingdom, the United States or other approved jurisdictions, a venture capital fund of funds established and maintained in those countries, or a taxable resident of Canada, Finland, France, Germany, Italy, Japan, the Netherlands (excluding the Netherlands Antilles), New Zealand, Norway, Sweden, Taiwan, the United Kingdom, the United States or other approved jurisdictions, that holds less than 10 per cent of the committed capital of a venture capital limited partnership.

These concessions are intended to facilitate non-resident investment in the Australian venture capital industry by providing incentives for increased investment which will support patient equity capital investments in relatively high-risk start-up and expanding businesses that would otherwise have difficulty in attracting investment through normal commercial means.

 

E13 50 per cent capital gains tax exemption for small business active asset sales

Other economic affairs (C) ($m)
2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08
* 125 185 240 250 240 240 250
Tax expenditure type:
Exemption
2003 TES code:
E13
Commencement date:
1999
Expiry date:
 
Legislative reference:
Subdivision 152-C ITAA97

A capital gains tax exemption applies to 50 per cent of capital gains arising from the sale of active assets of a small business. Active assets include assets used in carrying on a business and intangible assets inherently connected with a business (for example, goodwill). This exemption applies to capital gains occurring from 21 September 1999. It replaced a 50 per cent exemption that applied only to the portion of a capital gain on the sale of a small business that was attributable to goodwill. This reduction is directed at promoting investment in small business and recognises the important contribution that small business makes to employment.

 

E14 Capital gains tax roll-over relief for small business

Other economic affairs (C) ($m)
2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08
60 35 60 75 75 70 70 70
Tax expenditure type:
Deferral
2003 TES code:
E14
Commencement date:
1997
Expiry date:
 
Legislative reference:
Subdivision 152-E ITAA97

Capital gains tax roll-over relief is available for capital gains arising from the disposal of active small business assets if the proceeds of the sale are used to purchase other active small business assets. As a result, the capital gains tax liability is deferred from the time of the sale until the ultimate disposal of the active assets. This relief is directed at promoting investment in small business and recognises the important contribution that small business makes to employment.

 

E15 Capital gains tax discount for individuals and trusts

Other economic affairs (C) ($m)
2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08
1,390 1,920 2,440 2,530 2,580 2,650 2,720 2,860
Tax expenditure type:
Exemption
2003 TES code:
E15
Commencement date:
1999
Expiry date:
 
Legislative reference:
Division 115 ITAA97

A capital gains tax exemption applies to 50 per cent of any nominal capital gain made by an individual or trust where the asset has been owned for at least one year. For assets acquired prior to 21 September 1999 and held for at least one year, an individual or trust may instead choose to be taxed on the difference between the disposal price and the frozen indexed cost base as at 30 September 1999.

 

E16 Capital gains tax scrip-for-scrip roll-over relief

Other economic affairs (C) ($m)
2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08
- 120 195 - 80 75 65 55
Tax expenditure type:
Deferral
2003 TES code:
E16
Commencement date:
1999
Expiry date:
 
Legislative reference:
Subdivision 124-M ITAA97

Capital gains tax roll-over relief is available for capital gains arising from an exchange of interests in companies or fixed trusts. The roll-over relief ensures that an equity holder who exchanges original shares or other equity for new equity in a takeover or merger can defer a capital gains tax liability arising from the exchange until the ultimate disposal of the replacement asset. The roll-over relief ensures that capital gains tax does not impede takeovers and similar reorganisations.

 

E
17 Capital gains tax roll-over relief for assets compulsorily acquired, lost or destroyed

Other economic affairs (C) ($m)
2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08
* * * * * * * *
Tax expenditure type:
Deferral
2003 TES code:
E17
Commencement date:
1985
Expiry date:
 
Legislative reference:
Subdivision 124-B ITAA97

Capital gains tax roll-over relief is available for capital gains where an asset is compulsorily acquired, lost or destroyed and the taxpayer purchases a replacement asset. In recognition that the disposal was not initiated by the taxpayer, the capital gains tax liability is deferred from the time of the compulsory acquisition, loss or destruction until the ultimate disposal of the replacement asset.

 

E18 Capital gains tax discount for investors in listed investment companies

Other economic affairs (C) ($m)
2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08
- 5 20 20 20 20 20 20
Tax expenditure type:
Deduction
2003 TES code:
E18
Commencement date:
2001
Expiry date:
 
Legislative reference:
Subdivision 115D ITAA97

A company that makes a capital gain may distribute that gain to shareholders as a dividend. The benchmark treatment for such capital gains is that they are not subject to the partial capital gains tax exemption for individuals, trusts and superannuation funds. However, resident shareholders are eligible for an income tax deduction if they receive a distribution of capital gains realised after 1 July 2001 by a listed investment company. The value of this deduction is equivalent to the value of the exemption shareholders would have been entitled if they had realised the capital gain themselves. Consequently, the deduction is available at different rates to individuals, complying superannuation funds, trusts and life insurance companies. This tax expenditure allows shareholders of certain listed companies to obtain benefits similar to those conferred by discount capital gains.

 

E19 Capital gains tax roll-over relief and exemption and related taxation relief for demergers

Other economic affairs (C) ($m)
2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08
- - * * * * * *
Tax expenditure type:
Deferral, exemption
2003 TES code:
E19
Commencement date:
2002
Expiry date:
 
Legislative reference:
Division 125 ITAA97, Section 45B ITAA36

Tax concessions are available to assist the restructuring of a corporate or a trust group by splitting the group into two or more entities or groups (that is, by demerging). There are three components to demerger relief:

  • capital gains tax roll-over relief at the shareholder or trust membership interest level for interests such as shares that are exchanged during the demerger process (this results in a tax deferral);
  • a capital gains tax exemption for certain capital gains and losses at the entity level; and
  • an income tax exemption for certain ‘demerger dividends’.

These concessions are available for demergers that occur on or after 1 July 2002 and are designed to increase efficiency by allowing greater flexibility in structuring businesses, providing an overall benefit to the economy.

 

E20 Removal of taxation of certain financial instruments at point of conversion or exchange

Other economic affairs (C) ($m)
2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08
- * * * * * * *
Tax expenditure type:
Deferral
2003 TES code:
E20
Commencement date:
2002
Expiry date:
 
Legislative reference:
Not yet legislated

Convertible interests are financial instruments that convert into shares in the company that issued the convertible interest. Exchangeable interests are instruments that convert into ordinary shares in a company other than the issuer of the exchangeable interest. A gain or loss may arise from the conversion of convertible interests that are traditional securities into ordinary shares or from the exchange of an exchangeable interest. Any such gains or losses on convertible or exchangeable interests issued after 14 May 2002 will not be subject to taxation until the ultimate disposal of the ordinary shares acquired on conversion or exchange. This concession is designed to alleviate cash flow difficulties that investors experienced at the point of conversion because the gain is in the form of shares rather than cash.

For individuals, trusts, life insurance companies and superannuation funds, gains and losses on conversion or exchange were taxed at a higher tax rate than the benchmark capital gains tax rate. Subsequent to 14 May 2002, no taxable gains or losses will arise until the ultimate disposal of the shares and these taxpayers will be able to qualify for discount capital gains tax treatment for such gains or losses.

 

E21 Capital gains tax roll-over relief for superannuation entities on transition to the new superannuation safety arrangements

-

Other economic affairs (C) ($m)
2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08
- - - * * * *
Tax expenditure type:
Deferral
2003 TES code:
New
Commencement date:
July 2004
Expiry date:
30 June 2006
Legislative reference:
Not yet legislated

Superannuation entities that merge to meet the requirements of the new superannuation safety requirements (commencing 1 July 2004) will not incur a capital gains tax liability as a result of the merger.

The roll-over will be available for the transfer of an asset of a superannuation entity to another superannuation entity that is made between 30 June 2004 and 1 July 2006.

 

E22 Exempt capital gains made by non-residents who sell a substantial interest in an Australian trust

Other economic affairs (C) ($m)
2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08
- - - - * * * *
Tax expenditure type:
Exemption
2003 TES code:
New
Commencement date:
Date of Royal Assent
Expiry date:
 
Legislative reference:
Not yet legislated

Capital gains made by foreign residents who sell substantial interests in Australian fixed trusts are exempt from tax. Such gains or losses are disregarded if at least 90percent of the underlying assets of the trust are without the necessary connection to Australia.

This ensures a comparable tax outcome irrespective of whether the foreign resident held the underlying assets directly or through an Australian fixed trust.