The Commonwealth Treasury


Tax Expenditures Statement - 2007

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Capital Gains Tax

Tax expenditures for defence

E1 Capital gains tax exemption for valour or brave conduct decorations
Defence ($m)
2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11
.. .. .. .. .. .. .. ..
Tax expenditure type:
Exemption
2006 TES code:
E1
Commencement date:
1985
Expiry date:
-
Legislative reference:
Paragraph 118-5(b) of the Income Tax Assessment Act 1997

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.

Tax expenditures for health

E2 Capital gains tax roll-over for membership interests in medical defence organisations
Health ($m)
2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11
* * * * * * * *
Tax expenditure type:
Deferral
2006 TES code:
New
Commencement date:
2007
*Category:
1+
Expiry date:
1 July 2010
Legislative reference:
Section 5 of the Medical Indemnity Act 2002

A capital gains tax roll-over is available for capital gains arising from the exchange of a membership interest in a medical defence organisation for a similar interest in another medical defence organisation where both organisations are companies limited by guarantee. The roll-over allows a member who exchanges their membership interest for the replacement interest to defer a capital gains tax liability arising from the exchange until the ultimate disposal of the replacement membership interest.

Tax expenditures for housing and community amenities

E3 Capital gains tax concessions for conservation covenants
Housing and community amenities ($m)
2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11
.. .. .. .. .. .. .. ..
Tax expenditure type:
Exemption
2006 TES code:
E2
Commencement date:
2000
Expiry date:
-
Legislative reference:
Section 104-47 of the Income Tax Assessment Act 1997

For capital gains tax purposes, perpetual conservation covenants are treated as a part disposal of 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.

E4 Capital gains tax main residence exemption
Housing and community amenities ($m)
2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11
* * * * * * * *
Tax expenditure type:
Exemption
2006 TES code:
E3
Commencement date:
1985
*Category:
4+
Expiry date:
-
Legislative reference:
Subdivision 118-B of the Income Tax Assessment Act 1997

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.

E5 Extensions to the capital gains tax main residence exemption
Housing and community amenities ($m)
2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11
* * * * * * * *
Tax expenditure type:
Exemption
2006 TES code:
E4
Commencement date:
1985 and 1997
*Category:
3+
Expiry date:
-
Legislative reference:
Sections 118-145, 118-190 and 118-200 of the Income Tax Assessment Act 1997

A taxpayer’s dwelling may continue to be treated as their main residence for up to six years (the six year rule) even if the dwelling ceases to be their main residence and is used to produce assessable income. This is provided that no other dwelling is treated as the taxpayer’s main residence during this time.

In addition, from 20 August 1996, a taxpayer who receives a dwelling as beneficiary of a deceased estate, or who owns the dwelling as the trustee of a deceased estate, may be able to ignore for capital gains tax purposes, any use of the dwelling to produce assessable income by the deceased prior to their death if:

Tax expenditures for recreation and culture

E6 Capital gains tax exemption for the disposal of assets under the Cultural Bequests and Cultural Gifts programs
Recreation and culture ($m)
2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11
* * * * * * * *
Tax expenditure type:
Exemption
2006 TES code:
E5
Commencement date:
1994, expanded in 1999
*Category:
1+
Expiry date:
-
Legislative reference:
Section 118-60 of the Income Tax Assessment Act 1997

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.

Tax expenditures for other economic affairs

E7 Capital gains tax roll-over relief for worker entitlement funds
Other economic affairs - Total labour and employment affairs ($m)
2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11
* * * * * * * *
Tax expenditure type:
Deferral
2006 TES code:
E15
Commencement date:
2003
*Category:
2+
Expiry date:
-
Legislative reference:
Subdivision 126-C of the Income Tax Assessment Act 1997

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.

E8 Capital gains tax deferral of liability when taxpayer dies
Other economic affairs - Other economic affairs, nec ($m)
2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11
* * * * * * * *
Tax expenditure type:
Deferral
2006 TES code:
E9
Commencement date:
1985
*Category:
3+
Expiry date:
-
Legislative reference:
Division 128 of the Income Tax Assessment Act 1997

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. 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.

E9 Capital gains tax discount for individuals and trusts
Other economic affairs - Other economic affairs, nec ($m)
2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11
2990 5140 6040 7420 6870 7140 7410 7770
Tax expenditure type:
Exemption
2006 TES code:
E14
Commencement date:
15 September 1999
Expiry date:
-
Legislative reference:
Division 115 of the Income Tax Assessment Act 1997

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 before 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 indexed cost base frozen as at 30 September 1999.

E10 Capital gains tax discount for investors in listed investment companies
Other economic affairs - Other economic affairs, nec ($m)
2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11
10 10 15 15 15 20 20 20
Tax expenditure type:
Deduction
2006 TES code:
E18
Commencement date:
1 July 2001
Expiry date:
-
Legislative reference:
Subdivision 115D of the Income Tax Assessment Act 1997

The shareholders of a listed investment company (LIC) who receive dividends that represent a distribution of capital gains made by that company are entitled to a deduction in respect of those dividends equivalent to the capital gains tax discount they would have received if they had realised the capital gains themselves. This concession applies in respect of gains realised by a LIC on or after 1 July 2001, provided the assets have been held by the LIC for at least 12 months.

E11 Capital gains tax exemption for assets acquired before 20 September 1985
Other economic affairs - Other economic affairs, nec ($m)
2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11
* * * * * * * *
Tax expenditure type:
Exemption
2006 TES code:
E7
Commencement date:
1985
*Category:
na
Expiry date:
-
Legislative reference:
Division 104 of the Income Tax Assessment Act 1997

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.

E12 Capital gains tax exemption of non-portfolio interests in foreign companies with active businesses
Other economic affairs - Other economic affairs, nec ($m)
2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11
* * * * * * * *
Tax expenditure type:
Exemption
2006 TES code:
E10
Commencement date:
1 April 2004
*Category:
2+
Expiry date:
-
Legislative reference:
Subdivision 768-G Income Tax Assessment Act 1997

Capital gains and losses by Australian companies and controlled foreign companies arising from certain capital gains tax events related to non-portfolio interests in foreign companies with active business interests are reduced.

E13 Capital gains tax roll-over for small business
Other economic affairs - Other economic affairs, nec ($m)
2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11
75 100 100 120 130 160 160 180
Tax expenditure type:
Deferral
2006 TES code:
E13
Commencement date:
1997
Expiry date:
-
Legislative reference:
Subdivision 152-E of the Income Tax Assessment Act 1997

A capital gains tax roll–over 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. Active assets include assets used in carrying on a business and intangible assets inherently connected with a business (for example, goodwill). An eligible small business is one where the net value of assets that the taxpayer and connected entities own is no more than $5 million (this asset test was increased to $6 million from 1 July 2007).

From 1 July 2007, small businesses with average annual turnover of less than $2 million have been able to access this concession under the Small Business Framework without having to satisfy the net value of assets test.

E14 Capital gains tax roll-over for transfer of Public Sector Superannuation Fund assets to pooled superannuation trust
Other economic affairs - Other economic affairs, nec ($m)
2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11
- - - 50 -15 -15 -15 -15
Tax expenditure type:
Deferral
2006 TES code:
E21
Commencement date:
1 July 2005
Expiry date:
-
Legislative reference:
Schedule 7, item 3 of the Superannuation (Consequential Amendments) Act 2005

An automatic capital gains tax roll-over will occur for the transfer of capital gains assets from the Public Sector Superannuation Board to the trustee of a pooled superannuation trust to establish the Public Sector Superannuation Accumulation Plan.

E15 Capital gains tax roll-over relief and exemption and related taxation relief for demergers
Other economic affairs - Other economic affairs, nec ($m)
2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11
* * * * * * * *
Tax expenditure type:
Exemption, Deferral
2006 TES code:
E19
Commencement date:
2002
*Category:
3+
Expiry date:
-
Legislative reference:
Division 125 of the Income Tax Assessment Act 1997 and subsection 44(4) of the Income Tax Assessment Act 1936

Capital gains tax (CGT) concessions are available to defer or exempt the CGT payable in respect of the restructuring of a corporate or trust group, where the group is split into two or more entities or groups (that is, by demerging). There are three elements to demerger relief:

These concessions are available to demergers that occur on or after 1 July 2002.

E16 Capital gains tax roll-over relief for assets compulsorily acquired, lost or destroyed
Other economic affairs - Other economic affairs, nec ($m)
2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11
* * * * * * * *
Tax expenditure type:
Deferral
2006 TES code:
E17
Commencement date:
1985
*Category:
2+
Expiry date:
-
Legislative reference:
Subdivision 124-B of the Income Tax Assessment Act 1997

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 liability is deferred from the time of the compulsory acquisition, loss or destruction until the ultimate disposal of the replacement asset.

This measure has been extended to establish the same treatment for a compulsory acquisition whether by a private or public acquirer and to provide greater flexibility for landowners whose land is compulsorily subject to a mining lease.

E17 Capital gains tax roll-over relief for financial service providers on transition to the Financial Services Reform regime
Other economic affairs - Other economic affairs, nec ($m)
2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11
* * * * * * * *
Tax expenditure type:
Deferral
2006 TES code:
E6
Commencement date:
2002
*Category:
2+
Expiry date:
2004
Legislative reference:
Subdivision 124-O of the Income Tax Assessment Act 1997

An automatic capital gains tax (CGT) roll-over is available to eligible financial service providers on transition to the Financial Services Reform regime. Financial service providers were provided the roll-over when, during the Financial Services Reform transitional period:

E18 Capital gains tax roll-over relief for superannuation entities on transition to the new superannuation safety arrangements
Other economic affairs - Other economic affairs, nec ($m)
2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11
- - * * * * * *
Tax expenditure type:
Deferral
2006 TES code:
E23
Commencement date:
1 July 2004
*Category:
1+
Expiry date:
30 June 2006
Legislative reference:
Subdivision 126-F of the Income Tax Assessment Act 1997

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 from 1 July 2004 to 30 June 2006.

E19 Capital gains tax roll-over relief for transfer of assets on marriage breakdown
Other economic affairs - Other economic affairs, nec ($m)
2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11
* * * * * * * *
Tax expenditure type:
Deferral
2006 TES code:
E8
Commencement date:
1985
*Category:
2+
Expiry date:
-
Legislative reference:
Subdivision 126-A of the Income Tax Assessment Act 1997

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

Legislation is pending to extend the existing capital gains tax roll-over on marriage breakdown to assets transferred under a binding financial agreement or an arbitral award entered into under the Family Law Act 1975 or similar arrangements under State, Territory or foreign legislation.

This also includes roll-over where there is a transfer of a capital gains tax asset from a small superannuation fund to another complying superannuation fund following marriage breakdown but only where such transfers meet specific conditions.

E20 Capital gains tax scrip-for-scrip roll-over relief
Other economic affairs - Other economic affairs, nec ($m)
2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11
-1 -21 82 4 3 2 1 -
Tax expenditure type:
Deferral
2006 TES code:
E16
Commencement date:
1999
Expiry date:
-
Legislative reference:
Subdivision 124-M of the Income Tax Assessment Act 1997

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 arrangements. This tax expenditure is likely to vary considerably depending upon actual takeover and merger activity. Estimates for the projection years are based on the average activity in preceding periods.

E21 Captial gains tax - indexation of cost base
Other economic affairs - Other economic affairs, nec ($m)
2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11
* * * * * * * *
Tax expenditure type:
Reduction in taxable value
2006 TES code:
New
Commencement date:
20 September 1985
*Category:
3+
Expiry date:
-
Legislative reference:
Division 114 of the Income Tax Assessment Act 1997 and
Section 110-36 of the Income Tax Assessment Act 1997

For assets acquired at or before 11:45 am EST on 21 September 1999, taxpayers may choose to calculate the capital gain on the asset by reference to its indexed cost base. Taxpayers that choose to use the indexed cost base cannot access the capital gains tax discount. The indexed cost base for these assets was frozen as at 30 September 1999.

E22 Capital gains tax - demutualisation of health insurers
Other economic affairs - Other economic affairs, nec ($m)
2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11
- - - - - 26 2 1
Tax expenditure type:
Exemption
2006 TES code:
New
Commencement date:
1 July 2007
Expiry date:
-
Legislative reference:
Not yet legislated

Policyholders of a health insurer which demutualises will not be subject to capital gains tax on any capital gains or losses that they realise on the exchange of rights in the insurer for shares in the demutualised entity. In addition, any capital gains or losses arising from transactions which relate to the mechanism that allows policyholders to receive shares will also be disregarded for capital gains tax purposes.

E23 Exemption from the market value substitution rule in relation to the cancellation or surrender of interests in widely held entities
Other economic affairs - Other economic affairs, nec ($m)
2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11
- - - * * * * *
Tax expenditure type:
Exemption
2006 TES code:
New
Commencement date:
For CGT events that occur during the 2006-07 income year and after
*Category:
1+
Expiry date:
-
Legislative reference:
Section 116-30 of the Income Tax Assessment Act 1997

The capital gains tax market value substitution rule deems assets that are disposed of for less than their market value to have been disposed for a consideration equal to their market value. This measure exempts membership interests in widely-held entities that are disposed of by way of a redemption, cancellation or surrender (capital gains tax event C2) of the interest from the market value substitution rule, with effect from the 2006-07 income year.

Legislation implementing this change is pending.

E24 Extension to the capital gains tax roll-over relief for statutory licenses
Other economic affairs - Other economic affairs, nec ($m)
2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11
- - - 20 90 * * *
Tax expenditure type:
Deferral
2006 TES code:
New
Commencement date:
2006
*Category:
1+
Expiry date:
-
Legislative reference:
Subdivision 124-C of the Income Tax Assessment Act 1997

A capital gains tax roll-over is available where a statutory licence ends and is replaced with a new licence that authorises substantially similar activity to the original licence. From the 2006-07 income year, a partial capital gains tax roll-over is available where a statutory licence ends and the licence holder receives a new licence and non-licence capital proceeds. The part of a capital gain or capital loss on the ending of the original licence referable to the non-licence capital proceeds is subject to tax at that time, whereas the part referable to the extent the new licence replaces the original licence is rolled over.

E25 Quarantining of capital losses
Other economic affairs - Other economic affairs, nec ($m)
2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11
* * * * * * * *
Tax expenditure type:
Denial of deduction
2006 TES code:
New
Commencement date:
20 September 1985
*Category:
4-
Expiry date:
-
Legislative reference:
Section 100-50 of the Income Tax Assessment Act 1997

Capital losses may only be offset against capital gains, which means they are quarantined from ordinary income.

E26 Removal of capital gains tax threshold for testamentary gifts
Other economic affairs - Other economic affairs, nec ($m)
2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11
- - - * * * * *
Tax expenditure type:
Exemption
2006 TES code:
E22
Commencement date:
1 July 2005
*Category:
1+
Expiry date:
-
Legislative reference:
Section 118-60 of the Income Tax Assessment Act 1997

Testamentary gifts (that is, gifts made under a will) of certain property to deductible gift recipients are no longer required to be valued at greater than $5,000 to access the capital gains tax exemption.

E27 Removal of taxation of certain financial instruments at point of conversion or exchange
Other economic affairs - Other economic affairs, nec ($m)
2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11
* * * * * * * *
Tax expenditure type:
Deferral
2006 TES code:
E20
Commencement date:
2002
*Category:
2+
Expiry date:
-
Legislative reference:
Sections 26BB and 70B of the Income Tax Assessment Act 1997

Gains or losses from conversion or exchange of convertible or exchangeable interests issued after 14 May 2002 are not subject to taxation at the point of conversion or exchange, but, instead, taxation is deferred until the ultimate disposal of the shares.

Convertible interests are financial instruments that convert into shares in the company that issued the convertible interest. Exchangeable interests are instruments that convert into shares in a company other than the issuer.

E28 Small business capital gains tax 50 per cent reduction
Other economic affairs - Other economic affairs, nec ($m)
2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11
240 320 370 405 425 500 530 575
Tax expenditure type:
Exemption
2006 TES code:
E12
Commencement date:
1999
Expiry date:
-
Legislative reference:
Subdivision 152-C of the Income Tax Assessment Act 1997

Fifty per cent of the capital gains arising from the sale of active assets in an eligible small business are exempt from capital gains tax. This applies in addition to any capital gains tax discount entitlement of the taxpayer. Active assets include assets used in carrying on a business and intangible assets inherently connected with a business (for example, goodwill). An eligible small business is one where the net value of assets that the taxpayer and connected entities own is no more than $6 million.

From 1 July 2007, small businesses with average annual turnover of less than $2 million have been able to access this concession under the Small Business Framework without having to satisfy the net value of assets test.

E29 Tax exemption for certain foreign investment in venture capital
Other economic affairs - Other economic affairs, nec ($m)
2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11
- - - - * * * *
Tax expenditure type:
Exemption
2006 TES code:
E11
Commencement date:
1999
*Category:
2+
Expiry date:
-
Legislative reference:
Sections 51-54 and 51-55 and Subdivisions 118-F and 118-G of the of the Income Tax Assessment Act 1997; further enhancements not yet legislated.

Certain non-resident investors are exempt from tax on profits and gains in respect of their eligible venture capital investments.

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 from tax 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 a 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.

The venture capital limited partnerships regime is to be enhanced by:

 

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