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NEW BUSINESS TAX SYSTEM (TAXATION OF FINANCIAL ARRANGEMENTS) ACT (NO. 1) 2003 NO. 133, 2003 - SCHEDULE 1

- Removal of taxing point on conversion or exchange of traditional securities

Income Tax Assessment Act 1936

1 Subsection 26BB(1)

Insert:

"connected entity" has the same meaning as in the Income Tax Assessment Act 1997 .

2 At the end of section 26BB

Add:

(4)
Subsection (2) does not apply to a gain on the disposal or redemption of a traditional security if:

(a) the disposal or redemption occurs because the traditional security is converted into ordinary shares in a company that is:
(i) the issuer of the traditional security; or
(ii) a connected entity of the issuer of the traditional security; and
(b) the traditional security was issued on the basis that it will or may convert into ordinary shares in:
(i) the issuer of the traditional security; or
(ii) the connected entity.

(5)
Subsection (2) does not apply to a gain on the disposal or redemption of a traditional security if:

(a) the disposal or redemption is in exchange for ordinary shares in a company that is neither:
(i) the issuer of the traditional security; nor
(ii) a connected entity of the issuer of the traditional security; and
(b) in the case of a disposal—the disposal is to:
(i) the issuer of the traditional security; or
(ii) a connected entity of the issuer of the traditional security; and
(c) the traditional security was issued on the basis that it will or may be:
(i) disposed of to the issuer of the traditional security or to the connected entity; or
(ii) redeemed;
in exchange for ordinary shares in the company.
3 After subsection 70B(2A)

Insert:

(2B)
A deduction is not allowable under subsection (2) for a loss on the disposal or redemption of a traditional security if:

(a) the disposal or redemption occurs because the traditional security is converted into ordinary shares in a company that is:
(i) the issuer of the traditional security; or
(ii) a connected entity of the issuer of the traditional security; and
(b) the traditional security was issued on the basis that it will or may convert into ordinary shares in:
(i) the issuer of the traditional security; or
(ii) the connected entity.

(2C)
A deduction is not allowable under subsection (2) for a loss on the disposal or redemption of a traditional security if:

(a) the disposal or redemption is in exchange for ordinary shares in a company that is neither:
(i) the issuer of the traditional security; nor
(ii) a connected entity of the issuer of the traditional security; and
(b) in the case of a disposal—the disposal is to:
(i) the issuer of the traditional security; or
(ii) a connected entity of the issuer of the traditional security; and
(c) the traditional security was issued on the basis that it will or may be:
(i) disposed of to the issuer of the traditional security or to the connected entity; or
(ii) redeemed;
in exchange for ordinary shares in the company.

Income Tax Assessment Act 1997

4 Section 109-55 (after table item 11)

Insert:


11A


You acquire shares in a company in exchange for the disposal of an exchangeable interest, and the disposal of the exchangeable interest was to:

(a) the issuer of the exchangeable interest; or
(b) a connected entity of the issuer of the exchangeable interest


when the disposal of the exchangeable interest happened


section 130-105


11B


You acquire shares in a company in exchange for the redemption of an exchangeable interest


when the redemption of the exchangeable interest happened


section 130-105


5 After section 112-75

Insert:

112-77 Exchangeable interests


Exchangeable interests


Item


In this situation:


Element affected:


See section:


1


You acquire shares in a company in exchange for the disposal of an exchangeable interest, and the disposal of the exchangeable interest was to:

(a) the issuer of the exchangeable interest; or
(b) a connected entity of the issuer of the exchangeable interest


First element of cost base and reduced cost base


130-105


2


You acquire shares in a company in exchange for the redemption of an exchangeable interest


First element of cost base and reduced cost base


130-105


6 Paragraph 122-25(4)(a)

Omit "option or", substitute "option,".

7 Paragraph 122-25(4)(a)

Omit "; and", substitute "or * exchangeable interest; and".

8 At the end of paragraph 122-25(4)(b)

Add "or in exchange for the disposal or redemption of the exchangeable interest".

9 Paragraph 122-135(4)(a)

Omit "option or", substitute "option,".

10 Paragraph 122-135(4)(a)

Omit "; and", substitute "or * exchangeable interest; and".

11 At the end of paragraph 122-135(4)(b)

Add "or in exchange for the disposal or redemption of the exchangeable interest".

12 Paragraph 126-50(3)(a)

After "134", insert ", or an * exchangeable interest".

13 At the end of paragraph 126-50(3)(b)

Add "or in exchange for the disposal or redemption of the exchangeable interest".

14 Section 130-1

Repeal the section, substitute:

130-1 What this Division is about

This Division sets out the rules for these kinds of investments:


* bonus shares and units; and

* rights; and

* convertible interests; and

* shares acquired under an employee share scheme; and

* exchangeable interests.

Most are about modifying the cost base and reduced cost base of a CGT asset.

15 After section 130-90

Insert:

Subdivision 130-E—Exchangeable interests

Table of sections

130-100 Exchangeable interest
130-105 Shares acquired in exchange for the disposal or redemption of an exchangeable interest

130-100 Exchangeable interest

An exchangeable interest is a * traditional security that:

(a) was issued on the basis that it will or may be:
(i) disposed of to the issuer of the traditional security or to a * connected entity of the issuer of the traditional security; or
(ii) redeemed;
in exchange for * shares in a company that is neither:
(iii) the issuer of the traditional security; nor
(iv) a connected entity of the issuer of the traditional security; and
(b) was issued on or after 1 July 2001.
130-105 Shares acquired in exchange for the disposal or redemption of an exchangeable interest

Cost base and reduced cost base

(1)
The table has effect:


Exchange of an exchangeable interest


Item


In this situation:


The rules about cost base and reduced cost base are modified in this way...


1


You * acquire shares in a company in exchange for the disposal of an * exchangeable interest, and the disposal of the exchangeable interest was to:

(a) the issuer of the exchangeable interest; or
(b) a * connected entity of the issuer of the exchangeable interest.


The first element of the * cost base of the shares is the sum of:

(a) the cost base of the exchangeable interest at the time of the disposal; and
(b) any amount paid for the exchange, except to the extent that the amount is represented in the paragraph (a) amount; and
(c) all the amounts to be added under subsection (2).

The first element of their * reduced cost base is worked out similarly.


2


You * acquire shares in a company in exchange for the redemption of an * exchangeable interest.


The first element of the * cost base of the shares is the sum of:

(a) the cost base of the exchangeable interest at the time of the redemption; and
(b) any amount paid for the exchange, except to the extent that the amount is represented in the paragraph (a) amount; and
(c) all the amounts to be added under subsection (2).

The first element of their * reduced cost base is worked out similarly.


(2)
An amount is to be added under this subsection if a * capital gain on the disposal or redemption of the exchangeable interest has been reduced under section 118-20. This is so even though a capital gain that is made on the disposal or redemption of the exchangeable interest is disregarded under subsection (4). The amount to be added is the amount of the reduction.

(3)
The payment for the exchange can include giving property (see section 103-5).

Other CGT consequences

(4)
The table has effect:


Exchange of an exchangeable interest


Item


In this situation:


This is the result:


1


You * acquire shares in a company in exchange for the disposal of an * exchangeable interest, and the disposal of the exchangeable interest was to:

(a) the issuer of the exchangeable interest; or
(b) a * connected entity of the issuer of the exchangeable interest.


(a) you are taken to have acquired the shares when the disposal of the exchangeable interest happened; and
(b) a * capital gain or * capital loss you make from the disposal of the exchangeable interest is disregarded.


2


You * acquire shares in a company in exchange for the redemption of an * exchangeable interest.


(a) you are taken to have acquired the shares when the redemption of the exchangeable interest happened; and
(b) a * capital gain or * capital loss you make from the redemption of the exchangeable interest is disregarded.


Application

(5)
This section applies to the disposal or redemption of an * exchangeable interest on or after 1 July 2001.

16 Subsection 995-1(1)

Insert:

"exchangeable interest" has the meaning given by section 130-100.

17 Application of amendments

(1) The amendments of sections 26BB and 70B of the Income Tax Assessment Act 1936 made by this Schedule apply to the disposal or redemption of a traditional security if the traditional security was issued after 7.30 pm, by legal time in the Australian Capital Territory, on 14 May 2002.
(2) The amendments of sections 122- 25, 122-135 and 126-50 of the Income Tax Assessment Act 1997 made by this Schedule apply to the disposal or redemption of an exchangeable interest on or after 1 July 2001.


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