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Arbitary Ruling by Commissioner undermines Capital Gains Law

Publication date: 01 Aug 97 | Source: THE TAX INSTITUTE

Arbitary Ruling by Commissioner undermines Capital Gains Law

The release of a draft Ruling by the Commissioner of Taxation (TR 97/D10) on the circumstances in which the discretion to require public companies and publicly traded unit trusts to trace back to natural persons with individual interests of less than 1% undermines the broad intent of legislation, according to Taxation Institute of Australia President, Mr Richard Gelski.

"The legislation passed by the Parliament was intended to clarify the application of the capital gains tax regime to property held by public companies prior to 20 September 1985," Mr Gelski said.

"However, this draft Ruling which seeks to lay down an arbitrary 20% "tracing rule", not found in the legislation, greatly complicates the issue and could significantly increase compliance costs to companies," he said.

The draft Ruling will negate the safe harbour rule set out in the legislation whereby if a public company has a number of shareholders with less than 1% interests in the company, these can be aggregated and treated as a "notional single shareholder". A notional single shareholder is taken to have had continuity of interest in the shares since 1985 except where it is reasonable to assume otherwise.

"The arbitrary 20% rule, whilst subject to some limited safeguards in the draft Ruling is likely to become the de facto test if the Ruling is issued in its present state, under which the Commissioner will require all companies with a notional single shareholder of more than 20% to undertake costly and time consuming tracing of the natural owners of their shares," Mr Gelski said.

"In many cases, particularly where shares are held overseas, it is impossible for a company to determine the natural persons who own the shares. It was precisely this reason that led to the Government introducing the notional single shareholder safe harbour. The discretion given to the Commissioner to disregard the safe harbour was intended to only be applied where there was clear evidence that the underlying majority interests in the company or public unit trust had changed."

"The adoption of an arbitrary 20% rule in the draft Ruling is totally at odds with the safe harbour rules that were adopted in the legislation that was approved and passed by Parliament," he said.

"Under the safe harbour rules, if a company's shareholders comprise 30% of shareholders with less than 1% each and a single holder with say a 25% holding who has held the shares since 20 September 1985, then for the purpose of applying section 160ZZS, the company would be taken not to have triggered the section, as the majority of the underlying interests, in this case 55%, in the company are not taken to have changed since 1985," Mr Gelski said.

Mr Gelski called on the Commissioner to immediately withdraw the draft Ruling.