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New CGT law to cost taxpayers millions

Publication date: 14 Jul 97 | Source: THE TAX INSTITUTE

Flaws in the drafting of the Government's recently released exposure draft of the rewrite of the CGT law could cost taxpayers millions of dollars if left unaddressed, according to Taxation Institute Vice President, Mr Gordon Cooper.

"This exposure draft is littered with errors which could amount to the payment of million of dollars of tax in circumstances where there has clearly been no capital gain," Mr Cooper said.

"These errors are a major embarrassment to the Tax law Improvement Team, who have spent the last 18 months working on the new CGT provisions. If this new law is to come into operation on July 1, 1998 as expected, the TLIP Team has its work cut out for it," he said.

One of the main changes made in the draft concerns the way in which distributions from unit trusts are taxed in order to allow unit holders to make only one cost base adjustment each year. Under the present CGT law where distributions are received by a unit holder, the tax free portion of the distribution is required to be deducted from each unit's cost base. CGT becomes payable once the cost base is reduced to zero. With unit holders receiving four or more distributions each year, the ongoing compliance costs with holding units, and the cost to determine CGT liabilities on the disposal are significant.

"The change doesn't work because each time a distribution is made, under the exposure draft, all of the previous distributions made in the year must be deducted from the cost base, rather than requiring only one deduction at the end of the year," Mr Cooper said.

"Another serious flaw in the draft, if not fixed, will result in damages awards that are now not taxed, being subject to full taxation in circumstances where no capital gain will have arisen."

"Under the current law where damages are awarded, for example, to compensate for misrepresentations as to the value of a property purchased or where an insurance payout is received, for CGT purposes, the cost base of the property is reduced by the amount of the award or payout, and generally no CGT is payable. Under the exposure draft, CGT will be payable on the compensation or payout," he said.

"This change is all the more galling because of the vast amounts of time and energy spent by the Taxation Institute and other professional bodies with the Tax Office to resolve this problem under the existing law," Mr Cooper said.

A number of other undocumented changes contained in the exposure draft will also have an adverse impact on taxpayers if not fixed. These include changes to the tests in the present law which tax disposals of pre-CGT shares in private companies, doubts on the way in which the draft treats for CGT purposes separate rights under contracts, uncertainty over whether CGT assets will now extend to non property rights, uncertainty over whether bequests to charities will be subject to CGT and uncertainty over the status of personal use assets held for investment.

"The TLIP Team must go back to the drawing board and address these fundamental drafting errors if it expects the industry to take this rewrite seriously. Otherwise, the penalty will be paid by taxpayers and it will amount to millions," Mr Cooper said.