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Chapter 13: Involuntary receipts

A case for reform

The current taxation rules for involuntary receipts do not result in consistent treatment of involuntary receipts based on a common set of principles. As a consequence, the existing taxation treatment of involuntary transactions will vary according to the nature and form of the transaction.

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A strategy for reform

To pursue a simpler and more consistent treatment based on a common set of principles
for taxing involuntary receipts.

Reform option 1
Make no tax distinction between voluntary and involuntary receipts.

Reform option 2
Distinguish between involuntary and voluntary receipts on an equitable and consistent basis, and defer the tax liability on the former in certain circumstances.

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Key policy issues
Involuntary receipts would be taxed when received. Symmetrically, losses that arise from an involuntary event would be allowable, as either an income loss (wasting assets) or a capital loss. What is the appropriate boundary line for determining whether a transaction is voluntary? Interaction of the CGT and income tax provisions in relation to compensation receipts. What is a replacement asset? Maintaining pre-CGT status for replacement assets. Treatment of losses. Anti-avoidance rules.
Advantages
- No boundary problems
- Consistent with income benchmark
- Symmetry between treatment of gains and losses

- Disadvantages
 Potential cash flow problems

Sub-issue

What constitutes ‘compulsion’ where the parties have scope to agree.

Sub-issue

Treatment of involuntary receipts that may be subject to ordinary income tax.

Sub-issue

If an appropriate replacement asset is not acquired, whether grounds for denying rollover relief exist.

Sub-issue

Appropriate rules to deal with more expensive replacement assets.

Sub-issue

Whether losses could be realisable immediately upon involuntary disposal
or be deferred.

Sub-issue

Whether generic value shifting rules for related parties would suffice.