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Chapter 28: Towards single recognition of losses and gains

A case for reform

Under the present capital gains tax system, duplication of an economic loss or gain — capital or revenue, realised or unrealised — may arise on disposal of the interests in the entity that has produced the loss or gain.

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A strategy for reform

To recognise an economic loss or gain only once. To integrate shareholder and entity interests. There is also a need to balance the integrity benefits of each option against the associated costs, including compliance and administration costs.

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Key policy
issues
How could loss cascading be prevented? How could duplication of realised losses be prevented? How could duplication of unrealised losses be prevented? How could duplication of realised gains be prevented? How could duplication of unrealised gains be prevented?
Option
Implement consolidation and remove loss transfer and asset roll over concessions outside consolidation. No loss on asset transfers within same majority-owned group.
Option
Amend existing continuity of ownership test. Remove same business test.







see below
V

Options
- Adopt a Canadian-based approach; or
- Adopt a United Kingdom-based approach.
Option
Extend current rules to allow a loss to all new equity owners. The option is made possible by the full franking of currently untaxed inter-entity distributions.




see below
V

Option
Extend current rules to allow a loss to all new equity owners. Again, the option is made possible by full franking (or inter-entity taxation).
Further issues
How could the proposed cost base models for consolidation be used to prevent duplication of realised losses and realised gains for majority ownership cases?

Option 1
Adjust equity cost bases as under the entity-based model.

Option 2
Adjust equity cost bases as under the asset-based model.