Transitional Provisions
23.31. Only capital gains arising after the introduction of the tax should be liable to tax. The Committee however rejects the view that only gains on assets acquired after the introduction of the tax should be liable. Such an approach would be inequitable and would have a very powerful lock-in effect for existing owners of appreciating assets.
23.32. To ensure that only capital gains arising after the date selected for commencement of the tax are subject to levy, and also that a deduction is given for losses incurred after that date, it is necessary to lay down a procedure for valuing all assets (other than those exempted from the tax) at the commencement date, usually referred to as ‘valuation day’. Furthermore, to reduce the scope for investors to rearrange their affairs so as to benefit from advance notice of the date from which the tax will commence, it is proposed that the valuation day be selected and announced after the decision to introduce the tax has been publicised and after the date selected as valuation day has passed. This should be the case even if the recommendation as to the deferment of introduction of the tax and publication of the Green Paper is adopted. This procedure was followed in Canada, apparently with success.
23.33. The major transitional problem is fixing the value of all assets (other than assets the gains from which are
exempt from tax) at the valuation date. In the United Kingdom and Canada specific provisions were introduced to reduce
to a minimum the occasions when special valuations by independent or government valuers would be required. The
transitional provisions in the 1974–75 Budget proposals have drawn on the United Kingdom and Canadian experience.
While there are numerous aspects
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of the transitional provisions not yet announced, the Committee is in
general agreement with the principles which it appears are to apply, with the one exception referred to in the next
paragraph.
23.34. One method of determining a gain or loss, called the ‘valuation method’, involves comparing the proceeds from the disposal of an asset with the value on a particular day—17 September 1974 in the Budget proposals. The method, as proposed, will apply subject to an over-riding rule that no taxable gain or allowable loss may exceed the difference between the proceeds of the disposal of the asset and its cost. This rule is fair if, for example, the taxpayer can establish that an asset sold in 1975 for $21,000 was purchased early in 1974 for $20,000 although its value on 17 September 1974 was $18,000. The rule limits the gain to $1,000. The rule is unfair where an asset is sold in 1975 for $21,000 and its value on 17 September 1974 was $25,000, as the Commissioner will be obliged to deny the loss to the taxpayer until the taxpayer can establish that the cost of the asset was in excess of $21,000. The ‘cost’ may include some expenditure incurred by the taxpayer and of which he now has no record. The Committee considers that the rule should be limited to gains and not be extended to losses.