Australia: Corporate Restructures And Takeovers – CGT Changes

As part of its 2008 Budget, the Federal Government announced changes to the capital gains tax (CGT) scrip for scrip rollover provisions to take effect from 13 May 2008. The changes are designed to prevent taxpayers gaining taxation advantages from the application of the rollover in corporate takeovers where the transaction is treated as a "restructure". On 3 December 2008 the Tax Laws Amendment (2008 Measures No 6) Bill 2008 (Bill) was introduced into Federal Parliament to implement these changes.

Applicable law

Scrip for scrip rollovers are commonly used in takeovers and other corporate restructures. Shareholders exchanging interests in one company (Target) for interests in another company (Acquirer) may be able to defer any CGT under the scrip for scrip rollover provisions in Division 124 of the Income Tax Assessment Act 1997 (Cth) provided certain conditions are satisfied. Division 124 also contains provisions to establish the Acquirer's cost base for the shares it obtains in the Target.

Another consequence of a scrip for scrip rollover is that the Acquirer's cost base in the interests in the Target will generally be the market value of the interests provided by the Acquirer in exchange for interests in the Target. If the Target then joins the Acquirer's consolidated group, the tax cost setting rules push down the market value cost base of the interests acquired in the Target to the underlying assets of the Target, with the result that there may be an uplift in the tax cost of the Target's assets. This can result in an increase in capital allowance deductions and a reduction in capital gains that arise on disposal of the Target's assets. Companies could obtain significant benefits by restructuring in a way that qualified for scrip for scrip rollover.

Changes introduced by the Bill

The Bill proposes tests to ensure that transactions that are effectively corporate restructures, such as 'top-hat' schemes involving the insertion of a new holding company above the Target, cannot use the scrip for scrip rollover in subdivision 124-M and utilise the market value cost base rules.

An arrangement will be taken to be a restructure if, broadly, just after the arrangement is completed the market value of the interests issued by the Acquirer to the Target's shareholders under the arrangement in exchange for interests in the Target is more than 80 per cent of the market value of all the shares (including options, rights and similar interests to acquire shares) issued by the Acquirer.

However, an arrangement will only be taken to be a restructure if the Acquirer knows or could reasonably be expected to know that:

  • a scrip for scrip rollover has been, or will be, obtained; and
  • there is a "common stakeholder" for the arrangement (ie. in general terms, an entity that, together with its associates, had an interest of 80% or more in the Target just before the arrangement started and an interest of 80% or more in the Acquirer just after the arrangement was completed). There appears to be an inconsistency between the wording of the Bill and its Explanatory Memorandum (EM) in this regard – the EM stating the requirement as that there be no common stakeholder.

If an arrangement is taken to be a restructure, the Acquirer will be required to take a cost base for the shares that is calculated using the cost bases of the underlying net assets of the Target. The market value cost base rules that would ordinarily apply in a scrip for scrip rollover will not be available.

Where the arrangement is taken to be a restructure and results in the Target becoming a member of a consolidated group, the Bill allows the head company of the consolidated group to elect to retain the tax costs of the Target's assets. This is seen as reducing compliance costs as it removes the need to apply the tax cost setting rules to reset the tax costs of the Target's assets and it removes the need to apply the provisions in the Bill to ascertain the cost base of the interests acquired in the Target.

An Acquirer will be able to make a choice to prevent Target shareholders applying scrip for scrip rollover if the Target or the Acquirer notifies the Target shareholders before the exchange of interests. If this choice is made the arrangement will fall outside the scope of the changes made by the Bill.

The EM warns that "arrangements that are structured in an artificial or contrived way so as to avoid being treated as a restructure could, depending on the circumstances, attract the operation of Part IVA." Part IVA of the Income Tax Assessment Act 1936 (Cth) contains the general anti-avoidance rules and can apply to deny tax benefits to certain schemes entered into with the dominant purpose of obtaining a tax benefit.

Who is affected?

Companies seeking to apply the scrip for scrip rollover provisions in Subdivision 124-M to transactions occurring on or after 13 May 2008 need to consider the proposed changes. Where "a decision to enter into the arrangement" was made prior to 7:30 pm 13 May 2008 the Bill will not apply. For transactions that are "takeover bids" or "schemes of arrangement" within the Corporations Act 2001, the Bill prescribes certain steps in the process that must occur after 7:30pm 13 May 2008 in order for the Bill to apply. Guidance as to whether the changes contained in the Bill apply to your transaction can be obtained from the Deacons tax group.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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