Go to our Contact page for our office details.
The Department of Home Affairs has issued its draft guidance “Modern Slavery Act 2018: Draft Guidance for Reporting Entities” (Draft Guidance) for the new Modern Slavery Act 2018 (Cth) (the Act).
As reported in our demerger update of November 2018, the Australian Taxation Office (ATO) has been developing guidance on the meaning of “restructuring” for the purposes of the demerger rules in Division 125. Although initially marked for release in December 2018, the ATO released Draft Taxation Determination 2019/D1 “Income tax: what is ‘restructuring’ for the purposes of subsection 125-70(1) of the Income Tax Assessment Act 1997?” (the Ruling) on 21 March 2019. In doing so, the ATO set its first goal post on demergers. The second goal post is expected to be set in May 2019 when the ATO is due to provide guidance on the availability of capital gains tax (CGT) roll-overs in sequential planned transactions where a CGT roll-over is claimed for each transaction and the first roll-over contains a “nothing else” condition. We expect the goal posts to be set close to each other, hence confirming the ATO is making it harder to score a demerger that qualifies for demerger relief.
A demerger broadly involves a restructuring of a corporate group by splitting it into two corporate groups. Both the demerger group and the demerged group will be owned directly and in the same proportions by the existing shareholders (Shareholders) of the pre-demerger group.
If the demerger rules apply:
In order for demerger relief to apply, a “demerger” must happen, which requires:
As expected, the ATO has taken a broad view of what a “restructuring” is for the purposes of the demerger rules. Consequently, the requirements to qualify for demerger relief are more difficult to satisfy.
Based on the examples the ATO has provided in the Ruling, the ATO considers that the following public markets transactions will not qualify for demerger relief:
We are not surprised by the first two examples, noting that the second example is in essence the AMA transaction we reported on in our demerger update of November 2018. However, we are surprised by the third example. The inequity of the ATO’s view is that the selling shareholders will trigger taxing events when they sell, but the demerger group and other shareholders are penalised by not allowing demerger relief. We note that ATO ID 2003/1053 (the ID) provided that the “nothing else” requirement was not precluded from being satisfied as a consequence of shareholders in the demerger group being offered the opportunity to sell shares via a sale facility. The ID was withdrawn on 19 February 2010 on the basis it was “a straight application of the law and did not contain an interpretative decision” (using the ATO’s words). Noting that sale facilities have been a common feature of demerger transactions, we find it concerning that what was understood to be a settled area of the law is now being viewed in a different light by the ATO. There is a pattern of behaviour here, noting that the ATO has previously issued class rulings allowing demerger relief in the same fact pattern that the second example addresses. See for example, Class Ruling 2013/23 and Class Ruling 2008/74.
Perhaps in an effort to justify its views, the ATO highlights the policy underpinning the demerger rules in the Ruling, which are:
Against that policy backdrop, the ATO says that CGT consequences are expected where there is both a legal and economic change in the ownership of the property resulting from a transaction (referring to the second bullet point). We do not dispute that proposition, but we consider the ATO is taking too broad a view of the term “restructuring”. This is seen in the second and third of the ATO’s examples above – CGT consequences will arise to the shareholders in Head Co when they dispose of their shares to Bid Co in example 2, and CGT consequences will arise to shareholders in Sub Co when they dispose of their shares via the sale facility in example 3. We also find it hard to reconcile the ATO’s approach with the stated policy objective above, noting that the ATO caused the AMA transaction not to proceed (as it may have other transactions).
Despite it taking the ATO 17 years to provide this guidance in narrowing the demerger goal posts (the demerger rules were introduced in 2002), taxpayers can take some comfort that they now better understand the way the ATO will apply the demerger rules. The ruling is in draft form and open for comment until 30 April 2019. Please contact one of our tax experts if you want to discuss the impact of this draft ruling or if you would like assistance in providing comments to the ATO.