Welcome to the May 2015 update from Gilbert + Tobin’s Corporate Advisory team.
Legislation and proposed legislation
Tax reform - the flavour of the month
Treasury has announced a number of tax reform proposals, including a new tax system for managed investment trusts, measures to restore integrity to the tax consolidation rules, changes to the scrip for scrip roll-over rules and new “look through” CGT treatment for earnout arrangements. In addition, the Government has released a discussion paper which discusses options in relation to a new tax system that supports higher economic growth and living standards. We will continue to monitor developments in relation to these reform proposals.
Proposed new tax system for managed investment trusts
The Government has released Exposure Draft Tax Laws Amendment (New Tax System for Managed Investment Trusts) Bill 2015 which proposes a new tax system for certain managed investment trusts (MITs) to modernise the tax rules for eligible MITs (referred to as attribution MITs orAMITs) and increase certainty for both MITs and their investors. The key features of the proposed new tax system include:
- an attribution model for determining member tax liabilities, which allows amounts to retain their tax character as they flow through an AMIT to its members;
- the ability to carry forward understatements and overstatements of taxable income, instead of re-issuing investor statements;
- deemed fixed trust treatment under the income tax law;
- upwards cost base adjustments to address double taxation; and
- legislative certainty about the treatment of tax deferred distributions.
Submissions on the Exposure Draft legislation closed on 23 April 2015.
See also the Explanatory Material and Treasury's media release dated 9 April 2015.
Proposed measures to restore integrity to tax consolidation rules
The Government has released Exposure Draft Tax and Superannuation Laws Amendment (2015 Measures No.4) Bill 2015: Consolidation which is aimed at ensuring the ongoing integrity of the income tax consolidation regime. The key proposed measures include:
- removing a double benefit (or double detriment) that can arise in respect of certain liabilities held by a joining entity that is acquired by a consolidated group;
- removing anomalies that arise when an entity joins or leaves a consolidated group where the entity has securitised an asset;
- preventing the tax costs of a joining entity's assets from being uplifted where no tax is payable by a foreign resident owner on the disposal of the joining entity in certain circumstances;
- clarifying the operation of the Taxation of Financial Arrangements provisions when certain intra group assets or liabilities emerge from a consolidated group because a subsidiary member leaves the group; and
- removing anomalies that arise when an entity leaves a consolidated group holding an asset that corresponds to a liability owed to it by the old group because the value of the asset taken into account for tax cost setting purposes is not always appropriate.
Submissions on the Exposure Draft legislation closed on 19 May 2015.
See also Explanatory Material and Treasury’s media release dated 28 April 2015.
Proposed changes to the scrip for scrip roll-over rules
The Government has released Exposure Draft Tax and Superannuation Laws Amendment (2015 Measures No.3) Bill 2015: scrip for scrip rollover which makes it harder for companies and trusts to avoid capital gains tax when they sell subsidiary companies other than as part of a genuine merger, takeover or restructure of their business. The proposed amendments will:
- expand the significant and common stakeholder tests to include any entitlements that interest holders have to acquire additional rights;
- provide that a capital gain arising on the settlement of a debt owed by an acquiring entity to its parent company as part of the scrip for scrip acquisition is no longer disregarded;
- extend the application of the cost base allocation rules regardless of whether the interest is issued to the group’s parent company or to another member of the group;
- introduce a new condition on the availability of scrip for scrip roll-over relief in downstream acquisitions; and
- extend the application of the restructure provisions to trusts restructures.
Submissions on the Exposure Draft legislation closed on 20 May 2015.
See also the Explanatory Materials and Treasury’s media release dated 29 April 2015.
Proposed “look-through” CGT treatment for earnout arrangements
The Government has finally released Exposure Draft Tax and Superannuation Laws Amendment (2015 Measures No.4) Bill 2015: CGT treatment of earnout rights which proposes changes to the treatment of the sale and purchase of businesses involving earnout rights (ie rights to future financial benefits linked to the performance of an asset or assets after the sale), after the measures were first announced as part of the 2010-11 Federal Budget. Under the proposed amendments:
- capital gains and losses arising in respect of eligible earnout rights will be disregarded; and
- instead, financial benefits received under the earnout rights will affect the capital proceeds and cost base of the underlying asset or assets to which the earnout arrangement relates.
Submissions on the Exposure Draft legislation closed on 21 May 2015.
See also the Explanatory Materials and Treasury’s media release dated 23 April 2015.
Time to “re-think” our tax system
The Treasurer has released a Re-think - Tax discussion paper which discusses options in relation to a new tax system that supports higher economic growth and living standards.
Submissions on the discussion paper close on 1 June 2015. Submissions will inform the Government’s tax options Green Paper which is due to be released in the second half of 2015. The Government will seek further feedback on those options before putting forward policy proposals for consideration by the Australian people in 2016.
See also the Treasurer’s media release dated 30 March 2015.
Australian Federal Budget
Australian Federal Budget 2015-2016 - Key tax issues
On 12 May 2015, the Coalition Government released its second federal budget since coming to power in 2013. There appears to be a greater acceptance that deficits will be a reality for the medium term, with an underlying cash surplus not expected until 2019-2010. There are also a number of key tax issues (both business and personal) which have emerged from the budget and which are the subject of a recent G+T client alert.
For further details and analysis of the key tax measures, focussing on business taxpayers, see G+T Client Alert on 13 May 2015.
Regulation of complex product
In its recently released 2014-2015 strategic outlook, ASIC has noted its continuing focus on improving the design, disclosure, marketing and distribution of a range of financial products that are generally considered to be “complex” and have potential to confuse clients. ASIC has taken a number of steps recently (including launching the first stage of the financial services register) to improve adviser accountability generally, and has additional proposals in relation to complex product regulation.
For further details, see G+T Client Alert – Regulation of complex products on 21 April 2015.
Revised ASX guidance
As part of its ongoing project to refresh its Guidance Notes, ASX has revised Guidance Notes 3 (Co-operatives and Mutuals), 23 (appendix 4C Cash Flow Reports) and 26 (Management Agreements), and also withdrawn Guidance Note 25 (Exercise of Discretions) which is now outdated.
ASX has revised the following Guidance Notes (as part of its ongoing project to refresh all Guidance Notes):
Guidance Note 3: Co-operatives and Mutuals listing on ASX which assists co-operatives and mutuals considering a listing on the ASX to understand the options available to them;
Guidance Note 23: Appendix 4C Cash Flow Reports which assists listed entities which are subject to the quarterly cash flow reporting regime in Listing Rule 4.7B and Appendix 4C to understand their obligations; and
Guidance Note 26: Management Agreements which assists listed entities to understand how ASX applies Listing Rule 1.1 condition 1 and 12.5 in relation to management agreements and assists investment entities to understand the additional requirements that apply to their management agreements under Listing Rules 4.10.20 and 15.16
In addition, Guidance Note 25: Exercise of Discretions was withdrawn on 30 April 2015 because it contained outdated guidance which has largely been replaced by more specific guidance in updates to other Guidance Notes.
ASX signs MOU with China Futures Association
ASX has signed a 5 year memorandum of understanding with the China Futures Association, the aim of which is to develop a joint understanding of how the markets and futures products are evolving in both jurisdictions, at a time when trade and investment between Australia and China are continuing to grow.
ASX has announced the signing of a Memorandum of Understanding with the China Futures Association (CFA), with an initial term of 5 years.
ASX and CFA intend to cooperate in areas of common interest within the futures markets in Australia and China, which in the first instance, will involve the cross-training of staff and exchange of information to develop an understanding of how the markets and futures products are evolving in both jurisdictions.
The MOU will also enable the ASX to develop a better understanding of China’s futures markets at a time when these markets are evolving rapidly, and the trade and investment flows between Australia and China are growing.
See media release dated 26 April 2015
ASX launches 2 new natural gas futures
ASX has launched the Wallumbilla natural gas futures and the New Zealand natural gas futures. The new futures should provide benchmark prices and greater transparency, and should also increase competition while meeting the risk management needs of Australian energy participants.
ASX and the Australian Energy Market Operator have launched the Wallumbilla natural gas futures, which comprises 2 contracts:
- Wallumbilla Natural Gas Calendar Quarter Futures; and
- Wallumbilla Natural Gas Calendar Monthly Futures.
ASX and Transpower’s emsTradepoint have also launched the New Zealand gas futures, which comprises 2 contracts:
- New Zealand Natural Gas Calendar Quarter Futures; and
- New Zealand Natural Gas Calendar Month Futures
Both futures were launched on 7 April 2015.
For details of the contracts, see ASX Notice 0187.15.03 and for details of the amendments to ASX 24 Operating Rules to support the new contracts, see ASX Notice 0270.15.03.
See also media release in relation to the Wallumbilla natural gas futures dated 31 March 2015 and media release in relation to the ASX New Zealand gas futures dated 7 April 2015.
Conduct and functions (rather than formal title) are key in determining whether a person is a de-facto or shadow director: Featherstone v D J Hambleton as liquidator of Ashala Pty Ltd (in liq)  QCA 43
This case demonstrates that Courts will look beyond ASIC’s records and a person’s formal written agreements in respect of a company to determine whether such person is in fact acting as a de-facto or shadow director of the company, and agreements designed to be “self-serving evidence” that such person is not a director will be disregarded. Instead the Courts will look at a person’s active involvement in the day-to-day operations and management of the company, and also the level of influence they are able to assert over other directors.
Mr Featherstone was recorded by ASIC as being a director of Ashala Pty Ltd (Ashala) (which occupied premises owned by Mr Featherstone as trustee of his family trust) from 10 March 2004 to 7 October 2005 and then again from 28 November 2005 to 12 December 2005. In October 2005, Mr Featherstone transferred his shares in Ashala (and 2 other related companies) to Ms Marks who also became the sole director of all 3 companies after Mr Featherstone ceased to be recorded as a director.
Mr Featherstone was employed as Ashala’s training and events co-ordinator pursuant to an agreement letter which recorded that he had “no responsibility or rights or powers as a director, secretary, officer or manager of the company” and that he would not “be involved in any decisions that substantially affect the operation of Ashala”, but did entitle Ms Marks to seek Mr Featherstone’s advice at times (Employment Letter).
Ashala went into liquidation in 2010 and the liquidators brought proceedings against Mr Featherstone for insolvent trading in respect of debts of approximately $200,000 incurred by Ashala between 30 June 2008 and 9 September 2010.
The trial judge found that:
- despite not being recorded as a director of Ashala, Mr Featherstone was a de-facto director (ie he performed functions which would usually be expected to be performed by a director, or the board of directors) and a shadow director (ie he had sufficient influence to ensure compliance by the directors with his wishes and instructions);
- as a result of his active involvement in the day-to-day affairs and management of Ashala, there were reasonable grounds for him to suspect that Ashala was insolvent; and
- the transfer of the shares to Ms Marks and the Employment Letter were ”nothing more than attempts to create self-serving evidence in the event (which has turned into fact) that [Mr Featherstone] was sued”.
Lyons J in the Supreme Court of Queensland of Court of Appeal (with Gotterson JA and Douglas J in agreement) agreed with the trial judge, and pointed to evidence that:
- Mr Featherstone “pulled the strings” in respect of the operation of Ashala and that nothing happened at Ashala’s premises unless Mr Featherstone “okay’d it”;
- when Mr Featherstone was in Brisbane (which was for all but a couple of months each year), he was in attendance at the Ashala premises each day and was involved in “making decisions and the like” for Ashala and that after he resigned as a director in 2005 he continued to be involved in “the day-to-day affairs of everything that was happening” with Ashala;
- despite Ms Marks paying for the shares in Ashala, the shares were always held on trust for Mr Featherstone; and
- it was Mr Featherstone’s decision to accept the involvement of Mr Marshall (who later became sole director) in Ashala and one of its related companies and the control which he asserted in relation to one of the other related companies was evidenced by his refusal to allow Mr Marshall, as sole director at the time, to be a signatory on the company’s bank accounts.
Court construes the meaning of “persons eligible to vote” for the purposes of a special majority shareholder approval: Melissa Alexander v Nicholas Edgar Burne  NSWSC 345
In this case, the Supreme Court of New South Wales construed the meaning of “persons eligible to vote” for the purposes of a special majority shareholder approval requirement to mean a special majority of those present at the meeting, and not all shareholders technically eligible to vote. The Court held that by declining to attend a meeting, a shareholder submits to the majority of the people present to make the relevant decision.
Approval of the merger of an accountancy business which was operated via a unit trust required a “special majority” which was defined under the Unitholders Deed (Deed) to mean “a vote of a majority (in number and not equity) of the persons eligible to vote in respect of” a particular resolution.
The question before Young AJA in the Supreme Court of New South Wales was whether, in the circumstances, “special majority” meant:
- two thirds of the total number of unitholders; or
- two thirds of the unitholders present and voting at the meeting.
Young AJA rejected the argument that the reference to “persons eligible” meant that what was required was a majority of all unitholder (and not just those at the meeting) because all unitholders were eligible to vote.
Instead, Young AJA held that eligibility to vote must be determined in accordance with the Deed and a unitholder who declines to attend the meeting (voluntarily or involuntarily) has submitted to the parts of the Deed which require a quorum and entitle a majority of those who are present and voting to make the decision.
When will no notice constitute reasonable notice of a directors’ meeting?: Summerdowns Rail Ltd v Stevens  NSWSC 321
In this case, the Supreme Court of New South Wales held that subject to any contrary provisions in the constitution, a meeting of a company (including its board of directors) may sometimes be valid even where the required notice has not been given to a person entitled to attend the meeting. However, this is only the case in exceptional cases in which, having regard to modern means of rapid communication, due notice cannot be given to the person without the necessary business at the proposed meeting seriously being hampered. In circumstances were a director was overseas, but there was insufficient evidence of the urgency of the matters discussed or how long it would be before the absent director could be in a position to attend a meeting, the other directors’ failure to give the absent director notice amounted to failure to give him reasonable notice of the meeting to which he was entitled by section 248C of the Corporations Act 2001 (Cth).
This case arose out of payment of $38,500 (Payment) made by Summerdowns Pty Ltd (Summerdowns) to Management Skills Alliance Pty Limited (MSA) in connection with services provided by MSA to assist in Summerdowns’ incorporation, the establishment of its governance structure and the raising of funds to implement its business plans.
The Payment was made following a meeting attended by 3 of the 4 directors of Summerdowns. The meeting was initially called to discuss another urgent issue, but then proceeded to discuss other issues relevant to the business of Summerdowns including the Payment. The fourth director was overseas at the time and was not given notice of the meeting. Following the meeting, one of the directors who attended the meeting and the company secretary signed the banking documents to effect the Payment.
Robb J in the Supreme Court of New South Wales held that:
- subject to any contrary provisions in the constitution, a meeting of a company (including its board of directors) may sometimes be valid even where the required notice has not been given to a person entitled to attend the meeting. However this is only the case in exceptional cases in which, having regard to modern means of rapid communication, due notice cannot be given to the person without the necessary business at the proposed meeting seriously being hampered;
- the above is consistent with the replaceable rule in section 248C of the Corporations Act 2001(Cth) (Act) which requires that reasonable notice be given to directors because the term “reasonable” is capable of encompassing the situation where circumstances are such that it is reasonable that no notice be given;
- in this case, the circumstances did not justify it being reasonable that no notice being given to the fourth director. The evidence did not disclose how urgent the matters discussed at the meeting were, how long it would take for the fourth director to be in a position to participate or whether resolution of the issue could simply wait until a properly constituted meeting at which he was present;
- on that basis, the other Summerdowns directors failed to give the fourth director the reasonable notice of the meeting to which he was entitled by section 248C. As such the meeting was not a duly constituted meeting of the Summerdowns board and the resolution to make the Payment was not validly passed; and
- given the perceived urgency of the matters and the fact that the meeting attendees believed that they could secure a subsequent ratification so that any shortcoming would be technical and short-lived, the meeting attendees did not act in breach of their statutory or common law duties.
Court rejects notion that the proceeds of crime for insider trading is the whole of the gross proceeds of the sale of the shares in question: Director of Public Prosecutions (Cth) v Gay  TASSC 15
Prosecution authorities have tried and failed for a third time to argue that the proceeds of crime for an insider trading offence are the gross proceeds of the sale of the shares in question. In this case, the Supreme Court of Tasmania has confirmed that the purchase price of the tainted shares should normally be deducted from the sale proceeds, and it is only the difference (the net benefit to the offender) that can be recovered by the Commonwealth as proceeds of the crime. While the objects of the proceeds of crime legislation are to punish and deter, Estcourt J concluded that the value of the benefit derived from the unlawful sale of shares which were otherwise purchased lawfully, must involve bringing into account the purchase price of the shares against the proceeds of their sale, and that there was no ambiguity about that in the relevant sections of the Corporations Act 2001 (Cth).
For further discussion, see G+T Client Alert on 21 April 2015.
When will a liquidated damages clause constitute a penalty?: Grocon Constructions (Qld) Pty Ltd v Juniper Developer No 2 Pty Ltd & Anor QSC 102
The Supreme Court of Queensland has found that a liquidated damages clause in a construction contract was not a penalty in circumstances where failure by the construction company to achieve timely Practical Completion (even for failure to achieve a minor requirement) would mean that the developer would suffer significant loss (as it would not be able to settle contracts for sale with potential purchasers). Rather the Court found that the liquidated damages clause was the result of a genuine attempt between the parties to pre-estimate the loss which the developer would suffer if Practical Completion was delayed. This decision demonstrates the importance of ensuring that liquidated damages clauses are negotiated as a genuine pre-estimate of loss to minimise the possibility of the clause being challenged as a penalty.
A development contract between Grocon Construction (Qld) Pty Ltd (Grocon) and Juniper Developer No 2 Pty Ltd (Juniper) (Contract) provided that:
- Grocon had to complete the work so as to achieve Practical Completion by the Date for Practical Completion;
- Practical Completion included requirements that the works were complete and “fit for use or occupation”, as well as “free from all identifiable omissions and defects”, as well as a number of very specific requirements, for example that there were 2 sets of keys with plastic labels having approved label inserts
- the Date for Practical Completion was defined as the date certified by the Independent Certifier to be the date upon which Practical Completion was achieved (and could be extended in accordance with time extensions allowed for under the Contract); and
- if Grocon failed to achieve Practical Completion by the Date for Practical Completion, Grocon would be indebted to Juniper for liquidated damages in accordance with a schedule which set out daily liquidated damages rates which depended on the length of the delay in reaching Practical Completion (Liquidated Damages Clause).
In submitting that the Liquidated Damages clause was not a penalty, Grocon argued that:
- on the analysis in Andrews v Australia and New Zealand Banking Group Limited, achieving Practical Completion by the Practical Completion Date was a “primary stipulation” and the Liquidated Damages Clause was a collateral (or accessory) stipulation which imposed upon Grocon an additional or different liability or detriment, in the event of failure to satisfy the primary stipulation. As such, the Liquidated Damages Clause was in the nature of security for and in terrorem of the satisfaction of the primary stipulation and was therefore a penalty; and
- a presumption from Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd applied, that a clause is a penalty when “a single lump sum is made payable by way of compensation, on the occurrence of one of more of several events, some of which may occasion serious, and others but trifling, damage” applied to building contracts. On this basis, the Liquidated Damages Clause was a penalty because it imposed the same penalty on Grocon for different breaches, some of which were serious and some of which were trivial (eg failure to have the correct label insert in a set of keys).
Juniper argued that:
- the relevant test was whether the amount of liquidated damages payable was extravagant or unconscionable in comparison with the greatest conceivable loss that could flow from the breach (and in this case, that greatest loss was the inability of Juniper to give vacant possession and complete the sale contracts); and
- the Liquidated Damages Clause only operated when Grocon failed to achieve timely Practical Completion and did not operate in respect of several events.
Lyons J in the Supreme Court of Queensland found that the Liquidated Damages Clause was not a penalty. Specifically, Lyons J found that:
- the Liquidated Damages clause operated when there was breach of a single event, namely the failure to achieve Practical Completion by a specified time, and so the amount was payable for delay and thus the particular presumption in Dunlop did not apply; and
- any delay, even for a minor matter, would have been expected by the parties to prevent Juniper from settling contracts for sale with potential purchasers because it would not be able to give vacant possession of the units (as under the Contract, Grocon still had control of the site up until Practical Completion). As such the damages payable under the Liquidated Damages Clause were neither extravagant nor unconscionable in comparison with the loss suffered.
Lyons J also distinguished Paciocco v Australia and New Zealand Banking Group Ltd as he considered that the obligation to pay on time could be breached many times in different ways, with each breach having different consequences (whereas in this case, the only breach was the delay in achieving Practical Completion).
Lyons J also found that the evidence showed that the Liquidated Damages Clause was the result of a genuine attempt between Grocon and Juniper to pre-estimate the loss which Juniper would suffer if Practical Completion was delayed. In so finding, Lyons J held that in the process of determining whether a clause is a penalty, courts can consider a wider range of extrinsic evidence than is ordinarily admissible in other construction exercises.
How long does a party have to exercise a contractual right to terminate (absent any time stipulations in the contract)?: Zeman v Bollard  NSWCATCD 13
In this case, a party to a building contract was prevented from effectively exercising its contractual right of termination because it failed to do so within a “reasonable period”, with the question of what is a reasonable period being a question of fact. Further, the parties were held to have abandoned the contract as “an inordinate length of time” had elapsed during which neither party had manifested any intention to perform the contract. Contracting parties wishing to exercise a right of termination should do so within a reasonable period of such right arising, and take care to ensure that any inaction does not inadvertently amount to abandonment of the contract.
This case involved a dispute in relation to a purported termination of a residential building contract between Mr Zeman and Mr Bollard (trading as Clearwater Homes) (Contract).
Harrowell, Principal Member in the New South Wales Civil and Administrative Tribunal found that:
- following the issue by Mr Bollard of a notice of substantial breach under the Contract on 16 September 2010 (and Mr Zeman’s failure to remedy the breach within the 10 day timeframe stipulated in the Contract), Mr Bollard was required to exercise his right to terminate the Contract within a reasonable period after the right accrued (in the absence of an expressed timeframe in the Contract);
- what is a reasonable period is a question of fact and in this case, expired no later than November 2010. As such, a notice purporting to terminate the Contract on 4 September 2012 was ineffective. Relevant factors in determining the reasonable period included the fact that Mr Bollard was aware by October 2010 that the matters specified in the notice (including redelivery of possession of the premises to Mr Bollard) were not going to be remedied by Mr Zeman and signage had been placed on the site indicating that another company would undertake any future building work. Further, it was clear that Mr Zeman claimed that Mr Bollard was in breach for defective works and was not prepared to pay Mr Bollard any further money; and
- whether there is abandonment or abrogation of a contract is a matter of fact to be inferred from the objective assessment of the conduct of the parties. The underlying premise of abandonment cases is that “an inordinate length of time” elapses during which neither party manifests any intention to perform the contract. In this case, a period of 5 months had elapsed from the initial notice of substantial breach until the commencement of proceedings during which time, neither party had taken any further steps to perform the Contract. On this basis, 5 months was “an inordinate length of time”, particularly having regard not only to the parties’ lack of intention to perform, but also the fact that the duration of the Contract was only 20 weeks for completion.