9 November 2018
In June this year, we noted that the ATO had appeared to change its views on whether demerger relief would be available where the demerger was followed by an acquisition of the "old" demerging company.
On Wednesday, the ATO announced that it would provide guidance on two matters relevant to demerger relief.
(a) The nothing else condition
First, the ATO updated its register of CGT advice under development to include a new item for back-to-back CGT roll-overs. The ATO stated it will provide guidance on sequential planned transactions where a CGT roll-over is claimed for each transaction and the first roll-over contains a "nothing else" condition. For example, to qualify for demerger relief, the shareholders must receive shares in the entity being demerged and nothing else. The ATO has been concerned that where the demerger is followed by a takeover of the old head company, the shareholders receive both a share in the demerged entity and a right to receive consideration for the sale of their shares in the head company, where the transactions are economically contingent even if not legally inter-conditional. This issue arose in relation to the Westfield distribution of shares in One Market Limited, which was conditional on approval of the Unibail-Rodamco transaction. The ATO ruled that demerger relief would not apply as "the requirement in s.125-70(1)(c) that under the restructuring, Westfield Shareholders acquire OneMarket Shares “and nothing else” in relation to their Westfield Shares will not be satisfied due to the nexus of the Demerger to the Unibail-Rodamco Transaction".
There are other CGT rollovers where the relevant taxpayer must only receive a specific form of consideration. For example, under sub-division 122-A where an individual or trustee transfers an asset to a wholly owned company, CGT rollover relief is available if the transferee only receives shares in the transferor. Although this is drafted in a different way to the demerger "nothing else" condition, the concepts are similar. The "nothing else" requirement is also present in sub-division 615, which provides roll-over relief where a company is interposed over a company or unit trust.
It would also be helpful if the ATO were to expand its views on the interaction of the general anti-avoidance provisions in Part IVA where back to back rollovers are utilised. In general Part IVA does not apply simply because the taxpayer receives a "tax benefit" by the "making of an agreement, choice, declaration, agreement, election, selection or choice, the giving of a notice or the exercise of an option (expressly provided for [by the income tax legislation])". However, that safe harbour does not apply if the taxpayer created the circumstances or state of affairs the existence of which is necessary to enable the agreement, choice etc. to be made. In ATO Class Ruling CR 2018/14 the ATO provided a ruling on CGT scrip for scrip relief. In the background there was a reference to an internal restructure by one of the shareholders which appeared to rely on a 122-A rollover. At the end of the ruling there was a comment that "roll-over under Subdivision 124-M of the ITAA 1997 will not be available to the Original Unitholders where the Commissioner concludes that Part IVA of the ITAA 1936 applies to the internal restructure." This contrasts with the restructure of the Bailador Siteminder Co-Investment Trust (ATO Class Ruling CR 2015/12) where the unitholders in that trust used successive rollovers (122-A followed by 124-M) without the ATO appearing to raise the possible application of Part IVA.
The ATO advice is expected to be completed by May 2019.
(b) What is the ‘restructuring’ for applying the demerger provisions
The ATO also registered its plan to provide guidance on how to establish the scope of a "restructuring" for the purposes of the demerger provisions. The concept of when the "restructuring" starts and ends is fundamental to demerger relief as it determines which entities are in the "demerger group" and therefore the securities in which entities can be spun out under the demerger. It is also linked to the "nothing else requirement" – the broader the restructure, the more likely that the "nothing else" requirement will not be satisfied.
This issue arose recently in relation to the in-specie distribution of converting preference shares in UIL Energy Ltd by Eneabba Gas Ltd (CR 2018/7), where the ATO stated:
"47. For a demerger to happen (as defined in subsection 125-70(1) of the ITAA 1997), there must be a 'demerger group' consisting of one head entity and at least one demerger subsidiary (subsection 125-65(1) of the ITAA 1997). UIL is not a demerger subsidiary of ENB when the restructuring commences.
48. The exchange of ENB's shares in Ocean Hill and GCC for Class A and Class B CRPS in UIL (step 1), and the subsequent distribution of those CRPS to ENB shareholders (step 2), is a single restructuring for the purposes of the definition of a 'demerger''in subsection 125-70(1) of the ITAA 1997. Therefore, the demerger group to which the restructuring happens is the one that existed before step 1 was implemented, at which time UIL was not a member of the demerger group.
This ATO advice is expected to be completed by December 2018.