The Board of Taxation (BoT) is undertaking an important review of the capital gain tax (CGT) roll-over provisions, and just before Christmas, released a Consultation Paper.
- Central to the current BoT thinking is a proposal to introduce a general business restructure rollover to replace a number of roll-overs, including scrip for scrip roll-over and the demerger relief.
- Whilst the review is ongoing, we understand that the BoT is intending to make a recommendation to Government in the first half of 2021.
- Any recommendation would have to be first accepted by Government and then legislated, but the proposals, if implemented, may have significant implications for both public and private M&A transactions.
Scrip for scrip roll-over
Scrip for scrip roll-over can allow Target shareholders to defer CGT when they exchange their Target shares for BidCo shares, which can be important to facilitating shareholder approvals.
The BoT is still developing how the general business restructure roll-over rules would operate for scrip for scrip transactions, but note the following possible changes:
- The like for like requirement would be removed – this would allow a company to acquire a unit trust (and vice versa) and still obtain CGT roll-over (noting that there are other limitations on a trust holding stakes in companies).
- Potentially making it easier to allow employees in a target to obtain roll-over (private M&A transactions often have difficulties where there is a desire for management to obtain scrip but investors to receive cash).
- The acquirer may have to actually acquire 80%+ of the Target under the restructure rather than just increasing their stake in the Target to 80%.
- Transactions which currently require multiple roll-overs (and often prove difficult) can be undertaken (ie a company acquiring a trust to facilitate a takeover).
However, any improvement to the scrip for scrip roll-over provisions will largely be illusory if the BoT proceeds with a plan to stop acquirers from getting a CGT cost base in the Target shares equal to the market value of the acquirer’s scrip given to target shareholders as consideration. Instead, the acquirer obtains a cost base in the Target shares which is derived from the cost base of the Target’s assets.
As the tax outcomes for the acquirer would become vastly different between using scrip consideration (no market value cost base) compared to cash consideration (market value cost base), this may mean that scrip for scrip transactions are no longer viable.
In broad terms, tax demerger relief allows companies to “demerge” subsidiaries to their shareholders, without tax consequence arising for either the company or the shareholders.
Recent views of the ATO have made demergers more challenging – see our summary from 2020.
The proposed changes are good news for demergers – and are largely directed at undoing the impact of the ATO’s restrictive interpretation of the demerger concessions. That is:
- A demerger in conjunction with a takeover (even if pre-ordained) should be eligible for both demerger relief and scrip for scrip roll-over.
- Demergers followed by a pre-ordained capital raising should be eligible for demerger relief.
Three other key changes being contemplated with the general business restructure rollover are worth noting:
- The dominant purpose of the restructure would need to be a “commercial purpose”– this would likely result in more ATO engagement being required as to why the transaction is being undertaken.
- Roll-over may be extended to “revenue assets” (ie for share traders/private equity).
- Roll-over may be extended more generally for attribution managed investment trusts (a type of collective investment vehicles).