In summary

The Commissioner has raised Part IVA concerns about arrangements entered into by multiple entry tax consolidated (MEC) groups to transfer assets prior to a sale of shares to avoid capital gains tax (CGT).

Although the Taxpayer Alert deals with the specific features of the MEC rules, it also reminds taxpayers of the risks of engaging in pre-sale restructuring generally where some or all of the steps do not have a sufficient commercial non-tax rationale.

In detail

The Commissioner has released Taxpayer Alert TA 2020/4 regarding multiple entry consolidated groups (MEC) avoiding capital gains tax (CGT) through the transfer of assets prior to the sale of shares in an eligible tier-one (ET-1) company.

The release follows on from Taxpayer Alert TA 2019/1 issued last year, which also concerned MEC groups avoiding CGT through funding ET-1 companies with related party loans.

Although the Taxpayer Alert deals with the specific features of the MEC rules and conversions of tax consolidated groups to MEC groups, it also serves as a general reminder of the risks of engaging in pre-sale restructuring where some or all of the steps do not have a sufficient commercial non-tax rationale. The simple selection of one company over another to aggregate assets to be disposed of should not of itself be a cause for concern. However, undertaking complicated steps that cannot readily be explained, except for tax effects, will attract the ATO’s attention.

The Taxpayer Alert is also a reminder to taxpayers that the best time to engage in internal restructuring designed to achieve commercial objectives should be well before any sale of assets is contemplated.

The Taxpayer Alert gives three examples of schemes that are of concern.

In the first example, a foreign resident controller of an Australian tax consolidated group incorporates a new Australian subsidiary (New Co) and elects to form a MEC. Shares in an existing subsidiary member that owns the underlying assets (Asset Co) are transferred to New Co. Then New Co is sold to a third party purchaser.

The tax effect of this scheme is to avoid CGT on the capital gain in the underlying assets as Australia does not tax foreign resident taxpayers on disposals of assets unless they represent “taxable Australian property”. Shares in an Australian company are not generally taxable Australian property unless more than 50% of the value of the assets of the company are direct or indirect interests in Australian real property.  

The second example is the same as the first, except that New Co acquires the underlying assets directly (rather than by acquiring shares in Asset Co).

The third example adds some additional colour by setting out the involvement of an aggressive tax adviser, who both orchestrates the shape of the transaction and participates in the manufacture of evidence of a purported non-tax rationale, including drafting board submissions and board minutes. The adviser then drafts a formal advice taking the purported commercial rationale as an assumption or factual instruction, in an attempt to minimise the adviser’s downside risk once the ATO detects the scheme.

This last example clearly demonstrates that the ATO remains concerned about the “marketing” of schemes that it sees as tax-driven and aggressive, and may treat the involvement of advisers as an aggravating factor in deciding whether to apply Part IVA. There is no surprise here.

Interestingly in this context, the Taxpayer Alert is directed to situations where “the stated justification for additional steps under the internal restructure lacks substance or real probative weight”. Therefore, it seems the ATO will not only challenge the commercial rationale of the additional steps as being secondary to the purpose of obtaining a tax benefit but may also assert the documentary evidence is, essentially, untrue.