- The government has released draft legislation to facilitate capital gains tax rollovers in transactions using share sale facilities.
- When enacted, these changes will take effect from 10 May 2010.
The government has released an exposure draft of legislation which will facilitate capital gains tax rollovers (CGT) in certain types of transactions which utilise a share sale facility. The transactions contemplated include interposing a new head entity and demergers. These changes were announced in the 2010 Budget but the government is only now releasing the draft legislation.
As presently drafted, a number of CGT rollovers (listed below) only operate where all shareholders receive shares in proportion to their existing share holding. However, where the company has shareholders in an overseas jurisdiction it may not be commercially viable to satisfy the securities legislation in each overseas jurisdiction in relation to the transaction. In that event, the company will arrange for a sale agent to sell the new securities issued under the transaction on behalf of the overseas shareholder. The overseas shareholder will then receive the net sales proceeds from the sale agent in full satisfaction of its entitlement. There has been uncertainty as to whether the use of the sale agent will result in the transaction not satisfying the ‘same proportion’ condition for CGT rollover. Similar issues arise for unit trusts.
The draft legislation is intended to address this anomaly by deeming the overseas shareholder as being entitled to the shares delivered to the sale agent for their benefit.
The rollovers addressed by the changes are:
- Sub-division 124-G – Interposition of a new head company by change of shares in one company for shares in another.
- Sub-division 124-H – Interposition of a new head trust by way of exchange of units in one trust for units in another.
- Sub-division 124-I – Conversion of a body to an incorporated body.
- Sub-division 124-N – Disposal of assets in a trust to a company in consideration for shares in the company.
- Sub-division 124-Q – ‘Top hat trust’, where a trust is interposed on top of a stapled structure by way of exchange of stapled securities for units in a trust.
- Sub-division 125 – Demerger of a company or trust.
- Sub-division 126-G – Transfer of assets between fixed trusts in consideration of issue of units in transferee trust.
These changes will take effect from the date of announcement, being 10 May 2010.
These amendments are welcomed and should remove a potential hurdle to the type of restructures listed above. However, the drafting of these amendments contains some minor ambiguities which will hopefully be addressed prior to the legislation being introduced into parliament.
In addition, it is somewhat disappointing that the government has not taken the opportunity to expressly confirm that the use of a sale agent does not adversely affect the ability to claim scrip for scrip rollover. At present, the scrip for scrip rollover provisions generally require that the offer be drafted so that participation is substantially on the same terms for all shareholders. A note to the relevant provision states that participation will be on substantially the same terms even where a sale agent for foreign shareholders acts in accordance with section 619(3) of the Corporations Act. In our view, it would be preferable for this ‘concession’ to be included as a specific provision rather than simply a note in the legislation.