Upcoming Mallesons seminarsTaxpayers currently undertaking, or intending to undertake, a scrip for scrip acquisition or restructure.
What do you need to do?Review any existing or proposed scrip for scrip transactions to ascertain whether a market value cost base will be obtained for the shares acquired under the arrangement. Consideration should also be given to whether arrangements are being structured so as to avoid being treated as a "restructure", which could attract the operation of the tax general anti-avoidance provisions.
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A Bill that modifies the scrip for scrip roll-over provisions to prevent a market value cost base from arising for any “qualifying interest” acquired by an acquiring entity under an arrangement that is taken to be a “restructure" has been introduced into Federal Parliament.
The amendments proposed by Tax Laws Amendment (2008 Measures No. 6) Bill 2008 (Bill) will apply retrospectively to arrangements (e.g. takeovers or schemes of arrangements) announced or entered into after 7.30pm on 13 May 2008.
Background
Roll-over may be available under Subdivision 124-G (exchange of shares for one company for shares in another company) - which is designed for corporate restructures - or Subdivision 124-M (scrip for scrip roll-over) - which is designed for corporate takeovers. Companies are able to gain significant tax benefits (in the form of a market value cost base for the shares acquired) by restructuring in a way that attracts the scrip for scrip rather than the exchange of shares roll-over.
These tax benefits are compounded (through a step up in the tax cost of the underlying assets) if the entity acquired becomes a member of the acquiring entity's tax consolidated group. The proposed amendments seek to ensure a market value cost base does not arise from arrangements that are akin to restructures.
When is an arrangement taken to be a restructure?
An arrangement will be taken to be a restructure if:
- the replacement entity (which could be the acquiring entity or the ultimate holding company of the acquiring entity) knows, or could reasonably be expected to know, that:
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- just after the arrangement is completed, the market value of the replacement interests issued by the replacement entity under the arrangement, or under an earlier arrangement that was taken to be a restructure, in exchange for qualifying interests in the original entity (i.e. shares, options, rights or similar interests in the original entity), is more than 80% of the market value of all the shares (including options, rights and similar interests to acquire shares) issued by the replacement entity.
Modification to the CGT cost base rules when an arrangement is taken to be a restructure
If:
- an arrangement that qualifies for scrip for scrip roll-over is taken to be a restructure, and
- the current integrity provisions do not apply to prevent the acquiring entity from obtaining a market value cost base,
then the cost base of each qualifying interest that the acquiring entity acquires will broadly reflect the cost of the underlying net assets of the original entity, divided by the total number of membership interests in the original entity (including options, rights or similar interests held at the completion time, which are created or issued by the original entity, to acquire a membership interest in the original entity).
If there is a “common stakeholder” under the current integrity provisions, those provisions will continue to apply to prevent the acquiring entity from obtaining a market value cost base. The current integrity provisions may only apply if neither the original entity nor the replacement entity has more than 300 members. Conversely, the amendments proposed by the Bill may apply if either the original entity or the replacement entity has more than 300 members.
If a qualifying interest is acquired partly in exchange for one or more replacement interests and partly for something else (e.g. cash) then this methodology will apply to work out that part of the cost base of the qualifying interest that is attributable to the exchange of scrip. The part of the cost base of the qualifying interest that is attributable to cash etc., will be worked out using the general rules about cost base. The cost base of each qualifying interest will be the sum of these amounts.
Adjustments for arrangements involving tax consolidated groups
The methodology used to calculate the cost base of each qualifying interest acquired will be modified where the original entity joins a tax consolidated group, is the head company of a tax consolidated group before being acquired or leaves a tax consolidated group and does not join another group. The adjustments primarily ensure that the assets and liabilities that are taken into account in the calculation are appropriately identified (e.g. the tax costs of the original entity's assets before they are reset on joining the acquiring entity's tax consolidated group).
In addition, if the original entity becomes a subsidiary member of a tax consolidated group under the arrangement, then the head company of the acquiring group can elect to retain the tax costs of the original entity's assets rather than applying the tax cost setting rules to reset them. If the head company makes such an election there will also be no need to work out the cost base of the qualifying interests acquired by the acquiring entity (although such a cost base would need to be calculated if the original entity subsequently left the acquiring entity's tax consolidated group).
Choice to deny a scrip for scrip roll-over for original interest holders
A replacement entity can also make a choice, even in respect of arrangements that would not otherwise be taken to be restructures, to prevent taxpayers from being able to choose to obtain a scrip for scrip roll-over in relation to the arrangement. Assuming the existing scrip for scrip roll-over integrity provisions do not apply, the replacement entity would therefore obtain a market value cost base for the qualifying interests acquired in this case.