Alert

Who does this affect?

Entities entering into "straddle contracts".

What do you need to do?

If you are preparing straddle contracts in an "entry-buy" or an "exit-sell" case for a tax consolidated group, please contact Phillip Davies (+61 3 9643 4106) or Danielle Atanasovska (+61 3 9643 4350) for assistance.

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Phillip Davies  
Partner
T +61 3 9643 4106

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The importance of the legal construction and drafting of contracts for the sale or purchase of CGT assets in a tax consolidation environment has again been emphasised with the recent release by the Australian Taxation Office of a new tax determination (TD 2008/29).

TD 2008/29 deals with the tax implications for an entity which contracts to buy or sell a CGT asset and that contract settles after the entity enters or exits a tax consolidated group (straddle contracts).

What are the legal and tax implications of straddle contracts?

Broadly, under the “CGT contract rules” a CGT event happens to the entity that owned a CGT asset and entered into a contract to dispose of it. The time of the disposal of the asset by the entity that owned it and the time of the acquisition of the asset by the entity which becomes its owner is the date the sale contract is entered into.

There are two instances where the tax consolidation rules will produce a different tax outcome to that produced under the “CGT contract rules”:

• Entry-buy case - a contract to buy a CGT asset is entered into by an entity before it becomes a subsidiary member of a consolidated group and the contract settles after that time - in that case, the head company of the consolidated group (not the subsidiary) is taken to have acquired the asset at the contract time. This will be the outcome even if the entity was a member of another consolidated group at the contract time.

• Exit-sell case - a contract to sell a CGT asset is entered into by a subsidiary member of a consolidated group and the contract settles after the subsidiary has left the group - in that case, the head company of the consolidated group (not the subsidiary) is taken to have disposed of the asset at the contract time. This will be the outcome even if the subsidiary is a member of another consolidated group at the settlement time.

Accordingly, the drafting of straddle contracts in the context of entities entering or leaving a tax consolidated group is crucial to ensure there is adequate commercial protection in those contracts for the relevant entity both from a legal and tax standpoint.

Note: TD 2008/29 does not apply if the entities entering into the contract are members of the same consolidated group at either the contract time or just after the contract has settled.