The capital gains tax (CGT) law has been amended to ensure that entities that restructure can use a share or interest facility to deal with foreign held interests without Australian tax residents automatically failing a key requirement of certain CGT rollovers.
The changes apply to CGT events happening after 7.30 pm (by legal time in the Australian Capital Territory) on 11 May 2010.
Under the new law, an interest holder is considered to be foreign where the issuing of an interest to that interest holder would be subject to foreign law. This means that a foreign interest holder could also be an Australian resident for tax purposes or could own taxable Australian property.
Australian entities may have interest holders who are located in Australia or abroad. Issuing or transferring interests when one of these entities restructures may be subject to a foreign law.
A share or interest sale facility (share sale facility) is used by entities when they restructure as it:
- can be unreasonably onerous or impractical for those entities to comply with the requirements in each relevant foreign jurisdiction relating to the issuing or transferring of interests
- avoids inadvertent breaches of these requirements where entities, despite their best intentions, have not ascertained nor fully understood all the foreign law requirements.
Under a share sale facility, interests issued or transferred under an entity restructure in relation to the foreign interest holder's interest will be allocated to the share sale facility to sell them and give the capital proceeds (less expenses) to the former foreign interest holders.
However, the use of a share sale facility in an entity restructure may mean that certain requirements of any CGT rollover relating to that restructure are not satisfied. A CGT rollover allows a taxpayer to defer any capital gain or capital loss arising when a CGT event happens.
Some CGT rollovers for entity restructures require that both of the following apply:
- All of the interest holders exchange their interests in the original entity for interests in the new entity.
- Each interest holder owns the same, or in some instances, substantially the same, percentage of interests in the new entity as they owned in the original entity (the 'same ownership requirements').
The entity restructure rollovers that include these requirements are contained in the following CGT provisions:
- Subdivision 124-G of the Income Tax Assessment Act 1997 (ITAA 1997) - Exchange of shares in one company for shares in another company
- Subdivision 124-H of the ITAA 1997 - Exchange of units in a unit trust for shares in a company
- Subdivision 124-I of the ITAA 1997 - Conversion of a body to an incorporated company
- Subdivision 124-N of the ITAA 1997 - Disposal of assets by a trust to a company
- Subdivision 124-Q of the ITAA 1997 - Exchange of stapled ownership interests for ownership interests in a unit trust
- Subdivision 126-G of the ITAA 1997 - Transfer of assets between certain trusts
- Division 125 of the ITAA 1997 - Demerger relief.
The same ownership requirements generally cannot be satisfied where a share sale facility is used to deal with the interests of a foreign interest holder. This is because the interests are now owned by the share sale facility and not the foreign interest holder. Therefore, an entity with foreign interest holders may be reluctant to restructure because the interest holders that are Australian residents for tax purposes or that are foreign residents with taxable Australian property would not qualify for certain CGT rollovers. If such a restructure occurs, these interest holders would face immediate CGT consequences from the realisation of their interests in the original entity.
The law change facilitates the use of share sale facilities in a greater range of CGT entity restructure rollovers and standardises the approach so that the interests of foreign interest holders are subject to the same ownership requirements of the relevant rollovers as Australian interest holders.
A foreign interest holder is treated as owning the relevant interest in an entity at a time the share sale facility owns the interest in that entity for the purposes of the relevant CGT entity restructure rollover provisions.
For the relevant CGT rollovers, this treatment ensures that entities can use a share sale facility in a restructure to deal with the interests of foreign interest holders without interest holders that are Australian residents for tax purposes (or foreign residents with taxable Australian property) automatically failing the same ownership requirements. The treatment also ensures that ownership requirements are appropriately maintained.
The amendments facilitate the use of share sale facilities in the CGT entity restructure rollovers referred to above.
The amendments do this by treating a foreign interest holder as owning an interest in a relevant entity at a time where the share sale facility owns that interest, provided certain conditions are satisfied. Where the foreign interest holder is treated as owning the interest, the share sale facility will not be treated as owning the interest.
Using a share sale facility ensures that Australian residents for tax purposes (or foreign residents with taxable Australian property) can satisfy the same ownership requirements in each of the relevant rollovers. This is because the original interest and the replacement interest are treated as being owned by the same foreign interest holder at the relevant test times for each of the relevant rollovers.
Where the foreign interest holder is an Australian resident for tax purposes (or a foreign resident with taxable Australian property), these interest holders can access the relevant CGT entity restructure rollovers where the share sale facility becomes the owner of the interest. Where a rollover is applied, this will defer any CGT consequences for the foreign interest holder until a later dealing with the asset, usually when the share sale facility disposes of the interest.
To ensure these particular entities can access the relevant CGT rollovers in the case of replacement asset rollovers, where the conditions for treating the foreign interest holder as owning the interest are satisfied, the foreign interest holder is also treated as owning the interest the share sale facility owns. This ensures that the requirements that the same entity own an original CGT asset or assets and a replacement CGT asset or assets will be satisfied.
The foreign interest holder is also treated as owning the interest the share sale facility owns, ensuring that the full period that the foreign interest holder owned the interest is taken into account for the purposes of determining access to the CGT discount.
Conditions for treating the foreign interest holder as owning the interest
All of the following conditions need to be satisfied for a foreign interest holder to be treated as owning an interest for the purposes of the relevant restructure rollover provision:
- The foreign interest holder owns an interest in a relevant entity (or for cases where there is a conversion of a body to an incorporated company, owns an interest in a body, with or without rights relating to the body).
- A transaction happens to the original interest.
- A foreign law impedes an entity's ability to issue or transfer an interest to the foreign interest holder, or alternatively, it would be impractical or unreasonably onerous to determine whether a foreign law impedes the entity's ability to issue or transfer the interest to the foreign interest holder.
- A share sale facility will acquire the replacement interest instead of the foreign interest holder.
- Under the share sale facility, the foreign interest holder is entitled to receive the capital proceeds (less any expenses or taxes) when the share sale facility disposes of the interest on their behalf.
Condition 3 - An entity is facing an impediment in issuing or transferring an interest
A foreign law impedes the entity's ability to issue or transfer an interest to the foreign interest holder where it is shown that a foreign law had obstructed or hindered the entity issuing or transferring the interest. This condition would be satisfied where, for example, the foreign law would not permit the entity to issue or transfer a particular interest to a foreign interest holder.
Condition 3 is also satisfied where it would be impractical or unreasonably onerous to determine whether a foreign law impedes the entity's ability to issue or transfer the interest. Even where an entity could ultimately issue or transfer an interest to a foreign interest holder, this condition would be satisfied where the entity would be required to incur substantial cost in issuing a prospectus that complies with the particular foreign law of that country for a relatively small number of shareholders (by number and value).
In some circumstances, the share sale facility may dispose of some or all the interests on a pooled basis. That is, a share sale facility would dispose of the interests together with the interests that would ordinarily be allocated to the other foreign interest holders. In these circumstances, the share sale facility will be required to give the foreign interest holder an amount equal to their proportion of the capital proceeds (less expenses or taxes).
Each CGT restructure rollover specifies when the ownership requirements are tested. These requirements are tested 'just before' and 'just after' a specific time or period, or are tested throughout a particular period. The concepts 'just before' and 'just after' take their ordinary meanings so that the testing begins immediately before and ends immediately after the relevant time.
The ownership requirements will be satisfied for the foreign interest holder providing the share sale facility owns the interest in the same proportions as the foreign interest holder when the ownership requirements are tested. This is because the foreign interest holder is treated as owning the interest when the share sale facility owns that interest.
For more information, refer to:
Last Modified: Monday, 30 April 2012