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.
Last Modified: Monday, 30 April 2012