House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Treasurer, the Hon Wayne Swan MP)

Chapter 1 CGT roll-overs for corporate restructures

Outline of chapter

1.1 Schedule 1 to this Bill modifies the capital gains tax (CGT) provisions in the Income Tax Assessment Act 1997 (ITAA 1997) to prevent a market value cost base from arising when shares and certain other interests in an entity (the original entity) are acquired by another entity (the acquiring entity) following a scrip for scrip roll-over under an arrangement that is taken to be a restructure.

Context of amendments

1.2 Currently, depending on circumstances, Subdivision 124-G of the ITAA 1997 (exchange of shares in one company for shares in another company) or Subdivision 124-M (scrip for scrip roll-over) may apply to allow a CGT roll-over for shareholders who dispose of shares in a company (the original entity) in exchange for shares in another company (the acquiring entity). In essence:

•

the exchange of shares roll-over is designed for corporate restructures; and

•

the scrip for scrip roll-over is designed for corporate takeovers.

1.3 The exchange of shares roll-over provides a tax neutral outcome for corporate restructures where there is no substantive change in the underlying assets or the ownership of the original entity. If this roll-over applies, the cost base of the shares that an acquiring entity receives in the original entity reflects the cost bases of the underlying net assets of the original entity.

1.4 The scrip for scrip roll-over can apply to an arrangement only if the exchange of shares roll-over does not apply. If the scrip for scrip roll-over applies, the market value substitution rule generally applies so that the cost base of the shares that the acquiring entity receives in the original entity reflects the market value of the underlying net assets of the original entity. This recognises that, in a commercial takeover, shares are given in consideration for the acquisition of the value represented by those assets.

1.5 However, the scrip for scrip roll-over contains integrity rules that apply if the owners of the replacement entity and the original entity are substantially the same. If the integrity rules apply, the cost base of the shares that the acquiring entity receives in the original entity generally reflects the cost bases of the original shares held in the original entity (rather than the market value of the original entity).

1.6 Companies are able to gain significant tax benefits by restructuring in a way that attracts the scrip for scrip roll-over rather than the exchange of shares roll-over. These tax benefits are compounded if the entity taken over becomes a member of the acquiring entity's consolidated group.

1.7 For example, some entities have entered into schemes that involve the insertion of a new holding company above the original entity (known as 'top hat' schemes). The schemes are designed to attract a scrip for scrip roll-over. As a result, the holding company obtains a market value cost base for the shares it acquires in the original entity under the scheme even though there is no significant change in the underlying ownership of the assets.

1.8 Where the original entity subsequently joins the holding company's consolidated group, the consolidation tax cost setting rules apply to push this market value cost base into the underlying assets of the original entity. This effectively allows the tax costs of the original entity's assets to be reset which, in turn, can lead to an increase in capital allowance deductions and a reduction in capital gains that arise on the disposal of those assets.

Summary of new law

1.9 The scrip for scrip CGT roll-over provisions will be modified to prevent a market value cost base from arising for any qualifying interests acquired by the acquiring entity under an arrangement that is taken to be a restructure.

1.10 An arrangement will be taken to be a restructure if, broadly, just after the arrangement was completed (the completion time) the market value of the replacement interests issued by the acquiring entity under the arrangement in exchange for qualifying interests in the original entity is more than 80 per cent of the market value of all the shares (including options, rights and similar interests to acquire shares) issued by the replacement entity.

1.11 If an arrangement that qualifies for scrip for scrip roll-over is taken to be a restructure, then the cost base for the qualifying interests that the acquiring entity acquires in the original entity will reflect the cost bases of the underlying net assets of the original entity (rather than the market value of the original entity).

1.12 In addition, if the original entity becomes a member of a consolidated group or multiple entry consolidated group (MEC group) under the arrangement, then the head company of the group can elect to retain the tax costs of the original entity's assets.

Comparison of key features of new law and current law

Detailed explanation of new law

1.13 The scrip for scrip CGT roll-over provisions (Subdivision 124-M of the ITAA 1997) will be modified to prevent a market value cost base from arising for qualifying interests acquired by an acquiring entity under an arrangement that is taken to be a restructure.

1.14 Qualifying interests are:

•

original interests in the original entity - an interest is an original interest under paragraph 124-780(1)(a) if the interest is:

-

a share in the original entity acquired by an acquiring entity; or

-

an option, right or similar interest in the original entity acquired by an acquiring entity; and

•

any interests issued by the original entity to an acquiring entity under the arrangement in respect of other original interests in the original entity that are cancelled under the arrangement.

1.15 If an arrangement that qualifies for scrip for scrip roll-over is taken to be a restructure, then the cost base for the qualifying interests that the acquiring entity acquires in the original entity will reflect the cost bases of the original entity's assets (rather than the market value of the original entity).

1.16 In addition, if the original entity becomes a member of a consolidated group or MEC group under the arrangement, the head company of the group can elect to retain the tax costs of the original entity's assets.

When is an arrangement taken to be a restructure?

1.17 A single arrangement will be taken to be a restructure if:

•

the replacement entity for the arrangement knows, or could reasonably be expected to know:

-

that a scrip for scrip roll-over has been, or will be, obtained in relation to the arrangement; and

-

that there is a common stakeholder for the arrangement; and

•

just after the arrangement was completed (the completion time), 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 is more than 80 per cent of the market value of all the shares (including options, rights and similar interests to acquire shares) issued by the replacement entity.

[ Schedule 1, item 2, subsection 124-784A(1 )]

1.18 The replacement entity may be either the entity that acquires the original entity (the acquiring entity) or the ultimate holding company of the acquiring entity (paragraph 124-780(3)(c)).

1.19 An interest is a replacement interest under paragraph 124-780(1)(a) if, broadly:

•

the interest is a share in the acquiring entity that is issued in exchange for an interest in the original entity; or

•

the interest is an option, right or similar interest that gives an entitlement to acquire a share in the acquiring entity that is issued in exchange for a similar interest in the original entity.

Reasonable expectation that an arrangement will result in a scrip for scrip CGT roll-over

1.20 An arrangement will be taken to be a restructure only if the replacement entity for the arrangement knows, or could reasonably be expected to know, that a scrip for scrip CGT roll-over has been, or will be, obtained in relation to the arrangement. [ Schedule 1, item 2, subparagraph 124-784A(1 )( a )( i )]

1.21 It will be a question of fact as to whether the replacement entity for an arrangement knows, or could reasonably be expected to know, that a scrip for scrip CGT roll-over has been, or will be, obtained in relation to the arrangement. However, if the conditions for a scrip for scrip CGT roll-over in section 124-780 are satisfied, then it is likely that the replacement entity will know, or could reasonably be expected to know, that the arrangement will result in a scrip for scrip CGT roll-over unless it can establish that a CGT roll-over is denied to all the shareholders of the original entity because of the exceptions in section 124-795.

Common stakeholder

1.22 An arrangement will be taken to be a restructure only if the replacement entity for an arrangement knows, or could reasonably be expected to know, that there is no common stakeholder for the arrangement. [ Schedule 1, item 2, subparagraph 124-784A(1 )( a )( ii )]

1.23 It will be a question of fact as to whether the replacement entity for an arrangement knows, or could reasonably be expected to know, that that there is no common stakeholder for the arrangement.

1.24 If there is no common stakeholder under an arrangement, there will be a significant change in the underlying ownership of the original entity. As a consequence, the arrangement will be more akin to a takeover, rather than a restructure.

1.25 Under subsection 124-783(3), an original interest holder is a common stakeholder for an arrangement if it had:

•

a common stake (as defined in section 124-783) in the original entity just before the arrangement started; and

•

a common stake in the replacement entity just after the arrangement was completed.

1.26 For the purpose of determining whether there is a common stakeholder for an arrangement under section 124-784A, subsections 124-783(4) and (5), which alter the operation of subsection 124-783(3), are disregarded. Consequently:

•

an original interest holder that has a replacement interest will not be taken to be a common stakeholder just because an acquiring entity for the arrangement is an original interest holder; and

•

an original interest holder for an arrangement can be a common stakeholder even if the replacement entity or the original entity has 300 members or more just before the arrangement started.

[ Schedule 1, item 2, subparagraph 124-784A(1 )( a )( ii )]

Market value of the replacement entity increases by more than 80 per cent

1.27 If the replacement entity for an arrangement knows, or could reasonably be expected to know, that a scrip for scrip CGT roll-over has been, or will be, obtained in relation to the arrangement and there is a common stakeholder, then the arrangement will be taken to be a restructure if, just after the arrangement was completed (the completion time), the market value of the replacement interests issued by the replacement entity under the arrangement in exchange for qualifying interests in the original entity is more than 80 per cent of:

•

the market value of the shares issued by the replacement entity; and

•

the market value of options, rights and similar interests issued by the replacement entity that give the holder an entitlement to acquire a share in the replacement entity at or after the completion time.

[ Schedule 1, item 2, paragraph 124-784A(1 )( b) and steps 1 and 3 in the method statement in subsection 124-784A(2 )]

1.28 If the replacement entity issued replacement interests in exchange for interests in the original entity under any earlier arrangements that were taken to be restructures, then those replacement interests will be taken into account for the purposes of applying the test. [ Schedule 1, item 2, step 2 in the method statement in subsection 124-784A(2 )]

Example 1.1

Nestar Online Pty Ltd (the replacement entity) enters into an arrangement to acquire Miky Jay Toys Pty Ltd (the original entity). Just prior to the arrangement:

•

Nestar Online has a net market value of $50,000; and

•

Miky Jay Toys has a net market value of $1 million.

Under the arrangement, the shareholders of Miky Jay Toys receive $50,000 cash and shares with a value of $950,000 in Nestar Online in exchange for their Miky Jay Toys shares. The arrangement qualifies for a scrip for scrip CGT roll-over.

The market value, just after the completion time, of the replacement interests issued under the arrangement by Nestar Online to the original shareholders of Miky Jay Toys is $950,000 (step 1 in the method statement in subsection 124-784A(2)).

As there are no prior arrangements that have been taken to be restructures, the result of step 2 in the method statement in subsection 124-784A(2) is also $950,000.

The market value, just after the completion time, of all the shares (including options, rights and similar interests to acquire shares) issued by Nestar Online is $1 million (step 3 in the method statement in subsection 124-784A(2)).

As the result of step 2 in the method statement ($950,000) is greater than 80 per cent of the result of step 3 (80% × $1m = $800,000), the arrangement is taken to be a restructure.

Example 1.2

Zac Megastores Pty Ltd (the replacement entity) enters into an arrangement to acquire Nestar Online Pty Ltd (the original entity). Just prior to the arrangement:

•

Zac Megastores has a net market value of $50,000; and

•

Nestar Online has a net market value of $1 million.

The arrangement is undertaken in three stages.

Under stage 1, Zac Megastores acquires 5 per cent of Nestar Online shares for $50,000 cash.

Under stage 2, Zac Megastores acquires an additional 80 per cent of Nestar Online shares by exchanging shares. That is, the participating shareholders of Nestar Online receive Zac Megastores shares with a value of $800,000 in exchange for their Nestar Online shares, and qualify for a scrip for scrip CGT roll-over.

•

The market value, just after the completion time, of the replacement interests issued by Zac Megastores to the original shareholders of Nestar Online under stage 2 of the arrangement is $800,000 (step 1 in the method statement in subsection 124-784A(2)).

•

As there are no prior arrangements that have been taken to be restructures, the result of step 2 in the method statement in subsection 124-784A(2) is also $800,000.

•

The market value of all the shares (including options, rights and similar interests to acquire shares) issued by Zac Megastores just after the completion of stage 2 is $850,000 (step 3 in the method statement in subsection 124-784A(2)).

•

As the result of step 2 in the method statement ($800,000) is greater than 80 per cent of the result of step 3 (80% × $850,000 = $680,000), stage 2 of the arrangement is taken to be a restructure.

Under stage 3, Zac Megastores acquires the final 15 per cent of Nestar Online shares by exchanging shares. That is, the remaining shareholders of Nestar Online receive Zac Megastores shares with a value of $150,000 in exchange for their Nestar Online shares, and qualify for a scrip for scrip CGT roll-over.

•

The market value, just after the completion time, of the replacement interests issued by Zac Megastores to original shareholders of Nestar Online under stage 3 of the arrangement is $150,000 (step 1 in the method statement in subsection 124-784A(2)).

•

The net market value of the replacement interests issued by Zac Megastores to original shareholders of Nestar Online under stage 2 of the arrangement is $800,000. Therefore, the result of step 2 in the method statement in subsection 124-784A(2) is $950,000 (ie, $150,000 + $800,000).

•

The market value of all the shares (including options, rights and similar interests to acquire shares) issued by Zac Megastores just after the completion of stage 3 is $1 million (step 3 in the method statement in subsection 124-784A(2)).

•

As the result of step 2 in the method statement ($950,000) is greater than 80 per cent of the result of step 3 (80% × $1m = $800,000), stage 3 of the arrangement is also taken to be a restructure.

Value of interests in a listed entity

1.29 If a replacement entity is listed on an approved stock exchange at the completion time, then, for the purpose of applying the method statement in subsection 124-784A(2), the replacement entity may choose that the market value of the replacement interests is taken to be the officially quoted price of the interests at that time. [ Schedule 1, item 2, subsection 124-784A(3 )]

1.30 An interest in an entity has an officially quoted price at the completion time if, during the one week period starting on the day that the completion time occurred, there was at least one transaction on the relevant stock exchange of interests in that class. The officially quoted price is the weighted average of the prices at which those interests were traded on that stock exchange (ie, the volume weighted average price) during that period. [ Schedule 1, items 2 and 5, subsection 124-784A(6) and the definition of ' officially quoted price' in subsection 995-1(1 )]

1.31 If there are no transactions on a relevant stock exchange of interests in that class during that period, an interest in an entity will not have an officially quoted price at the completion time. In these circumstances, the replacement entity cannot make a choice under subsection 124-784A(3).

1.32 Where an interest is quoted on two or more approved stock exchanges on the day that the completion time occurred, the replacement entity can choose the stock exchange on which interests are traded to determine the officially quoted price. [ Schedule 1, items 2 and 5, subsection 124-784A(7) and the definition of ' officially quoted price' in subsection 995-1(1 )]

More than one original entity acquired under an arrangement

1.33 If qualifying interests in more than one original entity are acquired under the same arrangement, then:

•

the qualifying interests of each of the original entities are taken to be acquired under separate arrangements; and

•

those separate arrangements are taken to have happened in the order that the original entities were acquired.

[ Schedule 1, item 2, subsection 124-784A(4 )]

1.34 However, if interests are acquired in two or more original entities at the same time under a single arrangement, the replacement entity must choose the order in which the original entities were acquired for the purposes of applying section 124-784A. [ Schedule 1, item 2, subsection 124-784A(5 )]

More than one original entity acquired under separate arrangements that commence at the same time

1.35 Similarly, if interests are acquired in two or more original entities under separate arrangements that commence at the same time, the replacement entity must choose the order in which the original entities were acquired for the purposes of applying section 124-784A. [ Schedule 1, item 2, subsection 124-784A(5 )]

Choice to deny a scrip for scrip CGT roll-over

1.36 To reduce compliance costs, a replacement entity can make a choice to prevent taxpayers from being able to choose to obtain a scrip for scrip CGT roll-over in relation to an arrangement. The replacement entity or the original entity must notify affected taxpayers of the choice before the exchange of shares. [ Schedule 1, item 3, subsection 124-795(4 )]

1.37 The notification can be in the disclosure documentation sent to holders of interests in the original entity in relation to the arrangement or in any other form chosen by the replacement entity or the original entity.

1.38 If the replacement entity for an arrangement makes a choice under subsection 124-795(4), it will know, or could reasonably be expected to know, that a scrip for scrip CGT roll-over has not been, or will not be, obtained in relation to the arrangement. As a result, the arrangement will fall outside the scope of section 124-784A.

1.39 The choice to deny a scrip for scrip CGT roll-over is not limited to arrangements that are taken to be restructures. Therefore, the replacement entity does not need to establish that an arrangement will be taken to be a restructure under section 124-784A before making a choice under subsection 124-795(4).

Modification to the CGT cost base rules when an arrangement is taken to be a restructure

1.40 Where an arrangement is taken to be a restructure, the cost base and reduced cost base of the qualifying interests acquired in the original entity are worked out by applying the method statement in subsection 124-784B(2). [ Schedule 1, items 1 and 2, item 2A in the table in section 112-53 and section 124-784B ]

1.41 However, the modifications do not apply if the cost base and reduced cost base of the qualifying interests is worked out under section 124-782, because the common stakeholder rules in section 124-783 apply to the arrangement. [ Schedule 1, item 2, paragraph 124-784B(1 )( a )]

1.42 If an arrangement is taken to be a restructure, the first element of the cost base and reduced cost base of the qualifying interests will be worked out at the completion time under the method statement in subsection 124-784B(2). [ Schedule 1, item 2, subsections 124-784B(2) and (6 )]

1.43 The method statement, which consists of three components, broadly works out the first element of the cost base and reduced cost base of the qualifying interests using the formula:

[Original entity's assets (step 1 + step 2 + step 3) - Original entity's liabilities (step 4)] / Number of interests (step 5)

1.44 The first component of the method statement is to add up certain amounts relating to the original entity's assets - that is, steps 1, 2 and 3 in the method statement.

1.45 Step 1 in the method statement, which primarily relates to CGT assets held by the original entity, is the sum of:

•

the market value of the original entity's pre-CGT assets (except trading stock) at the completion time;

•

the cost bases of the original entity's CGT assets (except trading stock) at the completion time;

•

if any of the original entity's CGT assets (except trading stock) have no cost base, the maximum amount of consideration the entity would need to receive if it were to dispose of the assets at the completion time without an amount being included in its assessable income or allowed as a deduction; and

•

the amounts worked out under steps 2 and 3 in the method statement.

[ Schedule 1, item 2, step 1 in the method statement in subsection 124-784B(2 )]

1.46 Step 2 in the method statement, which relates to the original entity's trading stock, is the sum of:

•

the value of the original entity's trading stock at the start of the income year in which the completion time occurred;

•

the cost of livestock acquired by natural increase during the income year but before the completion time;

•

the amount of any outgoing incurred in connection with the acquisition of trading stock during the income year but before the completion time (except livestock acquired by natural increase); and

•

the amount of any outgoings forming part of the cost of the trading stock incurred by the original entity during its current holding of the trading stock but before the completion time.

[ Schedule 1, item 2, step 2 in the method statement in subsection 124-784B(2 )]

1.47 Step 3 in the method statement, which relates to assets of the original entity that are not CGT assets or trading stock, is the amount that would be an asset's cost base at the completion time if the asset were a CGT asset. [ Schedule 1, item 2, step 3 in the method statement in subsection 124-784B(2 )]

1.48 The second component of the method statement is to subtract the original entity's liabilities at the completion time in respect of those assets from the result of the first component of the method statement - that is, step 4 in the method statement. For the purpose of applying the method statement, the relevant liabilities are those that are recognised for income tax purposes (as distinct from accounting liabilities). [ Schedule 1, item 2, step 4 in the method statement in subsection 124-784B(2 )]

1.49 When a liability of the original entity is not a liability in respect of a specific asset or assets of the entity, the liability is taken to be a liability in respect of all the assets of the entity. [ Schedule 1, item 2, subsection 124-784B(4 )]

1.50 However, if a liability is in respect of two or more assets, the proportion of the liability in respect of each asset reflects the relative market value of each of those assets. [ Schedule 1, item 2, subsection 124-784B(5 )]

1.51 The third component of the method statement is to divide the result of the second component by the total number of membership interests in the original entity - that is, step 5 in the method statement.

•

If the original entity has one class of membership interests, the result of step 4 is divided by the total number of those membership interests at the completion time.

•

If the original entity has more than one class of membership interests:

-

a portion of the result of step 4 is allocated to each class in proportion to the market value of all the membership interests in that class; and

-

the amount allocated to each class is divided by the total number of membership interests in that class at the completion time.

[ Schedule 1, item 2, step 5 in the method statement in subsection 124-784B(2 )]

1.52 For the purposes of step 5 in the method statement in subsection 124-784B(2), a membership interest is taken to include an option, right or similar interest (including a contingent option, right or interest) held at the completion time, which is created or issued by the original entity, to acquire a membership interest (such as a share) in the original entity. [ Schedule 1, item 2, subsection 124-784B(7 )]

1.53 If an acquiring entity is listed on an approved stock exchange at the completion time, then, for the purpose of applying step 5 in the method statement, the replacement entity may choose that the market value of the membership interests is taken to be the officially quoted price of those interests at that time. [ Schedule 1, item 2, subsection 124-784A(3 )]

Example 1.3

Nestar Online Pty Ltd acquired Miky Jay Toys Pty Ltd under an arrangement that was taken to be a restructure. The arrangement was completed on 31 March 2009.

Just prior to the arrangement, Miky Jay Toys had:

•

pre-CGT assets (other than trading stock) with a market value of $265,000;

•

post-CGT assets (other than trading stock) with cost bases of $400,000 and a market value of $650,000;

•

trading stock with a value at the start of the 2008-09 of $60,000; and

•

trading stock acquired before 31 March 2009 with a cost of $25,000.

Liabilities in respect of those assets amount to $150,000.

After the completion of the arrangement, Nestar Online holds 100,000 shares in Miky Jay Toys. All of the shares are of the same class. Each share has a market value of $10.

As part of the arrangement, Nestar Online acquired 5,000 shares for cash, at a cost of $50,000 (ie, $10 per share). Therefore, the first element of the cost base and reduced cost base for each of those 5,000 shares is $10.

The remaining 95,000 shares were acquired under the arrangement by a scrip for scrip exchange. The first element of the cost base and reduced cost base of those shares is worked out by applying the method statement in subsection 124-784B(2).

•

The result of step 1 is $750,000 - that is, the sum of:

-

the market value of pre-CGT assets - $265,000 (step 1(a));

-

the cost bases of post-CGT assets - $400,000 (step 1(b));

-

the amount worked out for trading stock under step 2 - $85,000 (step 1(d))

•

The result of step 4 is $150,000 - that is, the value of the liabilities in respect of those assets.

•

The result of step 5 is $6 - that is, step 1 ($750,000) less step 4 ($150,000) divided by the total number of membership interests in the original entity (100,000).

Therefore, the first element of the cost base and reduced cost base of each of the remaining 95,000 shares is $6.

Cost bases of qualifying interests acquired partly with cash and partly with an exchange of scrip

1.54 Where a qualifying interest is acquired under an arrangement partly with a payment of cash and partly with an exchange of scrip, the method statement in subsection 124-784B(2) will apply to work out that part of the first element of the cost base and reduced cost base of the interest that is attributable to the exchange of scrip. [ Schedule 1, item 2, subsection 124-784B(3 )]

1.55 The first element of the cost base and reduced cost base that is attributable to cash is worked out using the general rules about cost base.

Example 1.4

In Example 1.3 Nestar Online Pty Ltd acquired Miky Jay Toys Pty Ltd. Under the arrangement, Nestar Online paid cash for 5,000 shares and purchased the remaining 95,000 shares by an exchange of shares.

Assume that, instead, Nestar Online acquired 100,000 shares partly by paying cash and partly by an exchange of shares - that is, 5 per cent of each share was acquired by paying cash and 95 per cent by exchanging shares.

In these circumstances, the cost base and reduced cost base of each share will be $6.20 - that is the sum of:

•

to the extent that the share is acquired by an exchange of scrip, the amount worked out under subsection 124-784B(2) - $5.70 (ie, $6 × $95,000 / $100,000); and

•

to the extent that the share is acquired by cash - $0.50 (ie, $10 × $5,000 / $100,000).

Adjustments to the method statement in subsection 124-784B(2) for arrangements involving consolidated groups

1.56 The operation of the method statement in subsection 124-784B(2) is modified where, under an arrangement that is taken to be a restructure:

•

the original entity (other than a head company) joins a consolidated group or MEC group;

•

the original entity is the head company of a consolidated group or MEC group and does not join another group;

•

the original entity is the head company of a consolidated group or MEC group and joins another group; or

•

the original entity leaves a consolidated group or MEC group and does not join another group.

1.57 The adjustments primarily ensure that the assets and liabilities that are taken into account under the method statement in subsection 124-784B(2) are appropriately identified.

Original entity (other than a head company) joins a consolidated group

1.58 Where an original entity (that is not a head company) becomes a subsidiary member of a consolidated group or MEC group under an arrangement that is taken to be a restructure, for the purposes of applying section 124-784B:

•

the completion time for the arrangement is taken to be the time the original entity becomes a member of the group; and

•

the core rules in the consolidation regime (Division 701) in relation to the original entity becoming a member of the group are disregarded.

[ Schedule 1, item 4, subsections 715-910(1) and (2 )]

1.59 As a result, the method statement in subsection 124-784B(2) is applied at the joining time disregarding the single entity rule, the entry history rule and the tax cost setting rules. This will ensure that the original entity's assets and liabilities are appropriately recognised for the purposes of applying the method statement.

Original entity is the head company of a consolidated group and does not join another group

1.60 The operation of the method statement in subsection 124-784B(2) is modified where, under an arrangement that is taken to be a restructure:

•

the original entity is the head company of a consolidated group or MEC group just before the arrangement was completed; and

•

the original entity does not become a subsidiary member of another consolidated group or MEC group.

1.61 In these circumstances, the single entity rule (section 701-1) and entry history rule (section 701-5) have effect for the purposes of applying the method statement in subsection 124-784B(2). [ Schedule 1, item 4, section 715-915 ]

1.62 As a result, the assets and liabilities that are taken into account under the method statement in subsection 124-784B(2) are the underlying assets and liabilities of the group.

Original entity is the head company of a consolidated group and joins another group

1.63 The operation of the method statement in subsection 124-784B(2) is modified where, under an arrangement that is taken to be a restructure:

•

the original entity is the head company of a consolidated group or MEC group (the acquired group) just before the arrangement was completed; and

•

as a result of the arrangement, the head company and all of the subsidiary members of the acquired group become subsidiary members of another consolidated group or MEC group.

[ Schedule 1, item 4, subsection 715-920(1 )]

1.64 In these circumstances, for the purposes of applying the method statement in subsection 124-784B(2):

•

the original entity is taken to be the head company of the acquired group at the completion time for the arrangement;

•

the operation of the consolidation provisions for head company core purposes in relation to the members of the group continue to have effect at the completion time for the arrangement - that is, the acquired group is taken to remain in existence as a consolidated group or MEC group;

•

the completion time for the arrangement is taken to be the time the original entity becomes a member of the other group; and

•

the core rules in the consolidation regime (Division 701) in relation to the original entity becoming a member of the group are disregarded.

[ Schedule 1, item 4, subsection 715-920(2 )]

1.65 As a result, the method statement in subsection 124-784B(2) is applied to the head company of the acquired group at the joining time disregarding the single entity rule, the entry history rule and the tax cost setting rules. This will ensure that all the assets and liabilities of the acquired group are appropriately recognised for the purposes of applying the method statement.

Original entity leaves a consolidated group and does not join another group

1.66 Where, under an arrangement that is taken to be a restructure, an original entity ceases to be a subsidiary member of a consolidated group or MEC group after the completion time for the arrangement and does not become a member of another consolidated group, the completion time is taken to be the leaving time for the purposes of applying section 124-784B. [ Schedule 1, item 4, section 715-925 ]

1.67 As a result, the method statement in subsection 124-784B(2) is applied to the leaving entity at the leaving time. This will ensure that all the assets and liabilities of the leaving entity are appropriately recognised for the purposes of applying the method statement.

Cost base of equity or debt given by an acquiring entity to an ultimate holding company

1.68 For a down stream acquisition where the acquiring subsidiary issues debt or equity to the ultimate holding company, the acquisition cost for the ultimate holding company for that debt or equity will be based on the cost base for the qualifying interests that the subsidiary acquires. [ Schedule 1, item 2, section 124-784C ]

1.69 In these circumstances, the first element of the cost base of the equity or debt for the ultimate holding company is that part of the cost base of the qualifying interests worked out under section 124-784B as:

•

may be reasonably allocated to the equity or debt; and

•

is not more than the market value of the equity or debt just after the arrangement was completed.

[ Schedule 1, item 2, subsection 124-784C(2 )]

1.70 In addition, any capital gain of the ultimate holding company from the repayment of new debt owed by an acquiring entity under the arrangement is disregarded to the extent that it relates to the difference between the part of the cost base worked out under section 124-784B and the market value of the debt just after the arrangement was completed. [ Schedule 1, item 2, subsection 124-784C(3 )]

1.71 Section 124-784C is based on section 124-784, which applies similar outcomes for a down stream acquisition where the cost base of an original interest is transferred or allocated under section 124-782.

Modification to the tax cost setting rules if an original entity becomes a member of a consolidated group

1.72 Under the consolidation regime, if an entity joins a consolidated group or MEC group, the tax cost setting rules (section 701-10 and subsection 701-35(4)) apply to reset the tax costs of the joining entity's assets.

1.73 However, the head company of a consolidated group or MEC group can choose to disregard the tax cost setting rules where, under an arrangement that is taken to be a restructure:

•

the original entity becomes a member of a consolidated group or MEC group; or

•

the original entity is the head company of a consolidated group or MEC group (the acquired group) just before the arrangement was completed and, as a result of the arrangement, the head company and all of the subsidiary members of the acquired group become subsidiary members of another group.

[ Schedule 1, item 4, subsections 715-910(3) and 715-920(3 )]

1.74 If the head company makes a choice under subsection 715-910(3) or 715-920(3), the tax costs of the original entity's assets will not be reset. Instead, the entry history rule will apply so that the head company's tax costs of the original entity's assets will be retained.

1.75 A choice to retain the tax costs of the original assets for an arrangement that is taken to be a restructure is appropriate because such an arrangement essentially involves a relatively small entity taking over a relatively large entity with little increase in value. The choice significantly reduces compliance costs as:

•

there will be no need to apply section 124-784B to work out the first element of the cost base and reduced cost base of the qualifying interests acquired in the original entity; and

•

there will be no need to apply the tax cost setting rules to work out the reset tax costs of the original entity's assets.

Schemes entered into for a tax avoidance purpose

1.76 The general anti-avoidance rule in Part IVA of the Income Tax Assessment Act 1936 applies to certain schemes entered into for the dominant purpose of obtaining a tax benefit. Ordinarily a transaction not treated as a restructure under section 124-784A of the ITAA 1997 will not give rise to any issues that call for a consideration of the potential application of Part IVA.

1.77 However, arrangements that are structured in an artificial or contrived way so as to avoid being treated as a restructure could, depending on the circumstances, attract the application of Part IVA. For example, some transactions involving the changing of the market value of the replacement interests or the interests on issue (or shifting value between them), or the issuing of interests before the completion time of the transaction, may contain features which could lead to the application of Part IVA. Each case will turn on its own particular facts.

Application and transitional provisions

1.78 If an arrangement involves a takeover bid (within the meaning of the Corporations Act 2001 ), the amendments will apply in relation to the arrangement if:

•

for an off market bid - the bidder lodged with the Australian Securities and Investments Commission a notice stating that the bidder's statement and offer document has been sent to the target (ie, step 4 in the table in subsection 633(1) of the Corporations Act 2001 is completed) after 7.30 pm, by legal time in the Australian Capital Territory, on 13 May 2008; or

•

for a market bid - the bidder announced the bid to the relevant financial market (ie, step 2 in the table in subsection 635(1) of the Corporations Act 2001 is completed) after 7.30 pm, by legal time in the Australian Capital Territory, on 13 May 2008.

[ Schedule 1, subitem 6(1 )]

1.79 If an arrangement involves a scheme of arrangement (within the meaning of the Corporations Act 2001 ), the amendments will apply in relation to the arrangement if a court orders, under subsection 411(1) of the Corporations Act 2001 , a meeting of a company's members, or one or more classes of a company's members, about the arrangement and the application for the order was made after 7.30 pm, by legal time in the Australian Capital Territory, on 13 May 2008. [ Schedule 1, subitem 6(2 )]

1.80 If an arrangement does not involve a takeover bid or a scheme of arrangement, the amendments will apply in relation to the arrangement if a decision to enter into the arrangement was not made before 7.30 pm, by legal time in the Australian Capital Territory, on 13 May 2008. [ Schedule 1, subitem 6(3 )]

1.81 It will be a question of fact as to whether a decision to enter into the arrangement was made before 7.30 pm, by legal time in the Australian Capital Territory, on 13 May 2008. However, it is expected that there would be some evidence of the decision in the records of the acquiring entity or the original entity.