House of Representatives

Tax and Superannuation Laws Amendment (2014 Measures No. 6) Bill 2014

Explanatory Memorandum

(Circulated by the authority of the Treasurer, the Hon. J. B. Hockey MP)

Chapter 1 - Removing tax impediments to certain business restructures

Outline of chapter

1.1 Schedule 1 to this Bill amends the Income Tax Assessment Act 1997 (ITAA 1997) (all legislative references are to the ITAA 1997 unless otherwise specified) to extend the existing business restructure roll-overs available where a member of a company or unit trust can defer the income tax consequences of transactions that occur in the course of a business restructure.

1.2 In particular, the amendments permit taxpayers to apply the roll-overs in circumstances where they held the relevant shares or units as revenue assets or trading stock. The amendments also consolidate the separate but effectively identical business restructure roll-overs for shares and units in a unit trust into a single set of provisions.

1.3 The amendments also make a number of technical changes to provisions of the ITAA 1997 to:

allow the roll-overs for trusts transferring all their assets to a trust or company to apply where the new trust or company holds rights needed to facilitate the transfer;
address a technical defect in the operation of the business restructure roll-overs in relation to revenue assets; and
clarify that the business restructure roll-overs only apply where the new asset has the same character (as a revenue asset or trading stock) as the original asset.

Context of amendments

Business restructure roll-overs, trading stock and revenue assets

1.4 Subdivisions 124-G and 124-H both provide roll-overs (the business restructure roll-overs) to allow eligible taxpayers to defer tax consequences that might otherwise arise from certain business restructures.

1.5 Subdivision 124-G allows taxpayers to defer the capital gains tax (CGT) consequences that would arise from a company restructure by providing a CGT roll-over where interest holders exchange all of their shares in a company for shares in an interposed company.

1.6 For the roll-over to apply, the taxpayer must elect for it to apply and satisfy the requirements in Subdivision 124-G. Broadly, these requirements will be satisfied where:

the interest holder is a member of the company;
the company has more than one member;
all of the members of the company dispose, cancel or redeem (subsequently in this Chapter, a reference to a disposal of shares or units includes a reference to the cancellation or redemption of the shares or units unless the contrary is indicated) all of their shares in the company and receive shares in the new company (the interposed company) as part of a scheme of re-organisation;
immediately following the re-organisation, the interposed company owns all of the shares of the original company;
the interests of members in the new company are equivalent to their interests in the old company; and
the shares in the interposed company are not redeemable shares; and
either:

-
the interest holder was an Australian resident; or
-
the interest holder was a foreign resident and the original shares, immediately before the time of disposal, and the new shares, immediately after disposal, were taxable Australian property.

1.7 Subdivision 124-G also includes provisions (see section 124-390) to provide an equivalent roll-over in the same circumstances in respect of the income tax consequences where the relevant shares are held as trading stock or revenue assets immediately before the company restructure. These roll-overs only apply where the original company and the company that is interposed are head companies of the same consolidated group.

1.8 The trading stock roll-over under Subdivision 124-G works by providing that the amount included in the taxpayer's income is its cost or value under the trading stock provisions and by providing that the replacement shares have been acquired for the same amount. As a result of the interaction of the trading stock provisions (Division 70) and the general law, this means that the assessable income from the disposal is offset by the deduction for the cost of acquiring the replacement shares, and the trading stock that the taxpayer acquires is taken to initially be the same as the value of the shares they replaced. This deferral does not alter the normal operation of the trading stock provisions under section 70-35 for changes in the value of the trading stock over the course of the income year.

1.9 The revenue asset income tax deferral uses the same approach as the concession for trading stock, requiring that the taxpayer include an amount in their assessable income. However, unlike the trading stock rules, the general income tax provisions do not necessarily provide a corresponding deduction for the acquisition of revenue assets. As a result, the provision does not always result in a tax deferral - interest holders may have to include amounts in their assessable income as a result of the realisation of their assets. This outcome is contrary to the intention of these provisions to permit the deferral of tax consequences.

1.10 Similar to Subdivision 124-G, Subdivision 124-H allows taxpayers to defer the CGT consequences that would arise from the restructure of a unit trust into a company where interest holders either transfer their units in a unit trust to a company or redeem or cancel their units in exchange for shares in the company.

1.11 For the roll-over to apply, the taxpayer must elect for it to apply and meet the requirements set out in the subdivision (which are effectively identical to those set out in Subdivision 124-G).

1.12 Unlike Subdivision 124-G, Subdivision 124-H does not allow taxpayers to defer the income tax consequences of a restructure where the affected units are held as a revenue asset or trading stock in any circumstances. As a result, taxpayers may incur an immediate income tax liability in respect of these restructures.

CGT roll-overs for a trust transferring an asset to a company or another trust

1.13 A CGT roll-over is available where a trust transfers a CGT asset to a company (Subdivision 124-N) or to another trust (Subdivision 126-G).

1.14 These roll-overs are not intended to allow for substantive changes in the underlying ownership arrangements or to provide tax advantages beyond the deferral of CGT consequences for the restructure. To prevent this, both of these roll-overs require that the company or trust receiving the asset must have no CGT assets other than a small amount of cash or debt.

1.15 Industry has identified that this condition may restrict the availability of the roll-over more widely than is intended. In particular, for certain transfers, the recipient entity must hold rights, which are themselves CGT assets, to facilitate the transfer of assets from the original entity to the receiving entity. Entities that hold such rights may be denied access to these roll-overs.

Trading stock and revenue assets

Trading stock

1.16 Trading stock is defined in section 70-10 as including anything that is held for the purpose of manufacture, sale or exchange in the ordinary course of business. As there will generally be high turnover of trading stock in an income year, applying the normal tax rules would involve considerable compliance costs and some potential inaccuracy.

1.17 To address this, Division 70 provides for a special tax regime for trading stock that is intended to reduce compliance costs while still producing an overall result that reflects the activities of the taxpayer in relation to the trading stock over the income year.

1.18 These rules provide that all of the taxpayer's earnings and outgoings in relation to trading stock are on revenue account. They also provide that, generally, a taxpayer must include the earnings from any disposal of trading stock and deduct the outgoings they incur in acquiring new trading stock from their assessable income for an income year. A taxpayer must also account for any net change in the value of the trading stock they hold at the end of any income year.

Revenue assets

1.19 A revenue asset is defined in section 977-50 as a CGT asset where:

the profit or loss on the disposal of the asset would not be taxed under the CGT provisions, but under other provisions of the tax law; and
the asset is neither trading stock under Division 70 nor a depreciating asset within the meaning of section 40-30.

1.20 In most cases, shares or units in a unit trust will be revenue assets if they are disposed of in the ordinary course of the taxpayer's business or the disposal forms part of an arrangement undertaken with the intention of realising a profit (see for example Coles Myer Finance Ltd v Federal Commissioner of Taxation (1993) 176 CLR 640). In this situation, the net profits from the sale of the shares will be subject to tax as ordinary income under section 6-5.

Announced changes

2011-12 Budget

1.21 The then Government announced, as part of the 2011-12 Budget, that it would provide certainty for interest holders by ensuring that the roll-over for revenue assets under Subdivision 124-G provided the intended deferral of tax.

1.22 It was also announced that the law would be amended to ensure that trusts transferring assets to another trust or company were not denied access to relevant roll-overs due to the recipient entity holding rights used to facilitate the transfer.

2011-12 Mid-Year Economic and Fiscal Outlook

1.23 During consultation on the 2011-12 Budget measures, concerns were raised that the lack of an equivalent deferral for revenue assets and trading stock in Subdivision 124-H presented a significant barrier to restructures of unit trusts.

1.24 To address these concerns, it was announced on 17 November 2011 that Subdivision 124-H would be extended to allow the deferral of the income tax consequences of unit trust restructures for taxpayers who hold units as either revenue assets or trading stock.

2012-13 Budget measures

1.25 During further consultation following the 2011-12 Mid-year Economic Financial Outlook announcement, further concerns were identified that the revenue asset and trading stock roll-overs in Subdivision 124-G only applied in limited circumstances - broadly only to restructures in the ownership arrangements of consolidated groups.

1.26 This meant that other restructures could result in significant tax consequences for interest holders, potentially deterring otherwise economically efficient restructures.

1.27 An issue was also identified that the existing provisions for the tax deferral for revenue assets and trading stock in Subdivision 124-G did not require that the replacement shares have the same tax character as the original shares. Changing the character of the replacement asset could result in the asset not being properly subject to tax under either the original revenue asset or trading stock provisions or the CGT provisions.

1.28 To address these two issues, the previous Government announced that it would:

broaden the revenue asset and trading stock roll-overs to apply to all situations in which Subdivision 124-G can apply; and
introduce a requirement in Subdivision 124-G and also in the proposed equivalent provisions in Subdivision 124-H to require that replacement assets must share the same tax character as the original asset for the concession to apply.

Summary of new law

1.29 These amendments improve the ability of businesses to restructure by extending the circumstances where an interest holder can defer the income tax consequences that may arise as a result of a business restructure.

1.30 In particular, these amendments extend the deferral in relation to revenue assets and trading stock by:

removing the restriction that limits the option to defer tax consequences for interest holders that exchange shares in one company for shares in another company as part of a restructure to cases where both companies are part of the same consolidated group; and
making the concession available to interest holders that exchange their units in a unit trust for shares in a company as part of a restructure.

1.31 Further, to simplify the law and remove duplication, the amendments consolidate the two separate Subdivisions which provide effectively identical roll-overs for restructures of trusts and companies into a single Division.

1.32 The amendments also make a number of technical changes to improve the operation of these and certain other roll-overs, including:

allowing trusts that transfer assets to another company or trust to access relevant CGT roll-overs despite the recipient entity holding rights that are used to facilitate the transfer;
correcting issues with the operation of the revenue asset deferral so that it properly defers tax liability in relation to the asset; and
restricting the use of the business restructure roll-overs in relation to revenue assets and trading stock to cases where the replacement asset acquired in a restructure is of the same character as the replaced asset.

Comparison of key features of new law and current law

New law Current law
Revenue asset and trading stock roll-overs are available where interest holders exchange their units in a unit trust for shares in a company. Revenue asset and trading stock roll-overs are not available where interest holders exchange their units in a unit trust for shares in a company.
The revenue asset and trading stock roll-overs that are available where interest holders exchange their shares in a company for shares in another company are not limited to ownership arrangements involving consolidated groups. The revenue asset and trading stock roll-overs that are available where interest holders exchange their shares in a company for shares in another company are only available for ownership arrangements involving consolidated groups.
The revenue asset and trading stock roll-overs that are available where interest holders exchange their shares in a company for shares in another company and where interest holders exchange their units in a unit trust for shares in a company are only available where the replacement interests are of the same tax character as the interests that were exchanged under the restructure. The revenue asset and trading stock roll-overs that are available where interest holders exchange their shares in a company for shares in another company do not require the replacement shares in the interposed company to be of the same tax character as the shares that were exchanged under the restructure.
The revenue asset roll-over that is available where interest holders exchange their shares in a company for shares in another company allows interest holders to defer a profit or loss on the exchange of shares under a corporate restructure. The revenue asset roll-over that is available where interest holders exchange their shares in a company for shares in another company does not operate effectively to defer a profit or loss on the exchange of shares under a corporate restructure.
A trust transferring an asset to a company or another trust may access a CGT roll-over if the receiving entity holds rights that are used to facilitate the transfer of assets to that entity. A trust transferring an asset to a company or another trust cannot access a CGT roll-over if the receiving entity holds any assets other than small amounts of cash or debt, including rights that are used to facilitate the transfer of assets to that entity.

Detailed explanation of new law

1.33 These amendments improve the ability of entities to restructure by extending the circumstances where an interest holder can defer their income tax consequences as a result of an entity restructure.

1.34 Broadly, these amendments do this in two ways: extending the availability of the concessions allowing taxpayers to defer the income tax consequences of exchanging shares or units they hold as revenue assets and trading stock for shares in a company as part of a restructure; and making technical amendments to improve the operation of the provisions.

1.35 These amendments also rewrite and consolidate Subdivisions 124-G and 124-H into the new Division 615 so as to reduce the number of provisions and simplify the law.

Extending the availability of the revenue asset and trading stock concessions

1.36 Where interest holders exchange units in a unit trust or shares in a company for shares in an interposed company, an income tax liability may arise under the tax rules for trading stock (as defined in section 70-10) or revenue assets (as defined in section 977-50). Otherwise, it will generally result in an income tax liability as a result of the CGT provisions.

1.37 Currently, the business restructure roll-overs under Subdivisions 124-G and 124-H may apply to allow taxpayers to in effect defer any liability that would otherwise arise. However, these roll-overs will generally only benefit taxpayers who will be subject to CGT on the disposal of the shares or units. The roll-overs are only available for assets held as trading stock or revenue assets if:

the assets are shares; and
the relevant transaction occurs as part of a restructure of a consolidated group.

1.38 These amendments allow the taxpayer to potentially access a rollover for all shares or units regardless of the character of the shares or units in the taxpayer's hands (including where it is held as a revenue asset or trading stock). [Schedule 1, item 1, Division 615]

Electing to access the roll-over for assets held as revenue asset and trading stock

1.39 In order for an interest holder to be eligible for the optional trading stock or revenue asset concession, the interest holder must elect for the roll-over to apply in respect of the asset. [Schedule 1, item 1, sections 615-5 and 615-45]

1.40 If the taxpayer meets the requirements for the roll-over and chooses for the roll-over to apply, the choice has effect regardless of the character of the asset. Having the election apply for all purposes is simpler for taxpayers and ensures consistent tax treatment.

1.41 It also ensures that there is no possibility that the deferral of tax in relation to shares or units held as a revenue asset may result in the asset being subject to CGT in that year.

1.42 So that all taxpayers are eligible to make this election, the CGT exemption for trading stock in section 118-25 is disregarded. [Schedule 1, item 1, section 615-60]

1.43 In some cases, the interest holder will be taken to have chosen for the roll-over to apply. In these cases, the interest holder is treated in the same way as if they had made an election. [Schedule 1, item 1, subsections 615-5(2) and 615-10(2)]

How the income tax consequences are deferred - trading stock

1.44 In cases where the shares or units are held as trading stock, the amendments provide that interest holders who exchange their shares or units for shares in a new company as part of the restructure are taken to have received an amount for each of the shares or units they have ceased to hold equal to either:

the value of the trading stock at the time of the restructure; or
if the trading stock was held at the start of the income year, the value of the trading stock at the start of the income year plus any subsequent increase in cost.

[Schedule 1, item 1, section 615-50]

1.45 Similarly, the value of the shares an interest holder receives in the restructure is taken be equal to the amount that has been included in their assessable income for the disposal of the old shares or units divided by the number of their new shares that are trading stock.

1.46 The effect of these special valuation rules is to ensure that the value of the old shares or units is taken to be the same as the value of the new shares. As a result, the amount included in the taxpayer's assessable income as a result of the disposal of the units or old shares will be exactly offset by the amount which the taxpayer may deduct from their assessable income as the cost of acquiring the new shares, ensuring no net tax consequence arises at the time of disposal.

1.47 Instead, as the new shares are taken to have the same value as the old shares or units, any unrealised gain or loss in respect of the old shares or units will be subject to tax upon the eventual disposal of the new shares (subject to any subsequent events that may affect this gain or loss).

1.48 To ensure this outcome is achieved, the amendments specifically exclude the application of certain integrity rules that can alter the value of trading stock when sold or acquired by related parties or outside the normal course of business. [Schedule 1, item 1, subsection 615-50(3)]

1.49 Altogether, this ensures that the interest holder's tax position will not change as a result of a restructure to which the provisions apply.

Example 1.1 Coffee is a publicly listed unit trust and restructures for commercial reasons by interposing a new company, Decaf Pty Ltd (Decaf) between itself and its unitholders.Chai Traders Pty Ltd (Chai) holds 10,000 units in Coffee Unit Trust (Coffee). Chai has held these units as trading stock since the start of the income year and has accounted for these units using the cost method under the trading stock provisions.As a result of the restructure, all of the units in Coffee are cancelled and as consideration for this cancellation, the former unitholders are issued one share in Decaf for every two units they held in Coffee. Chai therefore is issued 5,000 shares in Decaf.Chai elects for roll-over relief and the trading stock roll-over provided by these amendments apply.As Chai has elected the cost method to account for its trading stock, Chai is to include in its assessable income the total cost of the units at the start of the income year plus any cost incurred since the start of that income year. In the case of Chai, this cost is $1 per unit and as it holds 10,000 units in Coffee, Chai includes $10,000 in its assessable income.For Chai to determine the cost of each share it acquires in Decaf (and subsequently for Chai to determine the income tax deduction it receives as a result of acquiring shares in Decaf), Chai is required to use the formula described in paragraph 1.46.The cost of each of the shares in Decaf is $2 using the formula. This cost is calculated as follows:

[The total amount included in the interest holder's assessable income as a result of subsection   615-50(1)] / The total number of shares the interest holder acquires that are trading stock]

$10,000 / 5,000 = $2

As Chai received 5,000 shares in Decaf and the cost of each of the shares in Decaf is $2, Chai is entitled to an income tax deduction of $10,000.Therefore, by Chai including $10,000 in its assessable income for the realisation of the units in Coffee, and by receiving a $10,000 income tax deduction for acquiring shares in Decaf, this has the net effect of producing a trading stock deferral for Chai.As the value of Chai's units in Coffee at the start of the income year is the same as the value of its units in Decaf at the end of the income year, Chai is not required to include an amount in its assessable income in respect of these assets under section 70 35.

How the income tax consequences are deferred - revenue assets

1.50 In cases where the taxpayer holds the old shares or units as a revenue asset, the amendments instead provide that the interest holder is taken to have realised the unit for an amount that would result in them not making a profit or loss on the realisation of those shares or units. Generally this will be the price at which the entity acquired the shares or units. [Schedule 1, item 1, section 615-55]

1.51 When calculating any future profit or loss from the realisation of the shares in the interposed entity, the interest holder is assumed to have acquired each share or unit for the total amount they are taken to have received for the shares or units they disposed of in the restructure divided by the total number of new shares or units. [Schedule 1, item 1, subsection 615-55(1)]

1.52 As a result, a restructure to which the roll-over applies will similarly not change the effective net tax position of a taxpayer holding shares or units.

Example 1.2 Continuing on from Example 1.1, Debbie also holds 20,000 units in Coffee. These units are revenue assets for Debbie, as she buys and sells these units for the purposes of earning income.Debbie elects for roll-over relief.At the time of the restructure, all of Debbie's units in Coffee are valued at $40,000. In addition, at this time, the total cost of Debbie's units is $30,000.To ensure Debbie does not make a profit or loss on the realisation of her units in Coffee, using the principle described in paragraph 1.50, Debbie is taken to have received $30,000 for the realisation of her units and not the market value of $40,000.To determine a profit or loss on the future realisation of Debbie's shares in Decaf, Debbie is taken to have acquired each share for an amount as determined using the method set out as described in paragraph 1.51. This amount is calculated as follows:

[The total amount included in the interest holder's assessable income as a result of subsection   615-55(1)] / The total number of shares the interest holder acquires that are revenue assets]

$30,000 / 10,000 = $3

As Debbie is taken to have received $30,000 on the realisation of her units in Coffee and as she subsequently receives 10,000 shares in Decaf, she is taken to have acquired each share in Decaf for a cost of $3. This puts Debbie in the same income tax position in respect of her shares in Decaf as compared with her position in holding units in Coffee just before the restructure.

Technical amendments

1.53 This Schedule also makes a number of technical amendments to the operation of the business restructure roll-over and other CGT roll-overs.

Correcting the operation of the concession for revenue assets

1.54 As outlined above at paragraph 1.7, prior to these amendments, a taxpayer could elect for a roll-over where the taxpayer disposed of shares in a company in exchange for shares in an interposed company where the shares were held as revenue assets. However, it is not clear that the provisions to give effect to this roll-over gave rise to the intended outcome.

1.55 While interest holders were required to include an amount in their assessable income, the provisions could be interpreted as requiring the inclusion of a fixed amount rather than being whatever amount is necessary to ensure the transaction did not give rise to income tax consequences.

1.56 The amended provisions make clear that shares held as revenue assets are treated as having been realised for the amount that would result in the interest holder not making any profit or loss at the time of the restructure, whatever this amount may be. This ensures the taxpayer will face no net tax consequences in the year of disposal. [Schedule 1, item 1, subsection 615-55(1)]

1.57 The existing provisions that ensure that any unrealised profit or loss is appropriately brought to account in any subsequent disposal or other dealing with the new shares are effective and are not substantively changed by these amendments. [Schedule 1, item 1, subsection 615-55(2)]

Integrity rule for replacement assets

1.58 The amendments also include an additional requirement to access the business restructure roll-over in respect of revenue assets and trading stock (the 'same tax character' rule). As a result of this requirement, the replacement shares acquired must have the same tax character as the original share or unit - that is, the original asset and the replacement asset must both be trading stock or must both be a revenue asset. [Schedule 1, item 1, paragraphs 615-45(c) and (d)]

1.59 The provisions providing for the roll-over operate by modifying the value of the asset for the purposes of the relevant rules both at the time of the restructure and when subsequently subject to tax.

1.60 This symmetrical treatment allows income tax consequences to be deferred from the time of the restructure until the subsequent disposal or other dealing. However, if the replacement asset did not share the same character, the rules to modify the tax treatment of the subsequent disposal or other dealing would not apply. This would mean that any unrealised gain or loss at the time of the restructure would never be appropriately recognised for tax purposes, often resulting in an exemption rather than a deferral of tax.

1.61 The additional requirement included by the amendments about the character of the replacement asset ensures the integrity of the roll-over by ensuring indefinite deferral cannot occur.

Modifications to the CGT roll-overs where a trust transfers an asset to a company or another trust

1.62 A CGT roll-over is available where a trust transfers a CGT asset to a company (Subdivision 124-N) or another trust (Subdivision 126-G). A key condition for both of these roll-overs is that the company or trust receiving the asset must hold no CGT assets other than a small amount of cash or debt (see paragraphs 124-860(4)(b) and 126-225(1)(b)).

1.63 These amendments will modify these conditions, ensuring that the roll-overs will also be available where the entity receiving the asset holds rights under an arrangement that facilitates the transfer of assets to that entity. These rights, when treated collectively, must only be used to facilitate the transfer of assets from the transferring entity to the receiving entity. [Schedule 1, items 37 and 38, paragraphs 124-860(4)(b) and 126-225(1)(b)]

1.64 This requirement would be satisfied where the receiving entity holds any rights that only have a function of facilitating the transfer of assets to that entity, including:

rights that stipulate that particular assets will be transferred to the receiving entity;
rights that are required to be held by the receiving entity, to the extent they are required to facilitate the transfer of assets to that entity; and
ancillary rights arising from other rights, whereby these other rights facilitate the transfer of assets to the receiving entity.

1.65 Where an entity has more than one arrangement with rights that facilitate the transfer of assets to that entity, these amendments will apply separately for each of the arrangements. This ensures that all rights that facilitate the transfer of assets to the receiving entity are ignored for the purposes of determining whether an entity satisfies the CGT roll-over requirements.

Example 1.3 : New company under Subdivision 124-N Green Trust (Green) plans to dispose of its assets to a newly established company, Yellow Pty Ltd (Yellow).Yellow holds a deed which stipulates that as a result of the restructure the ownership of Green's assets will be transferred to Yellow at a particular point in time.As all of these rights under the deed facilitate the transfer of assets from Green to Yellow, they are ignored for the purposes of determining whether the roll-over conditions in Subdivision 124-N are satisfied.

Consolidating the business restructure roll-overs

1.66 The amendments repeal Subdivisions 124-G and 124-H and reproduce their effect in a new Division, Division 615. This consolidation eliminates significant duplication and simplifies the law. [Schedule 1, item 1, Division 615]

1.67 Other than in the specific changes detailed elsewhere in this explanatory memorandum, this consolidation results in only one additional change to the operation of the roll-overs (now the roll-over). This change relates to the period for the new interposed company to elect for the roll-over to apply. Under the existing law, the company has 28 days or such further time as the Commissioner of Taxation (Commissioner) may allow to make this choice for a corporate business restructure and two months for a restructure of a trust into a company.

1.68 As a result of the amendments, the new company will always have two months or such further time as the Commissioner may allow to choose for the rollover to apply, unless the restructure involves the replacement of the head company of a consolidated group. For restructures of consolidated groups, the period will remain 28 days or such further time as the Commissioner may allow which is consistent with the period required for reporting under the consolidation tax rules in Division 703. [Schedule 1, item 1, section 615-30]

1.69 The consolidation of Subdivisions 124-G and 124-H has resulted in changes to the structure of the provisions previously contained within those Subdivisions.

1.70 Under the new provisions, there are two sets of circumstances in which the roll-over may be available:

the disposal of shares or units; and
the redemption or cancellation of shares or units,

for shares in an interposed company as part of a restructure. [Schedule 1, item 1, sections 615-5 and 615-10]

1.71 The provisions then set out the requirements that must be met to access the roll-over in all cases, organised by the interest to which they apply. [Schedule 1, item 1, sections 615-15, 615-20, 615-25, 615-30 and 615-35]

1.72 Finally, they outline the tax consequences of the roll-over for shares or units held as CGT assets, trading stock and revenue assets. [Schedule 1, item 1, sections 615-40, 615-45, 615-50, 615-55 and 615-60]

1.73 While this is broadly aligned with the current structure of Subdivisions 124-G and 124-H, these Subdivisions separately reproduce some of the requirements after each set of circumstances and have a less structured approach to laying out the general requirements and tax consequences.

1.74 The guide material for the provisions has been revised to better reflect the intended operation of the consolidated Division. [Schedule 1, item 1, section 615-1]

1.75 Finally, the new Division is located in the Part of the Act for general roll-over rules (Part 3-80 - Roll-overs applying to assets generally). This reflects that the business restructure roll-overs will no longer be restricted to applying only to CGT consequences. [Schedule 1, item 1, Division 615]

1.76 In addition to these specific changes a number of consequential amendments have been made to replace existing references to Subdivisions 124-G or 124-H with references to the new Division. [Schedule 1, items 2 to 36, note 5 to section 121AS in the Income Tax Assessment Act 1936, paragraph 103-25(3)(a), table items 9, 10, 14D and 14E in section 112-115, subparagraphs 124-20(3)(a)(i) to (ii) and (v) to (vi), Subdivisions 124-G and 124-H, subsection 124-795(3), notes to subsections 124-795(3), 125-70(5) and 703-5(2), Group heading before section 703-65, note to section 703-65, heading to section 703-70, subsections 703-70(1) and (2), notes to subsection 703-70(2) and (3), heading to section 703-75, subsection 703-75(1), note to subsection 703-75(1), subsections 703-75(2) and (3), heading to 703-80, subsection 703-80(1) and note 2 to section 703-80 in the ITAA 1997, subsections 58T(1) and (2) and the note to subsection 58T(2) in the Petroleum Resource Rent Tax Act 1987 and paragraph 45-705(4)(a), subparagraphs 45-705(4)(d)(i) and (ii) and paragraphs 45-705(d) and 45-740(2)(a) in Schedule 1 to the Taxation Administration Act 1953]

1.77 Further details on the operation of the business restructure roll-over may be found in the explanatory memorandum to the Bills that introduced the original provisions that have now been consolidated. The legislative history in relation to these provisions is summarised at paragraph 1.92.

Application and transitional provisions

Summary of key dates of effect

Amendment Announcement date Application date
Business restructure roll-overs
Providing revenue asset and trading stock concessions for units in unit trusts 17 November 2011 7.30 pm on 10 May 2011
Resolving technical defects in the revenue asset roll-overs for shares 10 May 2011 7.30 pm on 10 May 2011
Introducing the 'same tax character' integrity rule 8 May 2012 7.30 pm on 8 May 2012
Broadening the revenue asset and trading stock concession for shares 8 May 2012 7.30 pm on 8 May 2012
Subdivision 124-N
Removing technical defects in the CGT roll-over where the receiving entity holds facilitation rights 10 May 2011 7.30 pm on 10 May 2011
Subdivision 126-G
Removing technical defects in the CGT roll-over where the receiving entity holds facilitation rights 10 May 2011 1 November 2008

Business restructure roll-overs

1.78 The amendments to the business restructure roll-over provisions all apply from 7.30 pm (by legal time in the Australian Capital Territory) on 10 May 2011. [Schedule 1, subitems 39(1) and (2)]

1.79 However, transitional provisions modify the operation of the new rules for the period between 7.30 pm on 10 May 2011 and 7.30 pm on 8 May 2012 for shares and units that taxpayers hold as trading stock or revenue assets. [Schedule 1, item 41, section 615-5 of the Income Tax (Transitional Provisions) Act 1997]

1.80 During this period, taxpayers may apply the roll-over in respect of shares and units in unit trusts that are held as trading stock or revenue assets without having to satisfy the 'same tax character' integrity rule. [Schedule 1, item 41, sections 615-10, 615-15 and 615-20 of the Income Tax (Transitional Provisions) Act 1997]

1.81 Further, taxpayers may only access the roll-over in respect of shares held as trading stock or revenue assets if the taxpayer is taken to have chosen to obtain the roll-over because the restructure relates to the head company of a consolidated group. [Schedule 1, item 41, sections 615-10, 615-15 and 615-20 of the Income Tax (Transitional Provisions) Act 1997]

Rationale for application dates

1.82 Broadly, the date of effect for all of these amendments is the date each change was announced by the then Government.

1.83 This protects taxpayers who have acted in accordance with the announcements about how the law will be changed.

Minor technical changes to the CGT restructure roll-over provisions

Subdivision 124-N roll-over

1.84 The amendments to Subdivision 124-N that allow a company to hold rights that facilitate the transfer of assets to that company apply in relation to CGT events happening after 7.30 pm on 10 May 2011.

1.85 This change, which is beneficial for all taxpayers, applies from the time of the announcement in order to ensure the technical defect does not inhibit interest holders from accessing the CGT roll-over. [Schedule 1, subitem 39(2)]

Subdivision 126-G roll-over

1.86 The amendments to Subdivision 126-G that allow a receiving trust to hold rights that facilitate the transfer of assets to that trust apply in relation to CGT events happening on or after 1 November 2008. [Schedule 1, subitem 39(3)]

1.87 This amendment, which is beneficial for interest holders, applies retrospectively to align with the application date of the Subdivision 126-G fixed trust roll-over.

Requirement for trustees to notify beneficiaries of the Subdivision 126-G roll-over being chosen

1.88 If the CGT roll-over under Subdivision 126-G is applied, section 126-260 requires that the trustee of the transferring trust must, within three months after the end of the income year in which the transferring trust transferred the asset to the receiving trust, send written notice to each of the trust's beneficiaries providing them with certain information so they can meet their obligations. Section 126-260 imposes a penalty on the transferring trustee if they do not meet this condition.

1.89 As the amendment to Subdivision 126-G applies from 1 November 2008, some interest holders will not be able to benefit from the amendment by amending prior completed tax returns without the relevant trustee contravening section 126-260. This is because, in some cases, it would not be possible for the trustee to provide each of the trust's beneficiaries with the written documentation within three months after the end of the income year in which the asset transfer occurred, as this time period would have already lapsed.

1.90 Therefore, where the transferring trust transfers an asset to the receiving trust between 1 November 2008 and the income year that ends before these changes obtain Royal Assent, the amendments allow a trustee to provide the relevant beneficiaries with certain documentation within three months of the roll-over being chosen without the trustee breaching subsection 126-260(1). [Schedule 1, item 40]

Amendments to assessments

1.91 This Schedule modifies the application of section 170 in respect of amendments to assessments. Where an assessment has been made prior to the commencement of Schedule 1, amendments may be made for the purpose of giving effect to this Schedule for at least two years after the day this Schedule commences. This ensures that taxpayers are still able to receive the benefit of these changes despite the delay between the announcement and passage of these amendments. [Subclause 4(1)]

Legislative History of Subdivisions 124-G and 124-H

1.92 Subdivisions 124-G and 124-H were added to the ITAA 1997 by the Tax Law Improvement Act (No. 1) 1998. They were rewritten versions of the former sections 160ZZPA and 160ZZPB of the Income Tax Assessment Act 1936.

1.93 These provisions have been amended by:

Act title Act No. Effect of amendments
Tax Law Improvement Act (No. 1) 1998 46 of 1998 Rewrote the provisions and moved to ITAA 1997.
Taxation Laws Amendment (Company Law Review) Act 1998 63 of 1998 Updated the tax law to ensure that changes made by the Company Law Review Act 1998 to facilitate capital distributions did not have unintended tax consequences.
A New Tax System (Indirect Tax and Consequential Amendments) Act 1999 176 of 1999 Amendments to reflect new definition of market value.
New Business Tax System (Consolidation and Other Measures) Act (No. 1) 2002 117 of 2002 Extended roll-over relief to shares held as revenue assets or trading stock for restructures of corporate groups.
Tax Laws Amendment (2004 Measures No. 2) Act 2004 83 of 2004 Extended the period for the new head company to choose whether or not a restructured consolidated group continues to exist (electing for the group to continue is necessary for the rollover to be available but also has other tax consequences). The extended period is consistent with the general notification period that applies under the tax law for events affecting consolidated groups.
Tax Laws Amendment (2004 Measures No. 7) Act 2004 41 of 2005 Corrected terminology to refer to 'foreign resident' rather than 'not an Australian resident'.
Tax Laws Amendment (2006 Measures No. 2) Act 2006 58 of 2006 Minor correction to the use of asterisking when defining market value.
Tax Laws Amendment (2006 Measures No. 4) Act 2006 168 of 2006 Amendments to restrict the availability of roll-overs for foreign residents to cases where shares or units are taxable Australian property.
Tax Laws Amendment (2011 Measures No. 9) Act 2012 12 of 2012 Updated the provisions to reflect new rules introduced to permit the application of roll-overs to transactions involving foreign residents and share sale facilities.

Finding tables

Old law to new law

1.94 Below is a finding table to assist in locating the provision in the new Division 615 that corresponds with a provision in the old Subdivisions 124-G or 124-H.

Old law New law
124-350; 615-1
124-355 No equivalent provision
124-360 615-5
124-365 615-15,615-20
124-370 615-10
124-375 615-15, 615-20
124-380 615-25, 615-30
124-382 615-35
124-385 615-65
124-390 615-45, 615-50, 615-55
124-435 615-1
124-440 No equivalent provision
124-445 615-5
124-450 615-15, 615-20
124-455 615-10
124-460 615-15, 615-20
124-465 615-25, 615-30
124-470 615-65

New law to old law

1.95 Below is a finding table to assist in locating the provision in the old Subdivisions 124-G or 124-H that corresponds with a provision in the new Division 615.

New law Old law
615-1 124-350; 124-435
615-5 124-360; 124-445
615-10 124-370,124-455
615-15 124-365(1), 124-375(1); 124-450(1), 124-460(1)
615-20 124-365(2) to (4), 124-375(2) to (4); 124-450(2) to (4), 124-460(2) to (4)
615-25 124-380(1) to (3); 124-465(1) to (3)
615-30 124-380(5) to (7)
615-35 124-382
615-40 No equivalent provision
615-45 124-390(1)
615-50 124-390(2) and (3)
615-55 124-390(4) and (5)
615-65 124-385;124-470

STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Removing tax impediments to certain business restructures

1.96 This Schedule is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

1.97 Schedule 1 to this Bill amends the Income Tax Assessment Act 1997 to extend the circumstances where an interest holder can defer their income tax consequences as a result of a business restructure. In particular, the amendments:

provide revenue asset and trading stock roll-overs where interest holders exchange their units in a unit trust for shares in a company;
broaden the existing revenue asset and trading stock roll-overs that apply where interest holders exchange their shares in a company for shares in another company, so that the roll-overs are not limited to ownership arrangements involving consolidated groups;
provide adequate integrity by ensuring that the revenue asset and trading stock roll-overs are only available where the asset acquired under a restructure is of the same tax character as the asset exchanged under the restructure; and
resolve technical defects relating to the revenue asset roll-over that applies where interest holders exchange their shares in a company for shares in another company and to certain capital gains tax trust restructure roll-overs.

Human rights implications

1.98 This Schedule does not engage any of the applicable rights or freedoms.

Conclusion

1.99 This Schedule is compatible with human rights as it does not raise any human rights issues.


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