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House of Representatives

New Business Tax System (Consolidation, Value Shifting, Demergers and Other Measures) Bill 2002

Supplementary Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)

General outline and financial impact

Amendments to the New Business Tax System (Consolidation, Value Shifting, Demergers and Other Measures) Bill 2002

The amendments to the New Business Tax System (Consolidation, Value Shifting, Demergers and Other Measures) Bill 2002 will ensure the demerger measures operate as intended. There are a number of amendments resulting from the consideration of representations made after the introduction of the bill. Other amendments are of a technical and clarifying nature.

Date of effect : 1 July 2002.

Proposal announced : Not previously announced.

Financial impact : The financial impact is unquantifiable.

Compliance cost impact : The amendments will not impose any additional compliance costs.

Chapter 1 - Amendments to the New Business Tax System (Consolidation, Value Shifting, Demergers and Other Measures) Bill 2002

Outline of chapter

1.1 The New Business Tax System (Consolidation, Value Shifting, Demergers and Other Measures) Bill 2002 introduces capital gains tax (CGT) relief and exempts certain dividends when a demerger happens. There are a number of amendments resulting from the consideration of representations made after the introduction of the bill. Other amendments are of a technical and clarifying nature.

Explanation of amendments

Amendments 1 and 23

1.2 These amendments will ensure that if another CGT rollover is available, the restructure is not a demerger and the demerger concessions are not available.

Amendments 2, 31 and 32

1.3 These amendments assist readers by inserting notes and renumbering an existing note.

Amendments 3, 4 and 5

1.4 Amendment 3 provides an exception to the head entity rule that the highest head entity in a demerger group is identified. Amendment 3 gives greater flexibility in choosing an appropriate demerger group.

1.5 It inserts a new subsection allowing a listed public company or listed widely-held trust to choose that an entity be excluded from the demerger group if that entity owns, either alone or together with another entity, between 20% and 80% of the interests in the company or trust.

Example 1.1

Example 1.1:  Flowchart showing that X has 25% of Y and 5000 other shareholder have 75% or Y. Y has 100% of Z.

Company Y chooses that Company X is not the head entity of a demerger group comprising of Companies X, Y and Z. As a consequence Company Y can be the head entity of the demerger group comprising itself and Company Z (demerger subsidiary). The effect of the choice is that Company X is simply a shareholder of the head entity.Although Company X is not the head entity for this demerger, it could be the head entity of a demerger where its interests in Company Y are demerged to the owners of Company X.

1.6 Amendments 4 and 5 renumber the subsections following the subsection inserted by amendment 3.

Amendments 6, 7 and 15

1.7 These amendments delete the references to taking account of the number, nature and value when determining the level of ownership interests. The change is necessary to remove uncertainty that the determination does not need to be satisfied in terms of the number and the nature and the value of the interests.

1.8 The references to these features of ownership interests were simply to indicate that there are various means by which the level of ownership can be determined. For example, it may be appropriate to take account of just the value of the ownership interests, while in another case it may be appropriate to take account of a mix of the number, nature and value.

Amendments 8, 9, 10 and 24

1.9 These amendments allow for an additional demerger method. Amendment 8 inserts a subparagraph enabling a demerged entity to issue ownership interests in itself to the owners of the head entity, without cancelling any of the existing interests. This enables the interests that other members of the group own in the demerged entity to be 'swamped', providing sufficient interests are issued.

Example 1.2 To continue Example 1.1, if Company Y owned 10 ordinary shares in Company Z, the demerger of Company Z could be achieved by Company Z issuing 1 million ordinary shares in itself to the shareholders of Company Y. These 1 million shares would 'swamp' the 10 shares Company Y owns in Company Z.

1.10 Amendment 24 replaces the subsection defining a demerging entity to clarify the definition and to include this method.

1.11 Amendments 9 and 10 renumber the subparagraphs following the subparagraph inserted by amendment 8 and include a reference to that new subparagraph.

Amendments 11, 16, 18, 19, 20, 22, 27 and 33

1.12 Amendments 11 and 18 clarify the proportion test and market value test of ownership interests in a demerged entity acquired by owners of the demerger group's head entity. The requirement that the market value of original interests not be less than the market value of new interests is removed.

1.13 Amendments 16, 19, 20, 22 and 33 renumber the subsections following the subsection inserted by amendment 18 and/or renumber subsection references affected by that amendment. Amendment 27 corrects a section reference.

Amendments 12 and 13

1.14 These amendments ensure that owners of the head entity can only receive new interests in the demerged entity under the demerger.

Amendment 14

1.15 This amendment allows the 50% foreign resident ownership test to be satisfied if it is reasonable to assume that the ownership level has been satisfied. In applying the ownership test in paragraph 125-70(1)(f) the focus is on the legal owner of the original interests.

Amendment 17

1.16 This amendment adds a 'note' to explain that a new ownership interest may be acquired under a demerger if an owner's entitlement to a new interest is:

sold by a nominee at the direction of the owner;
sold by a nominee as the owner is a non-resident and the demerger scheme provides these owners will receive the cash equivalent of their new interest, because the interests attributable to them are sold on their behalf; or
held by a nominee pending the location of the owner being determined.

Amendment 21

1.17 This amendment changes the 'note' to an 'example' and includes an additional example.

Amendments 25 and 26

1.18 Amendments 25 and 26 correct headings.

Amendments 28 and 29

1.19 These amendments enhance the exception to the maintenance of ownership test provided for certain employee share scheme interests.

1.20 Amendment 28 allows the percentage to be determined by either or both of the number and value of the total ownership interests.

1.21 Amendment 29 ensures that interests acquired under a scheme to which section 26AAC of the Income Tax Assessment Act 1936 (ITAA 1936) applied are now added to the exclusion.

Amendment 30

1.22 This amendment allows an additional type of ownership interest to be excluded when determining whether the maintenance of ownership test has been satisfied. The ownership interest is an adjusting instrument issued by a listed public company or a listed widely-held trust. It is a requirement of this exclusion that just before the demerger these interests do not represent more than 10% of the ownership interests in the entity.

1.23 Broadly, in the context of a demerger, an adjusting instrument is one whose value is protected if the impact of the demerger on other ownership interests adversely affects the value of the instrument.

1.24 Regulations may be made to refine the definition of an adjusting instrument and to change the total percentage of ownership interests to be disregarded under the maintenance of ownership test. The combined exclusion under section 125-75 is capped at 20%.

Amendments 34 and 35

1.25 These amendments ensure consistency in certain terms used in the legislation.

Amendments 36, 37, 38, 39, 40 and 53

1.26 These amendments ensure that the provisions operate as intended.

1.27 Amendment 36 clarifies how the rollover rules apply where rollover is chosen for some but not all of the owner's original interests in the head entity.

1.28 Amendment 38 ensures that CGT event J1 does not happen to a demerged entity or a member of a demerger group whether or not another CGT event happens.

1.29 Amendment 40 ensures that other cost base adjustment rules do not apply if a CGT asset's reduced cost base is reduced, because of a demerger.

1.30 Amendment 53 ensures the transitional rule operates as intended.

Amendments 41, 42, 43 and 44

1.31 These amendments clarify certain elements of the exemption available for demerger dividends:

the demerger allocation is the total market value of new interests:

-
issued by the demerged entity in itself; and/or
-
disposed of by a member of a demerger group,under a demerger, to owners of original interests in the head entity;

the demerger dividend component under subsection 44(1) of the ITAA 1936 of the demerger allocation;
who elects for a dividend to be treated as a demerger dividend; and
when this election must be made.

Amendments 45, 46, 47, 48, 49 and 50

1.32 These amendments clarify the application of the integrity rule that must be satisfied for the exemption of a demerger dividend.

Amendment 51

1.33 This amendment includes a demerger dividend as an unfrankable distribution in the simplified imputation system provisions.

Amendment 52

1.34 Under a demerger Scheme of Arrangement an owner of the head entity may acquire a right, power or option to acquire an ownership interest in the demerged entity. This amendment ensures that such a scheme will not prevent access to a group company rollover.


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