CGT and tax amendments in Tax Bill (No 9) 2011

Tax Laws Amendment (2011 Measures No 9) Bill 2011 has introduced CGT rollover and demerger amendments, as well as amendments re deductible gift recipients, and miscellaneous amendments.

CGT roll-overs: use of “share sale facilities”

The Bill will amend the ITAA 1997 to ensure entities in a restructure can use a share or interest sale facility (ie a “share sale facility”) to deal with foreign held interests without Australian tax residents automatically failing a key requirement of certain CGT roll-overs – namely, the “same ownership requirements” for exchange of interests. The relevant CGT roll-overs are as follows:

• Subdiv 124-G (Exchange of shares in one company for shares in another);
• Subdiv 124-H (Exchange of units in a unit trust for shares in a company);
• Subdiv 124-I (Conversion of a body into an incorporated company);
• Subdiv 124-N (Disposal of an asset by a trust to a company);
• Subdiv 124-Q (Exchange of stapled ownership interests for ownership interests in a unit trust);
• Div 125 (Demerger relief); and
• Subdiv 126-G (Transfer of assets between certain trusts).

Background

The same ownership requirements in these roll-overs generally cannot be satisfied where a share sale facility is used to deal with the interests of a foreign interest holder as the interests are owned by the share sale facility and not the foreign interest holder. As a result, if such a restructure occurs, these interest holders face immediate CGT consequences from the realisation of their interests in the original entity.

While Subdiv 124-G and Subdiv 124-Q already allow the same ownership requirements to be satisfied where a share sale facility is used to deal with certain foreign holders, they disregard interests held by foreign holders rather than modifying the provisions so that the same ownership requirements can still apply to the interests held by the remaining holders. Subdivision 124-G also restricts this treatment to entities that are authorised deposit-taking institutions (ADIs).

Likewise, while Div 125 allows taxpayers access to the demerger roll-over where a share sale facility is used, it only does so under a “‘two-step” process, involving a notional allocation of the interests to the interest holders followed by an actual allocation to a nominee (see note to subs 125-70(1).)

Effect of amendments

The amendments will facilitate the use of share sale facilities in these circumstances and standardise the approach so that the interests of foreign interest holders are subject to the same ownership requirements for the relevant roll-overs as Australian interest holders.

To do this, the amendments will treat a foreign interest holder as owning the relevant interest in an entity at a time the share sale facility owns the interest in that entity for the purposes of the relevant CGT roll-over provisions. This will ensure that entities can use a share sale facility in a restructure to deal with the interests of foreign interest holders without interest holders that are Australian residents for tax purposes (or foreign residents with taxable Australian property) automatically failing the same ownership requirements. The treatment is also designed to ensure that ownership requirements are appropriately maintained.

In particular, the amendments will replace the existing share sale facility provisions in Subdivs 124-G and 124-Q and insert a broader share sale facility provision into the ITAA 1997 by inserting a new provision into Div 125 and new provision into Subdivs 124-A and 126-G. Each of these new provisions will use the same general approach to allow the operation of the relevant roll-over where a share sale facility is used to deal with the interests of foreign interest holders.

Also, where a restructure involving the use of a share sale facility for foreign interest holders qualifies for Div 125 roll-over and the share sale facility could be accommodated under either the existing law or these amendments, taxpayers will be able to choose the approach to use because it will result in the same outcome. Further, the amendments will have no application where the management of an entity that is restructuring decides to comply with the foreign law of the relevant jurisdiction when issuing or transferring the interest.

Meaning of foreign interest holders

For the purpose of these amendments, an interest holder will be considered to be a “foreign interest holder” where the issuing of an interest to that interest holder would be subject to a foreign law. This means that a foreign interest holder could also be an Australian resident for tax purposes or could own taxable Australian property.

Date of effect

The changes will apply to CGT events happening after 7.30 pm (by legal time in the ACT) on 11 May 2010.

CGT demerger relief

The Bill will exclude an entity from being a member of a demerger group for the purposes of Div 125 of the ITAA 1997 if the entity is a corporation sole or a complying superannuation entity. This will allow an entity owned by the corporation sole or complying superannuation entity to qualify as the head entity of a demerger group and be able to demerge entities from the group and qualify for Div 125 relief.

Background

For demerger relief under Div 125 to apply, the demerger must happen to a “demerger group” which is comprised of the head entity of the group and one or more demerger subsidiaries. If the head entity of a demerger group is a corporation sole, that corporation cannot demerge any of its interests in the demerger group because it does not issue ownership interests and therefore does not have shareholders to whom it could demerge its interests in the demerger group.

As a result, if an entity owned by the corporation sole demerged any of its interests in the demerger group, Div 125 relief does not currently apply because the corporation sole owns ownership interests in that entity and the corporation sole is still the head entity of the demerger group as defined under ss 125-65(1) and (3) of the ITAA 1997.

Likewise, if the head entity of a demerger group is a superannuation entity, it is unable to demerge any of its interests in the demerger group as a “demerger” as defined cannot happen to a demerger group if the head entity or the demerged entity is a trust which is a superannuation fund (see s 125-70(1)(g)). Furthermore, even if complying superannuation entities could access Div 125 demerger relief, they would most likely breach relevant regulatory requirements of the Superannuation Industry (Supervision) Act 1993.

Effect of amendments

The proposed amendments will exclude an entity from being a member of a demerger group if the entity is a corporation sole or a complying superannuation entity. This will allow an entity owned by the corporation sole or complying superannuation entity to qualify as the head entity of a demerger group. As a result, the new head entity will be able to demerge entities from the demerger group and qualify for Div 125 relief.

In short, the excluded corporation sole or complying superannuation entity will be able to qualify for the CGT roll-over (as the taxpayer under s 125-55) when a capital gain or loss arises on its interest in the head entity as part of a demerger. If relevant, the exemption for demerger dividends may also be available to the corporation sole or complying superannuation entity under the amendments.

Date of effect

The amendments will apply to CGT events happening after 7.30 pm (by legal time in the ACT) on 11 May 2010.

CGT roll-over for change of incorporation

The Bill will amend the ITAA 1997 to expand the existing CGT roll-over for the change of a body to an incorporated company. The expanded roll-over applies to entities that change incorporation to become a Corporations (Aboriginal and Torres Strait Islander) Act 2006 corporation. The expanded roll-over also covers a taxpayer’s rights associated with a body, as well as their ownership interests, and situations where a body is wound up and replaced by a new company incorporated under a different law.

Background

Subdivision 124-I currently provides a replacement asset roll-over for a member of a body that is established under a law (other than the Corporations Act 2001 or a similar foreign law relating to companies) and, as a result of the body being converted to a company incorporated under the Corporations Act (or a similar foreign law), the member receives shares in the company in exchange for their interests in the body.

However, the existing roll-over does not provide roll-over for an Indigenous body which is converted to a Corporations (Aboriginal and Torres Strait Islander) Act 2006 corporation as it is limited to bodies converting their incorporation to the Corporations Act or a similar foreign law relating to companies. It is also not available to Indigenous companies that transfer incorporation from the Corporations Act to the Corporations (Aboriginal and Torres Strait Islander) Act 2006. Instead, the existing roll-over requires an incorporated body to be “converted” to a Corporations Act (or similar foreign law) company. As a result, the existing roll-over does not cater for situations where a body is wound up and then replaced by a new company incorporated under a different corporations law.

In addition, the existing Subdiv 124-I roll-over does not accommodate situations where the members of a body being converted wish to be compensated with additional shares in the new company for the value of rights (separate to their ownership interests) they held in the incorporated body. This is because the existing roll-over only allows the new company to issue the member shares in substitution for the member’s ownership interests in the body.

Effect of amendments

Accordingly, the proposed amendments will allow Indigenous bodies to incorporate as Corporations (Aboriginal and Torres Strait Islander) Act 2006 corporations without immediate CGT consequences for the body’s members. Also, the amendments will allow Indigenous companies incorporated under the Corporations Act to change their incorporation to the Corporations (Aboriginal and Torres Strait Islander) Act 2006 without immediate CGT consequences.

In addition, the amendments will extend the existing Subdiv 124-I roll-over by allowing the value of rights associated with a body to be reflected in the shares issued by the company, when the body changes its incorporation. These rights may include allowing a member to: attend, speak and vote at general meetings; be made a director; put forward resolutions at general meetings; ask the directors to call a general meeting; and inspect the records of the corporation.

The amendments will also allow members to access the roll-over where the body winds up and is replaced by a new company incorporated under a different law (the “reincorporation roll-over”). This will also allow the new company to be in existence before the original body is wound up, to reflect the commercial reality that a company can be created in anticipation of the original body ending. This will allow for the use of “shelf company” arrangements in winding up the original body.

Finally, the amendments will provide for tax neutral consequences for CGT, depreciating, revenue and trading stock assets of a body that is wound up and replaced by a new company incorporated under a different law, where these assets are transferred to the new company.

Date of effect

The amendments apply to CGT events happening after 7.30 pm (by legal time in the ACT) on 11 May 2010.

Deductible gift recipients

The Bill proposes to amend s 30-70 of the ITAA 1997 to update the list of deductible gift recipients (DGRs) by adding “Rhodes Trust in Australia” as a DGR and amending the name of “Playgroup Australia Incorporated” to “Playgroup Australia Limited”.

Date of effect

The listing of Rhodes Trust in Australia will apply to gifts made after 20 October 2011. The name change from “Playgroup Australia Incorporated” to “Playgroup Australia Limited” will apply from 25 October 2010.

Miscellaneous amendments

The No 9 Bill makes a number of miscellaneous amendments. The amendments correct technical or drafting defects, remove anomalies, seek to address unintended outcomes, and correct grammatical and referencing errors as well as clarify the operation and application of the tax law. They also address issues raised through the Tax Issues Entry System (TIES).

While the amendments might essentially be seen as “clean up” measures, they do effect some important changes, including:

• CGT main residence exemption: Providing the Commissioner with a discretion to extend the two-year ownership period in which the trustee of a deceased estate or beneficiary of such an estate must dispose of their interest in the deceased’s dwelling to access either a full or a more generous partial CGT main residence exemption. The EM to the Bill says the Commissioner would be expected to exercise discretion in situations such as where, for example: (i) the ownership of a dwelling or a will is challenged; (ii) the complexity of a deceased estate delays the completion of administration of the estate; (iii) a trustee or beneficiary is unable to attend to the deceased estate due to unforeseen or serious personal circumstances arising during the two-year period (eg the taxpayer or a family member has a severe illness or injury); or (iv) settlement of a contract of sale over the dwelling is unexpectedly delayed or falls through for circumstances outside the beneficiary or trustee’s control. The amendments will apply in relation to CGT events that happen in the 2008-09 income year and later income years.
• Discretionary trusts: Ensuring that taxpayers can have a non-zero direct small business participation percentage (SBPP). This may occur in situations where shares in a company are held jointly by taxpayers and a discretionary trust has not make a distribution in an income year where the trust had a tax loss or no net income for that year. This issue was identified through TIES.
  • Section 152-120 currently treats a trust (where entities do not have entitlements to all of the income and capital of the trust) as if it had a significant individual during an income year in which the trustee did not make a distribution of income or capital if the trust had a tax loss or no taxable income for that year. This applies only for the purposes of meeting the condition required in particular circumstances in the small business 15-year exemption that a trust must have a significant individual for at least 15 years. However, s 152-120 does not work for indirectly held entities as it does not give the assumed significant individual a direct SBPP in the first entity in the chain, which is needed to calculate their SBPP in the final entity in the chain (the indirectly held entity).
  • A problem arises when the trustee of the trust does not make a distribution in an income year, which results in the trust not having a significant individual or any CGT concession stakeholders for that income year. This is particularly problematic if the income year is the CGT event year because access to the small business CGT concessions in particular circumstances requires an entity to have a significant individual or a CGT concession stakeholder.
  • Proposed amendments will allow an entity to work out their direct SBPP in a trust at the relevant time if, during the income year that includes that time (the relevant year), the trustee of the trust: (i) does not make a distribution of income; and (ii) does not make a distribution of capital. However, an entity will be able to work out a direct SBPP greater than zero only if the trust did not have net income or had a tax loss for the relevant year.
  • The amendments will generally apply in relation to CGT events happening in the 2006-07 income year and later income years to align with the date of effect of the amendments that introduced the “significant individual” test.
• COT: ensuring that the continuity of ownership test applies to payments made on or after 1 July 2009 and not from the time the company acquired the dwelling. The intent of the continuity of ownership test is to ensure that the ownership of a dwelling does not change on or after 1 July 2009 rather than before 1 July 2009.
• Same business test and consolidated group: An amendment id proposed to the ITAA 1997 to give effect to a suggestion made through TIES to clarify how the same business test applies when an entity leaves a consolidated group for the purposes of determining whether the integrity rules relating to unrealised net losses apply. The proposed amendment seeks to ensure that the leaving entity can apply the assumptions that are ordinarily applied in respect of trading stock losses for the purposes of determining whether it satisfies the same business test. This amendment will apply from the commencement of s 715- 90, which was 1 July 2002.
• Demutualisation and CGT: Enabling lost policy holders with an interest in a demutualisation receive equal CGT treatment to other policy holders where the other relevant conditions are satisfied. The amendment will apply in relation to demutualisations occurring on or after 1 July 2008, so that demutualisations that have already applied the demutualisation concessions can benefit from this amendment.
• Limited amendment period: A taxpayer can take advantage of retrospective changes to the law provided the ATO processes their request for an amendment to an assessment and issues an amended assessment. The Commissioner can amend an ordinary assessment after a limited amendment period expires if, broadly, the taxpayer has raised an issue affecting the assessment before the period expires and the Commissioner is still considering the issue. Therefore, the No 9 Bill proposes to allow the Commissioner to amend an assessment after the two-year period that commences from the date of Royal Assent to the Bill to allow a taxpayer to take advantage of the retrospective change in circumstances. This amendment is designed to ensure that taxpayers are not unfairly disadvantaged if the ATO is unable to issue an amended assessment, despite the request for amendment being lodged and having been considered, within a two-year period. This amendment gives effect to the suggestion made through TIES.
• Offence for failing to provide information: The object of s 8C of the TAA is to make it an offence to fail to comply with requirements under the taxation law. Paragraph 8C(1)(a) is intended to make it an offence to fail to provide any information or document to the Commissioner as required under a taxation law. The Bill makes an amendment to clarify that an offence under para 8C(1)(a) is not limited to failure to furnish an approved form as defined in Sch 1 to the TAA, or any other particular form. For example, it would include a failure to lodge a superannuation Guarantee statement as required under the Superannuation Guarantee (Administration) Act 1992.