Tax Implications of Restructures

Transcription

1 Tax Implications of Restructures Presented by: Vaughan Lindfield & Raefe Brown 25 June 2015

2 Introduction The Voluntary Administrator (VA) is liable for tax debts that arise after the date of their appointment. Further stakeholders will often attribute value to maximising tax attributes post any restructure (including the value it adds to the potential divestments and relisting of the distressed company). Accordingly before entering a formal DOCA or implementing any major restructure steps it is important to get an understanding of the potential cash tax ramifications that may arise and impact on tax attributes. The tax analysis can often be circular given that restructures under taken by the VA often involve the release, forgiveness, compromise, settlement or equitisation of debts. All of which potentially give rise to the application of the Commercial Debt Forgiveness (CDF) Rules. Page 2

3 You need to understand the starting Point - Attributes Diligence It is important to confirm the tax attributes and underlying nature of assets held by the company as a starting point (including impact of historical transactions): What prior year tax losses and capital losses are available (any reliant on SBT?) What is the balance of any prior year undeducted expenditure (borrowing costs, black hole costs) What is the cost base held in the depreciable assets and capital gains tax assets including debt and equity interests in associates The nature of assets (are any unlikely to be subject to tax regardless of cost base i.e. shares in foreign companies that undertake active business activities, pre CGT assets) It is also important to understand uncertain tax positions and risks associated with overreliance. Page 3

4 You need to understand the starting Point - Attributes Diligence Having a strong understanding of the above should provide confidence that the tax analysis is robust. However obtaining this understanding can often be challenging with distressed companies as there is generally the added complexity of poor records and loss of key corporate knowledge. Consider timing of restructuring finance staff levels Page 4

5 Understanding the tax implications of the restructure Implications of the restructure: Impact on availability of losses (COT) where new equity is issued directly to creditors or the creditors trust in satisfaction of the debt. Need to consider whether Division 166 concessions continue to be available (20/75 rule) Impact if COT is failed and ability to satisfied given proposed restructure activities. The release, waiver, compromise of debts for less than full face value will often give rise to the potential application of: The Limited Recourse Debt Rules Application of Commercial Debt Forgiveness Rules Taxable gains on the realisation of assets sold either to third parties or transferred to creditors (including a transfer of assets to the Creditors Trust) in compromise of debts. Page 5

6 Understanding the tax implications of the restructure The Limited Recourse Debt Rules (LDR) are often overlooked but have the potential to bring to account assessable income and apply in priority the CDF rules. The application of the LDR rules to consolidated groups is unclear given the wording in the legislation. Page 6

7 Commercial Debt Forgiveness Rules Operate to reduce the tax attributes of the company at the beginning of the year in the following order Available tax losses Capital losses Certain specified undeducted expenditure including depreciable assets and borrowing costs Other CGT Assets (with allocation discretionary subject to requirement that debt and equity in associates) What is meant by Available Losses if the tax losses could, if you had enough assessable income be deducted in: (a) the forgiveness year (b) a later income year Page 7

8 Commercial Debt Forgiveness Rules The wording in the legislation introduces the hypothetical ( crystal balling ) which potentially provides opportunities depending on the circumstances. The allocation to associated debt and equity (if required) also needs to be considered in detail depending on the nature and market value of these assets ELECTIONS (Flow on affect) Foreign shares Page 8

9 Gains from the realisation of assets Any reduction in the opening balance of tax losses and opening cost base of assets as a consequence of the debt forgiveness should then be determined. Once this has been undertaken it is worthwhile performing a tax estimate for the current year taking into account forecast expenditure (including redundancies) and any reduction in depreciation/other deductibles. Any taxable gains from the sale or disposal of assets should also then be included in the tax forecast model. Please note the market value deeming rules may be applicable in determining the quantum of any gain on the transfer of assets to creditors or the creditors trust. Other points to be aware of: Mining permits acquired post 1 July 2001 Cash at Bank Page 9

10 Deductibility of Administrator Costs To be deductible, costs need to be incurred in producing assessable income or necessarily incurred in carrying on a business to produce income. To the extent the cost of the administrator relates to maintaining/running the business and dealing with pre-appointment claims, the costs are generally deductible. However, to the extent costs are capital in nature they are not deductible. For example legal matters need to be reviewed to determine if their associated costs (legal fees and the administrators costs in managing the matter) are deductible. costs associated with selling capital assets are generally capital in nature and reduce the proceeds of disposal Where the trading operations cease and the company does not continue to trade under the administrator there are private rulings which suggest the costs are not deductible. The costs may be deductible over 5 years under the black hole provisions. Page 10

11 Creditors Trusts When a creditor trust is created, specified assets are transferred to the trust and the company s obligations to some or all creditors bound by the DOCA are transferred to the trust. Under the terms of the deed the creditors become beneficiaries of the trust in a process similar to that of a proof of debt. This mechanism accelerates a company s exit from external administration. Tax issues arise because the tax rules associated with trusts apply to Creditors Trusts. They are not taxed like a company. Page 11

12 Creditors Trusts Issues In order for the trustee to distribute income it must have distributable income to distribute. Similar to discretionary trusts the trust should have some flexibility as to defining income otherwise it defaults to trust law income. The following are issues associated with calculating the taxable income for a creditors trust: Assets transferred to the trust usually receive market value as their cost base but a key exception includes where shares are issued to the trust (as opposed to the transferred). Is the disposal of shares and the resulting gain revenue or capital in nature? Trustee costs associated with determining what the beneficiaries receive are generally not deductible (usually sizable). Trustee costs associated with a) determining the trusts income tax obligations; and b) deriving income for the trust are deductible (usually small). Trustee costs are unlikely to be claimable as a black hole cost because the trustee is not running a business. Income not distributed by 30 June is taxed to the trustee at 49% (typically interest income). Whilst trusts typically get the CGT discount for capital gains on assets held for more than 12 months, no CGT discount is available where the gain is assessed to the trustee. Page 12

13 Creditors Trusts Issues The following are issues associated with any distribution from the trust: Where the trust is closely held (20 < individuals control > 75%), the trustee needs to collect TFN s of beneficiaries and advise the ATO of those TFN s otherwise the trustee needs to withhold tax on the distribution of any taxable income The trustee may be required to withhold tax on distributions of income to nonresidents (the % of tax withhold depends on the nature of the income, e.g. interest, dividends, capital gains). Distributions to beneficiaries should detail the following components of the distribution in an appropriate format: Corpus/capital of the trust Taxable income previously subject to tax to the trustee Taxable income for the year of distribution and the nature of the amounts distributed (typically interest income) Page 13

14 Contacts Vaughan Lindfield Partner, Transaction Taxes Tel: vaughan.lindfield@au.ey.com Raefe Brown Partner, Tax Tel: Raefe.Brown@au.ey.com Page 14

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