Glossary The following abbreviations and acronyms are used throughout this explanatory memorandum. Abbreviation Definition ADI Authorised Deposit-taking Institution CGT Capital gains tax ITAA 1997 Income Tax Assessment Act 1997 1
General outline and financial impact Share and interest sale facilities for foreign interest holders in a restructure Part 1 of Schedule 1 to this Bill amends the Income Tax Assessment Act 1997 to ensure entities in a restructure can use a share or interest sale facility to deal with foreign held interests without Australian tax residents automatically failing a key requirement of certain capital gains tax (CGT) roll-overs. Date of effect: This measure applies to CGT events happening after 7.30 pm (by legal time in the Australian Capital Territory) on 11 May 2010. The amendments are either beneficial to taxpayers or do not disadvantage them. Proposal announced: This measure was announced by the then Assistant Treasurer in Media Release No. 090 on 11 May 2010 and in the 2010-11 Budget. Financial impact: This measure will have an unquantifiable, but expected to be nil, revenue impact. Compliance cost impact: Low. This is comprised of a low implementation impact and no change in ongoing compliance costs relative to the affected group. 3
Chapter # Share and interest sale facilities for foreign interest holders in a restructure Outline of chapter 2.1 Part 1 of Schedule 1 to this Bill amends the Income Tax Assessment Act 1997 (ITAA 1997) to ensure entities in a restructure can use a share or interest sale facility to deal with foreign held interests without Australian tax residents automatically failing a key requirement of certain capital gains tax (CGT) roll-overs. 2.2 For the purposes of this chapter, an interest holder is considered to be foreign if their recorded address in relation to the interest is outside Australia. This means that a foreign interest holder could also be an Australian resident for tax purposes. 2.3 All legislative references in this chapter are to the ITAA 1997. Context of amendments 2.4 Australian entities may have interest holders who are located in Australia or abroad. 2.5 A share or interest sale facility (referred to as a share sale facility ) is used by entities when they restructure as it: can be impractical and expensive for those entities to comply with the requirements in each relevant foreign jurisdiction relating to the issuing of interests to their residents; and avoids inadvertent breaches of these requirements where entities, despite their best intentions, have not ascertained nor fully understood the requirements. 2.6 In a share sale facility, new interests issued under an entity restructure in relation to the foreign interest holder s interest may be allocated to the foreign interest holder s agent or nominee. The agent or nominee owns these interests, but deals with them on the foreign interest 5
[Click here and insert the name of the Bill] holder s behalf, including ultimately selling them and giving the proceeds (less expenses) to the former foreign interest holders. 2.7 However, the use of a share sale facility in an entity restructure may mean that certain requirements of any CGT roll-over relating to that restructure may not be able to be satisfied. A CGT roll-over allows a taxpayer to defer any capital gain or capital loss arising when a CGT event happens in the particular circumstances of the roll-over. 2.8 In particular, some CGT roll-overs for entity restructures require that all of the interest holders must exchange their interests in the original entity for interests in the new entity and that each interest holder owns the same, or in some instances substantially the same, percentage of interests in the new entity as they owned in the original entity (the same ownership requirements ). The entity restructure roll-overs that include these requirements are contained in the following provisions: Subdivisions 124-G, 124-H, 124-I, 124-N and 124-Q; Division 125; and Subdivision 126-G. 2.9 Where an agent in a share sale facility merely acts on the foreign interest holder s behalf and does not obtain an ownership interest in the new asset, the same ownership requirements can still be satisfied. This is because the new interests are allocated to the foreign interest holders, rather than to the agent or nominee. In a situation like this, the entity is required to meet the foreign regulatory requirements when they issue interests to foreign interest holders. 2.10 The same ownership requirements generally cannot be satisfied where a share sale facility is used and the agent or nominee obtains an ownership interest in the new asset to deal with on behalf of the foreign interest holder. This is because the new interests are now owned by the agent or nominee and not the foreign interest holder. Therefore, an entity with foreign interest holders may be reluctant to restructure because the interest holders that are Australian residents for tax purposes would not qualify for certain CGT roll-overs. If such a restructure occurs, these interest holders would face immediate CGT consequences from the realisation of their interests in the original entity. 2.11 Subdivisions 124-G and 124-Q and Division 125 already allow interest holders that are Australian residents for tax purposes to satisfy the same ownership requirements where a share sale facility is used to deal with certain foreign holders. However, Subdivisions 124-G and 124-Q simply disregard interests held by foreign holders rather than modifying 6
[Click here and enter the name of the Chapter 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). 2.12 For Division 125, the note to subsection 125-70(1) allows taxpayers access to the demerger roll-over where a share sale facility is used only if it entails a two step process, involving a notional allocation of the new interests to the interest holders followed by an actual allocation to a nominee. 2.13 These amendments facilitate the use of share sale facilities in a greater range of CGT entity restructure roll-overs and standardise the approach so that the interests of foreign interest holders are subject to the same ownership requirements of the relevant roll-overs as Australian interest holders. Summary of new law 2.14 Part 1 of Schedule 1 treats a foreign interest holder as owning an interest in the relevant entity at a time their agent or nominee owns an interest in that entity for the purposes of the relevant CGT entity restructure roll-over provisions, provided certain conditions are satisfied. 2.15 For the relevant CGT roll-overs, this ensures 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 automatically failing the same ownership requirements. It also ensures that ownership requirements are appropriately maintained. Comparison of key features of new law and current law New law An interest holder that is an Australian resident for tax purposes could satisfy the same ownership requirements under certain CGT entity restructure roll-overs where a share sale facility is used to deal with the interests of foreign interest holders. Current law An interest holder that is an Australian resident for tax purposes may fail the same ownership requirements under certain CGT entity restructure roll-overs where a share sale facility is used to deal with the interests of foreign interest holders. 7
[Click here and insert the name of the Bill] Detailed explanation of new law 2.16 Part 1 of Schedule 1 replaces the existing share sale facility provisions in Subdivisions 124-G and 124-Q and inserts a broader share sale facility provision into the ITAA 1997 in three places. This is achieved by inserting a new Subdivision into Division 125 and inserting a new provision into Subdivisions 124-A and 126-G. Each of these new provisions uses the same general approach to allow the operation of the relevant CGT restructure roll-over provisions where a share sale facility is used to deal with the interests of foreign interest holders. [Schedule 1, Part 1, items 3, 4, 5, 6 and 7, section 124-20, subsections 124-382(3) and (4), sections 124-1065, 125-235, and 126-265] 2.17 The amendments do not replace the approach to accommodate certain share sale facilities in the note to subsection 125-70(1) of the demerger relief provisions, as the note covers a broader range of use of share sale facilities. Where a restructure involving the use of a share sale facility for foreign interest holders qualifies for Division 125 roll-over and the share sale facility could be accommodated under either the existing law or these amendments, taxpayers can choose the approach to use because it will result in the same outcome. 2.18 These amendments have no application where the management of an entity that is restructuring decides to comply with the regulatory requirements of the relevant jurisdictions when they issue new interests to residents of these jurisdictions. These amendments have potential application only where a share sale facility is used for foreign interest holders in conjunction with an entity restructure covered by certain CGT roll-overs. Facilitating the use of share sale facilities for foreign interest holders for various CGT restructure roll-overs 2.19 The amendments facilitate the use of share sale facilities in the CGT entity restructure roll-overs in Subdivisions 124-G, 124-H, 124-I, 124-N, 124-Q and 126-G, and Division 125. The amendments do this by treating a foreign interest holder as owning an interest in the relevant entity at a time where their agent or nominee owns that interest, provided certain conditions are satisfied (paragraph 2.24 discusses the relevant conditions). Where the foreign interest holder is treated as owning the interest, their agent or nominee will not be treated as owning the interest at that point in time. [Schedule 1, Part 1, items 3, 6 and 7, subsections 124-20(1) and (2), 125-235(1) and 126-265(1)] 2.20 Under these amendments, using a share sale facility does not itself prevent the ownership requirements in each of the roll-overs mentioned in paragraph 2.19 from being satisfied. This is because the 8
[Click here and enter the name of the Chapter original and the new interest are treated as being owned by the same foreign interest holder at the relevant test times for each of the relevant roll-overs. 2.21 Where the foreign interest holder is an Australian resident for tax purposes, these amendments also ensure that these interest holders can access the relevant CGT entity restructure roll-overs where the agent or nominee becomes the owner of the new interest when a share sale facility is used. This defers any CGT consequences for the foreign interest holder until a later dealing with the asset, typically when the agent or nominee sells the new interest. 2.22 When the conditions in paragraph 2.24 are met, treating the foreign interest holder as owning the interest their agent or nominee owns for them (see paragraph 2.19) also applies for the purposes of sections 124-10 and 124-15. These provisions require the same owner to own the original CGT asset and the replacement CGT asset, and contain generic cost base and reduced cost base rules for the replacement asset CGT roll-overs in Division 124. This treatment is relevant where a foreign interest holder who is an Australian resident for tax purposes utilises a share sale facility under a relevant restructure roll-over contained in Division 124. [Schedule 1, Part 1, item 3, subsection 124-20(1)] 2.23 Notes are inserted to alert taxpayers that where a share sale facility is used, foreign interest holders that are Australian residents for tax purposes may still be able to access a replacement asset roll-over from Divisions 124 or 125, despite the new interest in the restructuring entity being owned by an agent or nominee. [Schedule 1, Part 1, items 1 and 2, subsection 112-105(2) and 124-5(1) (after note 1)] Conditions for treating foreign interest holder as owning the interest 2.24 The conditions that need to be satisfied for a foreign interest holder to be treated as owning an interest are: the foreign interest holder owns an ownership interest in a relevant entity or for Subdivision 124-I cases, owns an interest in a body (with or without rights relating to the body); the foreign interest holder s recorded address is outside Australia; the agent or nominee is nominated by the foreign interest holder or by someone on behalf of the foreign interest holder; 9
[Click here and insert the name of the Bill] the agent or nominee acts on behalf of the foreign interest holder in relation to a transaction, including a conversion, under one of the roll-overs mentioned in paragraph 2.19; the transaction happens in relation to the ownership interest or the interest in a body (with or without rights relating to the body); and as a result of the transaction, the agent or nominee becomes the owner of an ownership interest or, where a company is incorporated under the Corporations (Aboriginal and Torres Strait Islander) Act 2006, they receive rights as a member of a company. [Schedule 1, Part 1, items 3, 6 and 7, subsections 124-20(3), (5) and (6), 125-235(2) and 126-265(2)] Location of the foreign interest holder of an entity 2.25 An interest holder is a foreign interest holder if their recorded address is a place outside Australia and the external Territories. This address must be shown in the register in which the entity records details of the ownership interest. Where there is no such register, the address is as otherwise recorded for the purposes of the foreign interest holder s ownership. In the case of shares, an address may be recorded on the company s share register. For trust interests, the address may be recorded on the trustee s register of interest holders. [Schedule 1, Part 1, items 3, 6 and 7, paragraph 124-20(3)(b), subsection 124-20(4), paragraph 125-235(2)(b), subsection 125-235(3), paragraph 126-265(2)(b) and subsection 126-265(3)] Period when the foreign interest holder is treated as owning the interest 2.26 Each CGT restructure roll-over specifies when the ownership requirements are tested. These requirements are tested just before and just after a specific time or period, or are tested throughout a particular period. The concepts just before and just after take their ordinary meanings so that the testing begins immediately before and ends immediately after the relevant time. 2.27 Providing the agent or nominee owns the interest when the ownership requirements are tested, the ownership requirements will be satisfied in respect of the foreign interest holder. This is because the foreign interest holder is treated as owning the interest at a time when the agent or nominee owns that interest. 10
[Click here and enter the name of the Chapter Example 2.1 Paint Ltd (Paint) has a foreign shareholder, who owns one per cent of the shares in Paint. Australian shareholders own the remaining 99 per cent. Paint proposes to interpose a non-operating holding company, Brush Ltd (Brush), between itself and its shareholders under an arrangement where its shareholders exchange their shares in Paint for shares in Brush. Due to the cost of obtaining the necessary information to ensure compliance with the requirements of issuing new shares in the relevant foreign jurisdiction, a share sale facility is used for the foreign shares, with Sue being appointed to act as a nominee. For the Australian shareholders to be eligible for a CGT roll-over when their shares in Paint are cancelled, Subdivision 124-G requires, amongst other things, all the shareholders in Paint to own shares in Brush just after the completion time and that each shareholder in Paint owns the same percentage (by number and value) of shares in Brush as they owned in Paint. The new shares in Brush are issued so that each shareholder in Paint owns the same percentage (by number and value) of shares in Brush that they owned in Paint, with the exception that the one per cent of shares representing the foreign shareholder s shares are issued to Sue. For the purposes of Subdivision 124-G, the foreign shareholder is treated as owning the one per cent of shares in Brush for the time that Sue owned those shares in Brush. This ensures the same ownership requirements are satisfied in the Subdivision. Provided all the other conditions in Subdivision 124-G are satisfied, Australian tax resident shareholders will be eligible for the CGT roll-over. Application and transitional provisions 2.28 This measure applies to CGT events happening after 7.30 pm (by legal time in the Australian Capital Territory) on 11 May 2010. [Schedule 1, Part 1, item 8] 2.29 These amendments are not expected to disadvantage taxpayers that could access the roll-overs in Subdivisions 124-G and 124-Q and use a share sale facility to deal with the original interests of foreign interest holders. This is because the level of regulatory oversight and reputational risk relevant to an ADI or stapled entity that restructures would typically 11
[Click here and insert the name of the Bill] mean the restructures could still satisfy the ownership requirements in Subdivisions 124-G and 124-Q that now need to be satisfied as a result of the amendments. 12