Senator Helen Coonan, Minister for Revenue and Assistant Treasurer, today announced details of the Government's policy on the provision of tax relief for demergers. This measure will apply to demergers happening on or after 1 July 2002.
In essence, a demerger involves restructuring a corporate or trust group by splitting it into two or more entities or groups, with the underlying owners holding one or more of those entities or groups directly.
Senator Coonan said the key features of the model to provide tax relief for demergers include:
- providing demerger tax relief where underlying ownership is maintained and the demerging entity divests at least 80 per cent of its ownership interests in the demerged entity;
- applying the measure to widely held and non-widely held companies and trusts;
- allowing capital gains tax relief at both the shareholder and entity levels; and
- providing an exemption from the existing dividend rules, subject to integrity rules.
"This model has been developed in consultation with industry representatives and tax practitioners," Senator Coonan said.
"Tax relief for demergers will increase efficiency by allowing greater flexibility in restructuring businesses, providing an overall benefit to the economy.
"The Government has implemented this latest measure in business tax reform to enhance the competitiveness of Australia's business sector."
Providing tax relief for demergers was recommended by the Ralph report on business taxation reform.
Today's announcement follows the Treasurer's announcement of 22 March 2001 indicating the Government's in-principle support to provide tax relief for demergers, with effect from 1 July 2002.
"Further consultations with interested parties on the final form of the legislation will take place in coming weeks," Senator Coonan said.
"Legislation will be introduced into Parliament following those consultations."
Further details are provided at Attachment A.
Attachment A
The model to provide tax relief for demergers includes the following features.
- The central test for obtaining demerger tax relief will be maintenance of underlying ownership. This will be tested by examining proportional interests and market values of ownership interests. Ownership interests (other than ordinary shares) acquired by employees under an employee share scheme will be excluded from this test by a de minimus rule, with the details of this rule being determined in consultation with industry. Further, a specific modification will allow a dual listed company structure to access the demerger tax relief.
- Demerger tax relief will be available for all entities other than discretionary trusts. Discretionary trusts have been excluded because it is difficult to establish, with any degree of certainty, the real economic ownership of their assets, and it is equally difficult to test whether that ownership has been maintained. Switching between companies and trusts will not be permitted, consistent with scrip for scrip rollover.
- Multiple demergers will be permitted (eg one entity demerging into more than two entities), subject to a proportional interest test.
- Demerger tax relief will apply to both widely held and non-widely held entities, with integrity rules for non-widely held entities.
- Demerger tax relief will be available only where the demerger group is demerging at least 80 per cent of its ownership interests in an entity. This requirement is comparable to the 80 per cent threshold applied to obtain tax relief for scrip for scrip transactions. An 80 per cent threshold is designed to ensure that only "genuine" demergers can obtain the tax relief. Demerger tax relief will not be available for disposals, at a later date, of the remaining ownership interests.
- CGT roll-over relief will be provided at the owner level for capital gains arising from a CGT event happening to original ownership interests under the demerger. This means that there will be no change to the current law for ownership interests held on revenue account or for shares acquired by employees under employee share schemes. This is consistent with the scrip for scrip rollover relief. In relation to shares acquired by employees under employee share schemes, the Government is currently considering its response to the House of Representatives Inquiry into employee share ownership in Australia. That report made a number of detailed recommendations, including relating to taxation arrangements, that require careful consideration.
- The pre-CGT status of ownership interests will be maintained. This ensures that those with pre-CGT interests are not disadvantaged in circumstances where there is no change in underlying ownership.
- The original cost bases of the ownership interests will be apportioned between their ownership interests in the original entity and in the demerged entity, based on their relative market values. These cost base rules applying to demergers may be refined in the context of finalising the Consolidation regime.
- CGT relief will be provided at the entity level for capital gains and losses arising to the demerging entity under the demerger. In this context, CGT relief will also be provided to the demerged entity in relation to certain demerger transactions (in particular, CGT J1 events) associated with the spin-off of ownership interests in the demerged entity.
- An exemption from the dividend rules in the tax law will be provided for genuine demergers of a business or business assets. Integrity rules will support this exemption. A key rule will be modelled on section 45B of the Income Tax Assessment Act 1936 and will be designed to deny the dividend exemption if the demerger was only entered into to convert what would normally be an assessable dividend into an exempt demerger dividend. In considering the possible application of this integrity rule, certain factors will be taken into account in determining whether the dividend exemption should be available. These factors could include, inter alia, the treatment in the shareholder funds (including the share capital accounts) of the demerging entity, the pattern of distribution of dividends, bonus shares and returns of capital by the demerging entity, the effect on the entity's capacity to pay dividends in the future and whether the shareholders of the demerged entity have entered into any agreement or understanding at the time of the demerger that they will subsequently sell their shares in the demerged entity to a third party. As a general principle, this integrity rule is unlikely to apply to a demerger of an active business where there is a reasonable proportionate allocation of the shareholder funds (including the share capital accounts) of the demerging entity, unless the particular circumstances of the demerger suggest otherwise.
- A transitional rule for demergers, where the process has already commenced, will provide an appropriate outcome for interactions between the current dividend rules and the new rules in the demerger relief measure.
- Demerger tax relief will be available to resident and non-resident entities and for owners of these entities whose ownership interests remain within the Australian CGT regime (similar to scrip for scrip rollover).
- There will be no change within the demerger provisions to the existing law or policy in relation to the treatment of tax attributes (such as tax losses, franking credits and foreign exempt income) at the entity level.