The Australian Taxation Office has announced the issuance of Taxpayer Alert (TA) 2020/4 on multiple entry consolidated groups avoiding capital gains tax.

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Description

We are currently reviewing arrangements which appear to be designed to avoid the inclusion of capital gains in the assessable income of Australian-resident entities upon the disposal of their assets (underlying assets).

The arrangements involve:

• an internal restructure within a multiple entry consolidated (MEC) group to enable the underlying assets to be disposed of by way of an eligible tier-1 (ET-1) company (directly or indirectly owning the underlying assets) leaving the MEC group
• circumstances where the disposal of the underlying assets might reasonably be expected to have been achieved in a more convenient or straightforward manner resulting in the inclusion of a capital gain in the assessable income of the provisional head company of the MEC group, and
• on closer investigation, the stated justification for additional steps under the internal restructure lacks substance or real probative weight.

The arrangements typically display some or all of the following features:

• steps or circumstances resulting in a company becoming an ET-1 company of an existing or new MEC group, for example, by way of
  • incorporating a company
  • acquiring the shares in a dormant company which is a subsidiary member of an existing consolidated group, or
  • migrating the central management and control of an associated foreign or dual resident company to Australia
• steps or circumstances resulting in the intra-group transfer of
  • the underlying assets to the new ET-1 company (either directly or indirectly) being disregarded for Australian tax purposes, or
  • assets other than the underlying assets to the new ET-1 company (either directly or indirectly) being disregarded for Australian tax purposes
• steps or circumstances resulting in
  • the new ET-1 company (directly or indirectly owning the underlying assets) leaving the MEC group, or
  • another ET-1 company (directly or indirectly owning the underlying assets) leaving the MEC group
• some or all of the above-mentioned steps or circumstances are not responsive to the commercial objectives of the taxpayer and/or are responsive to anticipated Australian tax outcomes. For example, some of the steps are not necessary to achieve the commercial objective of divesting the underlying assets to a third-party buyer or a foreign associate of the taxpayer
• the underlying assets are CGT assets which may not be taxable Australian real property (or an indirect interest therein) or active foreign business assets.

In relation to arrangements involving ET-1 companies, Taxpayer Alert TA 2019/1 Multiple entry consolidated (MEC) groups avoiding CGT through intra-group debt should also be considered. In TA 2019/1, we expressed concerns about arrangements designed to reduce or avoid capital gains tax where the new ET-1 company is funded through the use of related party loans rather than equity. The arrangements of concern in TA 2019/1 involve underlying assets which are more likely to be taxable Australian real property and the sale of the ET-1 company accompanied by either the refinancing of the related-party loans by the purchaser or the sale of the loans directly to the purchaser.