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Consolidation rules to be amended to take rollovers into account — Orbitax Tax News & Alerts

On 12 October 2007, the Assistant Treasurer announced that the law will be amended to clarify the interaction between the tax consolidation rules and capital gains tax (CGT) rollovers.

By way of background, a disposal of membership interests (e.g. shares) in a company constitutes a CGT event and the holder of the interests makes a capital gain or capital loss from the event. However, where the gain or loss is made in the course of certain reorganizations, it may be deferred by operation of rollover provisions. The provisions disregard the gain or loss and transfer cost base of the disposed interests to the replacement interests. However, the disposed interests in the hands of the acquirer may receive cost base equal to their market value.

On the other hand, an Australian group may elect to form a tax consolidated group, where all members of the group are taxed as one taxpayer and transactions between the members are ignored for tax purposes. The formation of the group follows the "asset" model (instead of the "entity" model employed by consolidation rules in other countries). Under the asset model, the head company of the group is deemed to acquire all assets of the members of the group. A complex "allocable cost amount" (ACA) calculation is used to calculate the combined tax cost of all assets transferred to the head company; the ACA is then allocated to specific assets based on the asset type. The first step in the ACA calculation is tax cost base of interests in the joining member, which is then adjusted for liabilities, owned retained earnings, losses, etc.


-   Consider a situation where shares in "Old Company" are held by various shareholders with cost base of each share of AUD 100 and the market value of AUD 140. Old Company holds all shares in the operating subsidiary (OpCo) with tax cost base of AUD 100 and the market value of AUD 140. If Old Company and OpCo elect to form a tax consolidated group, the tax cost base of assets of OpCo will be reset based on the OpCo ACA calculation. As the cost base of shares in OpCo is below their market value, there may be insufficient ACA to allocate to the assets of OpCo to reset tax cost of assets of OpCo to their market values (a higher cost base is obviously beneficial as it is likely result in additional deductions – e.g. for depreciation, or lower gains/higher losses from the disposal of the assets).
-   However, if the shareholders transfer their shares in Old Company to New Company and one of the rollovers is available in relation to the reorganization, the shareholders will not make a capital gain on the transfer and will receive shares in New Company with cost base inherited from shares in Old Company, being AUD 100. However, cost base of shares in Old Company held by New Company may be stepped up to their market value, being AUD 140. If New Company, Old Company and OpCo elect to form a tax consolidated group, the ACA for Old Co of AUD 140 will be allocated to shares in OpCo, which in turn may result in cost base of assets of OpCo be stepped up to their market value. Such an outcome is deemed to be unintended and is addressed by the amendments.

It has been suggested that the amendments will have an impact on the M&A activities in Australia. Such an impact is unclear, unless the activities are undertaken with a dominant purpose to obtain a tax benefit, which in itself may give rise to entirely different set of taxation issues.

The application of the amendments to non-residents will be limited to shares which are, broadly, non-portfolio interests in Australian real property or mining/prospecting rights.

The amendments will apply to transactions where an intention to undertake a corporate action by takeover bid or scheme of arrangement is announced by either party to an approved stock exchange after 12 October 2007. For unlisted companies, the amendment will apply to arrangements announced to shareholders of the target company after that date.