Demergers – a new view?




Written by Louise Boyce

Louise Boyce is Tax Counsel at Squire Patton Boggs, a global business law firm with 47 offices in 20 countries. She is co-Chair of the Tax Institute’s Large Business and International Technical Committee. She is also a member of The Tax Institute and Revenue NSW Liaison Committee and a member of The Tax Institute’s NSW State Council.

Demergers – a new view?

The Tax Institute’s Large Business and International Technical Committee has been consulting with the ATO on its controversial draft determination TD 2019/D1 on the extent of demerger relief. Here is a link to our submission.

We have concerns because we consider that it represents a shift in view by the ATO from the position previously adopted in publicly available class rulings and represents an unnecessarily restrictive view of when the relief should apply. We are also concerned with the potential retrospective application of the ATO’s changed view and have asked that the final determination only apply prospectively.

A demerger occurs when a group splits part of its operations into a separate entity and issues shares or units in that entity to the original interest holders. Demerger tax relief was originally designed to ensure that there are no adverse tax consequences for the members of the demerger and the cost base is split across the new and old interests. The rationale for demerger relief is that if the members are in the same economic position after the reorganisation, they should not suffer a taxing event. It is relatively common for a group with diverse operations to wish to “spin off” part of the operations.  This might be to enable those operations to be operated more effectively or it may be to make one or both parts of the business more attractive to an acquirer.

The demerger provisions were introduced in response to the Ralph Review of Business Taxation (1999) which recommended that both demerger relief and scrip for scrip rollover relief should be allowed to remove tax as an impediment to corporate acquisition activity and to prevent tax from acting as an obstruction to companies restructuring their operations. Giving demerger relief to a restructure which enables a scrip for scrip takeover to proceed seems entirely within the stated rationale of promoting the overall efficiency of the economy.
The draft determination restricts the circumstances in which demerger relief will be available by denying relief where the demerger is associated with transactions such as a subsequent capital raising by the demerged entity, a takeover of the group, a sale facility for shares in the demerged group or a split in ownership of a family owned business. The rationale behind the draft determination stems from the ATO’s strained interpretation of the word “restructure”. The ATO’s restrictive approach may actually reduce the amount of tax collected because if the subsequent transaction does not occur, the taxing event will not eventuate. Companies may also seek more complex ways to achieve a neutral tax outcome. Either way, the outcome of the ATO’s restrictive view will not be beneficial for the economy.
Sadly, the hidden victims of this uncertainty may be the investors in companies which have done a demerger but not sought a class ruling. In a coincidence of timing, the draft determination was issued the day after Twenty-First Century Fox demerged its news, sports and broadcast businesses into Fox Corporation and subsequently Disney completed its acquisition of Twenty-First Century Fox. As Twenty-First Century Fox was the successor to former Australian listed company News Limited, there are a large number of continuing Australian shareholders who will now be uncertain as to how to prepare their tax returns for the year ended 30 June 2019. This creates a difficult situation for both taxpayers and advisers, especially in relation to transactions which have already happened which were not subject to a class ruling.

While most practitioners agree that that there has been a change of view, it appears that the ATO is reluctant to admit it has had a change of view. The standard wording in the draft determination proposes that the ATO’s view will apply to transactions occurring both before and after the date of the draft determination. However, the ATO agreed to implement the recommendations of the Inspector General’s review into ATO U-Turns which limits the circumstances in which ATO views will be applied retrospectively and depends on ‘‘the extent to which the ATO has facilitated or contributed to the taxpayer perception of the previous industry practice or position”.

We feel that the ATO’s previously published class rulings and now arguably apparent change of view have contributed to uncertainty and on this basis the final determination should only apply prospectively.

Members, we welcome your thoughts via the Vine Feedback inbox.

Kind regards,
Louise Boyce, CTA

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