Australia: Capital gains tax rollovers, implications for business restructuring

Australia: Capital gains tax rollovers

The Board of Taxation’s second consultation paper is part of its review of capital gains tax (CGT) rollovers, and outlines further thinking on how reform to the CGT rollover provisions may be approached.

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The second consultation paper [PDF 883 KB] has two objectives:

  • It presents a framework of principles for CGT rollovers, outlining what rollovers are for and the role they play in the CGT framework and the tax system more broadly.
  • It also presents a general rollover for business restructuring, which is intended to replace the existing suite of transaction-based restructure rollovers with a single, principles-based relief.

The consultation paper focuses on replacing existing rollovers—rather than expanding the scope of transactions eligible for CGT rollover relief—and proposals in earlier submissions about extending CGT rollover relief for joint ventures and asset realignment do not seem to be covered in this round of proposals.

Three principles for design

The Board of Taxation defined three principles for the design of a new general business restructure rollover:

  • The rollover is to allow taxpayers the freedom to choose how they restructure their businesses based on commercial reasons.
  • The general rollover is to have the same effect as the original rollovers it replaces.
  • The general rollover is to function as a single coherent rollover and not multiple distinct rollovers located in a single division of the tax law.

Three core steps

Step 1: Identify the restructure

This step requires identifying transactions that constitute the restructure. The restructure concept would be concerned with commercial outcomes rather than legal steps used to achieve those outcomes, and in that regard, the Board envisages a rollover to be accessed in some cases when relief would not be otherwise available, or would be unclear under the current law.

The model would also allow business some flexibility to select which CGT events occurring under the restructure are to receive rollover relief. This means that a particular CGT event may not need to be taken into account in assessing any general rollover conditions, and would not mark the start of an eligible restructure period.

In the context of demergers, there are commonly three stages—assembly stage, demerger stage and post-demerger stage.

During the assembly stage, CGT assets may be moved between entities so that the appropriate assets sit within the demerging entity. The ability to exclude specific CGT events allows taxpayers who would otherwise be eligible for rollover relief under the current system to continue to receive relief under the general model. The relevant entities may elect to exclude the assembly stage transactions from the “eligible restructure” for the purposes of the rollover and CGT would be paid on gains arising from the transfers and general rollover could be applied to the remaining stages.

To import greater certainty to the restructure concept, the Board was considering limiting CGT events occurring under a restructure to those occurring within 12 months from the first CGT event eligible for the general rollover.

Broadly, the Board would like to explore ways of aligning the general rollovers with commercial practice by reducing the constraints on post-demerger transactions, particularly equity raising.
 

Step 2: Eligibility rules

The general restructure rollover model presently incorporates and replaces two broad categories of rollovers—underlying assets-for-scrip and scrip-for-scrip rollovers. The general rollover would attempt to preserve these distinct characteristics unless they are no longer relevant and appropriate in the current business environment


Step 3: Consequences of rollover

  • Capital gains and losses: When the eligibility conditions are satisfied under an eligible restructure, it is proposed that gains and losses arising from every CGT event elected to form part of the eligible restructure would be disregarded.
  • Acquisition date: To allow existing acquisition date adjustments to continue to be available, an asset acquired under general business restructure rollover could be deemed to have been acquired for the purposes of the CGT discount when the original asset was acquired before the rollover.
  • Cost base: The Board of Taxation is exploring the prospect of preserving the cost base “push up” rule, currently found in Division 615 and the restructure provision in section 124-784B of the scrip for scrip rollover as the uniform rule (i.e., a cost base constructed by reference to cost bases of the underlying trading assets of the target entity).

KPMG observation

The proposal for CGT rollover reform aims to provide better clarity around business restructures, and in particular as it relates to demerger relief, is viewed by tax professionals as being a welcome development because it would provide certainty of the tax outcomes and determine the transactions are commercially viable.


For more information, contact a KPMG tax professional in Australia:

Jenny Wong | +61 2 9335 8661 | jywong@kpmg.com.au

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