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					    ISSUE 2 MAY-JUNE 2002




                         TAX




                                   We look at tax issues relating to demergers and the latest
                                   developments in consolidation.

                 Inside:
                                   Tax relief for demergers
 Government to allow               AAR Tax Partners Martin Fry and Larry Magid report on the
 demerger relief from              recently announced tax relief provisions for demerged entities,
           July 2002               beginning at the start of the new financial year.
                                   The Federal Government has announced that tax relief will apply to company demergers,
 Consolidation: latest             or ‘spin offs’, from 1 July 2002.
      developments                 Importantly, relief will only be provided where the demerger results in continuity of the
                                   underlying ownership of the demerged entity. That is, it is not proposed that demerger
                                   relief will extend to allow a group to ‘split’, with some shareholders receiving interests in
                                   one group and other shareholders receiving interests in the other group.

                                   The distribution will have to be made pro rata to existing shareholders, but that should
                                   not preclude a demerger from being done in conjunction with a sell-down facility or
                                   further capital raising by an additional offering of shares.

                                   A demerger occurs when a group splits itself into two or more groups by distributing to
                                   its shareholders a direct interest in one or more parts of the group. Often referred to as a
                                   ‘spin off’, examples include the Amcor-PaperlinX demerger, the BHP-OneSteel demerger
        Your publication:          and the BHP Billiton-BHP Steel demerger.

  If you would prefer to receive   Demerger relief will be available to both companies and trusts (except discretionary
  our publications in electronic   trusts). However, as with scrip for scrip rollover relief, the demerger relief will only be
           format, please email:   available for a company demerging another company or a trust demerging another trust.
       publications@aar.com.au
                                    It will be available for widely held and non-widely held entities (with additional integrity
                                   rules applying to non-widely held entities) and will apply to the demerger of a single
      www.aar.com.au
                                   entity or multiple entity demergers.
    VISIT OUR WEB SITE
TO READ ALL FOCUS EDITIONS
ISSUE 2 MAY-JUNE 2002




                        Status                                                          transactions which contain a disguised dividend
                                                                                        component). This will be determined by reference
                        Tax relief will apply from 1 July 2002, however,
                                                                                        to factors including the treatment of shareholder
                        transitional rules will apply to transactions that have
                                                                                        funds in the demerging entity, the pattern of dividend
                        already commenced. There has been extensive
                                                                                        distributions and the existence of a pre-arranged on-
                        consultation with business and professional groups
                                                                                        sale by shareholders of their shares in the demerged
                        regarding the design of the measures.
                                                                                        entity;
                        The consultation process is ongoing, but the                  • relief from capital gains tax (CGT) that would
                        Government plans to introduce the legislation in the            otherwise be payable as a result of the demerger
                        winter 2002 Parliamentary sittings (probably late in            transaction;
                        June 2002).                                                   • the cost base in the original interest will be spread
                                                                                        between the original interest and the interest in
                        Requirements                                                    the demerged entity (based on the relative split in
                        The key criteria for tax relief on demergers are:               market values); and

                        • underlying ownership of the demerged entity must            • any pre-CGT interests will retain their pre-CGT
                          be maintained. This will be tested by reference               status.
                          to both proportionate ownership interests in the            At the corporate level, demerger relief will result in:
                          demerged entity and the market value of those               • relief from CGT that would otherwise be payable
                          ownership interests. A de minimis exception is to be          on the disposal by the demerging entity of the
                          provided for shares acquired under an employee                demerged entity (which is significant in that it is a
                          share scheme, however, the de minimis threshold is            permanent relief at the corporate level, not just a
                          not yet settled; and                                          deferral); and
                        • the demerging entity must divest at least 80% of            • relief from a recapture of CGT roll-over relief that has
                          its ownership interests in the demerged entity. If            been applied to certain transfers of assets that have
                          the demerging entity subsequently disposes of its             occurred prior to and as part of the overall demerger
                          remaining ownership interests, demerger relief will           transaction. At this stage there is no guidance on
                          not be available for this later disposal.                     how broad this measure will be.
                        Specific provisions will be provided to allow dual listed
                        companies to access the demerger relief.                      Limitations
                                                                                      The demerger relief will not apply to:
                        As with the scrip for scrip relief, demerger relief will be
                        available to both residents and non-residents, provided       • tax on gains derived by shareholders who hold their
                        the demerger does not result in an asset moving                 shares as revenue assets (eg share traders); or
                        outside of the Australian tax net.                            • tax on gains derived by shareholders from the
                                                                                        disposal of shares acquired under employee share
                        Consequences                                                    schemes where the shareholder has elected for
                        The capital gains and income tax relief for demergers           deferred taxation under the special taxing rules
                        will apply at both the shareholder and entity levels.           which apply to such shares (ie Division 13A).

                        From the shareholder’s perspective, demerger relief
                                                                                      Stamp duty
                        will result in the following:
                                                                                      Importantly, the demerger relief does not address the
                        • an exemption from the provisions that would                 stamp duty costs of a demerger in any way. In this
                          otherwise treat the shareholder as having received          context it will be critical to consider both:
                          a taxable dividend from the transaction, subject to
                                                                                      • whether there is stamp duty payable on the
                          specific anti-avoidance rules. The anti-avoidance
                                                                                        demerger transaction; and
                          rules will be directed at demerger transactions
                          which return value to shareholders that may                 • whether the demerger transaction triggers a
                          otherwise have been taxed as dividends (ie similar            recapture of reconstruction relief previously obtained
                          to existing section 45B, the rules will target demerger       within the demerged group.
Next steps                                                   • 30 June 2003, for groups with a 30 June year end;

The enactment of tax relief for demerger transactions        • as late as 30 December 2003, for groups with
could lead to a significant increase in spin-off                substituted accounting periods.
transactions undertaken by Australian corporate              The existing tax grouping concessions include
groups.                                                      grouping of losses, asset roll-overs, thin capitalisation
                                                             grouping and rebates for intra-group unfranked
Many such transactions are likely to have been               dividends.
inhibited by the amount of tax likely to be incurred
by the parent company on its disposal of profitable           The retention of these grouping concessions until 30
subsidiaries and the inability of the parent company to      June 2003 (or later) means that wholly owned groups
debit the entire amount of the distribution to its share     have added flexibility in deciding whether and when
capital account, which under present law is necessary        to enter the tax consolidation regime (and less risk in
to avoid creating a taxable dividend for shareholders.       delaying the decision).

It is anticipated that shareholders receiving shares         Joint and Several
in spin-off transactions are relatively more likely to
                                                             Liability for Tax
sell either those shares or their shares in the parent
                                                             The latest version of the draft consolidation legislation
company.
                                                             contains rules which make wholly owned group
The taxation of gains from those subsequent share            companies jointly and severally liable for the tax
sales would offset (to some unquantifiable extent) the        liabilities of the entire consolidated group if the group
loss of revenue from the demerger relief itself. If all of   defaults in paying its tax liabilities.
that occurs, the enactment of tax relief for demergers
                                                             As a concession, the joint and several liability for tax
will facilitate the creation of more efficient business
                                                             will not apply if the wholly owned group companies
structures and a more efficient allocation of capital
                                                             enter into a ‘Tax Sharing Agreement’ which allocates
among Australian business organisations.
                                                             the tax liability of the entire consolidated group among
                                                             its members on a reasonable basis.
Consolidation:                                                   As the Tax Sharing Agreement
latest                                                           is a means of avoiding joint and
                                                                 several liability, it will be critical
developments                                                     for acquirers and lenders to
                                                                 ensure that the Agreements are
The Government remains committed to                              in place and effective.
introduce the tax consolidation rules from
                                                             The joint and several liability for tax will clearly be a
1 July 2002. Two key developments have                       fundamental issue in the acquisition and disposal of
arisen in recent weeks.                                      wholly owned companies, and in providing finance to
                                                             companies which are in a consolidated group.
Extension of
                                                             As the Tax Sharing Agreement is a means of avoiding
Grouping Benefits
                                                             joint and several liability, it will be critical for acquirers
Wholly owned groups may still elect to consolidate for       and lenders to ensure that the Agreements are in place
tax purposes from 1 July 2002.                               and effective.
However, the recent Federal Budget announced that
groups electing not to consolidate will continue to have
the benefit of the existing tax grouping concessions
until:
ISSUE 2 MAY-JUNE 2002




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                            For further information, please contact:

                            Martin Fry                  Larry Magid                     Peter Allen                Jeff Tyler
                            Tax Partner, Melbourne      Tax Partner, Sydney             Partner, Brisbane          Special Counsel, Perth
             Sydney
         Melbourne
                            Ph: +61 3 9613 8610         Ph: +61 2 9230 4918             Ph: +61 7 3334 3350        Ph: +61 8 9488 3765
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Description: Tax relief for demergers