ATO Guidance: back-to-back CGT roll-overs and demergers

Last week the Australian Taxation Office (ATO) updated its ‘advice under development’ pages to include back-to-back capital gains tax (CGT) roll-overs and what is a ‘restructuring’ for purposes of the demerger provisions.

The ATO said that it will provide guidance (expected by May 2019) on sequential planned transactions where a CGT roll-over is claimed for each transaction and the first roll-over contains a ‘nothing else’ condition.

Sequential or back-to-back CGT roll-overs are common in rearranging groups. Several CGT roll-overs include a condition that the selling entity receive, for example, shares and ‘nothing else’. The ATO has been concerned that when there is a back-to-back roll-over and the first roll-over includes a ‘nothing else’ condition the selling entity receives both (say) a share and a right to receive consideration under the second roll-over.

CGT roll-overs with a ‘nothing else’ condition include:

  • Subdivision 124E – exchange of shares

  • Subdivision 124F – exchange of rights or options

  • Subdivision 124I – change of incorporation

  • Subdivision 124Q – exchange of stapled ownership interests for ownership interests in a unit trust

  • Division 125 – demerger relief

  • Division 615 – rollovers applying to assets generally

There are other CGT roll-overs where the taxpayer must only include a specific form of consideration. For example, under Subdivision 122-A where an individual or trustee transfers an asset to a wholly-owned company, CGT roll-over relief is only available if the seller receives shares in the buyer. While drafted differently to the ‘nothing else’ requirement the concepts are similar.       

The ATO also said that it intends providing guidance (by December 2018) on the scope of a ‘restructuring’ in the demerger provisions. What is a ‘restructuring’ is a key concept in the context of demergers as that determines what is in the demerger group (and thus what can be demerged) and links with the ‘nothing else’ requirement. For example, if there is a demerger followed by a scrip-for-scrip roll-over does the restructuring only include the first transaction or both transactions? If the latter, the ‘nothing else’ requirement may not be met.

We await the ATO guidance with interest as recent Class Rulings, for example CR 2018/7 and CR 2018/31, signalled that the ATO may be changing its approach to what is the scope of a restructuring and applying a more literal interpretation of the ‘nothing else’ requirement.

Clients wishing to undertake back-to-back transactions to rearrange their affairs and/or undertake a demerger should seek professional taxation advice, and possibly seek early engagement with the ATO as part of that advice, prior to undertaking those transactions.     

If you have any questions in relation to the above, please contact us.

Neil Brydges
Special Counsel | Accredited specialist in Tax Law
Sladen Legal
M +61 407 821 157 | T +61 3 9611 0176
Level 5, 707 Collins Street, Melbourne, 3008, Victoria, Australia  

Kelvin Yuen
Sladen Legal
T +61 3 9611 0177
Level 5, 707 Collins Street, Melbourne, 3008, Victoria, Australia