Tax Implications
PART 8
113
8
Tax Implications
8.1
General
114
8.2
Australian tax consequences for BHP Shareholders
114
8.3
Overseas BHP Shareholders
116
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PART 8
Tax Implications
8.1 General
The intention of the following information is to
provide a guide to the general tax position of BHP
Shareholders in relation to the Spin-out Proposal.
It does not purport to be a complete analysis or
identification of all potential tax consequences,
nor is it intended to replace the need for
specialist tax advice in respect of the particular
circumstances of individual BHP Shareholders.
The information in Part 8.2 is not applicable to all
categories of BHP Shareholders and, in particular,
does not apply to:
• BHP Shareholders who do not hold their BHP
Shares as capital assets (for example, BHP
Shareholders who hold their BHP Shares as
trading stock or revenue assets);
• non-resident BHP Shareholders who own
(or are deemed to own) less than 10% of the
issued shares of BHP; and
• BHP Shareholders who are not the beneficial
owners of their BHP Shares.
All BHP Shareholders, including those whose
registered address is outside Australia or who are
otherwise not resident in Australia for Australian
tax purposes, should consult their tax advisers as
to the tax consequences of the Spin-out.
Part 8.3 below discusses the taxation
consequences for US, United Kingdom and
New Zealand resident BHP Shareholders. These
jurisdictions have been selected because they are
the jurisdictions in which the largest number of
BHP Shareholders are located whose registered
addresses on the BHP Share Registry are outside
Australia. Except as regards the US, the United
Kingdom and New Zealand, this Scheme Booklet
does not contain discussion of possible taxation
implications in foreign jurisdictions of the Spin-out
for BHP Shareholders whose registered address is
outside Australia.
8.2 Australian tax consequences
for BHP Shareholders
8.2.1 Australian resident BHP Shareholders -treatment of return of capital
The return of capital by BHP from its share capital
account to Fully Paid Shareholders and Partly Paid
Shareholders will not be treated (in whole or part)
as a dividend for Australian tax purposes. In this
regard, BHP, through a representative Australian
resident individual BHP Shareholder, has sought
and obtained confirmation of the treatment of the
return of capital by way of a ruling from the
Australian Taxation Office (“ATO”). A copy of this
ruling and its supporting explanation is available
on request at BHP’s registered office.
Those BHP Shareholders who acquired BHP
Shares before 20 September 1985 will have no
Australian CGT consequences arising on the
return of capital from BHP’s share capital
account, other than those outlined in Part 8.2.4
below, as these BHP Shares do not fall within the
Australian CGT regime.
BHP Shareholders who acquired (or are deemed
to have acquired) BHP Shares on or after
20 September 1985 will not realise a capital gain
or loss in respect of the receipt of the return of
capital from the share capital account.
In relation to Partly Paid Shareholders, if the
Partly Paid Scheme is approved, an interim call
will be made and the Reduction Amount will be
applied to meet the interim call and should not be
taxable. Partly Paid Shareholders will not receive
any OneSteel Shares.
If the Partly Paid Scheme is not approved, Partly
Paid Shareholders will receive the Reduction
Amount by cheque. In these circumstances, the
difference between the Reduction Amount and the
initial call on each Partly Paid Share may be
taxable as a capital gain in the hands of Partly
Paid Shareholders.
8.2.2 Non-resident BHP Shareholders treatment of return of capital
Consistent with the treatment of Australian resident
BHP Shareholders, the return of capital by BHP
from its share capital account should not be treated
(in whole or in part) as a dividend for Australian
taxation purposes.
For non-resident BHP Shareholders that own
(or are deemed to own) 10% or more of the
issued shares of BHP, or whose BHP Shares have
been used in carrying on a trade or business
(wholly or partly) at or through a permanent
establishment in Australia, the Australian CGT
consequences are the same as for those outlined
for Australian resident BHP Shareholders
(refer to Part 8.2.1). Non-resident
BHP Shareholders that own less than 10% of the
issued shares of BHP are prima facie not subject
to Australian CGT.
Tax Implications
8.2.3 Cost base of Fully Paid Shares
For BHP Shareholders who acquired Fully Paid
Shares before 20 September 1985, those BHP
Shares will not fall within the Australian CGT
regime. The concept of “cost base” for those
BHP Shares is irrelevant.
For BHP Shareholders who acquired (or were
deemed to acquire) Fully Paid Shares on or after
20 September 1985, the cost base (indexed up to
the September 1999 quarter if appropriate) of
those Fully Paid Shares for Australian CGT
purposes will change. Generally, it will be reduced
by an amount corresponding to the Capital
Reduction returned to them by BHP per Fully Paid
Share. Accordingly, the cost base of each Fully
Paid Share will be the cost base less the Capital
Reduction for that Share.
For example, if a BHP Shareholder acquired a
Fully Paid Share for $14.00 which has an indexed
cost base for Australian CGT purposes of $16.00
and receives a return of capital of $0.66 cents
per Fully Paid Share from BHP as par t of the
Fully Paid Scheme, the BHP Shareholder will not
realise a capital gain or capital loss on receipt of
the return of capital. The BHP Shareholder will
have an adjusted indexed cost base in the Fully
Paid Share after implementation of the Fully Paid
Scheme of $15.34
If the BHP Shareholder subsequently disposes of
their Fully Paid Share, the adjusted cost base
(post the return of capital) will be used in the
calculation of any Australian CGT liability. The
method of calculation will depend on whether or
not the Fully Paid Share was acquired before
21 September 1999 and on the nature of the
BHP Shareholder (for example company, individual,
complying superannuation fund or trust). Where
the Fully Paid Share was acquired before
21 September 1999, the BHP Shareholder may
chose to index elements of the Fully Paid Share’s
cost base up to the September 1999 quarter, at
which point indexation has been frozen.
Alternatively, the gain may be eligible for the
discount capital gain method (refer to Part 8.2.5
for an explanation of this method which is not
available for companies). Where the Fully Paid
Share was acquired after 21 September 1999
and is disposed of more than 12 months after its
acquisition, no indexation is available and only the
discount capital gain method may be available.
For BHP Shareholders who acquire their Fully Paid
Shares by paying the amount owing on their Partly
Paid Shares, their cost base will depend on
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whether the Partly Paid Scheme is approved. If the
Partly Paid Scheme is approved, the cost base of
the Fully Paid Shares on payment of the amount
owing will equal the issue price of those Partly Paid
Shares less the Reduction Amount. If the Partly
Paid Scheme is not approved, the cost base for a
Partly Paid Shareholder on payment of the amount
owing on their Partly Paid Shares will be equal to
the issue price of those Partly Paid Shares.
8.2.4 Cost base of OneSteel Shares
Regardless, of whether the Fully Paid Shares
owned by a BHP Shareholder were acquired
before or after 20 September 1985, their
OneSteel Shares will fall within the Australian CGT
regime. Generally, the cost base for Australian
CGT purposes of the OneSteel Shares acquired
under the Fully Paid Scheme will be equal to the
amount of the return of capital which the BHP
Shareholder is treated as receiving under the Fully
Paid Scheme which was compulsorily applied to
acquire the OneSteel Share, namely $2.64 per
OneSteel Share.
If a BHP Shareholder were to sell their OneSteel
Shares on market at a price greater than the
OneSteel acquisition price, the OneSteel
Shareholder would realise a capital gain on the
amount of the excess.
If the price received on the market is less than
the OneSteel share acquisition price, the
OneSteel Shareholder will realise a capital loss
equal to the difference (shortfall).
8.2.5 Calculation of Australian CGT on disposal
As all OneSteel Shares will be acquired after
21 September 1999, there will be no indexing of
the cost base to adjust for inflation and only the
discount capital gain method may be available
(as mentioned in Part 8.2.3 above).
Where the Fully Paid Shares or OneSteel Shares
are held by individuals, complying superannuation
entities or trusts for more than 12 months, BHP
has received advice that they may be entitled to
claim a CGT discount in calculating the amount of
the capital gain. For an individual, the CGT
discount is worked out as follows:
(a) the individual must calculate the capital gain
on the difference between the price received
on the sale of the shares and the cost base
of the shares (no indexation);
(b) if the individual has any capital losses they
must be used to offset the capital gain; and
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PART 8
Tax Implications
(c) of the remaining capital gain (if any), only
one half (50% discount) of the capital gain is
then included in their assessable income.
For complying superannuation entities, the same
general methodology as above is used, with the
exception that two-thirds (33.3% discount) of the
remaining capital gain after the offset of available
capital losses (if any) is included in their
assessable income.
The methodology for trusts is complex and has
not been outlined in this Part. Trustees should
obtain specific tax advice in this regard.
For BHP Shares or OneSteel Shares which are
disposed of for a price less than their cost base,
the shareholder may incur a capital loss. This
capital loss may be available to offset against
capital gains in the same year of income or may be
carried forward for future years of income. It cannot
be used to offset other assessable income.
8.3 Overseas BHP Shareholders
8.3.1 US BHP Shareholders
Sullivan & Cromwell, US counsel to BHP, has
advised that the Spin-out should qualify as a
“tax free spin off” under section 355 of the
Internal Revenue Code of 1986, as amended,
for tax purposes.
If the Spin-out qualifies under Section 355 of the
Code, then for US federal income tax purposes no
gain or loss will be recognised by (and no amount
will be included in the income of) a US Holder
(as defined below) on the receipt of OneSteel
Shares. If however, the Spin-out does not qualify
under Section 355 of the Code, then for US
federal income tax purposes a US Holder will be
treated as receiving a taxable distribution in
amount equal to the fair market value in US
dollars of OneSteel Shares received, which will be
treated as a taxable dividend to the extent of
such holder’s pro rata share of BHP’s current and
accumulated earnings and profits (as determined in
accordance with US federal income tax principles);
any excess will be treated as a non-taxable return
of capital to the extent of such holder’s basis in
BHP Shares or ADSs and thereafter as capital gain.
For this purpose, a “US Holder” is a beneficial
owner of Fully Paid Shares or ADSs that is
(i) a citizen or resident of the US, (ii) a corporation
created or organised in the US or of any political
subdivision thereof, (iii) an estate whose income
is subject to US federal income tax regardless of
its source, or (iv) a trust if a United States court
can exercise primary supervision over the trust’s
administration and one or more US persons are
authorised to control all substantial decisions of
the trust.
The above referenced advice is based on the
Code, its legislative history, existing and proposed
regulations under the Code, published rulings and
court decisions, all as currently in effect and all
of which are subject to change, possibly with
retroactive effect. In addition, the advice is based
upon certain customary factual representations
made by BHP and OneSteel and customary
assumptions and may not apply to Fully Paid
Shareholders in special situations (such as Fully
Paid Shareholders who hold BHP Shares or ADSs,
as part of a straddle or conversion transaction).
The conclusions set forth above are not binding
upon the Internal Revenue Service (the “IRS”) and
no ruling has been or will be requested from the
IRS concerning the US federal income tax
consequences of the Spin-out.
The foregoing is only a summary of certain US
federal income tax consequences of the Spin-out
and is intended for general information only. US
Holders are encouraged to consult their own tax
advisors as to the US federal, as well as US state
and local and non-US, tax consequences to them
of the Spin-out in their particular circumstances.
8.3.2 United Kingdom BHP Shareholders
Freshfields (Solicitors, United Kingdom) has
advised that the Spin-out transactions will
probably not satisfy the conditions of section 136
of the United Kingdom Taxation of Chargeable
Gains Act 1992 and that they will therefore
probably give rise to a chargeable disposal for the
purposes of United Kingdom tax on chargeable
gains for those BHP Shareholders who are subject
to such tax in respect of their BHP Shares. Such
BHP Shareholders should seek advice in respect
of their own specific circumstances.
8.3.3 New Zealand BHP Shareholders
Chapman Tripp (Barristers and Solicitors,
New Zealand) has advised that it is likely that the
distribution arising from the Spin-out transactions
will be treated as a taxable dividend for New
Zealand resident BHP shareholders. New Zealand
residents should seek advice in respect of their
specific circumstances.