Kick-start 2014
Key tax issues for 2014
1
Kick-start 2014 – corporate tax checklist
Mergers and acquisitions / capital management
Transfer pricing and BEPS
Part IVA
MITs
GST update
2
Mergers & acquisitions
/ capital management
Toby Eggleston & Narelle McBride
3
Key developments
Scrip for scrip deals
Warrnambool Cheese and Butter takeover – dividend issues
Unenacted measures
4

earn outs

buy backs

2013/14 budget announcements regarding consolidation ‘double benefits’

demerger relief for consolidated groups

200% diminishing value uplift for consolidation acquisitions
Fabig v FCT: Scrip for scrip rollover relief
For scrip deals not involving schemes of arrangement or public takeover bids, the
‘arrangement’ under which shares are acquired “must be one in which participation was
available on substantially the same terms for all owners…” (s.124-780(2)(c))
Purchaser initially offered to acquire all shares for a global price and was indifferent as to
how consideration was to be allocated among shareholders
Shareholders agreement required shareholders divide the sale proceeds in proportions
different to equity holdings
Shareholder
Ownership
Shareholder’s Agreement
50%
80%
Fabig
32.3%
15.5%
Robekesh & Kezweasel
16.3%
2.25%
Global Interactive
1.4%
2.25%
Dickinson
Was scrip for scrip roll-over relief available?
Fabig v FCT: Scrip for scrip rollover relief
Full Federal Court decision:
An ‘arrangement’ of the kind to which s. 124-780 is directed is an arrangement that meets the
composite requirements of the section
The ‘arrangement’ in this case was the contractual relationship entered into
Photon’s indifference did not form part of the relevant “arrangement” because of the terms on
which the parties did contract.
Photon may have been indifferent about the allocation of consideration when it made the offers
but the Shareholders’ Agreement meant that it was not open to the shareholders to accept
Photon’s offer on the same terms. They were contractually obliged to sell their shares for
different consideration and in consequence, participation in the share sales was not available to
them on substantially the same terms
6
The battle for Warrnambool Cheese and Butter Factory
15
7
Saputo’s 15 November offer
$9.00 cash less amount of permitted dividends


Saputo changes
bid to include
franked dividend
15 Nov
8
dividend of $0.46 if Saputo acquires 50.1%+ (franking credit of $0.20)
dividend of $0.85 per WCB Share if Saputo acquires 90%+ (franking credit of $0.36)
Saputo intends
to go
unconditional
Ex-dividend-date
WCB issues 7
page guidance
on dividends
Dividend
record date for
Saputo’s 15 Nov
bid
19 Nov
26 Nov
20 Nov
28 Nov
Franked dividends in Saputo’s 15 November offer
$9.00 cash less amount of permitted dividends

permitted fully franked dividend of $0.46 per WCB Share if Saputo acquires 50.1%+
(franking credit of $0.20)

permitted fully franked dividend of $0.85 per WCB Share if Saputo acquires 90%+
(franking credit of $0.36)
Saputo and WCB referred to franking credits as “may be of value of up to $0.56 per
share”.
WCB ‘intends to declare and pay the special dividends … subject to Saputo reaching
certain relevant interest thresholds’
Record date for dividends (26 November)
Saputo intended to go unconditional on 28 November
9
Franked dividends in Saputo’s 15 November offer
Required complex payment mechanism and adjustment provisions depending on:

whether shares acquired by seller pre-or post Record date;

when offer was accepted; and

if either or both dividends paid.
Saputo’s 15 November bid effectively unworkable due to uncertainty at Record date as to
whether dividends would be paid.
How would market operate post ex-date? A post ex-date purchaser could receive:

if Saputo acquired 90%:
$7.69

if Saputo acquired between 50.1% and 89.9%:
$8.54

if Saputo acquired less than 50.1%:
$9.00
On 20 November ASX announced that it would not support a basis of quotation that
indicates whether trading and settlement occurs with or without an entitlement to the
special dividends.
10
Saputo revises bid on 25 November
Saputo revises
bid, drops
dividends, just
cash of $9 or
$9.20 if 50.1%
Saputo changes
offer again
$9.00/ $9.20 if
50.1% / $9.40 if
75%/ $9.60 if 90%
Takeover Panel
interim orders Saputo unable to
process
acceptances
Bega revises bid
to adjust for
dividends
MG lodges
Takeover Panel
application
15 Nov
11
19 Nov
20 Nov
21 Nov
25 Nov
26 Nov
29 Nov
16 Dec
Franked dividends in Saputo’s bid: 25 November offer
$9.00 cash and additional $0.20 to be provided if 50% threshold reached
Permitted dividend proposal abandoned
Offer declared unconditional
$0.20 to compensate for lost franking credits in relation to $0.46 dividend, but no
compensation for franking credits associated with $0.85 dividend
12
Takeovers panel
MG application 26 November 2013 sought to reinstate permitted dividends proposal but
Record Date would only be set after % thresholds reached.
Panel orders:
13

interim order – Saputo not allowed to process acceptances

On 16 December Saputo gives undertaking to avoid declaration of unacceptable
circumstances

Retrospective / conditional dividends are “complex, creates uncertainty and
undesirable and (do) not want to see similar arrangements in future”
Saputo's THIRD revised bid: 16 December offer
All cash:
14
$9.00
unconditional
$9.20
if >50%
$9.40
if >75%
$9.60
if >90%
Takeovers Panel: 14 Jan 2014
draft Guidance Note on use of dividends in takeovers
Franking credits in the ‘headline’ offer price
Unacceptable to include value of franking credit in headline offer price
Bidder today announced that it is increasing offer for target by increasing the cash offer
from $1.50 to $1.90 per share (and further potential increase up to $2.07 per share) by
allowing shareholders to receive the 40c fully franked dividend and to receive up to a
further 17 cents per share in franking credits attached to the dividends declared.
Acceptable: add cash and cash dividend together. Value of franking should be separate
suitably qualified statement
Attached to the $0.40 fully franked dividend will be a franking credit of $0.17. Certain
shareholders will be able to use this as an offset to their liability for Australian tax,
although the franking credit itself needs to be included in taxable income and is
therefore subject to tax.
15
Takeovers Panel draft Guidance Note
Deduction for value of franking credits
Bids commonly contain a term reserving the bidder’s right to deduct the value of any
‘Rights’ attaching to the target shares that the bidder does not receive
‘Rights’ typically defined to include dividends, other than permitted dividends, and can
also include franking credits.
In that event the deduction is for the ‘value of franking credits as reasonably assessed by
the Buyer’.
Takeovers Panel – Bidder must make clear how any deduction for franking credits is
established by either a formula or fixed amount
Example – Bidder offers 40 cents for each share in Target. During the offer period, a fully franked
dividend of 14 cents per share is paid by Target. Bidder can lower the amount of cash it pays
shareholders to 23 cents, if the Bidder’s statement:
16
(a)
has provided that, for the purposes of the term allowing the, deduction of the value of
‘Rights’, Bidder will value franking credits at 50% of their face value (eg 3 cents); and
(b)
has established the basis for that figure
Key takeaways on using franked dividends in takeovers
Retrospective/ conditional dividends are not allowed
Description of value of franking credits:

cannot form part of the headline offer price; and

needs to be in a separate suitably qualified statement.
If ‘Rights’ are defined to include the value of franking credits then the bidder’s statement
needs to precisely specify how the adjustment will be made.
17
Buy-backs: comparison between current and proposed law
Now
Proposed
Dividend component = purchase price – share capital
account debit
Yes
Yes (if average
capital or approved
calc. used)
Share capital debit calculation: Average share capital per
share
Yes
Yes
if ATO approve
if ATO approve
No franking credit if buy back price greater than market
value
Yes
Yes
Tax value uplift if buy back price less than market value
(assuming no buy back)
Yes
No
Discount cap on buy-back
14%
None
Debit to franking account for ‘wastage’ for non-residents
Yes
Yes
Notional losses available for super funds, individuals and
trusts
Yes
No *
Extension of time to provide distribution statements
Yes
Yes
Application of anti-avoidance provisions: s. 45A, s. 45B,
s.177EA(5)(b) & s. 204-30
Yes
No
Share capital debit calculation: Slice when requested
18
* Loss available to the extent that buy-back price less than reduced cost base
Buy-backs: comparison between current and proposed law
Now
Proposed
Dividend component = purchase price – share capital
account debit
Yes
Yes (if average
capital or approved
calc. used)
Share capital debit calculation: Average share capital per
share
Yes
Yes
if ATO approve
if ATO approve
No franking credit if buy back price greater than market
value
Yes
Yes
Tax value uplift if buy back price less than market value
(assuming no buy back)
Yes
No
Discount cap on buy-back
14%
None
Debit to franking account for ‘wastage’ for non-residents
Yes
Yes
Notional losses available for super funds, individuals and
trusts
Yes
No *
Extension of time to provide distribution statements
Yes
Yes
Application of anti-avoidance provisions: s. 45A, s. 45B,
s.177EA(5)(b) & s. 204-30
Yes
No
Share capital debit calculation: Slice when requested
19
Unenacted measures – earn outs
TR 2007/D10
2010 Budget: Announced look through approach for qualifying earn-outs. Could apply new
‘law’ from 11 May 2010
December 2013: Look through approach will be enacted with effect from Royal Assent
Transitional ‘protection’ for taxpayers who relied on announcement
20
Unenacted measures – deductible liabilities
Head company
$10
acquisition
MV
Tax cost
Target
Reset
tax cost
Gain/loss
Assessable
adjust
Cash
10
10
10
Nil
Nil
Land
100
‒
100 70
Nil 30
Nil
(100)
‒
–
(100)
100
Deductible provisions
Nil
Consolidation ‘double benefit’ to be removed by recognising assessable income
21
Unenacted measures – intra-group TOFA liabilities
Consolidated group
Head co
Sub 1
Purchaser
$1,000 loan
Share sale
Sub 2
To prevent deduction for principal repayment on intra-group TOFA liabilities, on
exit the ‘cost’ of the liability (for Sub 2) and the asset (for Sub 1) will be set to
market value ($1,000)
22
Unenacted measures – intra-group value shift
Head company
No taxable
gain
Sub 1
Favourable
lease
MV: 100
MV cost base
• Div 112 (asset deal)
• ss 701-20 and 701-60
(share deal)
Sub 2
Sale 100
Land
Cost:
100
MV:
200 100
Double benefit to be addressed by limiting the cost base of the created asset to the
cost of creation (rather than market value)
23
Unenacted measures – asset churning
Foreign parent
Share sale
MEC or
consolidated group
Aust Co
Not Div 855 land
rich
Assets
Tax cost: 100
MV:
1,000
1,000 100
Double benefit to be addressed by disallowing the cost base step-up unless there has
been a change in majority ownership or a prior 12 month acquisition
24
Unenacted measures – consolidation/demerger interaction
The CGT event L5 exemption is not available for demergers and the tax cost setting rules
apply to demerged groups forming a consolidated group
Consider pre-disposal ‘care and maintenance’ to ensure no negative ACA in any leaving
entity

repay intra-group debts where possible

forgive any remaining balances

be careful of share capital tainting

be careful of restructure steps that create additional liabilities in the leaving entity
Consider pre-disposal ‘restructuring’ required to minimise ‘ACA skewing’ if the demerged
group reconsolidates
Be careful of Part IVA
25
‘ACA skewing’
Demerged consolidated group
Demerged consolidated group
Head co
Tax cost: nil
Not reset
Sub 1
Goodwill
Tax cost: nil
MV: 100m
Reset tax cost $nil
Head co
Tax cost: 40m
Not reset
Tax cost: 40m
Not reset
Sub 1
Sub 2
Plant
Tax cost: 40m
MV: 40m
Reset tax cost: $40m
Tax cost: $40m
Reset tax cost: $11m
Goodwill
Tax cost: nil
MV: 100m
Reset tax cost: $29m
26
Sub 2
Plant
Tax cost: 40m
MV: 40m
Reset tax cost: $11m
Unenacted measures – 200% diminishing value uplift
200% diminishing value uplift for assets acquired on or after 9 May 2006
Previous Government announcement that from 8 May 2007 this rule would not apply to
consolidation acquisitions
This proposed amendment will not proceed, so the 200% uplift is now (and was always)
available
Will taxpayers be penalised for ‘doing the right thing’?
‘…, the Government is developing a legislative measure to protect taxpayers who may
have self-assessed on the basis of an announced measure that will no longer proceed’
Will this ‘protection’ enable taxpayers to:
27

correct assessments that are now out of time?
(30 June taxpayers are not potentially out of time for 2007, 2008 and 2009
assessments)

obtain interest on their over payments?
Transfer pricing
and BEPS
Andrew Mills
28
BEPS
Recap the program – at OECD/G20 and in Australia
Why BEPS is important to governments and taxpayers
The most recent developments
What to expect in coming months
29
BEPS – The Program
G20/OECD

November 2012 – G20 Finance Ministers ask for diagnosis of the problem

12/2/2013 – OECD publishes report “Addressing BEPS”

19/7/2013 – OECD publishes “BEPS Action Plan”

5-6/9/2013 OECD Report to G20 Leaders (St. Petersburg)
Australia:
30

Assistant Treasurer speech 22/11/2012

formation of specialist reference group 10/12/2012

3/5/2013 – Issues Paper “Implications of the Modern Global Economy for the Taxation
of Multinational Enterprises” released by Treasury

24/7/2013 - Scoping Paper “Risks to the Sustainability of Australia’s Corporate Tax
Base” published by Treasury
The OECD Action Plan endorsed by G20
31
Issue
Action
Output
Deadline
1 Digital economy
Address challenges
Report
9/14
2 Arbitrage
Neutralise
Model/domestic law
9/14
3 CFCs
Strengthen regimes
Domestic law
9/15
4 Interest deductions
Limit base erosion
Domestic law/TPG
9/15 12/15
5 Harmful tax practices
Counter more effectively
Identify OECD/nonOECD/revise criteria
9/14
9/15 12/15
6 Treaty abuse
Prevent
Model/domestic law
9/14
7 PE
Prevent avoidance
Model
9/15
8-10 Transfer pricing
Place of value
TPG/Model
9/14 9/15
11-13 Transparency
Disclosure, data analysis
Recommendations/TPG
9/14 9/15
14 Dispute resolution
Make effective
Model
9/15
15 Multilateral treaty
Identify issues, then draft
New tax treaty
9/14 9/15
Australian response
Treasury Scoping Paper

Recommendation 1 – Produce better taxation statistics on international dealings of
multinationals and publish annual report on the health of the business tax system

Recommendation 2 – Review each tax treaty once a decade to ensure that it serves
the national interest

Recommendation 3 – Explore options to further improve international cooperation of
tax authorities

Recommendation 4 – Endorse the G20/OECD Action Plan with a comprehensive
work program to deal with the key drivers of BEPS
Ministerial Press Releases supportive of the exercise but no firm commitment to
recommendations
32
Why is this important?
It’s really all about the corporate tax base
Starbucks – payments for IP

why not McDonalds? Mastheads, etc
Intangible property generally (not just IP) is biggest concern

consider 3-D printing – future delivery of goods via downloaded IP that you “print off”
(make) yourself
Where is activity located?
Tension between those countries wanting to tax despite lack of presence versus
traditional approach
33
Newest Developments – OECD
25/09/2013 – public consultation on transfer pricing matters
27/09/2013 – OECD engages with developing countries on BEPS
22/10/2013 – Transfer Pricing Documentation + TP Aspects of Intangibles – Comments
received published
13/11/2013 – OECD consults on transfer pricing matters
13/01/2014 – OECD publishes comments received on Tax Challenges of the Digital
Economy
16/01/2014 – OECD publishes comment received on artificial avoidance of PE Status
34
Newest Developments - Australia
Treasury forms BEPS Tax Advisory Group

first meeting 28/11/2013

report of progress mainly at OECD and Treasury/ATO involvement in various
workstreams

subsequent consultation on certain draft OECD documents – input sought on Transfer
Pricing Documentation, Interest Deductions & Financial Payments, Transfer Pricing –
Intangibles
1/12/2013 – Australia assumes role of head of G20
35
OECD Deliverables - September 2014
Digital Economy in-depth report (Action 1)
Hybrid mismatch arrangements recommendations - both from a domestic and treaty law
perspective (Action 2)
Harmful tax practices - finalise the review (Action 5)
Tax treaties abuse – recommendations regarding preventative measures (Action 6)
Changes to the transfer pricing rules in relation to intangibles (Action 8)
Changes to the transfer pricing rules in relation to documentation requirements (Action 13)
Report on development of a multilateral instrument to implement the measures developed
from BEPS work (Action 15)
36
What to expect in coming months
Feb/Mar 2014 – OECD will be publishing Discussion Drafts related to September 2014
deliverables
Apr/May 2014 – Public Consultation

opportunity to provide input and influence final documents

September 2014 – Publication of reports, etc.
Treasury Papers? Australian responses to reports (or pre-empting reports?)
G20 – 4+ Finance Ministers meetings throughout 2014
G20 – Leaders Summit – 15-16 November 2014
37

have emphasised that will be something of substance adopted – clear actions

relationship with OECD reports
Transfer Pricing
“New” law, not so new?
ATO approach to TP – same as previously (per 2nd Commissioner)
NTLG TP group disbanded
New TP Advisory Group formed in light of OECD work
Recent work and input sought on
38

APAs

safe harbours & administrative concessions

revision of ATO publications – 27 rulings + 13 PSLAs

object of being shorter

initial focus on documentation and penalties rulings
Part IVA
Tim Neilson
39
What’s new?
Important insight into ATO approach to Part IVA
What?
NTLG consultative workshop on 18 July 2013 discussing fact patterns
Who?
Top of the food chain ATO technical officers
Why?
Ostensibly to understand whether ATO guidance on the 2012 amendments is warranted
Output?
Minutes published on 8 January 2014 setting out the ATO views
Focus was on purpose rather than tax benefit
Note qualifications!
40
Takeaways
ATO general approach

relaxed approach to “scheme” – change of plans examples

purpose – “how”, not “why”

“narrower” nature of the counterfactual enquiry
Interaction between the annihilation/reconstruction limbs

no greater clarity

ATO happy to try both limbs on – puts tension on scheme
Change of plans
41

narrow view of scheme

surprisingly relaxed view of purpose due to application of general approach
Takeaways (continued)
Can there be multiple reconstruction counterfactuals?

ATO parks the issue

… but softens the ground
RPS and gaming the debt/equity borderline

RPS don’t generally raise any s.177D(2) concerns

term changes also change commercial substance
Pre-disposal dividends
42

still in the “quite hard” basket – no general principle

clearly inflammatory - but hamstrung by RCI purpose finding
Takeaways (continued)
Accessing an intended benefit

eg, R&D concession

but compare small business roll-over example
Avoiding unintended outcomes

not a get out of jail free card
Relationship between Part IVA and other provisions

43
ATO view is that Part IVA is paramount
MITs
Adrian O’Shannessy
44
MITs: key developments
Issues with rules we have
Status of further reforms
45
MITs: rules we have
Rules we have
MIT withholding tax – 15% (Clean Buildings – 10%)
CGT election
Issues
Distributions to foreign pension funds
 non-qualifying investors
Distribution < fund payment
 section 98(3) rates on shortfall
ATOID 2011/58
 insurance companies taxed on tax deferred
46
MITs: further reforms – status
Limited Exposure Draft released 28 November 2013
1 July 2014 start?
Proposed Rule
Attribution of income
Fixed trust – Clearly Defined Rights
Unders and overs
Cost base step up
Division 6B abolition
Arm’s length rule
47
Good/Bad Note







Unless Division 6 reform better!
Only if CDR workable
Eliminates discretion/certainty
Penalty regime where none previously
But not yet included
But seemingly watered down
MITs: attribution of income
Beneficiary taxation according to:

rights under the terms of the trust

to both income according to accounting principles and capital
Implications:

no present entitlement?

refined proportionate?

no “trust law” income?

drafting still under development
Multiple classes of units

48
separate calculations
MITs: unders and overs
< 5% net income or < 0.4% net assets

GIC if under exceeds

penalty if careless/reckless/intentional
Character retention
Licence in constitution/disclosure?
49
MITs: Clearly Defined Rights
Trustee discretions don’t significantly affect market value of units
= fixed trust for rollover + loss carry forward
= access to:
• unders and overs regime
• income attribution election
50
GST update
Andrew Howe
51
Current GST issues
Upcoming GST legislative changes

restricting GST refunds (Division 142)

reverse charge SOGCs

cross border changes
The MBI Properties fall out
Other GST issues
52
Division 142 GST Refunds
Latest ‘proposal’ – still backdated to 17 August 2012
Risk – no refund if GST borne but can’t show not passed on (eg. B2C)
Benefit – current period adjustment if reimburse
Process – need adjustment notes
53
Proposed Reverse Charge SOGC
Supply of a going concern
A
B
$200,000
(GST exclusive price)
Remits
GST = $20,000
Entitled to
an ITC = $20,000
Nil net amount of
GST [GST paid and
ITC claimed in the
same tax period]
54
Reverse-charged SOGC
Original proposal

replace GST-free SOGCs with reverse charge

‘wider range’ of SOGCs
Treasury Paper
55

‘substantially’ all things necessary

previously been & capable of operation

margin scheme carve out

Division 135 repealed

changes to bad debt rules

stamp duty risk!!
Reverse-charged SOGC
Option fees will be taxable
Adjustments for past option fees?
Grandfathering?
Pre-stamping?
Transitional clauses?
56
Cross border changes
Narrow ‘connected with Australia’ test so many NR suppliers that currently ‘unnecessarily
drawn in’ are taken out of the GST system.
Payoff: expanded Division 84 to include goods
Balance ‘simplifying cross-border transactions’ and ‘maintaining integrity of revenue base’
Services and goods: ‘done in Australia’ or ‘goods delivered’ by NR not CWA if supply is to
GST registered business with Aust presence and NR supplier:
57

does not have an ‘Australian business presence’; or

is not supplying through such a presence.
‘Provided’ in Aust, but GST-free
Goal: avoid unnecessary NR registration for ITCs
Method: relax section 38-190(3) to exclude supplies made to NR, but provided in Aust to:

GST registered entity (ECP irrelevant?);

employee/office holder (acting as such) of reg’d entity; or

employee/office holder (acting as such) of unreg’d NR will full ECP.
Key issues
58

onus still on resident supplier;

still applies if NR recipient is registered.

options: taxable unless info? No Div 69 services?
Cross-border changes
59
Cross-border changes: Impacts
Current pricing: inclusive or plus GST?
Contractual warranties for NR supplies:

recipient registered (reliance on ABR?);

has GST PE?
Contractual warranty for recipient:

60
no GST PE/ not ‘carried on in Aust’ (note ABN withholding)
ATOID 2013/30 v MBI Properties
Settlement
16 April
VENDOR OWNS
PURCHASER OWNS
Tax Inv.
1 April
FEB
MAY
MAR
Tenant pays
1 April $100,000
+ 10,000 GST
61
MBI Properties fallout
Special leave hearing expected April/May
Treasury’s (implied) view: await special leave hearing
Impact of Willmott Growers?
ATO’s interim DIS (draft 21 Nov):

acknowledge Division 135 impact

GSTD 2012/1 and GSTD 2012/2 still apply (s. 357-60(3) TAA?)

refund notice
Protective clauses?
62
Other GST issues
Consideration/nexus/multiparty: AP Group

car dealer payments: some consideration for retail sale, not wholesale acquisition;
some for no supply – ‘overall business relationship’
‘Who are you?’

trusts/trustees, partners/partnerships (Happy Days case)
RITC item 32, ASFs
63
G&F’s specialist
publications
Tax Brief Newsletter – published when tax
‘events’ arise
Weekly Tax Highlights – published weekly
64
Speaker contact details
65
Toby Eggleston
Tim Neilson
Director
+61 3 9288 1454
toby.eggleston@gf.com.au
Special Counsel
+61 3 9288 1054
tim.neilson@gf.com.au
Narelle McBride
Adrian O’Shannessy
Director
+61 39288 1715
narelle.mcbride@gf.com.au
Director
+61 3 9288 1723
adrian.o’shannessy@gf.com.au
Andrew Mills
Andrew Howe
Director
+61 2 9225 5966
andrew.mills@gf.com.au
Director
+61 2 9225 5919
andrew.howe@gf.com.au
www.gf.com.au