Contemplate how a sale of a company may occur and what the tax issues might be for the likely exit.
The exit could be undertaken by:
■ on-market takeover;
■ off-market takeover;
■ sale of the shares in the target company;
■ share buy-back;
■ capital reduction;
■ scheme of arrangement.
Consider whether the CGT discount is actually available (don’t just assume it is) by ensuring that:
■ shares have been held for more than 12 months, and consider specific acquisition rules that affect time shares are treated as being held;
■ check the company has met the rule on majority of its assets being owned for more than 12 months etc.
Undertake small business concession and exemptions analysis a long way out from sale. It is a complex area and requires time for planning to be undertaken.
Plenty of mistakes are being made by taxpayers, such as in the Bell’s case where the restructure did not work to reduce MNAV below the $6m threshold.
Check for non-resident exemptions for non-resident shareholders. Check also for the so called participation exemption in Div 768-G if offshore companies are involved.
Look for specific CGT traps, like CGT event K6 for pre-CGT shares held by a vendor in the target company, CGT event C3 for options etc. Checking for past issues as well as what might happen upon a sale.
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Check if the jurisdiction of registration of the company is in a jurisdiction and whether generally duty may be levied on a transfer of shares.
Consider landholder duty, transfer duty (marketable securities duty in NSW for example) and corporate trustee duty. Can the jurisdiction of registration be changed from NSW to Vic?).
Check if the company has undertaken a pre-23 May
2008 top-hatting restructure under subdivision 124-M to see if the cost base in the assets of the company achieved higher market value cost base uplifts.
Consider if stamp duty claw backs could occur if the target company holds assets that it had acquired under a corporate reorganisation exemption.
Undertake an analysis of the landholder duty, transfer duty and corporate trustee duty position for a likely sale. Notice the different thresholds for landholder duty (i.e. don’t assume landholder duty rules are consistent.
Is the target a member of a tax consolidated group? Is a valid tax sharing agreement in place to avoid the purchaser acquiring an entity that could have joint and several liability? Are arrangements in place that are clear as to how any post-acquisition amended assessments would be dealt with and paid?
Consider GST Grouping as it currently is undertaken, and review indirect tax sharing agreements to consider position for company that leaves the GST
Group.
Have tax consolidation elections been undertaken, and within the correct period?
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Identify and pre-plan for share or debt interests that could be affected by a sale of the company. Does debt have to be repaid if there is a change in control?
Do any options or employee share scheme (ESS, as defined in Div 83A) interests have crystallisation provisions for liquidity events or changes in control of the company? Can something be done in advance to vary these arrangements? How will a cancellation or variation of these debt or equity interests be treated for income tax and duty purposes?
Go to http://www.ato.gov.au/Business/Largebusiness/In-detail/Compliance-andgovernance/Mergers-and-acquisitions/
Consider the issues the ATO have pre-identified as being of interest:
■ understanding the context commercial environment and context in which the participants operate; and
■ understanding the transaction.
Sample area of concern for the ATO:
■ Private equity transactions.
■ Hybrid instruments offering arbitrage between jurisdictions.
■ Hybrid entities offering arbitrage between jurisdictions.
■ Uncommercial arrangements resulting in GST benefits.
■ Retail premiums paid on unexercised share entitlements.
■ Earn-out arrangements.
■ Consolidation issues: insertion of new head company lifts cost base of assets.
■ Consolidation issues: MEC group restructure facilitates tax-free disposal of non-TARP asset.
■ Dividend payment treated as proceeds of a sale.
■ Staggered sell down arrangements.
■ Exploitation of asset valuations to avoid capital gains tax.
■ Interaction of sections 25-90 and 23AJ offers tax benefits.
■ Blackhole expenditure.
Losses might be expected to be available going forward. Understanding past COT issues, documented SBT material can improve confidence and value for a purchaser.
Consider pre sale dividend issues:
■ duty risks
■ CGT issues, capital proceeds - Div 116 risks.
Check various OSR statements on the issue and also
TR 2010/4 for the capital proceeds risks of some presale dividend arrangements.
Consider international companies and opportunities afforded by subdivision 768-G. However, note the compliance issues that need to be reviewed under past CFC/FIF and s23AJ situations.
For non-residents there are some issues that might need to be attended to to avoid taxation in Australia.
Note the various warnings about arrangements that seek to avoid the principal asset test and TARP rules.
Leveraged buy out structures with Australian subsidiaries are of particular concern for the ATO.
Undertake work on the thin capitalisation analysis in advance to be comfortable on maximum allowable debt levels, and adjust accordingly.
Please contact your usual Revenue, Structuring and
Succession Team contacts.
©McInnes Wilson Lawyers 2013
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