The Australian Tax Board (ATO) confirmed that spin-off tax relief was available in a collective decision regarding the spin-off of Cannon Resources Limited shares (Cannon) by Rox Resources Limited (Rox).
This notwithstanding the fact that Cannon offered to undertake a post-split fundraiser on condition that the split occurs. The capital increase offer was made on the basis of a prorated priority offer to eligible Rox shareholders, with a separate offer for any amount missing from both eligible Rox shareholders (for an amount greater than their right under the priority offer) and to new investors.
Although this is not explicitly addressed in the class decision, it is clear that the ATO did not consider the post-split capital increase as part of the ârestructuringâ in the split in order to come to its conclusion.
This is a welcome move for taxpayers, which helps clarify the ATO’s perspective on post-split capital increases in TD Tax Determination 2020/6.
On September 29, 2021, the ATO published RC 2021/63 concerning the split by Rox where:
Rox transferred its nickel projects (the Fisher East Nickel project and the Collurabbie Nickel project) to its wholly owned subsidiary Cannon as part of an internal restructuring; and
Rox undertook an equal capital reduction satisfied through an in-kind distribution of 36.45 million Cannon shares (representing approximately 81% of Rox’s shareholding) to its shareholders (the split).
Subsequently, Cannon began trading on the ASX after finalizing its offers to raise $ 6 million in share capital, which were conditional on the completion of the spin-off. The capital increase offers involved a prorated priority offer of 30 million Cannon shares (representing 40% of the issued share capital), as well as a tie-in option for three shares issued, to eligible Rox shareholders (Priority offer). Another short offer was made to Rox shareholders (in excess of their allocation under the Priority Offer) and to new investors (Short Offer) (together, the Offers). The Offers have not been subscribed.
The ATO’s position regarding the split relief rules is that all steps that occur under a single reorganization plan will generally constitute ârestructuringâ for the purposes of Articles 125-70 (1). Therefore, the ârestructuringâ is not necessarily limited to the demerger itself, but can also include previous and / or subsequent operations, such as capital increases.
In this case, the Offers were clearly envisaged at the time of the split because they were conditional on the completion of the split.
For the purposes of the split-off rules, in the context of the restructuring, the shareholders of the group resulting from the split must:
become owners of at least 80% of the shares of the split entity (the â80%â requirement);
not receive anything else (for example, cash); and
acquire the same proportion of shares (in number and market value) in the split entity as their proportional interest in the split entity before the restructuring (the âproportionalityâ requirement).
The subsequent offers could have failed both the 80% and the proportionality requirements if they had been seen as part of the restructuring. This is due to Offers involving:
issuance of shares equivalent to approximately 40% of the total issued share capital of Cannon;
the potential for Rox shareholders to exceed their prorated allocation under the spin-off by participating in the Short Offer; and
the participation of new investors in the Short Offer.
Therefore, the fact that the split relief was available implies that the ATO did not consider the offers to be part of the restructuring.
This result is broadly consistent with example 1 in TD 2020/6, where the ATO noted that a capital increase subscribed post-spin-off, following the listing of a spin-off subsidiary on the ASX for pursue other growth opportunities, would not be part of the restructuring for the purposes of s. 125-70 (1). In the case of Cannon, the offers were made to obtain additional funds for significant exploration activities on its nickel projects. It is obvious that the fact that the offers were not subscribed was not considered by the ATO to be fatal to this analysis.
It is also evident that the ATO viewed the Cannon split as distinct from the circumstances of the ineligible split described in Example 2 of TD 2020/6. Example 2 dealt with a de facto model whereby, prior to the spin-off, the parent company had negotiated for an unrelated third party to acquire a “significant proportion” of the shares issued by the subsidiary as part of the capital raising. . In this regard, the ATO noted:
“[t]The fact that the raising of capital presents one or more characteristics likely to modify the holdings in Sub Co is significant. This suggests that the plan involves more than a capital increase that coincides with the separation of Sub Co, and is designed to change the economic position of the shareholders of Sub Co. â
As detailed in our Tax Insight here, the Tax Council (BoT) recommended the introduction of a general corporate restructuring rollover to replace a number of bearings, including split relief. The recommended changes are largely aimed at reversing the impact of the ATO’s restrictive interpretation of the split concession and should clarify that splits followed by a pre-ordered capital increase should be eligible for relief. of the split. Despite the great interest of taxpayers in clarifying the tax rollover rules, the federal government has not yet responded to the BoT’s recommendations and the timing for the introduction of these rules is therefore far from clear.