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Tax and Duty Issues of Buying Shares or Units in an Entity over Assets


In recent times there has become a growing popularity in transacting at the shareholder/unitholder level as opposed to selling the assets themselves. This is becoming the preferred transaction structure for several reasons including:

  • for shares, having no duty consequence in Queensland (unless the company is a landholder) in contrast to dealing with the assets which are still subject to conveyancing rates;

  • not disturbing third party dealings or changing the profile of the trading entity (subject to a review of change of control clauses in key contracts and agreements);

  • the potential to form an income tax consolidated group facilitating the subsequent movement of assets within the group without income tax (or duty, usually); and

  • the generous revenue concessions granted to individuals and trusts from a capital gains tax perspective – with both being able to access the 50% general discount and if applicable, the Small Business CGT Concessions.

The pitfalls can however undermine the initial advantages of no duty or disturbance of third party dealings if they are realised too late. These are outlined below.


1. Landholder and corporate trustee


The concept of a landholder varies from state to state but in Queensland and New South Wales the threshold is $2m and requires an analysis of the current market (not land tax or rateable value) of the property and fixtures. Borderline cases should have valuations to support the conclusions of a client and their adviser.


If a target is a landholder, an associate inclusive acquisition of 50% or more will incur duty at conveyancing rates, notwithstanding that it is a share sale.


In addition, Queensland has a unique regime that attaches duty to shares in corporate trustees for non-fixed trusts that hold Queensland dutiable property. Unless those trusts are family trusts with shares transacted within the family for duty purposes (nothing to do with ‘family trust elections’), conveyancing rates of duty can apply.


While relatively obscure, these issues do come up in estate and succession planning engagements or where advisers get creative with ways to transfer control of non-fixed trusts between arm’s length parties.


2. Pre-CGT assets and interests


Take a share sale for example, while the shares themselves may remain unchanged since September 1985 - if, just before the disposal of the shares, the market value of post-CGT assets in the underlying company is more than 75% of the company’s total value, a portion of those shares (i.e. that reflects, on a reasonable basis, the post-CGT property of the company) will effectively be treated as post-CGT, with some cost base modifications.


A more common issue occurs when there has been a change in the majority “ultimate owners” of pre-CGT interests in pre-CGT entities with pre-CGT assets. Pre-transaction changes in ultimate ownership of the underlying pre-CGT assets (in most cases, those individuals who have direct or indirect ownership interests in the asset owner) will affect the pre-CGT status of the assets in the entity where more than 50% of all ultimately held interests are post CGT interests.


This means that a post-CGT change of more than 50% of those ultimate interests would cause the pre-CGT assets to lose that status without any apportionment. This may be acceptable to the exiting party, but it is not ideal for the remaining party.


3. Carry forward tax losses


A change of ownership of less than 50% can occur in a loss carrying entity and an entity can continue to rely on having the same owners for the purposes of carrying forward tax losses.


If however, the change is 50% or more then the entity can no longer rely on the same owner test and must rely on the same or similar business test (depending on when the losses were incurred) which can be far more challenging to satisfy. Where the target has losses that the purchaser intends to utilise, it clearly warrants considerable upfront attention to ensure that the alternative test can be met.


4. Debit loan accounts


Particularly in the context of a seller looking to apply the small business CGT concessions, what can cause issues with eligibility are non-active debit loans (i.e. money lent into the group that is an asset on the balance sheet but is not a business asset as the lender is not in the business of lending money).


To the extent that the value of such loans is at least 20% of the market value of the active assets of an entity, this can cause the interests in that entity to fail the active asset test, if the loans have been in place at that value for too long. This still catches people out and is an important review point when structuring a transaction from the outset with access to the concessions in mind.


5. Entity elections


One of the hardest pitfalls to rectify pre-transaction is in the context of the many companies (and to a lesser extent unit trusts) that have made (usually incorrectly) interposed entity or family trust elections as part of their involvement in broader groups.


Given that such elections cannot be revoked (except in limited circumstances), these elections often render a sale of underlying shares or units commercially impossible as despite a non-family group member paying market value for the interests, family trust distribution tax would apply to any post acquisition dividend or distribution received by that third party. Consequently, one of the first items of due diligence if contemplating the purchase of shares or units is to seek confirmation that no such elections have been made.


Revenue considerations, while important, should not unnecessarily be a deal breaker when looking at the commercial objectives involved. While most transactions can be structured to manage the perceived pitfalls outlined above (if caught early enough), the devil, as they say, is always in the detail.


Disclaimer

This information is provided solely for general information purposes and is not intended as professional advice. Readers should not act on the information contained therein without proper advice from a suitably qualified professional.


We expressly disclaim all liability for any loss or damage to any person or organisation for the consequences of anything done or omitted to be done by any such person relying on the contents of this information.

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