Tax on corporate transactions in Australia: overview

A Q&A guide to tax on corporate transactions in Australia.

The Q&A gives a high level overview of tax in Australia and looks at key practical issues including, for example: the main taxes, reliefs and structures used in share and asset sales, dividends, mergers, joint ventures, reorganisations, share buybacks, private equity deals and restructuring and insolvency.

To compare answers across multiple jurisdictions, visit the Tax on corporate transactions Country Q&A tool.

The Q&A is part of the PLC multi-jurisdictional guide to tax on corporate transactions. For a full list of jurisdictional Q&As visit www.practicallaw.com/taxontransactions-mjg.

Karen Payne, Rhys Guild and Liz von Muenster, Minter Ellison
Contents

Tax authorities

1. What are the main authorities responsible for enforcing taxes on corporate transactions in your jurisdiction?

The Australian Taxation Office (ATO) is the federal agency responsible for the administration and collection of income tax (which includes capital gains tax (CGT)), fringe benefits tax, and goods and services tax (GST).

Each of the states and territories has an Office of State Revenue that is responsible for the administration and collection of state taxes and duties including stamp duty, land tax and payroll tax.

Pre-completion clearances and guidance

2. Is it possible to apply for tax clearances or obtain guidance from the tax authorities before completing a corporate transaction?

A tax clearance procedure is available for federal taxes from the ATO (see Question 1). A private binding ruling can be obtained for a corporate taxpayer or a class ruling can be obtained on behalf of a class of taxpayers (for example, all of the shareholders in the company) in appropriate circumstances. Private rulings set out the ATO Commissioner's opinion about how tax laws apply, including the following:

  • Income tax.

  • Fringe benefits tax.

  • Franking tax.

  • Withholding tax (mining and non-resident).

  • Excise duty.

  • Fuel tax credits (net fuel amount).

  • Excise product grants and benefits including the following fuel schemes:

    • energy grants;

    • cleaner fuel grants; and

    • product stewardship (oil) benefits.

  • Indirect taxes:

    • GST;

    • luxury car tax (LCT);

    • wine equalisation tax (WET).

The ATO provide written advice (in the form of a ruling) that provides full protection from underpaid tax, penalties and interest in relation to an adjusted assessment. A private ruling only relates to the applicant taxpayer and cannot be relied on by another entity. The ruling does not provide full protection where the full facts are not given, or circumstances change.

Private rulings can also be obtained from each of the offices of state revenue in respect of stamp duties.

 

Main taxes on corporate transactions

Transfer taxes and notaries' fees

3. What are the main transfer taxes and/or notaries' fees potentially payable on corporate transactions?

Stamp duty

Key characteristics. This duty generally applies to transactions, or more specifically, documents giving effect to transactions. The scope of the duty has been significantly reduced in recent times so that it is now predominantly a land transfer tax. Stamp duty on mortgages, share transfers and business asset transfers have been eliminated in all states and territories except as follows:

  • Duty on share transfers, which is still payable in New South Wales and South Australia until 1 July 2012.

  • Duty on transfer of business assets, which is still payable in New South Wales and South Australia until 1 July 2012, in Western Australia until 1 July 2013 and in Queensland and the Northern Territory indefinitely.

  • Mortgage duty, which is still payable in New South Wales until 1 July 2012.

Triggering event. A transfer of assets and interests in assets, and the creation of an interest or increased interest in an asset.

Liable party/parties. The buyer is generally liable for this duty (with the exception of Queensland and South Australia where the seller and purchaser are jointly and severally liable for the duty). In some transactions involving landholding entities, the entity can also be jointly and severally liable for the duty.

Applicable rate(s). Rates vary between states (from 4% up to 6.75%) but typically transfer duty/land holder duty rates are around 5.5%.

Corporate and capital gains taxes

4. What are the main corporate and/or capital gains taxes potentially payable on corporate transactions?

Corporation tax

Key characteristics. Corporation tax is payable at the rate of 30% (as at 2012) by all companies, which includes:

  • Corporate limited partnerships.

  • Trustees of corporate unit trusts.

  • Public trading trusts.

The Government has proposed that companies that are small business entities (aggregated turnover less than A$2 million) will be taxed at a reduced company tax rate of 29% from the 2012/13 income year (as at 1 March 2012, US$1 was about A$0.92). Legislation to give effect to this change has not been enacted, to date.

Triggering event. Taxable income is calculated by deducting all allowable deductions from assessable income. Resident taxpayers are generally assessed on their worldwide income (subject to specific exemptions) and non-residents on Australian sourced income only.

Net capital gains form part of assessable income. That is, there is no separate CGT. A capital gain arises when a CGT event occurs, such as, the sale of an asset. Generally, capital gains that are made on CGT assets that were acquired on or after 20 September 1985 are taxable.

Liable party/parties. Resident and non-resident taxpayers are liable for CGT. Residents are liable for CGT on assets worldwide. Non-residents are only taxable on assets that have a connection with Taxable Australian Property, that is:

  • Real property and other land interests (including an interest in Australian mining, quarrying and prospecting rights).

  • Indirect interests in land (equity holdings of 10% or more in "land rich" entities, that is, where the market value of Australian land assets is more than 50% of the total market value of all the assets of the entity).

  • Assets used at any time in carrying on a business through a permanent establishment in Australia.

  • An option or right to acquire any of the above assets.

Applicable rate(s). Since capital gains are assessed as part of taxable income, the general income tax rates apply. For companies, this is 30%.

Value added and sales taxes

5. What are the main value added and/or sales taxes potentially payable on corporate transactions?

GST

Key characteristics. GST is a broad-based tax of 10% on most goods, services and other items sold or consumed in Australia. The tax applies to all taxable transactions in a supply chain but generally business taxpayers claim a credit or refund for the GST they have incurred in acquiring supplies. So while GST is paid at each step in the supply chain, businesses do not generally bear any actual economic cost of the tax. The cost of GST is borne by the final consumer, who cannot claim GST credits.

The tax is collected by businesses and remitted to the ATO.

Triggering event. Generally, a taxable supply within Australia. Most goods, services and other things sold or provided within Australia are taxable.

There are some exceptions as follows:

  • GST-free sales are not subject to GST, these include:

    • most basic foods;

    • some education courses;

    • supplies of going concerns;

    • qualifying farmland (if used for a farming business); and

    • some medical, health and care products and services.

  • Input taxed supplies that include financial supplies (that is, dealing in securities or lending or borrowing money) and renting out residential premises. However, the supplier is also limited in its ability to claim input tax credits or refunds.

Liable party/parties. GST is collected by the seller and is paid by the buyer as part of the purchase price or consideration.

Applicable rate(s). GST is a flat rate of 10%.

Other taxes on corporate transactions

6. Are any other taxes potentially payable on corporate transactions?

There are no other taxes potentially payable (see Questions 3 to 5).

Taxes applicable to foreign companies

7. In what circumstances will the taxes identified in Questions 3 to 6 be applicable to foreign companies (in other words, what "presence" is required to give rise to tax liability)?

Stamp duty

Stamp duty applies to resident and non-resident taxpayers. The rates of stamp duty range between 4% and 6.75%, depending on the jurisdictions.

Corporate and CGT

Foreign residents are taxed on their Australian sourced income unless the terms of a double taxation agreement (DTA) limit Australia's right to tax that income.

Generally, non-residents that benefit from any DTA are not taxed on business profits in Australia unless they have a taxable presence (that is a permanent establishment).

Non-resident entities that do not have the benefit of a DTA are taxed on their Australian sourced income, which can include an amount of profit attributable to any permanent establishment in Australia under Australian transfer pricing rules.

The following income classes are generally taxed on a final withholding tax basis:

  • Interest at a rate of 10%.

  • Unfranked dividends at a rate of 30% but may be limited by a DTA.

  • Royalties at a rate of 30% but may be limited by a DTA.

GST

An enterprise with turnover that meets or exceeds the registration turnover threshold of A$75,000 (excluding GST) must register for GST. The threshold is greater for certain entities (for example, A$150,000 for certain not-for-profit entities).

If an enterprise does not meet the registration requirement it may choose to register for GST. This allows the enterprise to claim input tax credits on GST incurred in acquiring supplies in Australia. However, this means that the enterprise becomes liable for GST on any taxable supplies it makes.

 

Dividends

8. Is there a requirement to withhold tax on dividends or other distributions?

Dividend withholding tax must be withheld from any unfranked dividend payment that is made to a non-resident where any of the following applies:

  • According to the taxpayer's records, the shareholder has an address outside Australia.

  • The payee/shareholder has authorised the payment to be made to an address outside Australia.

  • The payee/shareholder is a non-resident and an individual or agent received the payment on behalf of the taxpayer.

Generally, the rate is 30%. However, this may be reduced under the terms of any DTA, generally to 15% but may be lower.

Where a payment is made to a non-resident, the payment must be reported in the annual investment income report, even if the payment is not subject to non-resident withholding.

Interest withholding tax (10%) must similarly be withheld from payments or distributions that are interest or in the nature of interest. This can include distributions on interests that qualify as debt for Australian tax purposes.

 

Share acquisitions and disposals

Taxes potentially payable

9. What taxes are potentially payable on a share acquisition/share disposal?

For the buyer

The following are relevant for the buyer:

  • Stamp duty. Stamp duty applies at the rate of 0.6% on a transfer of unquoted shares where the company is registered in New South Wales or South Australia. Marketable securities duty will be abolished in New South Wales and South Australia from 1 July 2012. In general, land holder or land rich duty applies in all states and territories where an interest of either 20% or 50% is acquired in a land rich or landholding entity (the percentage depends on the jurisdiction and the type of entity).

    Land rich or a landholder means that the market value of the company's assets that are Australian real property and other interests in land (including mining interests) is more than a specified value, for example A$2 million in New South Wales.

  • Corporate and CGT. The cost base for the shares is set at acquisition time for corporate income tax or CGT purposes. Where 100% of the company is acquired and it joins a tax consolidated group, then the cost base for the shares is effectively pushed down to the underlying assets at the acquisition time, thereby setting the cost base of the assets based on the cost base of the shares. Outside of tax consolidation, the cost base set for the shares is relevant on any subsequent disposal. The corporate tax rate is 30% (2012).

  • GST. An acquisition of shares is a financial supply and no GST is payable.

For the seller

The following are relevant for the seller:

  • Stamp duty. No stamp duty is payable by the seller. With the exception of South Australia where the seller and buyer are jointly and severally liable for marketable securities duty at the rate of 0.6% on a transfer of shares. Marketable securities duty will be abolished in South Australia from 1 July 2012.

  • Corporate and CGT. Corporate income tax or CGT can apply on the sale of shares. Where the share sale will result in a company leaving a tax consolidated group, then the cost base for the shares sold is effectively reconstructed based on the underlying tax cost base of the assets that the leaving company is taking. Otherwise the cost base is generally the actual cost adjusted for related acquisition and sale costs. The corporate tax rate is 30% (2012).

  • GST. A sale of shares is a financial supply and no GST is payable.

Exemptions and reliefs

10. Are any exemptions or reliefs available to the liable party?

Corporate reconstruction relief

Corporate reconstruction relief from stamp duty is available for the transfer of assets within, or the interposition of entities into, the current corporate structure, provided certain requirements are met. The requirements include a 90% ownership test and, in some jurisdictions, a pre-association period and a post-association period.

Non-resident exemptions from CGT

A non-resident is not subject to CGT on a sale of shares in a company unless the company is land rich (see Question 9, For the buyer: Stamp duty).

Scrip for scrip rollover

A CGT rollover is available where shares in a company are sold and the consideration for the sale is shares in the acquiring entity (or its ultimate parent) and the acquiring entity either:

  • Acquires at least an 80% shareholding interest.

  • Increases its shareholding to 80% or more.

Tax advantages/disadvantages for the buyer

 
11. Please set out the tax advantages and disadvantages of a share acquisition for the buyer.

Advantages

Tax losses and franking credits remain with the entity transferred. The tax losses are generally only available where the same business is carried on.

Lower stamp duties apply on a share transfer unless the entity acquired is land rich (see Question 9, For the buyer: Stamp duty).

Disadvantages

The principal disadvantages include the increased level of legal and tax due diligence required and the fact that the buyer inherits the acquired company's tax risks (subject to the availability, quality and reliability of any tax indemnities). The buyer also inherits the tax cost base of the company's assets unless it is joining a tax consolidated group (which provides an opportunity to reset the cost base of the assets to the cost base of the shares acquired).

Tax advantages/disadvantages for the seller

12. Please set out the tax advantages and disadvantages of a share disposal for the seller.

Advantages

Most share sale transactions are regarded as capital transactions. This allows both capital and revenue losses to be available to offset any taxable capital gains.

Disadvantages

The seller may need to conduct seller due diligence and prepare and provide access to a related data room, which is an electronic or physical room containing all relevant contracts, financial reports, and so on, relating to the entity or entities to be sold.

Transaction structures to minimise the tax burden

13. What transaction structures (if any) are commonly used to minimise the tax burden?

Tax consolidation

The tax consolidation rules broadly allow a share transaction to produce the same outcome as an asset acquisition for a buyer.

 

Asset acquisitions and disposals

Taxes potentially payable

14. What taxes are potentially payable on an asset acquisition/asset disposal?

For the buyer

The following are relevant for the buyer:

  • Stamp duty. Stamp duty is payable on any land acquisitions. The rates of stamp duty range between 4% and 6.75%, depending on the jurisdictions.

  • Corporate and CGT. The purchase price for the asset generally establishes its:

    • tax cost base; and

    • starting cost base, where it is eligible for depreciation or amortisation deductions.

  • GST. GST may be payable on asset acquisitions unless they form part of a going concern. Whether to apply a going concern concession to a sale is sometimes an area for disagreement between the seller and the buyer. GST is payable at the rate of 10%. Specifically, the benefit of applying the going concern concession is generally derived by the buyer (because stamp duty is calculated on the GST inclusive price), but the risk of incorrectly applying the concession is prima facie borne by the seller.

For the seller

The following are relevant for the seller:

  • Stamp duty. No stamp duty is payable for the seller (with the exception of Queensland and South Australia where the seller and buyer are jointly and severally liable for the duty. The rates of stamp duty range between 4% and 6.75%, depending on the jurisdictions.

  • Corporate and CGT. Corporate income tax and CGT may apply on the disposal of the asset. Where a depreciation deduction has been available in relation to the asset, then any gain on disposal is a revenue gain (including recapture of past depreciation deductions). The corporate tax rate is currently 30% (2012).

  • GST. GST is collected by the (GST registered) seller and remitted to the ATO where the asset sale is not part of a going concern.

Exemptions and reliefs

15. Are any exemptions or reliefs available to the liable party?

Tax consolidation

Asset transfers between members of the same tax consolidated group are disregarded for tax purposes. That is, corporate reorganisations generally do not attract corporate income tax or CGT where the group has elected to form a tax consolidated group.

Rollover relief is also available for transfers from or to subsidiaries outside Australia where the property is otherwise Taxable Australian Property (see Question 4, Corporation tax: Liable party/parties).

Tax advantages/disadvantages for the buyer

16. Please set out the tax advantages and disadvantages of an asset acquisition for the buyer.

Advantages

The advantages include:

  • Lower legal and tax due diligence.

  • No inherited tax risks.

  • Cost base for asset is aligned to purchase price.

Disadvantages

Additional stamp duty and GST may be payable on an asset acquisition.

Tax advantages/disadvantages for the seller

17. Please set out the tax advantages and disadvantages of an asset disposal for the seller.

Advantages

No seller due diligence is required.

Disadvantages

Asset sales may be revenue or capital transactions for the seller. However, capital losses are not available to offset revenue gains.

Transaction structures to minimise the tax burden

18. What transaction structures (if any) are commonly used to minimise the tax burden?

There are no relevant minimisation structures.

 

Legal mergers

Taxes potentially payable

19. What taxes are potentially payable on a legal merger?

Income tax

Shareholders are liable for income tax or CGT on the disposal of their shares as part of the legal merger.

Corporate and CGT

The entities may be liable for corporate income tax or CGT as part of the legal merger.

Exemptions and reliefs

20. Are any exemptions or reliefs available to the liable party?

Scrip for scrip rollover

A CGT rollover is available where shares in a company are sold and the consideration for the sale is shares in the acquiring entity (or its ultimate parent) and the acquiring entity either:

  • Acquires at least an 80% shareholding interest.

  • Increases its shareholding to 80% or more.

Transaction structures to minimise the tax burden

21. What transaction structures (if any) are commonly used to minimise the tax burden?

There are no relevant minimisation structures.

 

Joint ventures

Taxes potentially payable

22. What taxes are potentially payable on establishing a joint venture company (JVC)?

Corporate and CGT

Transfers of assets to the joint venture company are taxable at the corporate tax rate of 30% (2012).

GST

Transfers of assets to the joint venture company are generally subject to GST unless the going concern concession can be applied (see Question 14, For the buyer: GST). Whether the joint venture company is able to claim a credit for the GST depends on what activities it undertakes.

Exemptions and reliefs

23. Are any exemptions or reliefs available to the liable party?

There are no relevant exemptions.

Transaction structures to minimise the tax burden

24. What transaction structures (if any) are commonly used to minimise the tax burden?

There are no relevant minimisation structures.

 

Company reorganisations

Taxes potentially payable

25. What taxes are potentially payable on a company reorganisation?

Stamp duty

Corporate reorganisation relief is generally available for asset transfers between related party entities. However, there may be a requirement for the transfer to remain associated for a minimum period of time, both before and following the asset transfers.

Corporate and CGT

Transfers of assets between members of a tax consolidated group are disregarded for corporate income tax purposes.

GST

GST relief is available where the transferor and the transferee are part of the same GST group. While the grouping rules are complex, companies that are more than 90% commonly owned are eligible to form a GST group, as a general principle.

Exemptions and reliefs

26. Are any exemptions or reliefs available to the liable party?

There are no relevant exemptions.

Transaction structures to minimise the tax burden

 
27. What transaction structures (if any) are commonly used to minimise the tax burden?

There are no relevant minimisation structures.

 

Restructuring and insolvency

28. What are the key tax implications of the business insolvency and restructuring procedures in your jurisdiction?

Tax implications for the business

The making of a winding-up order has no immediate impact on the legal personality of a company, which remains in existence until it is dissolved.

The company's assets do not vest in the liquidator unless a court makes an order to that effect, unlike the position in bankruptcy (Corporations Act 2001, section 474(2)).

On the making of a winding-up order, control of the company's affairs is taken from the directors and vested in the liquidator, who may carry on the business of the company so far as is necessary for the beneficial disposal or winding-up of that business (Corporations Act 2001, s 477(1)(a)).

The liquidator is given various powers, including the power to sell or otherwise dispose of the company property (Corporations Act 2001, section 477(2)(c)). However, the powers given to the liquidator are to do acts on behalf of the company.

On liquidation, the company holds its property subject to the statutory scheme of liquidation, under which the liquidator is to:

  • Realise assets.

  • Pay creditors out of the proceeds of realisation of those assets.

  • Distribute any surplus amongst members.

Unsecured creditors and contributories have the benefit of the liquidator's administration of the company's estate. However, they do not acquire any legal or equitable interest in any of the company's assets.

Where the business has carried forward tax losses it is generally eligible to carry these forward on the basis of the same ownership test or the same business test. Restructuring and insolvency may result in either or both of these tests being failed so that the company will forfeit any carry forward loss. As the receiver is usually personally liable for taxes not paid under the Tax Act (that is, as trustee), then a conservative tax position is usually adopted in relation to the availability of such losses.

Tax implications for the owners

A CGT event happens when the company is deregistered in accordance with the Corporations Act 2001. A company ceases to exist on deregistration.

However, CGT event G3 (where a liquidator or administrator declares shares or financial instruments worthless) may happen at an earlier time in respect of worthless shares in a company in liquidation or administration. That is, if an administrator of a company declares in writing that there are reasonable grounds to believe, at the time of the declaration, that there is no likelihood that shareholders in the company will receive any further distribution for their shares.

Tax implications for the creditors

Creditors are not eligible to claim a bad debt deduction unless and until the bad debt is written off as bad. Accordingly, this would usually be at the completion of the company's administration.

Where a trustee in bankruptcy, a receiver or liquidator advises a creditor of the amount expected to be paid in respect of the debt (that is, the extent to which the amount likely to be received is less than the debt), the debt is accepted as bad when the advice is given.

 

Share buybacks

Taxes potentially payable

29. What taxes are potentially payable on a share buyback? (List them and cross-refer to Questions 3 to 6 as appropriate.)

Income tax and CGT

No income tax or CGT consequences arise for the company that is buying back their shares.

Shareholders are generally required to treat part of the buyback price as a dividend (which forms part of their assessable income) and part as capital proceeds for the disposal of their share, which may result in a CGT liability.

Exemptions and reliefs

30. Are any exemptions or reliefs available to the liable party?

Income tax and CGT

CGT discount is available for resident individuals (50%) and complying superannuation funds (33.33%) where the asset has been held for 12 months or more.

A non-resident individual was eligible for a 50% CGT discount on gains made on or before 8 May 2012. A non-resident is not subject to CGT on a sale of shares in a company unless the company is land rich (see Question 9, For the buyer: Stamp duty).

Transaction structures to minimise the tax burden

31. What transaction structures (if any) are commonly used to minimise the tax burden?

Tax requirements

It is important to ensure the tax requirements under the share buyback rules are complied with, including that the amount returned is the average capital per share.

 

Private equity financed transactions: MBOs

Taxes potentially payable

32. What taxes are potentially payable on a management buyout (MBO)?

The taxes payable depend on whether the MBO involves a share or asset sale (see Question 29).

Exemptions and reliefs

33. Are any exemptions or reliefs available to the liable party?

A private equity fund that qualifies as a Managed Investment Trust (MIT) can make a safe harbour election to treat all gains on the sale of shares on capital account.

Where the MIT also qualifies as a fixed trust then such gains can be distributed to non resident investors without CGT.

A non-resident is not subject to CGT on a sale of shares in a company unless the company is land rich (see Question 9, For the buyer: Stamp duty).

See also Questions 10 and 16.

Transaction structures to minimise the tax burden

34. What transaction structures (if any) are commonly used to minimise the tax burden?

See Questions 14 and 19.

 

Reform

35. Please summarise any proposals for reform that will impact on the taxation of corporate transactions.

Demerger relief

Several problems that arise where a tax consolidated group undertakes a demerger have been identified for reform. A Treasury Discussion Paper was issued in November 2010 but no legislative reforms have been introduced to correct these anomalies, to date. The reforms, once introduced, may apply retrospectively to the announcement date of 9 November 2010.

 
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