Corporate reorganisations not affecting economic ownership

Section YC 18B

Section YC 18B ensures that shareholder continuity is preserved for certain restructuring arrangements that result in no change of economic ownership in a group of companies. The preservation of shareholder continuity will ensure that no unintended consequences of the continuity rules will arise in respect of imputation credits and losses as a result of the restructuring. The new section was required as the existing concessionary continuity rules do not readily apply to the type of restructuring arrangements contemplated by the new section YC 18B.

Background

Some Australian banking groups with significant New Zealand operations are considering restructuring to separate their banking business from their other businesses. The restructuring results in the Australian bank replacing its initial parent company with a new company as the listed banking group parent company. This potential restructuring is a direct response to Australian regulatory standards and has the full support of the regulators and the Australian government.

The Income Tax Act 2007 provides general rules to determine the shareholder interests in a company. There are a number of concessionary rules that deal with situations where it is impractical to apply the more detailed general rules. However, this particular type of restructuring falls outside of the requirements of those concessions. This means that the initial parent company and its subsidiaries will not easily be able to carry forward any tax losses and imputation credits they had before restructuring under the existing concessionary rules.

Key features

Section YC 18B ensures that continuity is preserved for certain restructuring arrangements that result in no change in the economic ownership of a group of companies. The type of restructuring arrangement contemplated by the section is where the initial parent company of the group is replaced by a new parent company but results in no change to the economic ownership of the group of companies as a whole.

The preservation of shareholder continuity will ensure that there are no adverse consequences to the group of companies’ imputation credits, losses and other tax balances which depend on shareholder continuity, as a result of the restructuring.

Detailed analysis

Section YC 18B ensures that shareholder continuity is preserved for restructuring arrangements that do not result in an economic change of ownership within a group of companies. Shareholder continuity will be preserved for the initial parent, new parent and any interests deemed to be held by the initial parent before the restructuring.

The main criteria for the concession will be that the restructuring will result in no significant change to the ultimate economic ownership of the initial parent and all of its subsidiaries.

Section YC 18B(2) sets out the criteria for the concession:

• Except for a nominal amount of shares issued to facilitate the restructuring, or where securities law requirements make it impracticable or impossible, the shareholders of the initial parent company will at the start of the restructuring and immediately at the completion of the restructuring, own the same interests in the same proportions in the new parent.
• The market value of any nominal amount of shares issued to facilitate the restructuring expressed as a percentage of the market value of all the shares in the new parent company is such that it is reasonable to treat the exchanging shareholders as owning all the shares.
• The restructuring does not result in any return to the shareholders (ignoring any nominal amount of shares issued to facilitate the transaction, and shares in respect of which securities law requirements make it impracticable or impossible), apart from the exchange of shares in the initial parent company for shares in the new parent company.
• The initial parent company before the restructuring and the new parent company after implementation of the restructuring are limited attribution companies. If the initial parent ceases to be a limited attribution company before the new parent company becomes a limited attribution company this will be ignored.

If the criteria are met, the new parent company effectively steps into the shoes of the initial parent company for the purposes of the shareholder continuity rules. This results in no breach of the shareholder continuity rules as a consequence of the restructuring. As such, the group of companies involved in the restructuring will maintain its ability to use or carry forward any imputation credits, losses or other tax balances which depend on shareholder continuity which it had before the restructuring.

Note that certain “excluded preference shares” are ignored when determining the economic ownership of a group of companies for the purposes of this section. That is, shares that fall within the definition of “excluded preference shares” in subsection YC 18B(5)(b) are ignored when applying the criteria set out in section YC 18B(2).

Application date

Section YC 18B applies from 1 April 2008.