Background:

The State Revenue Legislation Amendment Bill 2012, introduced into the New South Wales Parliament on 28 March 2012, makes significant changes to the corporate reconstruction exemption (CRE) from stamp duty in NSW with effect from 1 July 2012.

In general terms, the CRE exempts transfers of property between entities of a corporate group from stamp duty, provided certain requirements are met.

The new provisions (now incorporated into the Duties Act 1997 (NSW) (Duties Act)) remove some previous requirements, potentially expanding the application of the CRE. However, the provisions also impose further requirements relating to the avoidance of duty and other taxes.

What changes have been made?

The stated purpose behind the CRE amendments “is to extend and simplify the exemption from duty for the restructuring of corporate groups”.

What do the changes mean?

From 1 July 2012, relief from stamp duty in NSW is likely to be available for transactions which previously did not qualify.

For example:

1. Interposing a new company or unit trust between existing companies or unit trusts and their share/unit holders (e.g. a consolidation/top hatting transaction).
2. Post-acquisition integration of businesses/assets after an acquisition without the requirement to wait for 12 months.
3. Transferring assets to a newly incorporated unit trust without the requirement to wait for 12 months after the establishment of the unit trust.

What has changed?

The main features of the new legislation include:

1. CRE provisions have been included into the Duties Act. Previously the CRE conditions were set out in guidelines approved by the NSW Treasurer.
2. The existing CRE 12 month “pre-association” period and the 12 month “post-association” period conditions have been abolished. This means that a transaction between entities that are group members only at the time of the transaction will potentially qualify for the exemption.
   • Where corporate reconstruction relief has already been obtained, any condition about the transferor and transferee remaining in the same corporate group for 12 months after the transaction will expire automatically on 1 July 2012. From that time, the parties would be able to leave the corporate group without triggering a revocation of the exemption which was previously obtained.
3.  Transitional provisions: From 1 July 2012 to 31 December 2012, transactions (not including “top-hatting”) which were pre-approved for exemption under the existing rules can still proceed on the basis of the existing rules, instead of the new rules. For this relief to apply, the ruling under the existing rules must be issued before 1 July 2012. It is not enough to lodge an application before that date. From 1 January 2013, all applications for corporate reconstruction relief will be assessed under the new rules.
4. Certain other anti-avoidance type rules have been removed from the CRE provisions, (for example, consideration provided or received from a non-group entity).
5. There will be no subsequent clawback of the exemption solely by virtue of the group relationship being broken.  However, the Chief Commissioner will have the power to revoke the exemption if he subsequently becomes aware of information which would have prevented the exemption from being granted.
6. The transaction must not be undertaken with the purpose of avoiding duty on another transaction, or for the sole or dominant purpose of avoiding or reducing a liability for any other Australian tax.  [This changes the current guidelines in which the only requirement was that the transaction must not be undertaken for a purpose of avoiding any Commonwealth, state or territory taxation].
7. The exemption is extended to the acquisition of an interest in a landholder.
   • Landholder duty specific anti-avoidance measures: Anti-avoidance measures have also been introduced into the landholder duty provisions.
   • For the purposes of determining whether a landholder duty liability is triggered, and the amount of that liability, the target landholder will be deemed to still hold (directly or indirectly) any land that was transferred to the acquirer (or their associate) within the 12 months prior to the acquisition of the interest in the target landholder.
   • The amount of the landholder duty payable by the acquirer on the acquisition of their interest in the target landholder will then be reduced by the amount of the transfer duty paid on the earlier land transfer/s.
   • This measure will apply to the acquisition of interests in unit trusts and companies on or after the date of assent to the amending Act. However, the measure will not apply in respect of any transfers of land to the acquirer (or their associate) that occurred prior to the date of assent.
8.  The exemption for top-hatting arrangements (interposition of an entity between members and a parent entity) is now expanded by the new provisions.
   • Under the old rules, relief from landholder duty was available for “top-hatting” but only in relation to rollovers involving certain “stapled securities” for which relief was available under Subdivision 124-Q of the Income Tax Assessment Act 1997.
   • Under the new rules, the “top-hatting” relief now allows for companies and unit trusts to be interposed between a landholder and the holder of its securities and is no longer linked to CGT rollover relief rules. The percentage interests held by holders of securities in the interposed entity must be the same as the percentage interests they held in the previous entity. Additionally, the interposed entity will generally need to be a newly incorporated company, although there may be exceptions in some cases.
   • There is no transitional relief for the changes to top-hatting. This is because the existing rules for top-hatting did not provide for a general pre-approval process (unlike corporate reconstruction relief).

What has stayed the same?

1. The CRE still needs to be applied for in writing. There has been no indication of any shift to a self assessed regime or other move away from the current process.
2. The transaction must be undertaken for a permitted purpose (generally, changing the structure of a corporate group and/or changing the holding of assets within a corporate group) and must not have a Duty or Australian tax avoidance motive.
3. Transactions must occur between members of the same “corporate group”, the definition of which is the same i.e. broadly a 90% share capital (or unit capital) and 90% voting control relationship. A group may include unit trusts and stapled entities.
4. The types of transactions where CRE may apply include a transfer, surrender or vesting as well as a land holder duty acquisition. However, there remains an issue with claiming CRE on, for example, a declaration of trust or a grant of a lease at a premium.

Commentary:

From 1 July 2013, New South Wales proposes to abolish transfer duty on the transfer of “business assets”, (5.5% rate) and shares and units (0.6% rate). The abolition of these taxes will mean that there will be less need to use corporate reconstruction relief in New South Wales. However, corporate reconstruction relief will still be relevant to the transfer of things such as land, goods transferred with land and also to relevant acquisitions in landholders with NSW landholdings. This is because the transfer of those things remains dutiable on and after 1 July 2013, unless an exemption applies.

In at least one situation it appears that the existing corporate reconstruction rules will be more favourable than the new rules. Where preference shares are issued to entities outside the corporate group the drafting of the new rules suggests that the preference shares can longer be disregarded in looking at whether two entities are in the same “corporate group”. Under the existing rules most preference shares can be disregarded when looking at that issue.