Late last month, the Deputy Commissioner of Taxation formally refused a request from AMA Group Limited for demerger relief in connection with a demerger and acquisition transaction involving private equity firm Blackstone. The ATO's decision, which resulted in the termination of that transaction, casts doubt on the availability of capital gains and income-tax relief for transactions involving demerger and acquisition structures. It follows a similar decision by the ATO earlier this year in connection with the demerger of OneMarket Limited from Westfield Corporation. Managing Associate Charles Ashton and Partners Craig Milner and Joseph Power report.
The demerger and acquisition structure is well known in public M&A transactions. In simple terms, the structure involves:
- an existing ASX-listed entity (RemainCo) demerging part of its business (DemergedCo) under a demerger scheme, pursuant to which DemergedCo is listed on the ASX and held by the previous RemainCo shareholders; and
- a bidder acquiring RemainCo (which then no longer holds the DemergedCo business) under an acquisition scheme, for cash, scrip or a combination of both.
This structure has been adopted in a number of transactions, such as Arrow Energy's demerger of Dart Energy (2010) and Straits Resources' demerger of Straits Metals (2011), in each case followed by an acquisition of RemainCo for cash by the bidder. Most relevantly, the structure was adopted in Texon Petroleum's demerger of Talon Petroleum (2013), which was followed by an acquisition of RemainCo, which also qualified for scrip for scrip roll-over relief. The ATO granted demerger tax relief in each of these demerger transactions. There is also the example of Sirius' demerger of S2 Resources (2015), which was followed by an acquisition that apparently qualified for scrip-for-scrip roll-over relief; however, the ATO refused to provide a favourable ruling on demerger relief, for reasons that are not evident from the public announcements at the time.
In April this year, AMA Group Limited (AMA) announced proposals whereby:
- AMA would demerge its automotive component, accessory and procurement business into a new company (ACAPCo), to be listed on the ASX pursuant to a demerger scheme. Existing shareholders would receive shares in ACAPCo on a 1:1 basis in proportion to their holding in AMA; and
- Blackstone would subsequently acquire all of the AMA shares (post the demerger) pursuant to an acquisition scheme.
Importantly, the acquisition scheme was conditional on the demerger scheme (but not vice versa). This feature was also present in the Arrow Energy, Straits Resources' and Texon Petroleum transactions referred to above.
The parties were entitled to terminate the ACAPCo demerger scheme (and consequently the AMA acquisition scheme) if the ATO failed to grant specific demerger relief under Australian taxation laws.
In June, AMA announced that it "received a formal response from the Deputy Commissioner of Taxation refusing AMA's request for a ruling for demerger relief". The AMA announcement did not disclose the basis for the ATO's decision, but did note the AMA Board's disappointment that the Deputy Commissioner of Taxation had taken a "different view as to the requirements for demerger relief as compared with previous transactions".
For a demerger to qualify for demerger relief, there must be a restructuring of the demerger group that satisfies a number of requirements under Australian tax laws. One of those requirements is satisfaction of the "nothing else" requirement. Essentially, shareholders in RemainCo must acquire a new interest in the DemergedCo through the demerger restructuring "and nothing else".
While the reasons for the ATO's decision in relation to AMA's relief application are not publically available, following on from the ATO's decision in Class Ruling CR 2018/31 earlier this year not to grant demerger relief in connection with the demerger of OneMarket Limited from Westfield Corporation Limited prior to the acquisition of Westfield by Unibail-Rodamco, it seems likely the ATO would have denied the relief, on the basis of the ATO's view that the transaction structure failed the "nothing else" requirement.
Unlike in the AMA transaction, the OneMarket demerger scheme was conditional on the Westfield acquisition schemes proceeding (but not vice versa). In effect, it was a condition of the demerger scheme that consideration was received by Westfield security holders under the acquisition schemes, in circumstances whereby part of the consideration in the acquisition scheme would be eligible for CGT scrip-for-scrip roll-over relief.
In the OneMarket example, the ATO's view in CR 2018/31 was that the demerger transaction did not satisfy the nothing-else requirement, apparently due to the "nexus" between the demerger and acquisition schemes. The demerger and acquisition schemes were viewed as a single restructuring arrangement and consequently, in the ATO's view, presumably the consideration provided under the acquisition scheme constituted "something else" received by Westfield security holders under the demerger restructuring.
Interestingly, in the AMA transaction (as with the Arrow Energy, Straits Resources' and Texon Petroleum transactions referred to above, for which the ATO granted demerger relief), the conditionality was such that the ACAPCo demerger would have occurred without the acquisition proceeding. Despite there being no certainty that the acquisition scheme would proceed or that any consideration would have been payable to AMA shareholders beyond the ACAPCo share under the demerger scheme, the ATO denied AMA's application for relief.
This willingness to find a 'nexus' between contemporaneous demerger and acquisition schemes suggests that the ATO has firmed its view that the consideration received under the acquisition scheme will not be separate from the demerger scheme, at least in circumstances whereby the acquisition scheme involves consideration that is intended to be eligible for CGT scrip-for-scrip roll-over relief. Whether the ATO would take the same view in an acquisition involving cash consideration only (like the slightly older examples involving Arrow Energy and Straits Resources) may be an issue to be tested in future transactions. For now, in the absence of any future ATO guidance about particular features of demerger and acquisitions schemes that are of concern to it – possibly because of reliance on "double" tax relief for both schemes - or a bold taxpayer contesting the ATO's view in a transaction, this approach may well signal the tolling of the bell for capital gains and income tax relief for transactions involving demerger and acquisition scheme structures.