The corporate restructuring rules in sections 41 to 47 of the Income Tax Act are extremely useful for creating, restructuring and dismantling groups of companies. They allow for tax-neutral transfers of businesses and shares, amalgamations, unbundlings and liquidations. Each rule has specific clawback and ring-fencing provisions that can be triggered after the deal is concluded. Some of these clawback and ring-fencing periods last for 18 months, others for six years and the rest last forever. There are anomalies in the current rules, as some of these clawback and ring-fencing provisions result in double tax, while others are easily avoided by using the corporate rules in a certain sequence. The Minister has therefore proposed the following changes as discussed below.
Changes to the asset-for-share rule
A taxable gain can still be triggered under the value-shifting rule where an asset is exchanged for shares in a company under the asset-for-share rule. This can lead to double taxation as the asset-for-share rule does not allow for a corresponding increase in the base cost where the value-shifting rule has applied It is therefore proposed that the base cost be increased in these circumstances.
An asset can be transferred to a company, partly for the delegation of certain qualifying debt and partly for the issue of shares. The transferors full base cost for the asset carries over to the base cost of the shares, without any reduction for the amount of the debt that was delegated. However, when the shares are sold to someone that falls outside the transferors group of companies, the transferor must add the face value of the delegated debt to its CGT proceeds. The additional CGT proceeds can be avoided if the shares are transferred again under the corporate restructuring rules, before they are sold to someone outside the transferors group. It is proposed that the additional CGT proceeds will be carried forward until the shares are sold to someone that falls outside the transferors group.
Changes to the intra-group transaction rule
The intra-group transaction rule provides that where an asset is transferred from one company to another company in the same group, and the transferee company sells the asset within 18 months of such transfer, the resultant gain or loss must be ring-fenced from the transferees other gains or losses. This means that the transferee cannot set off the gain (from selling