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2004-2005-2006-2007
THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA
HOUSE OF REPRESENTATIVES
FINANCIAL SECTOR LEGISLATION AMENDMENT
(RESTRUCTURES) BILL 2007
EXPLANATORY MEMORANDUM
(Circulated by the authority of the Treasurer,
the Hon Peter Costello, MP)
Table of Contents
GLOSSARY............................................................................................................1
OUTLINE ..............................................................................................................2
FINANCIAL IMPACT .............................................................................................4
INTRODUCTION ....................................................................................................5
SCHEDULE 1 RESTRUCTURE RELIEF: CORPORATIONL LAW ASPECTS ...............6
SCHEDULE 2 RESTRUCTURE RELIEF: TAXATION ASPECTS ...............................16
SCHEDULE 3 CONSEQUENTIAL AMENDMENTS ..................................................28
Financial Sector Legislation Amendment (Restructures) Bill 2007 iii
1
Glossary
1.1 The following abbreviations and acronyms are used throughout this
explanatory memorandum.
Abbreviation Definition
ADI Authorised deposit-taking institution
APRA Australian Prudential Regulatory Authority
ASIC Australian Securities and Investments Commission
Bill Financial Sector Legislation Amendment
(Restructures) Bill 2007
Corporations Act Corporations Act 2001
Court Means a court with jurisdiction in respect of
Chapter 5 of the Corporations Act 2001, namely the
Federal Court or a Supreme Court of a State or
Territory
FSTBA Financial Sector (Transfers of Business) Act 1999
NOHC Non-operating holding company
NOHC structure A non-operating holding company is the ultimate
holding entity of the group in Australia
Operating body An ADI, general insurer or life insurance company
Wallis Review Financial System Inquiry, March 1997
Financial Sector Legislation Amendment (Restructures) Bill 2007 1
2
Outline
2.1 The Financial Sector Legislation Amendment (Restructures) Bill 2007
(the Bill) seeks to facilitate the adoption of a non-operating holding company
(NOHC) as the ultimate holding company of a financial group in Australia
(NOHC structure). It will provide financial groups with greater flexibility in
choosing a corporate structure to manage their risk exposures and comply with
prudential requirements, without unnecessarily constraining their business
efficiency and competitiveness.
2.2 In March 1997, the Financial System Inquiry (Wallis Review)
recommended that subject to a financial group meeting prudential requirements,
the prudential regulator should permit the adoption of a NOHC structure. The
Review concluded that to protect against creditors of one entity seeking to
pursue the other entities of a group, legal separation structured around a NOHC
is the best method of quarantining the assets and liabilities of the various
entities in the group. Such a structure also relieves other entities of a group of
any formal obligation to support a distressed affiliate.
2.3 A NOHC structure can offer a financial group greater operational
flexibility while, at the same time, provide for more efficient and effective
means of meeting prudential requirements by allowing the appropriate
allocation of risk between prudentially and non-prudentially regulated
businesses of a group. This can be achieved by organising different types of
activities into separate business lines. This type of structure can assist efforts
aimed at quarantining risks in the various parts of a financial group by, for
example, separating the risks of a group's entrepreneurial private investment
activities from its insurance and banking operations.
2.4 In September 1997, the Australian Government announced its response
to the Wallis Review. As part of the response, the Australian Government
agreed to facilitate the establishment of non-operating holding companies to
encourage new entry and greater competition in the financial sector. The
Government's decision to facilitate the establishment of non-operating holding
companies was subject to prudential requirements being met.
2 Financial Sector Legislation Amendment (Restructures) Bill 2007
Outline
2.5 To implement the Government's decision, the Banking Act 1959 was
amended and provisions were included in the Financial Sector (Shareholdings)
Act 1998 to allow financial groups containing authorised deposit-taking
institutions (ADIs) to be established with a NOHC as the parent entity.
2.6 To date, no major Australian financial group containing an ADI has
chosen to adopt a NOHC structure. This has been the result of a number of
other regulatory and tax provisions that have impeded Australian financial
groups from moving to a NOHC structure.
2.7 Consistent with the Government's decision to facilitate the
establishment of NOHCs, this Bill will remove the regulatory impediments to
the adoption of a NOHC structure. The impediments identified arise under
particular requirements of the Corporations Act 2001 (Corporations Act) and
income tax law.
2.8 The Bill will provide the Minister with the power to grant relief from
these specific requirements of the Corporations Act. To grant relief, the
Minister will issue a restructure instrument that specifies the statutory
provisions and the entities of a company group (and any persons involved in
complying with a requirement) for which the relief applies.
2.9 The relief provided by the Minister will only relate to the specific
provisions of the Corporations Act as set out in the restructure instrument. It
will not relieve an entity from having to meet its other obligations under the
Corporations Act, associated regulations and other relevant legislation.
2.10 The Bill will also provide the Minister with the power to approve the
issue of associated internal transfer certificates by the Australian Prudential
Regulatory Authority (APRA). An internal transfer certificate will provide for
the transfer of assets and liabilities between two entities of the company group
being restructured and, thereby, facilitate the rearrangement of different types
of activities into separate business lines. This will allow a group containing
ADIs to separate its banking and non-banking businesses.
Taxation aspects
2.11 Schedule 2 to this Bill amends the consolidation membership rules and
the capital gains tax provisions in the Income Tax Assessment Act 1997 to
remove tax impediments that prevent financial groups containing ADIs from
restructuring.
Date of effect: The measure applies from 1 July 2007.
Proposal announced: The measure was announced on 8 May 2007 in
the 2007-08 Budget.
Financial Sector Legislation Amendment (Restructures) Bill 2007 3
Outline
Financial Impact
2.12 Minimal.
Compliance Cost Impact
2.13 Negligible.
4 Governance Review Implementation (Treasury Portfolio Agencies) Bill 2007
3
Introduction
Clause 1: Short title
3.1 This Act may be cited as the Financial Sector Legislation Amendment
(Restructures) Act 2007.
Clause 2: Commencement
3.2 This Act commences on the day on which it receives the Royal Assent.
Clause 3: Schedules
3.3 Schedule 1 and 3 (excluding consequential amendments to the Income
Tax Assessment Act 1997 in Schedule 3) will commence on the day on which
this Act receives the Royal Assent. Schedule 2 and consequential amendments
to the Income Tax Assessment Act 1997 in Schedule 3 will commence on
1 July 2007.
Financial Sector Legislation Amendment (Restructures) Bill 2007 5
4
Schedule 1 -- Restructure relief: corporations law
aspects
4.1 Schedule 1 to this Bill extends the coverage of the Financial Sector
(Transfers of Business) Act 1999 (FSTBA) to the restructure of financial groups
involving the creation of a NOHC as the ultimate holding company of the group
in Australia. It will be applicable to the restructure of a financial group that has
an ADI, general insurer or life insurance company as the ultimate holding
company of the group in Australia, and where that ultimate holding company
will be replaced by a NOHC. This Bill will facilitate the adoption of a NOHC
structure by providing the Minister with the power to grant financial entities
relief from specific statutory requirements under the Corporations Act that
currently impede such restructures. Any relief granted will be specified in a
restructure instrument.
The Minister will also be provided with the power to approve the issue of
associated internal transfer certificates, which provide for the transfer of
specified assets and liabilities between two related bodies of a financial group,
by the Australian Prudential Regulatory Authority (APRA).
The arrangement will allow APRA to work through the details of the
rearrangement with the financial group so as to assist APRA to efficiently
satisfy prudential requirements. This will provide financial groups with an
efficient mechanism to separate their activities into separate business lines. The
appropriate allocation of risk between prudentially and non-prudentially
regulated businesses can assist a financial group in more efficiently and
effectively meeting its prudential requirements.
6 Financial Sector Legislation Amendment (Restructures) Bill 2007
Schedule 1 -- Restructure relief: corporations law aspects
Financial Sector (Transfers of Business) Act 1999
Definitions
4.2 Items 1 to 14 provide additional and amended definitions required for
the extended scope of the FSTBA.
Key Changes
4.3 Items 8 and 14 extend the existing scope of coverage of `receiving and
transferring body' to include a body corporate receiving or transferring assets or
liabilities under an internal transfer certificate.
4.4 Item 9 defines the group of companies that would be considered to form
the financial group and, thus, be eligible for an internal transfer certificate as
part of a restructure incorporating a NOHC structure. A subsidiary has the same
meaning as defined in the Corporations Act.
Part 4A -- Restructures
Division 1 -- Outline of Part
4.5 Section 36A provides a brief outline of the effect of the Part.
Division 2 -- Restructure Approvals
4.6 A written application can be made to the Minister by a financial group
headed by an ADI, general insurer or life insurance company that intends to
enter into a scheme of arrangement under section 411 of the Corporations Act,
to restructure the group to incorporate a NOHC as the ultimate holding
company of the group in Australia.
4.7 Such an arrangement would transfer existing ordinary shareholders in
the operating body to become ordinary shareholders in the NOHC. This would
occur through a cancellation or transfer of shares in the operating body and an
issue of identical shares by the NOHC. However, this does not limit the scope
of the arrangement to provide for the other matters such as the transfer of assets
and liabilities.
4.8 A scheme of arrangement will ensure shareholders of the operating body
heading a financial group are given the right to vote on any proposal to adopt a
NOHC structure.
Financial Sector Legislation Amendment (Restructures) Bill 2007 7
Schedule 1 -- Restructure relief: corporations law aspects
4.9 An application can be made for the approval of a restructure instrument
and the issue of associated internal transfer certificates. It is also possible to
make an application for a restructure instrument alone.
4.10 In conjunction with the approval of a restructure instrument, the
Minister can provide approval for the issue of any internal transfer certificate by
APRA. The content and detail of these certificates will be determined by APRA
in conjunction with the operating body.
4.11 The application must be in the specified form and be accompanied by
the required information. The form of the application and the information
required is prescribed in the transfer rules issued by APRA under section 46(1)
of the FSTBA. Transfer rules are disallowed instruments.
4.12 The NOHC must be authorised by APRA in order to be the ultimate
holding company for a financial group containing an ADI or general insurer in
Australia.
4.13 The Minister will approve an application if he is satisfied that the
restructure would improve the operating body's ability to meet its prudential
requirements as administered by APRA. This provision does not infer that an
operating body be in breach or in non-compliance with prudential requirements,
to seek approval for a restructure. However, it must be demonstrated to the
Minister that, as a result of the restructure, the operating body would be in a
better position to meet relevant prudential requirements. In examining the
application, the Minister will also consider the interests of depositors/policy
owners of the operating body, the interests of the financial sector, and any other
matters appropriate in making a decision.
4.14 In the event that the Minister does not approve an application, the
Minister will provide relevant parties with a written statement setting out the
reasons for the refusal. The Minister may refuse an application on the grounds
that he is not satisfied that the matters in section 36C are met. For example,
approval would not be granted where the Minister believed that the restructure
would adversely affect the operating body's ability to meet its prudential
requirements.
4.15 Subsection 36 defines the prudential requirements that an operating
body is required to adhere to. This includes the relevant prudential standards,
rules and guidance notes issued by APRA.
4.16 The Minister can impose conditions on a restructure approval under
sections 36E(1)(a) and 36E(1)(b) to ensure that the restructure satisfies the
matters outlined in section 36C.
8 Financial Sector Legislation Amendment (Restructures) Bill 2007
Schedule 1 -- Restructure relief: corporations law aspects
4.17 Under section 36E(1)(a), the Minister can impose conditions on the
operating body, the NOHC, or any body that will be related to the NOHC after
the restructure, which must be satisfied prior to the restructure instrument
coming into force. Conditions that could be imposed include, but are not limited
to, obtaining approval for a scheme of arrangement by the Court, obtaining
regulatory approvals under the Financial Sector (Shareholdings) Act 1998 and
the Foreign Acquisitions and Takeovers Act 1975 and all necessary foreign
regulatory approvals. A Court will only approve a scheme of arrangement at
such a time as all of the other conditions imposed under the restructure approval
have been satisfied.
4.18 Under section 36E(1)(b), the Minister can impose conditions on the
operating body, the NOHC, or any body that will be related to the NOHC after
the restructure, which must be satisfied prior to the entry into force of the
internal transfer certificate. Conditions that could be imposed include, but are
not limited to, obtaining approval for a scheme of arrangement by the Court,
obtaining regulatory approvals under the Financial Sector (Shareholdings)
Act 1998 and the Foreign Acquisitions and Takeovers Act 1975, all necessary
foreign regulatory approvals, and any matters the Minister considers
appropriate to ensure any transfer of assets and liabilities would not comprise a
prudentially regulated entity's ability to meet its prudential requirements. As
part of its regulatory supervision of the operating body, and the group more
generally, APRA has responsibility for determining whether an entity has
satisfied the conditions imposed.
4.19 Subsections 36E(2),(3)&(4) provide for the submission of an application
to the Minister requesting an amendment to, or revocation of, the conditions
imposed on the restructure approval. The Minister will consider the request on
the basis of the matters outlined in section 36C.
Notes on specific sections
4.20 Conditions imposed under section 36E must be satisfied prior to a Court
order being issued under section 411(4) of the Corporations Act to approve a
scheme of arrangement. A Court will not approve a scheme of arrangement
where conditions set out in the restructure approval are outstanding. Entry into
force of the internal transfer certificate will also be subject to the relevant
conditions imposed being met.
Division 3 -- Restructure Instruments
4.21 A restructure instrument may provide relief to the NOHC established as
the ultimate holding company of the group in Australia, any body corporate
related to that NOHC and any persons involved in complying with a
Financial Sector Legislation Amendment (Restructures) Bill 2007 9
Schedule 1 -- Restructure relief: corporations law aspects
requirement, from section 254T, and sections in Division 1 of Part 2J.1 and Part
2J.2 of the Corporations Act.
4.22 The statutory measures described in 4.21 have been identified as
impeding the adoption of a NOHC structure by a financial group by
constraining the capacity of a NOHC to distribute dividends to shareholders
following a restructure. This is not consistent with the adoption of a NOHC
structure, which is an internal company restructure that is not aimed at changing
the entitlements of its shareholders.
4.23 Section 254T of the Corporations Act requires that dividends be only
paid out of profits. Without relief from section 254T, the pre-restructure profits
paid from an operating body, and other related bodies, to a NOHC, following a
restructure adopting a NOHC structure, would not be classed as profits under
the Corporations Act. The implication of this is that the pre-restructure profits
of the group would no longer be available as profits for distribution to
shareholders as dividends. This provision materially affects shareholders by
altering their rights to access profits of the group for which they have claim.
This is a significant regulatory barrier to financial groups restructuring to adopt
a NOHC structure.
4.24 Relief from section 254T of the Corporations Act would only apply to
the payment of pre-restructure profits of an operating body, and other related
bodies, to a NOHC. All profits earned by the operating body, and other related
bodies, and paid to the NOHC subsequent to the restructure would be
considered as profits and, therefore, available for distribution to shareholders.
4.25 Relief from section 254T of the Corporations Act will provide the
NOHC with the ability to distribute the same amount of dividends as that
available prior to the restructure. The relief will enable a NOHC to distribute
those pre-restructure profits even though they may be classified as share capital
or equity in the NOHC.
4.26 The amounts available for distribution must be sourced, directly or
indirectly, to the pre-restructure profits of the operating body, and bodies
related to the operating body, at the date of the restructure. These amounts
should be separately disclosed on the financial statements of the NOHC in order
to differentiate them from profits generated by the NOHC after the restructure.
4.27 As a consequence of granting relief from section 254T of the
Corporations Act, relief from Division 1 of Part 2J.1 and Part 2J.2 of the
Corporations Act will also be necessary to ensure that the distributions maintain
the same entitlements as ordinary dividends.
4.28 The restructure instrument will provide the legal basis for the payment
of dividends, up to the value of the pre-restructure profits of the operating body
10 Financial Sector Legislation Amendment (Restructures) Bill 2007
Schedule 1 -- Restructure relief: corporations law aspects
and bodies related to the operating body at the date of the restructure, out of the
NOHC's share capital.
4.29 For the purposes of section 256B of the Corporations Act and granting
relief to the above mentioned provisions, the Minister will give consideration to
whether allowing the distribution of pre-restructure profits from the NOHC's
share capital materially prejudices the company's ability to pay its creditors and
is fair and reasonable in relation to the company's shareholders as a whole.
4.30 Relief may also be granted from section 256D of the Corporations Act
to ensure that any persons involved in the distribution of pre-restructure profits
out of the NOHC's share capital is not considered to have committed an
offence.
4.31 In the process of adopting of a NOHC structure, the operating body may
hold shares in the ultimate holding company prior to the completion of the
restructure and, as a result, breach section 259C of the Corporations Act. ASIC
currently has power under section 259C(2) to exempt a company from the
operation of section 259C. To facilitate the restructure in a timely fashion and
streamline the approval process, the Minister will be provided with the power to
exempt a company, that is part of a NOHC restructure, from section 259C. In
such situations, a separate approval from ASIC will not be required.
4.32 In conjunction with the relief granted in relation to the Corporations
Act, the income tax law will be amended to facilitate the distribution of
pre-restructure profits from the NOHC's share capital and facilitate the
adoption of the NOHC structure. These amendments are discussed in Schedule
2.
4.33 The relief provided through the restructure instrument is specific and
considered transitional and consequential in nature to facilitate the restructure.
It will not relieve the NOHC, operating body or bodies related to the NOHC
from having to meet all their other obligations under the Corporations Act and
other relevant legislation. The allowable relief is specific to section 254T,
Division 1 of Part 2J.1 and Part 2J.2 of the Corporations Act and its duration is
transitional. Although the payment of dividends from the pre-restructure profits
of the operating body may not occur until an undetermined time in the future,
the relief relates back to the restructure event. Only the payment of dividends
out of the pre-restructure profits of the operating body will be given this
exceptional treatment. The NOHC, operating body or bodies related to the
NOHC are otherwise subject to the normal application of section 254T of the
Corporations Act for the payment of dividends out of profits.
4.34 The restructure instrument provides the legal basis for granting relief to
the NOHC, any body related to the NOHC, and any persons provided for, from
the requirements of the specific provisions of the Corporations Act.
Financial Sector Legislation Amendment (Restructures) Bill 2007 11
Schedule 1 -- Restructure relief: corporations law aspects
4.35 A restructure instrument's entry into force will be subject to the
conditions imposed under section 36E(1)(a) having been met and the issuance
of a Court order approving the scheme of arrangement under section 411(4) of
the Corporations Act.
4.36 A restructure instrument may be amended by the Minister where
particular aspects of the relief provided is either no longer required or
considered appropriate. This provision is intended to address the implications of
any future amendments to the Corporations Act that affect the relief provided
under the instrument.
Notes on specific sections
4.37 Subsection 36G(3) provides definitional certainty that a restructure
instrument is not a legislative instrument within the meaning of section 5 of the
Legislative Instruments Act 2003. A restructure instrument is not a legislative
instrument because it only applies in relation to a specific case. Restructure
instruments will be provided a case-by-case basis and will be tailored to the
specifics circumstances of the restructure.
Division 4 -- Internal Transfer Certificates
4.38 Division 4 provides an alternative mechanism to financial groups
wishing to restructure. It does not prevent a group from choosing to use other
available restructure mechanisms in other legislation such as Part 5.1 of the
Corporations Act.
4.39 As part of a restructure approval, the Minister may authorise APRA to
issue an internal transfer certificate. An internal transfer certificate provides for
the transfer of specified assets and/or liabilities or groups of assets and/or
liabilities between any two related bodies of the group involved in the NOHC
restructure. This could include a transfer between the operating body and the
NOHC, the operating body and a subsidiary of a NOHC, or between two
subsidiaries of a NOHC. These certificates can also provide for the transfer of,
among other things, classes of financial securities and wholly-owned subsidiary
entities.
4.40 In issuing an internal transfer certificate APRA will consider the
application for restructure approval, any additional information provided by the
operating body, the matters in section 36C(1)(b)&(c) and the restructure
arrangement approved by the Minister. APRA has the flexibility to settle the
detail of the transfer arrangements with the applicant consistent with the
restructure approved by the Minister.
12 Financial Sector Legislation Amendment (Restructures) Bill 2007
Schedule 1 -- Restructure relief: corporations law aspects
4.41 In determining a transfer certificate's entry into force and the specific
timing of any transfer, APRA must take into account the wishes of the
transferring and receiving body as practical and operational issues may
constrain the timing of the transfer.
4.42 The internal transfer certificate must include the names of the entities
involved in the transfer, the entities which will be the transferring and receiving
bodies, an agreed list of all the assets and liabilities to be transferred and state a
time or method when an internal transfer certificate will come into force.
4.43 In conjunction with an internal transfer certificate being issued, APRA
must provide a written notice to the transferring and receiving body, the
operating body (where it is not the transferring or receiving body) and the
Minister. The notice must include a copy of the internal transfer certificate/s. In
the event that APRA refuses to issue an internal transfer certificate, or issues a
certificate different from that which was applied for, APRA must provide
written notice to the transferring and receiving body, the operating body (where
it is not the transferring or receiving body) and the Minister with an explanation
of the decision or why the certificate has not been issued.
4.44 An operating body may apply to APRA to seek amendment to an
internal transfer certificate provided the certificate has not entered into force.
An application may be lodged in circumstances where the transferring and
receiving body wish to modify the assets and liabilities to be transferred or the
body transferring or receiving the assets and liabilities has changed. The
application must be submitted in the form prescribed by the transfer rules.
4.45 APRA may amend an internal transfer certificate having regard to the
matters outlined in subsections 36C(1)(b)&(c). If APRA amends a certificate, it
must provide written notice to the transferring and receiving body, the operating
body (unless it is the transferring or receiving body) and the Minister. If APRA
amends a certificate, it must provide written notice to the transferring and
receiving body, the operating body (unless it is the transferring and receiving
body) and the Minister including a statement providing reasons for not
amending the certificate.
4.46 An internal transfer certificate can enter into force in one of three ways:
at the time the restructure instrument enters into force (restructure time); at the
date specified in the certificate, which must be within twelve months of the
restructure time; or at a time approved under section 36Q.
4.47 An internal transfer certificate can specify multiple transfer times to
provide for the transfer of specific assets and liabilities at different times. On a
practical and operational level, it would be very unlikely that the transfer of all
assets and liabilities could be completed at one time.
Financial Sector Legislation Amendment (Restructures) Bill 2007 13
Schedule 1 -- Restructure relief: corporations law aspects
4.48 An internal transfer certificate can specify the exact time of day that a
transfer is to occur. For example midnight or market closing time in a particular
location.
4.49 Any transfers provided for in an internal transfer certificate must be
completed within twelve months of the entry into force of the restructure
instrument.
4.50 The transferring and receiving bodies may submit an application to
APRA seeking approval for a different transfer time to that specified in the
transfer certificate. On the basis that APRA considers the revised timing
appropriate, it can approve such applications.
4.51 The entry into force of an internal transfer certificate is subject to all
conditions imposed by the Minister under subsection 36E(1)(c) having been
satisfied. The Minister may impose conditions to ensure that the matters
outlined in subsection 36C(1) are met. The conditions are discussed in more
detail above.
4.52 At the time an internal transfer certificate takes effect, the assets and
liabilities being transferred from the transferring body, become the assets and
liabilities of the receiving body. Any duties or obligations relating to the assets
and liabilities being transferred become the duties or obligations of the
receiving body following any transfer. That is the transfer affects a statutory
novation and not an assignment of rights.
Notes on specific sections
4.53 Section 36R provides for the receiving body becoming the successor in
law to the transferring body for the specific assets or liabilities transferred under
an internal transfer certificate. The receiving body is taken to be responsible for
rights and obligations of the transferred assets and/or liabilities.
Division 5 -- Engagements of employees and contractors
4.54 Division 5 provides for the continuity of term and conditions of
employment for each person who was, immediately before the restructure,
performing duties in the group. The objective is to leave the employer and
employee in the same position, and with the same entitlements, following the
restructure. The restructure cannot be used by either party to change
employment conditions or to trigger redundancies.
4.55 To the extent that an internal transfer certificate results in the receiving
body becoming the successor in law to the transferring body, the receiving body
is responsible for the relevant employment contracts and contracts for service.
14 Financial Sector Legislation Amendment (Restructures) Bill 2007
Schedule 1 -- Restructure relief: corporations law aspects
That is, if the activities of an employee are moved as a result of an internal
transfer certificate, the employee can be moved with activities that relate to the
assets and liabilities being transferred.
Key changes
4.56 Section 36S covers contracts for service unlike section 30 and 36 of the
FSTBA.
Notes on specific sections
4.57 Subsection 36S(4) provides that employers and employees are not
prevented from renegotiating the terms and conditions of employment in the
event that both parties agree to do so.
Review of Decisions
4.58 Item 15 makes decisions made by APRA under section 36M,
section 36P and section 36Q(3) reviewable by the Administrative Appeals
Tribunal.
Financial Sector Legislation Amendment (Restructures) Bill 2007 15
5
Schedule 2 -- Restructure relief: taxation aspects
5.1 Schedule 2 to this Bill amends the consolidation membership rules, the
imputation provisions and the capital gains tax (CGT) provisions in the Income
Tax Assessment Act 1997 (ITAA 1997) to remove tax impediments that prevent
financial groups containing authorised deposit-taking institutions (ADIs) from
restructuring for prudential reasons.
Context of amendments
5.2 The tax consolidation rules treat wholly-owned groups as a single entity
for tax purposes. A consolidated group consists of a head company and all of its
wholly-owned subsidiaries. An entity is a `wholly-owned subsidiary' of the
head company for the purposes of Part 3-90 of the ITAA 1997 if the head
company beneficially owns, directly or indirectly, all the `membership
interests' in the subsidiary. In the case of a company, membership interests are
any interests held by a member or stockholder of the company.
5.3 Currently, if a consolidated group contains an ADI, the head company
tends to be the ADI. The membership interests in the ADI contribute to the
ADI's capital holdings for prudential purposes. Part of the ADI's required
capital holdings is Tier 1 capital (the highest form of capital), which includes
certain preference shares issued by the ADI.
5.4 For prudential reasons, ADI groups may restructure and impose a
non-operating holding company as the head company of the group, making the
ADI a wholly-owned subsidiary (an ADI restructure). However, this prevents
the ADI from issuing certain preference shares as part of the consolidated
group, despite these shares lacking key ownership characteristics.
5.5 Therefore, to ensure that an ADI can be a wholly-owned subsidiary of a
non-operating holding company for tax consolidation purposes following an
ADI restructure and continue to issue certain preference shares to meet its
16 Financial Sector Legislation Amendment (Restructures) Bill 2007
Schedule 2 -- Restructure relief: taxation aspects
capital adequacy requirements, those shares will be disregarded for
consolidation membership purposes.
5.6 The amendments will also ensure that shareholders who exchange their
shares in the ADI or extended licensed entity for shares in the non-operating
holding company can obtain a CGT roll-over.
Summary of new law
5.7 The amendments remove tax impediments that prevent financial groups
containing ADIs from restructuring for prudential reasons by:
· disregarding certain preference shares issued by an ADI or an
extended licensed entity member, for the purposes of determining
whether the ADI or extended licensed entity member is a
wholly-owned subsidiary of a consolidated group headed by a
non-operating holding company;
· ensuring that certain dividends paid by the non-operating holding
company are frankable if those dividends would have been frankable
had they been paid by the ADI prior to the ADI restructure; and
· ensuring that shareholders in the original company (either an ADI or
an extended licensed entity member) who exchange their shares for
shares in the non-operating holding company can obtain a CGT
roll-over if certain preference shares remain issued by the ADI and
some foreign holders of shares do not receive shares in the
non-operating holding company.
Financial Sector Legislation Amendment (Restructures) Bill 2007 17
Schedule 2 -- Restructure relief: taxation aspects
Comparison of key features of new law and current law
New law Current law
Certain preference shares are Preference shares are membership
disregarded for the purpose of interests for consolidation
determining whether an entity is a purposes. Therefore, an ADI that
wholly-owned subsidiary of a issues preference shares to
consolidated group. Therefore, in non-group members cannot be a
certain circumstances, an ADI subsidiary member of a
can be a subsidiary member of a consolidated group.
consolidated group even though it
issues preference shares to
non-group members.
Distributions made by a Distributions made by a
non-operating holding company non-operating holding company of
of an ADI from the company's an ADI from the company's share
share capital account or from capital account or from certain
certain other accounts will be other accounts will be unfrankable
frankable distributions if: distributions.
· the distributions are
sourced from the profits of
the ADI; and
· the distributions would
have been frankable
distributions had they been
paid by the ADI prior to
the restructure.
Shareholders of an original A CGT roll-over is available when
company (either an ADI or an a company is interposed between
extended licensed entity) who an existing company and its
exchange their shares for shares shareholders only if all the shares
in an interposed non-operating in the original company are
holding company may obtain a exchanged for shares in the
CGT roll-over even if: interposed company.
· certain preference shares
are not exchanged; and
· some foreign holders of
shares do not participate in
the exchange.
18 Financial Sector Legislation Amendment (Restructures) Bill 2007
Schedule 2 -- Restructure relief: taxation aspects
Detailed explanation of new law
Modification to the consolidation membership rules to disregard
certain shares
5.8 Section 703-37 ensures that certain preference shares are disregarded for
the purpose of applying the consolidation membership rules following an ADI
restructure. The object of the section is to ensure that an ADI restructure does
not prevent an ADI, or a member of an extended licensed entity including the
ADI, from being a subsidiary member of a consolidated group because it issues
certain preference shares. [Schedule 2, item 3, subsection 703-37(1)]
5.9 This is an exception to the general consolidation membership rule in
section 703-15 that requires a subsidiary member of a consolidated group (in
this case, the ADI or extended licensed entity member) to be wholly-owned,
directly or indirectly, by the head company of the group (in this case, the
non-operating holding company).
5.10 The exception enables the consolidation rules (except those applying
specifically to multiple entry consolidated groups under Division 719) to apply
as if the entity that issues the preference shares was a wholly-owned subsidiary
of the holding body. That is, the preference shares issued by the ADI or
extended licensed entity are effectively ignored for consolidation purposes.
[Schedule 2, item 3, subsection 703-37(2)]
5.11 The exception is limited to preference shares issued, either prior to or
after the ADI restructure, by specific bodies at a time when a restructure
instrument is in force and that have certain characteristics.
Who can issue the preference shares that are disregarded?
5.12 The preference shares can be disregarded for the purpose of applying the
consolidation membership rules only if the body issuing the preference shares
is:
· a body that would be a wholly-owned subsidiary of the holding body,
were the shares not to exist; and
· an ADI, or a member of an extended licensed entity (within the
meaning of the prudential standards) that includes the ADI.
[Schedule 2, item 3, subsection 703-37(3) and paragraph 707-37(4)(c)]
5.13 An entity is a member of an extended licensed entity if it is a subsidiary
of the ADI which is used to conduct some of the ADI's activities. The
Financial Sector Legislation Amendment (Restructures) Bill 2007 19
Schedule 2 -- Restructure relief: taxation aspects
Australian Prudential Regulation Authority recognises that an ADI subsidiary
operates, to all intents and purposes, as a division of an ADI. As such, an
extended licensed entity member can be considered part of the ADI for tax
consolidation membership purposes.
5.14 The `prudential standards' are defined in subsection 995-1(1) to mean
the prudential standards determined by the Australian Prudential Regulation
Authority and in force under section 11AF of the Banking Act 1959.
Restructure instrument must be in force when shares issued
5.15 The exception in section 703-37 applies only if:
· a restructure instrument under Part 4A of the Financial Sector
(Business Transfer and Group Restructure) Act 1999 is in force in
relation to the non-operating holding company; and
· because of the restructure to which the instrument relates, an ADI
becomes a subsidiary (within the meaning of the Financial Sector
(Business Transfer and Group Restructure) Act 1999) of the
non-operating holding company.
[Schedule 2, item 3, paragraphs 703-37(4)(a) and 703-37(4)(b)]
Characteristics of disregarded shares
5.16 A share can be disregarded for consolidation membership purposes
following an ADI restructure only if it is a preference share with certain
specified characteristics. [Schedule 2, item 3, paragraphs 703-37(4)(d) and(5)(a)]
5.17 First, any returns on the share must be fixed at the time of issue by
reference to the amount subscribed. For these purposes, the returns can be fixed
by reference to a rate, formula or amount set out in the terms of issue for the
preference share. [Schedule 2, item 3, paragraph 703-37(5)(b)]
5.18 Second, the share must not be a voting share. A `voting share' is defined
in subsection 995-1(1) of the ITAA 1997 to mean, so far as is relevant, a voting
share as defined by section 9 of the Corporations Act 2001. [Schedule 2, item 3,
paragraph 703-37(5)(c)]
5.19 A voting share in a body corporate is defined by the Corporations
Act 2001 as an issued share in the body that carries any voting rights beyond the
following:
20 Financial Sector Legislation Amendment (Restructures) Bill 2007
Schedule 2 -- Restructure relief: taxation aspects
· a right to vote while a dividend (or part of a dividend) in respect of the
share is unpaid;
· a right to vote on a proposal to reduce the body's share capital;
· a right to vote on a resolution to approve the terms of a buy-back
agreement;
· a right to vote on a proposal that affects the rights attached to the
share;
· a right to vote on a proposal to wind the body up;
· a right to vote on a proposal for the disposal of the whole of the
body's property, business and undertaking; and
· a right to vote during the body's winding up.
5.20 Third, the share must be either Tier 1 capital within the meaning of the
prudential standards, or would be Tier 1 capital were it not for a limit imposed
by those standards on the proportion of Tier 1 capital that can be made up of
such shares. [Schedule 2, item 3, paragraph 703-37(5)(d)]
5.21 The share may be issued on its own or as part of a stapled instrument. A
share is issued as part of a stapled instrument if it is issued in combination with
one or more schemes that are related to the scheme under which the share is
issued. A `related scheme' is defined in section 974-155 of the ITAA 1997.
[Schedule 2, item 3, subsection 703-37(6)]
5.22 Consequently, the share will satisfy the requirements of
paragraph 703-37(5)(d), for example, if the share, either on its own or as part of
a stapled instrument, is Tier 1 capital or would be Tier 1 capital were it not for a
limit imposed by the prudential standards on the proportion of Tier 1 capital
that can be made up of such shares or instruments.
What happens if the characteristics of the share change?
5.23 If the characteristics of a share change so that it no longer complies with
the requirements of subsection 703-37(5), the share will continue to be
disregarded for the purpose of applying the consolidation membership rules for
a period of 180 days. [Schedule 2, item 3, subsection 703-37(7)]
5.24 The most likely cause of a change in characteristics of a share that
would result in the share failing the conditions in section 703-37 would be a
change to the rights to returns or voting rights associated with the share.
Subsection 703-37(7) provides consolidated groups with a transitional period in
Financial Sector Legislation Amendment (Restructures) Bill 2007 21
Schedule 2 -- Restructure relief: taxation aspects
which to adjust their holdings to avoid non-compliance with the consolidation
membership rules.
Consequences of an ADI restructure
5.25 Generally a consolidated group will cease to exist where the head
company of the group no longer satisfies the conditions for being a head
company. However, as an exception to this rule, the consolidated group is taken
to continue to exist if:
· an entity (the original company) ceases to be the head company
because, through a share exchange, another company is interposed
between the original company and its shareholders; and
· the interposed company makes an irrevocable choice that the
consolidated group is to continue in existence.
5.26 In these circumstances, section 703-75 of the ITAA 1997 operates to
ensure that the original company and the interposed company are treated as
having exchanged identities throughout the period before the completion time.
As all the tax attributes of the original company effectively become those of the
interposed company, tax outcomes should be seamless and neutral.
5.27 Therefore, the interposition of the non-operating holding company as the
head company does not create a new consolidated group and the single entity
rule (section 701-1) continues under the new head company. The single entity
rule ensures that subsidiary members of a consolidated group for head company
core purposes and entity core purposes are treated as parts of the head company.
5.28 One effect of section 703-75, together with the single entity rule, is that,
if a subsidiary is moved from the original company (that is, the ADI or an
extended licensed entity member) to the non-operating holding company, the
assets in the subsidiary are treated as moving within the head company and
there are no taxation consequences. The membership interests in the subsidiary,
being intra-group assets, are not recognised for taxation purposes.
Consequently, the transfer of the membership interests cannot trigger a taxation
event, such as CGT event J1, in the group.
5.29 A second effect of section 703-75 is that the interposed company (ie, the
non-operating holding company) is taken to have the same shareholder history
as the original company (that is, the ADI or an extended licensed entity
member), including tracing through any interposed entities.
5.30 Therefore, for the purpose of applying the continuity of ownership test
to determine whether the non-operating holding company is entitled to
deductions for prior year losses and bad debts, the non-operating holding
22 Financial Sector Legislation Amendment (Restructures) Bill 2007
Schedule 2 -- Restructure relief: taxation aspects
company is taken to have the same ownership as the ADI or an extended
licensed entity member prior to the completion time. Consequently, if the ADI
was a widely-held company before the completion time, the non-operating
holding company is taken to be a widely-held company before that time.
Modifications to the imputation provisions to ensure that certain
distributions from the non-operating holding company are
frankable
5.31 Following an ADI restructure, distributable profits of the ADI that are
transferred to the non-operating holding company in connection with the ADI
restructure may be classified under the accounting standards as, for example,
share capital of the non-operating holding company. This may inappropriately
result in distributions that would have been frankable if made by the ADI being
treated as unfrankable because they are made from the non-operating holding
company.
5.32 Therefore, a distribution made by the non-operating holding company
will be taken to be a dividend for the purposes of the income tax law that is not
an unfrankable distribution where:
· the distribution is sourced, directly or indirectly from the ADI's
profits before the restructure instrument came into force; and
· the distribution would have been a frankable distribution if it had been
made by the ADI prior to the ADI restructure.
[Schedule 2, item 2, section 202-47]
5.33 An amount sourced indirectly from the ADI's profits could include
retained earnings of subsidiaries of the ADI prior to the ADI restructure.
Modifications to the CGT provisions to facilitate a CGT roll-over
5.34 Subdivision 124-G of the ITAA 1997 provides a CGT roll-over when
shareholders of an original company exchange their shares in the company for
shares in an interposed company. Requirements of the roll-over include:
· all the shareholders in the original company exchange their shares for
shares in the interposed company;
· the percentage of shares that each exchanging member receives in the
interposed company are equal to the percentage of the shares that each
member owned in the original company; and
Financial Sector Legislation Amendment (Restructures) Bill 2007 23
Schedule 2 -- Restructure relief: taxation aspects
· the following ratios are equal:
: the ratio of the market value of each exchanging member's
shares in the interposed company to the market value of the
shares in the interposed company issued to all the exchanging
members; and
: the ratio of the market value of that member's shares in the
original company that were redeemed or cancelled to the
market value of all the shares in the original company that
were redeemed or cancelled.
5.35 Subdivision 124-G will be modified to ensure that shareholders of an
original company who exchange their shares for shares in an interposed
non-operating holding company are able to roll-over any capital gain or loss
that arises from the exchange, into the shares they receive in the interposed
non-operating holding company. [Schedule 2, item 1, section 124-382]
5.36 The modification will apply if:
· the original company is either an ADI or part of an extended licensed
entity;
· a non-operating holding company, within the meaning of the
Financial Sector (Business Transfer and Group Restructure)
Act 1999, is interposed between the original company and its
shareholders;
· a restructure instrument under Part 4A of that Act is in force in
relation to the non-operating holding company; and
· the ADI becomes a subsidiary of the non-operating holding company
as a result of the restructure.
[Schedule 2, item 1, subsection 124-382(1)]
Certain preference shares are disregarded
5.37 If section 124-382 applies, then the preference shares that can be
disregarded under subsection 703-37(4) are also disregarded in determining
whether the requirements of Subdivision 124-G are satisfied. The
characteristics of these preference shares are explained in paragraphs 5.16
to 5.22. [Schedule 2, item 1, subsection 124-382(2)]
24 Financial Sector Legislation Amendment (Restructures) Bill 2007
Schedule 2 -- Restructure relief: taxation aspects
Certain foreign-owned shares are disregarded
5.38 In some circumstances, when a non-operating holding company is
interposed between an original company and its shareholders, arrangements
may need to be made for foreign holders of shares to dispose of their shares in
the original company (or have their shares cancelled) through a share sale
facility, rather than exchange their shares for shares in the non-operating
holding company.
5.39 This is likely to occur because:
· the foreign holders of shares in the original company would not be
permitted to own shares in the non-operating holding company; or
· the foreign holders of shares in the original company would only be
permitted to own shares in the non-operating holding company after
certain regulatory conditions are satisfied.
5.40 A foreign holder, as defined by section 9 of the Corporations Act 2001,
is a holder of securities (including shares) whose address, as shown in the
register which records the details of their holding, is a place outside Australia
and the external Territories.
5.41 Under a share sale facility, the foreign holders would dispose of their
shares in the original company to the non-operating holding company (or the
shares would be cancelled) and an agent or nominee would acquire shares, on
their behalf, in the non-operating holding company. The agent or nominee
would then dispose of the shares in the non-operating holding company and
give the capital proceeds (less expenses) from that disposal to the former
foreign holders of shares in the original company.
5.42 To ensure that shareholders in the original company who exchange their
shares for shares in the non-operating holding company can obtain the CGT
roll-over when a foreign share sale facility is used, certain foreign-owned shares
are disregarded when determining whether certain requirements of
Subdivision 124-G are satisfied.
5.43 Shares in the ADI will be disregarded for the purposes of applying
Subdivision 124-G if:
· the shares are owned by a foreign holder;
· the shares are either disposed of to the non-operating holding
company or cancelled;
Financial Sector Legislation Amendment (Restructures) Bill 2007 25
Schedule 2 -- Restructure relief: taxation aspects
· an agent or nominee, appointed on behalf of the foreign holder,
acquires shares in the non-operating holding company; and
· the agent or nominee subsequently:
: disposes of the shares; and
: gives the foreign holder an amount equal to the capital
proceeds of the disposal less expenses.
[Schedule 2, item 1, paragraph 124-382(3)(a) and subsection 124-382(4)]
5.44 In some circumstances the agent or nominee may dispose of the shares
in the non-operating holding company on a pooled basis. That is, the agent or
nominee may dispose of the shares together with other shares that the agent or
nominee acquired under the share sale facility.
5.45 In these circumstances the agent or nominee will be required to give the
foreign holder of shares in the original company an amount equal to their
proportion of the capital proceeds (less expenses). [Schedule 2, item 1,
subparagraph 124-382(4)(f)(ii)]
5.46 A foreign holder's proportion of the capital proceeds would be
determined by reference to their shareholding in the original company relative
to the total shareholdings of all the foreign holders in the original company who
receive capital proceeds from the agent or nominee.
Example 5.1
Brilliant Banking Ltd (Brilliant Banking) is an ADI. It has three foreign
holders of shares; Peter, Gary and Philip. Of the shares in Brilliant
Banking, Peter holds 10 per cent, Gary holds 15 per cent and Philip holds
5 per cent. Together they hold 30 per cent of the shares in Brilliant
Banking.
Brilliant Banking proposes to interpose a non-operating holding company,
Gold Holding Ltd (Gold Holding), between itself and its shareholders
under an arrangement where its ordinary shareholders exchange their
shares in Brilliant Banking for shares in Gold Holding. However, Peter,
Gary and Philip are unable to receive shares in Gold Holding and so set
up a share sale facility with Paul as their agent.
Gold Holding is interposed between Brilliant Banking and its
shareholders, and Brilliant Banking's shareholders (including Peter, Gary
and Philip) dispose of their shares to Gold Holding. Paul then acquires
26 Financial Sector Legislation Amendment (Restructures) Bill 2007
Schedule 2 -- Restructure relief: taxation aspects
shares in Gold Holding on behalf of Peter, Gary and Philip and
subsequently disposes of them on a pooled basis.
Peter's proportion of the capital proceeds would be determined by
reference to his shareholding in Brilliant Banking relative to the total
shareholdings of Gary, Philip and himself (that is, the foreign holders who
will receive capital proceeds from Paul).
As the total shareholdings of Peter, Gary and Philip totalled 30 per cent of
Brilliant Banking, and Peter held 10 per cent, he would be entitled to
receive 33.33 per cent of the capital proceeds (less expenses) from Paul
(that is, 10/30).
Similarly, Gary would receive 50 per cent and Philip would receive
16.67 per cent of the capital proceeds (less expenses).
5.47 Shares in the non-operating holding company will be disregarded for the
purposes of applying Subdivision 124-G if the agent or nominee acquires shares
in the non-operating holding company. [Schedule 2, item 1, paragraph 124-382(3)(b) and
124-382(4)(d)]
Application and transitional provisions
5.48 The amendments to the consolidation membership rules and the
imputation provisions apply to restructure instruments that come into force
under the Financial Sector (Business Transfer and Group Restructure)
Act 1999 on or after 1 July 2007. [Schedule 2, subitem 4(2)]
5.49 The amendments to the CGT rules apply to CGT events happening on or
after 1 July 2007. [Schedule 2, subitem 4(1)]
Financial Sector Legislation Amendment (Restructures) Bill 2007 27
6
Schedule 3 -- Consequential amendments
Australian Prudential Regulatory Authority Act 1998
6.1 One amendment is made to reflect the change in name of the FSTBA.
Financial Sector (Transfers of Business) Act 1999
6.2 To reflect the extended scope of the FSTBA, it will be re-named the
Financial Sector (Business Transfer and Group Restructures) Act 1999. Other
consequential amendments are made to reflect the extended scope of the
FSTBA.
Income Tax Assessment Act 1997
6.3 Two consequential amendments are made to the Income Tax Assessment
Act 1997 (ITAA) to reflect the change in name of the Financial Sector
(Transfers of Business) Act 1999. That Act will now become the Financial
Sector (Business Transfer and Group Restructure) Act 1999. [Schedule 3, items 10
and 11, sections 320-300 and 320-305]
6.4 Other consequential amendments to the ITAA 1997 ensure that the
consolidation tax cost setting rules and general value shifting regime apply
appropriately to preference shares that are disregarded for the purpose of
applying the consolidation membership rules following an ADI restructure.
These amendments mirror those applying to employee share schemes, which
are also disregarded for consolidation membership purposes. [Schedule 3, items 12
to 24, sections 703-30, 705-85, 707-325, 709-80, 711-45 and 715-615]
28 Financial Sector Legislation Amendment (Restructures) Bill 2007
Schedule 3 -- Consequential amendments
Life Insurance Act 1995
6.5 One amendment is made to reflect the change in name of the FSTBA.
Financial Sector Legislation Amendment (Restructures) Bill 2007 29
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