ATO issues 5 case studies to clarify tax considerations in commercial deals

The ATO inquired whether the siblings had undergone ‘real bargaining,’ to ensure that the sale price aligned with real market value and found no evidence of bargaining. In cases like these, where transactions are not arm’s length and there was no evidence of bargaining, the ATO said it would likely apply the market value substitution rule.

Under the market value substitution rule, the ATO takes an individual as having received the ‘market value’ of the asset at the time of a capital gains tax (CGT) event, for tax purposes.

The second case study concerned a company tax restructure, where a company founded by four individuals sought to sell some of their business. The founders started trading under a new company, each owning 25 per cent shares, and later sold a quarter of these shares to a third party.

During the sale, new classes of shares were issued for $1 each. One A-class share was issued to the third party, and one B-class share was issued to the family trust controlled by the founders, with priority given to dividends and other specific rights attached.

In the 2022 income year, the rights and terms attached to the A and B class shares were altered by a share split and variation of rights, in anticipation of a scheduled special purpose acquisition company (SPAC) process. One founder previously had the B class share valued, which determined their market value based on priority dividend rights.

The ATO examined this valuation, finding that A and B class shares now had an inflated value equal to the ordinary shares. After the SPAC process was completed in 2023, the ATO said the share split shifted the inflated value from the founders to their family trust via a direct value shift.

The founders, after reviewing the ATO’s general value shifting regime, agreed that direct value shifting rules applied to deem capital gains for the 4 individuals in the 2022 income year. This treated the capital gains as if they had sold the shares to the trust in 2022, increasing the capital gain from the group’s original position.

The third case study concerned foreign resident capital gains, where a foreign resident held shares in a listed company. The company entered a binding scheme implementation deed, where all ordinary shares would be acquired for non-cash consideration.

The foreign resident proposed to provide the ATO with an acceptable security, equal to the agreed CGT liability, and in return receive a 0 per cent foreign resident capital gains withholding (FRCGW) rate.

Following the execution of an escrow deed, the ATO secured $30 million in future tax payable, and the FRCGW rate was varied to 0 per cent.

Next, the ATO delved into a case where a trust sold its business operations, and the Tax Office had to consider the eligibility of a beneficiary for the CGT discount who was a non-resident for tax purposes.

The CGT discount is only applicable for periods where an individual is an Australian resident, but foreign residents could be entitled for an apportioned CGT discount for assets held while they were an Australian resident for tax purposes.

Under tax law, the ‘gain day’ is considered to be at the end of the income year, rather than the day of sale. In this case, the contract and settlement date had been used as the ‘gain day,’ which the ATO corrected. This reduced the CGT percentage they could claim to the correct amount.

Lastly, the ATO considered a case where three pieces of land were sold by three related trusts for $155 million. This examined whether the income from the sale was capital or revenue in nature.

Typically, a financial gain would be considered revenue if it arose from an isolated commercial transaction with the intention to make a profit. However, in this case, the taxpayer demonstrated they no longer required the land and the warehouses on it due to changed circumstances relating to the pandemic.

Because the facts indicated the taxpayer had no intention to sell for profit at the time of the transaction, the ATO classified the transaction as a realisation of capital and not revenue, therefore making it eligible for the 50 per cent CGT discount.

Given the complexity of tax rules surrounding commercial deals, the ATO urged taxpayers to get commercial deals assistance to help them get tax certainty and minimise the risk of post-transaction disputes.