Senate

Revised Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)

Chapter 7 - No tax consequences result from AGL's corporate conversion

Outline of chapter

7.1 Clause 5 of this bill will ensure that generally no taxation consequences arise for any person under any Commonwealth taxation laws as a result of the corporate conversion of AGL or from its registration under the Corporations Act 2001.

Context of measure

7.2 AGL and the NSW Government jointly undertook a process to convert AGL from an unincorporated company of proprietors established under NSW legislation dating back to 1837 to a company registered under the Corporations Act 2001 on the same basis as other companies. Legislation to give effect to this conversion has been passed by the NSW Parliament.

7.3 The legislation passed by the NSW Parliament, the Conversion Act, made provision for AGL to be constituted as a body corporate and enabled it to seek registration as a company under the Corporations Act 2001. AGL was constituted as a body corporate under the Conversion Act on 11 October 2002 and was also registered as a public company limited by shares under the Corporations Act 2001 on that date.

7.4 The provisions contained in this bill give effect to the announcement in Minister for Revenue and Assistant Treasurer's Press Release No. C60/02 of 23 May 2002 that the Government would legislate to ensure that there will be no taxation consequences resulting from the corporate conversion of AGL or from its registration under the Corporations Act 2001.

Summary of new law

7.5 These provisions will ensure that generally no taxation consequences arise for any person under any Commonwealth taxation laws as a result of the corporate conversion of AGL or from its registration under the Corporations Act 2001. This is achieved by deeming AGL, corporatised AGL and registered AGL to be, and to have always been, the same company and the same entity for the purposes of all Commonwealth taxation laws.

7.6 However, the share capital tainting rules will apply to ensure that the merger of AGL's share premium account with AGL's share capital account will not result in that account becoming tainted as a result of the merger.

Detailed explanation of new law

7.7 Clause 5 is structured in the following way:

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the main rules are set out in subclauses 5(3), 5(4) and 5(6);

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specific cases are set out in subclauses 5(7) and 5(8);

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the application of the share capital tainting rules is set out in subclauses 5(9) and 5(10); and

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the meaning of terms is set out in subclauses 5(11) and 5(12).

The main rules

7.8 The main rules are:

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AGL, corporatised AGL and registered AGL are deemed to be, and to have always been, the same company and the same entity [subclause 5(4)];

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there will generally be no taxation consequences in relation to any person as a result of AGL's corporate conversion, registration of AGL under the Corporations Act 2001, or the operation of any provision or any action taken under the Conversion Act [subclause 5(6)]; and

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the measure applies for all Commonwealth laws relating to taxation [subclause 5(3)].

7.9 Subclause 5(4) operates in conjunction with subclause 5(6) to ensure that broadly for the purposes of all Commonwealth taxation laws, both AGL's corporate conversion and AGL's registration:

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are tax neutral from the point of view of AGL, its subsidiaries, its shareholders or any other person;

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do not give rise to any tax liabilities or implications for AGL, its subsidiaries, its shareholders or any other person that would not arise if AGL's corporate conversion or registration did not occur; and

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do not extinguish, accelerate or defer any existing tax liability of those persons.

[Subclauses 5(4) and 5(6)]

7.10 The provisions are intended to operate broadly to prevent a range of tax effects that could potentially arise for AGL, its subsidiaries, its shareholders or any other person, if AGL was treated as a new company or a new entity as a result of the corporate conversion or registration. Examples of the consequences for tax purposes that will arise from the operation of subclauses 5(4) and 5(6) include:

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all the actions of AGL before conversion will be attributed to corporatised AGL or registered AGL;

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all the actions of the Secretary of AGL in relation to AGL's assets, rights and liabilities will be attributed to corporatised AGL or registered AGL;

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no CGT events will occur as a result of AGL's corporate conversion or AGL's registration;

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no alteration in ownership or control of AGL, or change in legal and beneficial ownership in any interest in any entity held by AGL, either directly or indirectly, will occur as a result of AGL's corporate conversion or AGL's registration;

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all taxation attributes of AGL, and where applicable, any entities in which AGL has an interest, either directly or indirectly, such as franking accounts, foreign dividend accounts, dividend rebates, tax losses and taxation liabilities will remain unchanged as a result of AGL's corporate conversion or AGL's registration.

7.11 This measure applies for the purposes of all Commonwealth laws relating to taxation. Commonwealth taxation laws cover a broad range of Commonwealth Acts and regulations, including those dealing with the assessment, administration, imposition and collection of taxation. Subclause 5(3) lists a number of Commonwealth taxation laws but the list is not exhaustive. [Subclause 5(3)]

Specific cases

Shares and interests in shares in AGL

7.12 Neither AGL's corporate conversion nor its registration as a company under the Corporations Act 2001 will give rise to any taxation consequences in relation to shares in AGL, or interests in shares in AGL because the legal and beneficial ownership of those shares or interests in shares are taken not to have altered. [Subclause 5(7)]

7.13 For example, this means that shareholders in AGL will be considered for the purposes of taxation laws to have acquired their shares in corporatised AGL and registered AGL at the same time and for the same cost as they acquired shares in AGL. Shareholders who acquired their shares before 20 September 1985 will continue, for taxation purposes, to do so despite the corporate conversion and registration of AGL.

Anything done by or to AGL's Secretary

7.14 The Conversion Act provides for the assets, rights and liabilities of AGL before conversion to be vested in, or become assets, rights and liabilities of corporatised AGL immediately on conversion. Where this is not possible, the assets, rights and liabilities remain vested in, or rights and liabilities of AGL's Secretary and the provisions of Schedule 3 to the Conversion Act apply. For example, assets are required to be held on trust for corporatised AGL and registered AGL until such time as they can be transferred to corporatised AGL or registered AGL.

7.15 Subclause 5(8) provides that, for taxation purposes, anything done by or to AGL's Secretary in relation to assets, rights and liabilities of AGL which were not able to be dealt with under the Conversion Act are taken to have been done by or to corporatised AGL or registered AGL. [Subclause 5(8)]

Application of the share capital tainting rules

7.16 The share capital tainting rules will apply to the corporate conversion and registration of AGL to allow the merger of AGL's share premium reserve with corporatised AGL's share capital in accordance with Schedule 4 to the Conversion Act. This is an exception to the general principle that there will be no taxation consequences arising from AGL's corporate conversion or registration.

7.17 The Conversion Act provides for any amount standing to the credit of AGL's share premium reserve on the conversion day to become part of AGL's share capital. This is identical to the merger of share premiums and share capital that occurred with the abolition of the concept of par value under the Company Law Review Act 1998 for companies registered under the Corporations Law at that time.

7.18 Subclause 5(9) ensures that transitional provisions to the consequential amendments made to the taxation laws as a result of the changes to company law made by the Company Law Review Act 1998 will also apply to AGL. The transitional provisions referred to in subclause 5(9) apply to tainted share capital provisions contained in Division 7B of Part IIIAA of the ITAA 1936. [Subclause 5(9)]

7.19 As a result of the introduction of the simplified imputation system with effect from 1 July 2002, Part IIIAA of the ITAA 1936 does not apply to events occurring after that date. On 27 September 2002, the Minister for Revenue and Assistant Treasurer announced that the Government would introduce as soon as practicable, further imputation amendments including amendments dealing with share capital tainting, to apply from 1 July 2002.

7.20 Subclause 5(10) operates to ensure that when the imputation amendments dealing with share capital tainting are re-enacted, that the effect of the transitional provisions referred to in subclause 5(9) apply appropriately to AGL's circumstances. [Subclause 5(10)]

Meaning of terms

7.21 Subclauses 5(11) and 5(12) deal with the meaning of relevant terms in the provisions. In particular:

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'AGL' is defined as having the same meaning as in the Conversion Act, which defines 'AGL' as meaning the company of proprietors known by the name "The Australian Gas Light Company" that was originally established by the Australian Gas Light Company Act 1837.

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'Corporatised AGL' is defined as meaning AGL after it is constituted as a body corporate under the Conversion Act.

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'Registered AGL' is defined as meaning corporatised AGL after it is registered as a public company limited by shares under Part 5B.1 of the Corporations Act 2001 of the Commonwealth.

[Subclauses 5(11) and 5(12)]

Application and transitional provisions

7.22 The provisions apply from 11 October 2002, which is the date of AGL's corporate conversion.