House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Wayne Swan MP)

Chapter 1 - Dual listed company arrangement

Outline of chapter

1.1 This Bill amends the Income Tax Assessment Act 1997 (ITAA 1997) to align the definition of a dual listed company (DLC) arrangement with the 2009 Australia-New Zealand Convention.

Context of amendments

1.2 The New Business Tax System (Consolidation, Value Shifting, Demergers and Other Measures) Act 2002 inserted the definition of a 'DLC arrangement' into subsection 125-60(4) of the ITAA 1997. The explanatory memorandum to the Bill noted that the definition would be refined following tax treaty discussions with other countries and industry representatives.

1.3 To be defined as a 'DLC arrangement' in subsection 125-60(4) of the ITAA 1997, the DLC must have the appointment of common (or almost identical) boards of directors. However, in certain circumstances there is a regulatory restriction (such as an industry regulation) that requires an Australian company to have at least two-thirds of its board of directors to be Australian citizens. If the foreign company also has a similar set of regulatory restrictions in its home country, it becomes impossible to satisfy the requirement of the appointment of common (or almost identical) boards of directors.

1.4 By failing to be defined as a DLC arrangement, the shareholders of the DLC must take into account the DLC voting share when determining whether they meet the requirements for capital gains tax (CGT) demerger relief. Often, it is difficult to ascribe a market value to such shares, as they do not carry rights to financial entitlements (except in certain situations) and it is also difficult to assess how the DLC voting share affects the proportion of interests of all shareholders.

Summary of new law

1.5 The amendment modifies the definition of DLC arrangement in subsection 125-60(4) of the ITAA 1997, ensuring that companies will not be required to have the appointment of common or almost identical boards of directors, where the effect of relevant regulatory requirements prevents this from occurring.

Comparison of key features of new law and current law

Detailed explanation of new law

1.6 Subsection 125-60(4) of the ITAA 1997 sets out various, cumulative criteria by which arrangements can be identified as a DLC arrangement. The first criterion that must apply is the appointment of common (or almost identical) boards of directors.

1.7 This criterion is modified and will not be required to be satisfied where the effect of relevant regulatory requirements prevents the appointment of common (or almost identical) boards of directors.

1.8 The relevant regulatory requirements must be imposed by legislation, statutory instrument, mandatory code of a regulatory authority, or similar regulatory requirement. Therefore, the agreement that is entered into to create the DLC will not be a relevant regulatory requirement for the purposes of satisfying the definition.

Example 1.1

Assume provisions regulating an Australian industry require that at least two-thirds of the directors of a company operating in that industry be Australian citizens. Suppose a company covered by those regulations sought to enter into a DLC arrangement with a New Zealand company that under New Zealand corporations law was also required to maintain at least two-thirds of its directors as New Zealand citizens.

As the statutory requirements in each country prevent the appointment of common boards of directors, the DLC would not be required to satisfy this requirement in order to be defined as a DLC arrangement for the purposes of the Australian demerger rules.

Application and transitional provisions

1.9 These amendments apply to CGT events happening on or after this Bill receives Royal Assent.