Explanatory Memorandum
(Circulated by the authority of the Treasurer, the Hon John Dawkins, M.P.)Capital Gains Tax - Roll-over for the Transfer of Assets Between Group Companies
Summary of proposed amendments
Purpose of amendment: The proposed amendment will operate as a general anti-avoidance measure relating to the effective disposal of rolled-over assets outside a company group. A company holding an asset which has been the subject of a CGT roll-over under section 160ZZO, or a number of such roll-overs, will be deemed to have disposed of and re-acquired the asset for its market value if the company subsequently leaves the control of the company which was the ultimate holding company of the group at the time of the first roll-over.
The amendment seeks to deem the disposal of assets by reference to the beneficial ownership of the transferee company rather than the relationship between the transferee company and the immediate transferor.
Consequential amendments to the record keeping provisions require a transferee company to be able to substantiate its status as a group company in relation to the ultimate holding company at all times that a rolled-over asset is held by the transferee.
Date of effect: The amendment will apply to disposals of assets occurring after 16 December 1992. Where a disposal of an asset occurred on or before 16 December 1992, transitional provisions will apply in respect of the continuing operation of paragraphs 160ZZO(1)(g) and (h).
Section 160ZZO provides, at the election of the transferor and transferee companies concerned, a roll-over relating to assets transferred between companies belonging to a 100% wholly owned company group. The effect of the roll-over is to maintain the pre-CGT status of assets acquired by the transferor before 20 September 1985, and to delay the realisation of an accrued gain or loss on assets acquired by the transferor on or after 20 September 1985.
In respect of assets transferred after 6 December 1990, paragraph 160ZZO(1)(g) deems (for CGT purposes) the asset to have been disposed of and re-acquired by the transferee if the transferee subsequently ceases to be a group company in relation to the transferor for any reason other than the dissolution of the transferor.
Where the asset is transferred after 13 February 1991 and the group company relationship between the transferee and transferor companies ceases due to the dissolution of the transferor, paragraph 160ZZO(1)(h) deems (for CGT purposes) a disposal and re-acquisition of a rolled-over asset on the occurrence of a specified event, where either:
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- a company that was a group company at the time of the roll-over disposal in relation to the transferee disposes of a share in the transferee; or
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- the transferee company issues a share to a person who was not, at the time of the disposal, a group company in relation to the transferee.
It has become apparent that these provisions are deficient in a number of respects.
Firstly, the deemed disposal mechanism under paragraph 160ZZO(1)(g) is potentially open to abuse. The mechanism examines the relationship between the transferee company and the company which was the immediate transferor of the asset. It does not examine the relationship between the "ultimate" transferee and any company which may have previously transferred the asset and obtained a roll-over under section 160ZZO. Therefore, if an asset is subject to multiple roll-overs under section 160ZZO, provided that the transferee company remains a group company in relation to the last in the series of transferor companies, there may be no CGT consequences even though there may effectively be a change in the underlying ownership of the asset. Although the general anti-avoidance provisions of Part IVA may apply in cases involving multiple roll-overs, it is proposed to include a specific anti-avoidance measure relating to the operation of section 160ZZO.
Secondly, paragraph 160ZZO(1)(g) can operate in inappropriate circumstances. In general, the paragraph applies where the transferee company ceases to be a group company - the asset has effectively been disposed of outside the group. However, if the transferor ceases to be a group company, paragraph 160ZZO(1)(g) operates to deem the transferee to have disposed of and re-acquired the asset. This occurs even though there has ben no change in the underlying ownership of the asset, which remains within the company group.
Thirdly, paragraph 160ZZO(1)(h) can also apply in inappropriate circumstances, where the transferee company is the ultimate holding company in a group structure and the transferor company has been liquidated. As described above, if the transferee issues shares to a person who was not a group company at the time of the roll-over, a disposal and re-acquisition of rolled-over assets will be triggered.
This limitation causes problems in some circumstances for transferee companies who may wish to issue shares to persons who were not group companies at the time of the roll-over. The motive for issuing shares may be quite unrelated to the mischief contemplated by paragraph 160ZZO(1)(h). For example, the issue of bonus shares to existing shareholders, the participation of employees in employee share acquisition schemes, or the issue of shares for the purposes of raising new equity would trigger the deemed disposal and re-acquisition under paragraph 160ZZO(1)(h).
A further anomalous result arises under paragraph 160ZZO(1)(h) where the transferor company has been liquidated and, at a later time, a group company disposes of a share in the transferee company to another group company. Although there has been no change in the underlying ownership of the asset, a deemed disposal and re-acquisition of the asset will be triggered.
Explanation of proposed amendments
The Bill proposes the repeal of paragraphs 160ZZO(1)(g) and (h) [Clause 53] , and the introduction of new section 160ZZOA.
New section 160ZZOA [Clause 54] is a general anti-avoidance provision which will apply where there has been a "group roll-over disposal" of an asset. A group roll-over disposal is a disposal of an asset between wholly owned group companies to which a roll-over under section 160ZZO applies. A group roll-over disposal may form part of a "series of group roll-over disposals" . A series of group roll-over disposals will arise where there is two or more group roll-over disposals occurring without the intervention of an actual disposal of the asset outside the group or a deemed disposal under new section 160ZZOA. There is no requirement that the group roll-over disposals in a series occur in quick succession or as part of the same transaction. For the purposes of new section 160ZZOA, a series of group roll-over disposals will commence with the first roll-over disposal after 16 December.
It is a requirement under new section 160ZZOA that the transferred asset remain under the direct or indirect control of the company which was the ultimate holding company of the group at the time of the first in the series of group roll-over disposals. At the time when an asset held by a transferee company leaves the control of its ultimate holding company (at the "break-up time" - see notes below) a disposal and re-acquisition of the asset is deemed to occur. The new section is therefore concerned to examine the beneficial ownership of the asset rather than the relationship between the transferor and transferee companies, as is the case with paragraphs 160ZZO(1)(g) and (h).
The "ultimate holding company" for the purposes of new section 160ZZOA is a company which at a particular time is part of a wholly owned company group but which is not itself a wholly owned subsidiary of another company. It will hold the other companies in the group as its subsidiaries. "Subsidiary" has the same meaning as that given in section 160ZZO. The ultimate holding company may therefore control an asset either through direct ownership or via the direct or indirect ownership (through another group company) of shares in a subsidiary company which holds the asset.
It is possible that the actual holding company of a group may change, for example where the ultimate holding company is taken over by another company and therefore becomes a subsidiary of a new ultimate holding company. However, the relevant holding company in relation to which the underlying ownership of a particular asset is determined will continue to be the company which was the ultimate holding company for new section 160ZZOA purposes at the time of the roll-over of the asset or the first in a series of roll-overs. Provided that an asset remains within the beneficial control of its ultimate holding company, no disposal and re-acquisition of the asset will be deemed under new section 160ZZOA.
Similarly, different rolled-over assets held by group companies may relate to different ultimate holding companies where there has been a change in the actual holding company of the group prior to the first roll-over of a particular asset.
The ultimate holding company may itself be a transferor or transferee company for the purposes of sections 160ZZO and 160ZZOA. A transfer of an asset to and from the ultimate holding company, as with any transfer to which section 160ZZO has applied, may form part of a series of transfers for the purpose of new section 160ZZOA. A deemed disposal and re-acquisition of the asset can not occur while it is owned by the ultimate holding company. However, in applying new section 160ZZOA, the break-up time (see below) is determined having regard to the first of the disposals in the series (where the series includes the intervening disposals to and from the ultimate holding company).
The time at which an asset leaves the control of its ultimate holding company is referred to as the "break-up time" . An asset will leave the control of the ultimate holding company if any shares in a subsidiary company holding the rolled-over asset are issued or disposed of outside the company group in which the ultimate holding company remains. An asset will also leave the control of the ultimate holding company if any shares of a company of which the transferee is a subsidiary are issued or disposed of outside the company group in which the ultimate holding company remains. Where this occurs, the company which holds the asset is deemed for the purposes of the capital gains tax provisions to have disposed of and immediately re-acquired the asset for its market value at the break-up time.
However, there are no restrictions on the issue or transfer of shares in the ultimate holding company itself for the purposes of new section 160ZZOA. Similarly, there is no restriction on the transfer of shares between group companies. This addresses the concerns discussed above in relation to former paragraph 160ZZO(1)(h).
Control of the asset by the ultimate holding company may also be lost where a rolled-over asset is held by a subsidiary and the ultimate holding company is dissolved. In this case a deemed disposal and re-acquisition of the asset will occur. The liquidation of the ultimate holding company itself cannot occur whilst the company holds assets. Therefore the liquidation of the ultimate holding company will only occur where the asset has been transferred to another group company, or following a disposal of the asset to which the general provisions of Part IIIA will apply.
Once new section 160ZZOA has applied at a break-up time to deem the disposal and re-acquisition of a rolled-over asset, any roll-overs prior to the break-up time will not form part of a subsequent series of roll-overs for new section 160ZZOA purposes. For example, if the disposal of shares in the transferee results in the creation of a new company group and also triggers a disposal and re-acquisition of rolled-over assets held by the company under new section 160ZZOA, any roll-overs of the asset occurring after the break-up time will form a new series and hence require the determination of a "new" ultimate holding company in relation to the asset. The same consequences will apply if the ultimate holding company disposes of a subsidiary and thus triggers a deemed disposal and re-acquisition of a rolled-over asset under new section 160ZZOA. If the subsidiary is later re-acquired by the group, not having disposed of the assets, a new series of group roll-overs may commence.
Provided that an asset remains within the control of the company which was the ultimate holding company at the time that the asset was first rolled-over, there is no restriction on the disposal of group companies other than the one holding the rolled-over asset, or the acquisition of new group companies.
Consequential amendments to the record keeping provisions contained in section 160ZZU will require a transferee company to substantiate its status as a group company in relation to the ultimate holding company at all times that the rolled-over asset is held by it [Clause 55].
The amendments proposed by clauses 52-55 will apply to disposals of assets occurring after 16 December 1992. [Clause 56]
The effect of the above amendments applying to disposals of assets after 16 December 1992 is that paragraphs 160ZZO(1)(g) and (h) will have a continuing operation in respect of a roll-over disposal which occurred on or before that date. Those paragraphs do not deem the disposal and re-acquisition to take place until the occurrence of the cessation time [for the purposes of paragraph 160ZZO(1)(g)] or the trigger time [for the purposes of paragraph 160ZZO(1)(h)]. Where the roll-over disposal occurred on or before 16 December 1992 but the cessation time or trigger time occur after that date, special transitional provisions will apply.
Where:
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- there is a roll-over disposal of an asset after 6 December 1990 [the operative date for paragraph 160ZZO(1)(g)] or after 13 February 1991 [the operative date for paragraph 160ZZO(1)(h)], and on or before 16 December 1992; and
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- paragraph 160ZZO(1)(g) or (h) would otherwise have applied in particular circumstances to deem a disposal and re-acquisition of the asset after 16 December 1992; and
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- had new section 160ZZOA applied to the roll-over disposal, there would be no deemed disposal and re-acquisition of the asset in those circumstances
then paragraphs 160ZZO(1)(g) and (h) will not apply to deem a disposal and re-acquisition of the asset.
The effect of these provisions is that a deemed disposal and re-acquisition of the asset will not occur after 16 December 1992 in the inappropriate circumstances addressed by these amendments - broadly if new section 160ZZOA would apply in the circumstances.
This means that company groups which refrained from taking certain actions so as not to attract the operation of paragraphs 160ZZO(1)(g) or (h) can now do so. For example, where an asset was rolled-over between group companies on or before 16 December 1992, the transferor company can be sold outside the group after that date without a deemed disposal and re-acquisition of the asset under paragraph 160ZZO(1)(g).
Similarly, a transferor company may not have been dissolved to avoid any potential operation of paragraph 160ZZO(1)(h). If the transferor company is dissolved after 16 December 1992, shares in the transferee can be sold within the group, the transferee (if it is the ultimate holding company) can issue bonus shares etc without there being a deemed disposal and re-acquisition of the asset.
However, where paragraphs 160ZZO(1)(g) or (h) have applied to deem a disposal and re-acquisition of an asset on or before 16 December 1992, the operation of those provisions will not be affected.