Measure twice, cut once: Lessons from AusNet’s restructure

The arrangement involves the shareholders in the stapled group giving all their shares to the new parent company, in exchange for the parent company issuing them with shares in itself.

Usually, disposing of shares triggers a taxable CGT event. But if all the shares are disposed in exchange for shares in the new parent and nothing else, the capital gain or loss may be disregarded under Division 615. 

At the time of the restructure, AusNet obtained an ATO Class Ruling confirming that Division 615 rollover relief would apply. However, years later, AusNet realised that if the rollover hadn’t applied to a part of the restructure involving the Distribution entity, the tax value of certain assets may have been revalued higher, allowing them to claim larger tax deductions through depreciation. 

As a result, AusNet objected to its own election, arguing that it had not validly met the rollover conditions, and therefore should be treated as if rollover relief never applied to that step. The ATO insisted that the transaction did satisfy Division 615, and that AusNet’s rollover election was valid.

The Court’s decision

The Full Federal Court sided with the Commissioner, and the High Court has since refused AusNet special leave to appeal. 

Firstly, where AusNet argued that the Distribution step should be taken on its own, the Court held that the requirement in the law that there be a ‘scheme for reorganising’ should be read at face value. This confirms that Division 615 does not only apply to simpler one-entity schemes. 

Secondly, a key requirement is that the shareholders receive shares in the new company ‘and nothing else’. This rule is designed to ensure that the transaction is a genuine reorganisation rather than a disposal for consideration. AusNet argued this wasn’t satisfied as the shareholders enjoyed a boost in the value of the shares. The Court rejected that an incidental increase in share value amounted to additional consideration. The test focuses upon what is actually provided under the scheme, not economic effects that arise as a consequence of the restructure. In other words, if the only thing shareholders receive under the arrangement is shares for shares, the condition is satisfied even if those shares later appreciate in value.

Finally, Division 615 requires that each shareholder’s proportionate interest in the company remains the same before and after reorganisation. AusNet argued that this criteria was not met as some shareholders received AusNet shares in earlier steps, skewing percentages by the time the Distribution step occurred. The Court held that the ratio test was met regardless of the sequential nature of the transactions or the use of an existing company as the acquirer. 

Together, these findings meant that Division 615 did apply.

What you should do

Before committing to any structure, businesses should plan and forecast carefully, and run the numbers upfront to understand the tax and commercial outcomes. Consider post-transaction tax integration issues early, as these can significantly affect the overall structure and future compliance. It’s also critical to obtain advice at the start of the process, instead of after the restructure has taken place. Early engagement with advisors can help avoid costly surprises and ensure that the transaction achieves its intended objectives. 

If you’re planning a restructure or want to understand how the AusNet decision might impact your next transaction, contact our team today to discuss your options and get tailored advice.

Article contributed to by Ryan Attard - Corporate Tax

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