Hire and Rental News - February 2017

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17 HIRE AND RENTAL NEWS • FEBRUARY 2017
a share sale because of the tax set-off
arrangements between the two countries
(ie: because of the foreign tax credits
allowed between the two countries).
But we explained generally non-resident
companies prefer to pay less Australian
tax because of difficulties in claiming
full foreign tax credits and difficulties
in claiming their own domestic tax
concessions to bring their overall UK tax
bill below the Australian corporate rate of
tax. So in this circumstance, the shares
were again sold.
No access to CGT concessions
This often occurs. Take the example of an
Australian company with a wholly owned
Australian subsidiary. Should it sell its
shares in the subsidiary or have the
subsidiary sell its own assets?
Our client was recently in this situation.
The CGT discount and non-resident
CGT considerations were irrelevant (and
normally are) in these circumstances.
Nevertheless the seller, Smith Pty Ltd, had
carry-forward capital losses of $3 million.
The directors wanted to sell its wholly
owned subsidiary, Subsmith Pty Ltd
(Subsmith – our client), both members of
the same tax consolidated group.
Subsmith’s assets consisted of plant
and equipment and Subsmith had been
advised by its former advisors its sale
would realise an accounting and tax
loss of $1.5 million if Subsmith sold
them. Subsmith also had goodwill and
the advisors had said Subsmith would
realise a profit on the sale of the goodwill
of $2.5 million. So if Subsmith sold its
own business, Subsmith had been told it
would realise a profit of $1 million (being
$2.5 million - $1.5 million).
We agreed with Subsmith that by
contrast, if Smith Pty Ltd sold its shares
in Subsmith, then Smith Pty Ltd would
realise the same profit – $1 million –
which would be a capital gain for Smith.
A share sale has the effect of netting
all underlying gains or losses into one
gain or loss of a capital or revenue
nature (depending on the nature of the
shareholding). In this instance, the
$1 million capital gain incurred by Smith
would be set off against its carried
forward capital losses of $3 million
leaving a balance of losses to be carried
forward of $2 million.
Nevertheless, we convinced Subsmith
to sell its own assets. Subsmith’s former
advisors had not taken into account the
effect of the sale on the consolidated
group. Subsmith’s sale of its own assets
would result in an improvement of the
tax position of the consolidated group.
The consolidated group would derive a
capital gain on the sale of the goodwill of
$2.5 million. That gain would be sheltered
from tax by its capital losses of $3 million.
This would leave a carry-forward capital
loss balance of $0.5 million. In addition,
there would be a deductible revenue loss
of $1.5 million on the sale of the plant and
equipment which it could use against
other taxable income.
Other matters to be taken into account
when considering buying and selling
businesses and shares are buyer
preferences and the capacity of the
seller to declare dividends, the status
of franking credits, proposed earn-out
arrangements, the application of GST,
stamp duty, purchase price allocation and
other matters.
Contact Leigh Adams on 02 9964 0022 or
email:
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