Tax Watch: Edition 4, June 2017

Demergers of Australian listed companies

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No dividends arising from demergers of Australian listed companies

A demerger involves the restructuring of a corporate group by splitting its operations into two or more entities or groups.

Currently the demerger of an Australian listed company may lead to the full value of the shares in the demerged company being taxable as a dividend to New Zealand shareholders. This is a longstanding problem: a dividend should not arise as there is no distribution of income and the shareholder’s economic ownership does not change.

Proposed changes, to apply from the 2016-17 income year, would prevent a dividend from arising on the transfer by an Australian Stock Exchange (ASX) listed company of shares in a subsidiary.

To ensure the changes are not used to effect an in-substance distribution of income, the transfer must not be a dividend under Australian tax law. Taxpayers can refer to statements from the Australian Taxation Office or the company’s demerger documents to help determine this.

Scope limited to Australian listed companies

The amendments are limited to Australian listed companies, where the tax problems with demergers are considered to be the most immediate. Part of the reason for the limited scope is due to Australian tax law already including anti-avoidance rules designed to prevent abuse.

While dividends can still arise for demergers in other countries and of unlisted Australian companies, we welcome this change. The amendment to apply to demergers of Australian listed companies will solve the most pressing issue for New Zealand taxpayers.