No One Home To Answer Taxing Questions On Law Changes To Share-based Bids
The Age
Friday October 19, 2007
The timing of Dutton's announcement has created consternation so close to an election.
ASSISTANT Treasurer Peter Dutton's election-eve takeover tax bombshell continues to cause consternation, despite a second "clarifying" statement on Tuesday that at least corrected the first one by stating that share exchange takeovers in progress will not be caught.The second statement also cleared the way for Publishing and Broadcasting Limited to continue work on its demerger. PBL put the plan on hold after the first statement appeared, but Dutton's second effort made clear that demerger deals are not a target. What is left is still generating concern and confusion, however. Deals are being delayed, and if the changes are confirmed, share exchange offers will become less common, and takeovers will produce lower returns.The fact that the Government gave no hint that it was about to make the change is not a huge issue, because the change aims to shut down what the Government believes is capital gains tax leakage on takeovers: such moves are rarely telegraphed, for obvious reasons.But the timing of the change is a problem: Dutton's first statement came out last Friday, two days before John Howard announced the election campaign had begun, and the second one came out the day before the Government went into caretaker mode. Takeover lawyers have questions, but the politicians are on the road, and Treasury doesn't know who it is going to be working for.The Government appears to have walked away from a policy position it adopted in 1999, when it encouraged share-based bids by introducing capital gains tax relief for share exchanges.Before the introduction of scrip rollover relief, Treasury had argued that if shareholders in a target company were to get rollover relief, the company that made the share exchange acquisition should not be entitled to also minimise its own potential capital gains bill, by using the market value of shares it acquired - the bid value, in other words - as the tax cost base. Companies making share-based takeovers should instead be required to inherit the cost base of the shares that previously existed in the hands of the former shareholders, Treasury believed.That was impractical, however. Large listed companies have armies of shareholders. Each shareholding has a unique cost base, and the task of identifying each one would be too time-consuming and expensive. In very large companies it would probably be impossible. So Peter Costello decided to adopt a hybrid system that works like this: where there are common shareholders or significant (30 per cent-plus) shareholders, the assumption is that the cost base is discoverable, and that the acquiring company will adopt the original, lower cost base on those "discoverable" shares. But the rest of the shares that are acquired (in practice, all the shares in widely held listed companies) are brought into the acquiring company's accounts at the bid value - producing an effective revaluation of the cost base, and a reduction in potential capital gains tax.The tax consolidation laws brought in by the Government in 2001 added another layer, by allowing a takeover to be treated as an asset acquisition. Since then, assets introduced by share exchange takeovers for listed companies have been consolidated on a basis that mirrors the approach Costello took in 1999 for scrip exchanges. They are booked at the uplifted value: the takeover price, plus debt.It is this asset cost uplift that Dutton's announcement aims to wipe out, and one suspects the argument for doing so is the same as the one Treasury mounted in 1999: that a company conducting a share exchange takeover that creates tax relief for the target company's shareholders should be restricted to the same tax base as the shareholders, and not be allowed to revalue the assets it is acquiring, in the process reducing the potential capital gains bill it will face if it sells the same assets later. The practical objection that sank this treatment in 1999 - difficulties in ascertaining the cost base of perhaps hundreds of thousands of individual shareholdings - does not apply to the importation of the assets themselves: there are fewer of them, and their value is tracked and documented.The change Dutton has announced goes way beyond compensating the system for shareholder rollover relief, however. Rollover relief is temporary, for one thing: eventually, capital gains will be paid, on the original cost base. The removal of the uplift for companies making acquisitions on the other hand is a permanent change, and a new cost.It will also produce much more tax revenue than rollover relief defers, because assets do not change ownership as frequently as shares, and therefore tend to have a significantly lower cost base that is capable of producing capital gains tax revenue that far outweighs any income deferred (not lost) by scrip rollover relief.It is too early to know if takeovers will actually be sunk by the change, but advisers say some proposals are on hold.Certainly the new rules make scrip bids more costly, and less attractive. Until now, rollover relief has sweetened the value of share exchange offers. Now, it may be cheaper for companies to bid cash, and offer a little more to replace the rollover fillip, than to offer shares and cop a big capital gains bill later.Any way you look at it, the cost of bids will rise, the returns they generate will fall, and shareholders will get fewer rollovers. Whether the Government intends all that is unclear: there's an election on, and nobody's home.-- mmaiden@theage.com.au
© 2007 The Age