KICK-START FEBRUARY 2015

Transcription

1 KICK-START FEBRUARY 2015

2 WELCOME AND INTRODUCTION NICK HEGGART, DIRECTOR, PERTH

3 INTRODUCTION Welcome! Speakers for today: Intro Nick Heggart Energy and Resources Nick Heggart Capital Management Toby Eggleston Financing Tristan Boyd US M&A structures Toby Eggleston 3

4 CURRENT ECONOMIC CLIMATE Many large scale mining investments scaled back or shelved What impact the falling oil price? Unsurprising that business sentiment at GFC levels WA CCI on 23 December 2014: The latest Westpac-CCI Survey of Business Expectations shows the number of Western Australian businesses expecting the state economy to deteriorate over the coming 12 months rose from 37 per cent in September to 55 per cent this quarter. Short-term expectations also fell to their third-ever lowest level, with 38 per cent of businesses expecting poor economic conditions in the first quarter of

5 TAX REFORM CLIMATE Tax white paper due soon? Informed sources report highly abstract filled with economic jargon and emphasis (ie, more interested in how v. how much) no clear indication of likely changes Base Erosion and Profit Shifting will continue to be a source of attention in 2015 and hand in hand with this will be the continued focus on the tax contribution of major corporations 5

6 RESOURCES AND M&A INTEREST REALIGNMENTS AND FARM OUTS

7 OUTLINE Background Recap: changes Interest realignment arrangements Definition Proposed roll-over relief Farm outs 2012 ATO rulings Proposed treatment 7

8 BACKGROUND changes apply from 14 May 2013 (were enacted in 2014) 2013 Budget announcement: proposed relief for farm outs 2014 Budget announcement: proposed rollover for tenement realignments Relief to also apply from 14 May 2013, but enactment was deferred Relief intended to effectively retain immediate deduction in these cases Ensure appropriate overall tax outcomes Exposure draft legislation and explanatory memorandum released January 2015 Submission period closed 6 February

9 RECAP: CHANGES DEDUCTION CATEGORIES Immediate Mining rights and information acquired from government General geological and geophysical data packages Newly created mining information Other depreciating assets first used for exploration 15 years Mining rights and information first used for exploration, where effective life more than 15 years; or First use test failed and no mine or proposed mine exists Life of mine / proposed mine Mining rights and information first used for exploration, where effective life less than 15 years; or First use test failed and a mine or proposed mine exists 9

10 INTEREST RE-ALIGNMENT ARRANGEMENTS Existing interests A B 100% 100% Tenement 1 Tenement 2 $15m $5m 10

11 INTEREST RE-ALIGNMENT ARRANGEMENTS Realigned interests A B A B 75% 25% 75% 25% Tenement 1 Tenement 2 $15m $5m 11

12 INTEREST REALIGNMENT ARRANGEMENTS The swapping of interests to achieve alignment will trigger taxing events under old an immediate deduction might be claimed for cost of acquired interest which would offset gain on disposed interest [assuming no cash adjustment] Such an outcome no longer possible under new hence the roll-over To get roll-over must have a tenement re-alignment arrangement JV parties exchange interests in mining rights purpose to pursue joint development project interest in project must equate to interest in underlying reserves [this will always be met where ownership of all tenements is aligned with JV interest] first use for exploration not necessary 12

13 PROPOSED ROLL-OVER RELIEF In broad terms, no gain on tenement swap apart from any cash (or non-tenement consideration) passing between the parties Special rules for maintaining pre-cgt and pre-uca status in acquired interest Special rules for cost base Exposure draft looks pretty good expect some further refinements through consultation for example, mining information? Other impediments remain for example, stamp duty 13

14 FARM OUTS Overview of farm out arrangements Immediate (petroleum) Deferred (mining) Definitions of farm in farm out arrangement and exploration benefits to be inserted into legislation cf ATO ruling definition not reimbursement of past expenditure 14

15 FARM OUTS ATO rulings MT 2012/1: immediate farm outs MT 2012/2: deferred farm outs Analysis very complicated: ATO takes granular approach Generally, income tax neutral outcome intended in respect of exploration benefits for both farmor and farmee relied on availability of immediate deduction for farmee when it obtains the title interest tax timing issues can arise for both parties Policy rationale: limitations and timing issues should not impede genuine exploration activity 15

16 PROPOSED CHANGES Essentially the proposed changes will ignore the exploration benefit in determining the income tax consequences The exploration benefit will be essentially defined as where: the farmee undertakes an exploration program as part of the arrangement; or the farmee disproportionately funds exploration for a period By ignoring the exploration benefit: the farmor will only be assessed on any cash or other consideration received (but not by reference to the value of any exploration done or funded); and the farmee will claim deductions for the exploration work it does or funds 16

17 ESOP CHANGES SCRIP SALES & DEMERGERS TOBY EGGLESTON, DIRECTOR, MELBOURNE

18 EMPLOYEE SHARE SCHEMES Background: Acceptance that problems with 2009 amendments, particularly for options Desire to make Australia more attractive for entrepreneurial start-ups incentivise key staff but conserve cash Announcement in October 2014 as part of the Industry Innovation and Competiveness Agenda Draft ED released January 2015 Start-date for ESS interests issued on or after 1 July

19 EMPLOYEE SHARE SCHEMES What s changing for all plans? For shares and options/rights: Maximum period of deferral increased from 7 years to 15 years (need genuine disposal restrictions) Ownership limit increased from 5% to 10%, and now includes rights over shares For options/rights: Don t need to have a real risk of forfeiture (eg, performance/service condition), but would need disposal restrictions on the rights Taxing point now based on when rights exercised rather than when exercisable Can now get a refund of tax if choose not to exercise (eg because under the water) Valuation tables and valuation short cuts What s not changing Still taxing point on cessation of employment, due to budget cost 19

20 EMPLOYEE SHARE SCHEMES Rights/Options (exercise price $100) Grant MV shares: $100 Vest MV shares: $90 Exercise period ends MV shares: $90 Current law: Potential taxing point on vesting possible that options had a MV at that time, even though out of the money due to exercise period No refund of tax if choose not to exercise due to being out of the money real risk of forfeiture or disposal restriction 1/7/15 on rights 1/7/16 1/12/17 Proposed changes: Don t need real risk of forfeiture Vesting should not be a taxing point Can now get a refund of any tax paid (due to cessation of employment/lifting of disposal restrictions on option) if option not exercised 20

21 EMPLOYEE SHARE SCHEMES Rights/Options (exercise price $100) Grant MV shares: $100 real risk of forfeiture Vest MV shares: $150 Exercise MV shares: $120 Disposal MV shares: $180 Current law: Potential taxing point on vesting; taxable on $50 If MV remains $120, capital loss of $30 Proposed changes: Taxing point on exercise; taxable on $20 or disposal restriction 1/7/15 on rights 1/7/16 1/12/16 1/7/17 1/12/17 21

22 EMPLOYEE SHARE SCHEMES START UPS Purpose: ESS interests given to employees of eligible start-ups taxed under the CGT provisions (so possible CGT discount) and only taxed when sell the ESS interest Discount not subject to tax No tax at cessation of employment What is a start-up? Not listed on ASX All members of group incorporated for less than 10 years Group turnover less than $50m Eligibility: Shares issued at a maximum 15% discount (so if shares worth $1.00, employee must pay $0.85) Options issued at or out of the money Disposal restrictions must apply to the ESS interest (or shares acquired on exercise of option) 10% ownership threshold 22

23 EMPLOYEE SHARE SCHEMES START UPS Acquisition Details Sale Details Options eligible for start-up concession 10,000 options, provided for free. Exercise price is $5 and the options have a market value of $0.50. The market value of the shares at the time the options are issued is $4, and at exercise the market value is, say, $6. Sold for $8 per share Shares eligible for start-up concession 10,000 shares, provided for $9 each, with a market value of $10 each. Sold for $15 per share What is the value of the discount? The discount is $5,000 [10,000 x ($0.5-$0)]. The option is 'out of-the money' and in an eligible for start-up tax concession The discount is $10,000 [10,000 x ($10-$9)]. The discount is 10 per cent (which is less than 15 per cent), the start-up concession can apply When is tax paid? At the time of sale of the underlying shares as a capital gain. Possible CGT discount. At the time of sale as a capital gain. Possible CGT discount. What tax is paid? The discount is not itself subject to income tax. CGT will instead apply on $30,000 [10,000 x ($8 - $5)] in the financial year that the shares are sold. The discount is exempt from income tax and market value of the share at acquisition will be part of the cost base for CGT purposes. CGT will be paid upon sale on the difference between the sale price and the market value at acquisition (ie, 10,000 x ($15-$10)). 23

24 SCRIP SALES & DEMERGERS TGP Australia Ltd sale of Nigerian assets to Kogi Iron Limited (completed 11 July 2014) Blackgold International Holdings Ltd sale of Chinese coal assets to Matex International Ltd (announced 31 December 2014) 24

25 TGP AND KOGI DEMERGER TGP and Kogi both listed on the ASX. TGP indirectly held Nigerian exploration assets through its subsidiary KCMH. TGP KOGI KCMH Nigerian expl. licenses 25

26 STEP 1: SALE OF KCMH TO KOGI FOR KOGI SCRIP TGP sold the KCMH shares to Kogi in exchange for Kogi issuing 85m Kogi ordinary shares to TGP (24%). TGP 24% KOGI KCMH KCMH Nigerian expl. licenses Nigerian expl. licenses 26

27 STEP 2: DISTRIBUTION OF KOGI ORDINARY SHARES TGP revalued KCMH shares to market value, which resulted in a loss in the accounts. TGP then undertook capital distribution to demerge the 85m Kogi shares to the TGP shareholders. 24% TGP KOGI KCMH Nigerian expl. licenses 27

28 SCRIP SALES AND DEMERGERS Important points to note: Justifiable business case required Initial transfer will be a disposal. Therefore structure only works where: selling assets at a loss; gain sheltered by prior year losses; capital gain disregarded under Div 768 or 23AH Cannot use scrip for scrip relief followed by demerger s (2)(a) & s PBR

29 FINANCING & INFRASTRUCTURE ISSUES TRISTAN BOYD, SENIOR ASSOCIATE

30 FINANCING AND INFRASTRUCTURE Section update ATO engagement Compensation payments Tax increment financing 30

31 ATO ENGAGEMENT Administratively Binding Advice (ABA) only administrative protection ABA converting into a Private Binding Ruling (PBR) process streamlined only if converted prior to issue ATO sign-off as precursor to PBR no issues letter PBR priority request; early engagement process improvements, but still a significant lag Or.wing it? no protection from penalties 31

32 SECTION Board of Taxation Report and exposure draft legislation still not released ATO draft tax determinations: TD 2014/D18 TD 2014/D19 TD 2014/D20 32

33 SECTION TD 2014/D18: non-resident debt investor Absent evidence suggesting otherwise, the return on the debt interest paid by the Australian entity is merely a source of funds which may be used by the parent entity to fund equity returns. As such, it would not be reasonable to conclude that the ultimate recipient (that is, the shareholder) is insubstance receiving de facto equity returns from the Australian company and thus there would not be a scheme, or series of schemes, under which returns paid by the Australian entity on the debt interests were designed to be the source of funds to fund returns on the equity interests held by the ultimate recipients. 33

34 SECTION TD 2014/D20: intra-staple debt The fact that Y Co has issued a debt interest to Property Trust will not on its own be sufficient to conclude that the scheme is designed to operate so that the interest on the loan is used to fund a return to the stapled security holders a stronger connection between the interest on the loan and the trust distributions must be evident from the structure of the scheme such that it is reasonable to conclude that the Property Trust's distributions to the stapled security holders are indirectly a return from Y Co. Relevant connections could include that Y Co was almost exclusively funded by the loan from Property Trust and/or the return on the loan was designed to pass the vast majority of Y Co's profits to Property Trust. 34

35 COMPENSATION PAYMENTS Our pledge is simple. [The long-term lease of Port of Gladstone] would be revoked immediately without compensation to investors. The Palmer United Party believes that all of these assets should remain in the hands of Queenslanders and not be sold off to private sector investors. - Dr Alex Douglas, Palmer United Party Be very clear about this: there will be no compensation. - The Hon. Daniel Andrews, Premier of Victoria 35

36 COMPENSATION PAYMENTS Contractual rights to termination payments: cancellation / discharge / satisfaction / surrender of rights (CGT event C2) capital gain if proceeds are greater than cost base does expenditure create cost base? or separate CGT asset giving rise to capital loss? timing: entering into an agreement may be eligible for CGT discount But: may be assessable ordinary income if it can be dissected or apportioned to revenue items (e.g. loss of profits) potential timing mismatch for certain expenditure (e.g ) 36

37 TAX INCREMENT FINANCING What is it? infrastructure funded by expected increase in localised taxes that benefit from the infrastructure (e.g. land tax, stamp duty) potential for private sector financing through bonds linked to tax increment benefits Who is pushing it? local councils, regional areas, Housing Industry Association, Property Council of Australia Limitations? risk to financiers may require a premium unless government guarantee is also provided hypothecating future tax revenue increases complexity in the tax system 37

38 US M&A STRUCTURES TOBY EGGLESTON, DIRECTOR, MELBOURNE

39 WHAT IS DRIVING M&A? I think we are in a new cycle and it's the beginning what I think is a long cycle that will lead to a lot of M&A, but I believe we are in a disinflationary or possibly even a deflationary environment, where it is very challenging for companies to achieve significant top-line growth. So companies are focusing on taking out costs and they're also interestingly upgrading the quality of their cash flows and their balance sheets. As a result, M&A activity is heavily driven by creating efficiencies. Companies are looking at every line item on their financial statement to identify where they can save costs. The three primary lines are cost of goods sold, SG&A, and taxes, and I think instead of looking at inversions as a unique event, if you look at it as just a necessity when you're looking throughout your income statement to reduce cost, you'll see that taxes cannot be ignored. Ken Moelis, CEO Moelis & Co Q earnings conference call 5 February

40 WHAT IS AN INVERSION? PRE-INVERSION POST-INVERSION US CO SHAREHOLDERS FOREIGN CO SHAREHOLDERS US CO SHAREHOLDERS FOREIGN CO SHAREHOLDERS US CO FOREIGN CO <80% NEW FOREIGN >20% HOLD CO US CO FOREIGN CO NON-US SUBS (US CO CFCS) FOREIGN CO SUBS NON-US SUBS FOREIGN CO SUBS 40

41 WHAT DRIVES AN INVERSION? PRE-INVERSION POST-INVERSION US tax on: US Co worldwide earnings Distributions from US Co Subs, subject to foreign tax credit Dividend US CO US tax only on US Co earnings and distributions by US Co Subs Reduced by interest and royalty payments Debt NEW FOREIGN HOLD CO US CO Interest and royalty US CO SUBS US CO SUBS Future expansion outside of US tax net US CO SUBS US CO SUBS NEW NON-US COS 41

42 AVERAGE CHANGE IN EFFECTIVE TAX RATE ON INVERSION DEALS 2010 TO 2014: 29.4% TO 20.5% 35% 30% 25% 20% 15% 10% 5% 0% Pre-inversion Post-inversion 42

43 ANNOUNCED US INVERSION TRANSACTIONS:

44 INVERSION DEALS MEASURED BY PRE-TAX INCOME 44

45 PROPOSALS TO STOP INVERSIONS POST-INVERSION US CO SHAREHOLDERS FOREIGN CO SHAREHOLDERS <50% NEW FOREIGN >50% HOLD CO US CO FOREIGN CO NON-US CO SUBS FOREIGN CO SHAREHOLDERS 45

46 HOW COULD IT WORK IN AUSTRALIA? PRE-INVERSION POST-INVERSION US CO SHAREHOLDERS UK CO SHAREHOLDERS AUS CO SHAREHOLDERS US CO SHAREHOLDERS UK CO + AUS CO SHAREHOLDERS <50% >50% US CO UK CO AUS CO NEW UK CO $1.5BN $1BN $0.7BN US CO UK CO AUS CO 46

47 CASH-RICH, SPLIT OFFS Year Deal Tax Saved 2008 White Mountain $161m 2014 Phillips 66 $262m 2014 Graham Holdings $437m 2014 Duracell $1.66bn TOTAL $2.52bn 47

48 CASH-RICH, SPLIT OFFS TRANSACTION TRANSACTION STEPS PUBLIC S/HS COMPANY Company shares BUYER 1. Company forms new subsidiary (Split Co) 2. Company transfers operating business, non-cash assets, and cash into Split Co Operating business must qualify as an active trade or business Up to ~66% of Split Co may be cash or cash equivalents Cash + ATB assets Form Split Co 3. Company splits off Split Co to Buyer in exchange for the Company shares owned by the Buyer SPLIT CO Split Co shares Split Co becomes a wholly owned subsidiary of Buyer 48

49 CASH-RICH, SPLIT OFFS POST TRANSACTION RESULTS PUBLIC S/HS BUYER Exchange of 100% of stock of Split Co for Company shares qualifies as a tax free distribution (split-off) Transaction is tax-free to both Company and Buyer COMPANY SPLIT CO 49

50 WILL IT WORK IN AUSTRALIA? TRANSACTION AUSTRALIAN TAX ISSUES PUBLIC S/HS STEP ISSUES? 1. Company forms Split Co OK COMPANY Company shares BUYER 2. Company transfers business assets, and cash into Split Co OK Cash + ATB assets SPLIT CO Form SplitCo SplitCo shares 3. Company splits off Split Co to Buyer in exchange for the Company shares owned by the Buyer Buy-back proceeds include dividend CGT event for Company on transfer of Split Co shares 50

51 HOW COULD IT WORK IN AUSTRALIA? FOR CO OTHER AUS CO SHAREHOLDERS 55% 45% AUS CO ASIA SUB AUS SUB 51

52 HOW COULD IT WORK IN AUSTRALIA? FOR CO $ 55% 45% AUS CO OTHER AUS CO SHAREHOLDERS Step 1: For Co acquires Asia Sub from Aus Co Capital gain disregarded under Div 768 Aus Co generates a Conduit Foreign Income (CFI) credit equal to disregarded gain ASIA SUB AUS SUB 52

53 HOW COULD IT WORK IN AUSTRALIA? FOR CO $ 100% OTHER AUS CO SHAREHOLDERS Step 2: Aus Co buys back shares held by For Co AUS CO Dividend declared to be CFI ASIA SUB AUS SUB 53

54 HOW COULD IT WORK IN AUSTRALIA? FOR CO OTHER AUS CO SHAREHOLDERS 100% AUS CO ASIA SUB AUS SUB 54

55 QUESTIONS?

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57 PRESENTERS Nick Heggart Director, Perth T nick.heggart@greenwoods.com.au Toby Eggleston Director, Melbourne T toby.eggleston@greenwoods.com.au Tristan Boyd Senior Associate, Perth T tristan.boyd@greenwoods.com.au 57

58 SYDNEY ANZ Tower, 161 Castlereagh Street Sydney NSW 2000 T F MELBOURNE 101 Collins Street Melbourne VIC 3000 T F PERTH QV.1 Building, 250 St Georges Terrace Perth WA T F The contents of this publication, current at the date of publication set out in this document, are for reference purposes only. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on this publication Greenwoods & Herbert Smith Freehills Pty Limited ABN