A draft ruling released yesterday by the ATO confirms the tax industry’s view that there is continuing inconsistency in the operation of the tax laws in relation to shares issued in consideration for assets, according to Deloitte M&A Tax Partner, Rick Taylor.

The draft ruling indicates the Tax Office’s view on companies giving scrip (shares) to acquire assets, including tax consequences arising from the issue of scrip (such as the availability of deductions for losses and outgoings) and the cost of capital assets, trading stock and depreciating assets acquired for scrip.

“People have always been concerned about how to deal with scrip transactions and now the ATO has accepted that when you give shares to pay for a capital asset, the cost is the market value of the shares given,” Mr Taylor said.

“There has previously been a concern that the Tax Office thought that you were creating property rather than ‘giving’ property when giving scrip consideration. Now they recognise from a cost base point of view that providing shares as consideration should be treated similarly to giving cash.

“From a merger transaction perspective, this provides greater certainty, because the market value of scrip consideration provided should result in a market value cost base of the acquired shares when calculating capital gains tax. This would then be relevant to a future transaction involving the target company.

“This area of the tax law dealing with cost base of shares acquired in a scrip-for-scrip deal is also the subject of a separate review by Treasury that the Assistant Treasurer, Chris Bowen, has indicated should be completed in mid-February.

“To date, many companies have been using a two-step process to deal with scrip transactions. Step one is to create an obligation to pay for assets or services upon the acquisition of the asset. Step two is to offset that obligation of the supplier to subscribe for shares. This provided greater clarity that a tax cost or deduction would arise for the assets or services acquired.

“In practical terms, the ruling highlights there are still inconsistencies in the way the tax laws apply to shares issued in consideration for different types of assets. For instance, the issue of shares to acquire services or trading stock will prima facie not give rise to tax deductions for their cost, whereas if cash was used or the two step process was used, a tax deduction should be available.”