Updates to RevenueWA connected entity duty exemption ruling

By Nick Heggart, Jinny Chaimungkalanont, Tristan Boyd, Louise Van Wyk

RevenueWA has released Revenue Ruling DA 19.2 in relation to applications for a connected entity duty exemption. This replaces the previous Revenue Ruling DA 19.1 – with the key difference being the inclusion of the Commissioner’s treatment of notifiable events (which can trigger revocation of an exemption) at the pre-transaction decision (ruling) stage and at the exemption application stage.

Revocation of connected entity exemptions

Following the 2019 amendments to the Duties Act 2008 (WA), there are two ways in which a connected entity exemption that is granted for a relevant reconstruction transaction can be revoked:

• Automatic revocation can occur where a notifiable event (commonly, the transferee from the relevant exempt transaction leaving the group) happens within 3 years after the exempt transaction. However, there is no automatic revocation where the notifiable event arises as a result of a public float or certain qualifying demergers; and
• The Commissioner can revoke an exemption if it is determined that the relevant exempt transaction is part of a scheme or arrangement with a duty or (WA state) tax avoidance purpose.

A connected entity exemption cannot be granted in the first place if the Commissioner is satisfied that the exemption would be automatically revoked or that there is an offending scheme or arrangement with a duty or tax avoidance purpose.

Revenue Ruling DA 19.2 sets out the Commissioner’s views in relation to applications for connected entity exemptions.

The Commissioner’s position

In DA 19.2, the Commissioner sets out the following principles:

• In determining an application for a connected entity exemption (i.e. an application after the connected entity transaction has been entered into), the Commissioner will not consider the impact of an expected or proposed event (that may be a notifiable event that would trigger a revocation) if the event has not occurred at the time of his/her decision.
• In determining an application for a pre-transaction decision request (i.e. a ruling before the connected entity transaction has been entered into):
  • the Commissioner will consider the impact of an expected or proposed event. However, a taxpayer can specifically request a ruling on whether an exemption would be granted if a decision on the application is made before the event occurs; and
  • the Commissioner will not consider the impact of a proposed event if the taxpayer does not disclose sufficient detail of the event.

Implications & Analysis

This means that for a pre-transaction decision request, if the Commissioner takes the view that a proposed event is a notifiable event (other than a public float or qualifying demerger), a favourable decision will not be received.

However, for an exemption application, the Commissioner will not consider whether a proposed event is a notifiable event (that will trigger automatic revocation) and will grant the exemption, with the ability to subsequently revoke it after the proposed event occurs – even if the taxpayer properly discloses the proposed event. The Commissioner may however take the proposed event into account in determining whether the relevant transaction is part of a scheme or arrangement with a duty or tax avoidance purpose – and may deny the exemption at the application stage if this is found to be the case.

The Duties Act 2008 provides that an exemption cannot be granted if “the Commissioner is satisfied that the exemption would be [automatically] revoked under section 264A because of the occurrence of a notifiable event”. The Commissioner has interpreted this prohibition to apply only where events have already occurred (as opposed to the prohibition on the Commissioner granting an exemption if there is a scheme that “has been, or is to be” carried out for a duty or tax avoidance purpose). Unfortunately, this means that an exemption that is granted may be of limited use to a taxpayer who is proposing a further transaction.

For example, if a taxpayer is proposing to undertake a demerger, they will often need to transfer assets or entities (or both) between group members to establish the demerging group and will most likely seek a connected entity exemption for such transactions. Under the approach in DA 19.2, the Commissioner will take the proposed demerger into account when determining a pre-transaction decision request but not an exemption application. If a taxpayer is unable to obtain a binding pre-transaction decision prior to entering into the internal transaction (agreement or transfer), which can happen because of circumstances outside of the taxpayer’s control, an exemption will give little comfort. This is because the real issue is whether the exemption will be automatically revoked as a result of the proposed demerger (i.e. if it is not a qualifying demerger) – which the Commissioner will not consider until after the demerger has occurred.

The recent change in approach from the Australian Taxation Office in relation to when a demerger is a qualifying demerger for demerger relief under Division 125 of the Income Tax Assessment Act 1997, and the fact that similar interpretative issues could arise in relation to the definitions of qualifying demergers under the Duties Regulations 2008 (WA), highlights the need for certainty upfront when proposing implementation of these types of transactions.

In addition, RevenueWA issues private rulings only on certain issues as specified in the Duties Act 2008 (the grant of a connected entity exemption, whether a proposed transaction would cause a revocation of a previously granted connected entity exemption because of a scheme or arrangement with a duty or tax avoidance purpose, or the application of the general anti-avoidance rule). This means that in the above example, a taxpayer cannot get certainty until it is too late.

The takeaway

The key takeaway for taxpayers is that if they wish for certainty in relation to the duty consequences of proposed connected entity transactions, a pre-transaction decision request should be lodged early in the process (as soon as the transaction structure has been settled). This should mean that the Commissioner will consider a subsequent (potentially notifiable) event and will provide a binding ruling in relation to whether it will cause revocation of the connected entity exemption.