Restructuring stapled trusts
05 June 2008The New South Wales Budget, released this week, included a stamp duty exemption for ‘top-hatting’. This removes another barrier to stapled groups restructuring under a single entity. This newsletter summarises the status of relevant exemptions and identifies some of the remaining hurdles.
Background
The ‘top-hatting’ provisions were inserted in Subdivision 124-Q in the Income Tax Assessment Act 1997 (Cth) in September 2007. The provisions give rollover relief for capital gains tax in relation to certain restructures of Australian property trusts with stapled securities.
The provisions allow stapled groups to restructure so that a single head trust holds the interests in the previous stapled entities. These diagrams show a typical stapled structure before restructuring, and two alternative ways in which it could restructure under the provisions.
What are some of the benefits?
The main reason given for the CGT amending legislation is to help Australian-listed property trusts compete in overseas takeover bids. In a scrip bid for a United States real estate investment trust, an Australian stapled group cannot provide full rollover relief to investors in the REIT. Restructuring under a single trust will remove that problem.
Another benefit is a significant saving in compliance costs (such as auditing and financial reporting, and management fees for responsible entities). With these costs often charged for each head-entity, moving to a single entity can save hundreds of thousands of dollars each year.
A third benefit is the marketability of the structure. Although Australian investors have become used to stapled structures, some foreign investors find them difficult to understand and their reporting is not as simple.
However, the most significant benefit for most stapled groups is likely to relate to capital management—it is harder to manage the allocation of capital between members of a stapled group than if there is a single head entity.
What are some of the hurdles?
Stamp duty
In the context of the Australian property market, one or more of the stapled entities will be a landholder. Therefore, the proposed restructure is likely to trigger a significant liability to stamp duty under ‘land-rich’ provisions—potentially up to 5.5 per cent on the gross value of the property assets of the fund. This would be the case even though the restructure involves no change in the ultimate ownership of the group.
Problems for takeovers
An entity that has top-hatted can raise difficulties in a takeover by stapled entities that have not top-hatted. Although the non-trading trust part of the stapled entity will want to acquire the target, if it acquires the head entity of a top-hat it will be acquiring a trading business and will lose its tax-free status.
ASIC regulatory problems
Funds with internalised management will be concerned with the prohibition against self-acquisition of shares or acquiring shares in a controlling entity.
Whether a fund has internal or external management, top-hatting may result in a merger of the head trust and one or more of the former stapled trusts which are rolled under the head trust.
Depending on which restructure option is chosen, disclosure issues can also be relevant. A new product disclosure statement might be necessary to allow issues or transfers of units.
What is Freehills doing to overcome the hurdles?
A number of our clients are considering top-hatting. However, the potential for significant stamp duty on these restructures, as well as the other hurdles we have identified, currently prevents most stapled entities from doing so.
Freehills has been advising the Property Council of Australia on its lobbying for stamp duty exemptions for top-hatting. That lobbying has already had success, with four states now having announced exemptions. The exemptions in New South Wales, South Australia and Western Australia are in general terms (although there may be issues in New South Wales for more active funds such as infrastructure or hotel funds). Unfortunately, the exemption in Victoria is limited to listed trusts. The Property Council is continuing to lobby in the remaining jurisdictions.
Since November last year, we have been speaking with ASIC about the regulatory problems for top-hatting and the relief that is necessary for top-hatting transactions to proceed.
With stamp duty exemptions in four states and with ASIC considering our submissions on the need for appropriate relief, we anticipate that some clients will be able to start top-hatting shortly after 1 July this year.
Our expertise in funds management and stamp duty, supported by tax experts from Greenwoods & Freehills, is available to help you overcome these remaining barriers and simplify your group structure by top-hatting.
Should you wish to discuss the implications of this article, please contact any of the following partners:
Title : Partner
Office : Sydney
Phone : +61 2 9225 5920
Fax : +61 2 9322 4000
Email : james.graham@freehills.com
Title : Partner
Office : Sydney
Phone : +61 2 9225 5343
Fax : +61 2 9322 4000
Email : peter.rowe@freehills.com
Title : Partner
Office : Perth
Phone : +61 8 9211 7509
Fax : +61 8 9211 7878
Email : andrew.shearwood@freehills.com
Title : Partner
Office : Sydney
Phone : +61 2 9225 5828
Fax : +61 2 9322 4000
Email : fiona.smedley@freehills.com
Title : Partner
Office : Brisbane
Phone : +61 7 3258 6482
Fax : +61 7 3258 6444
Email : ron.spackman@freehills.com
Title : Partner
Office : Sydney
Phone : +61 2 9225 5065
Fax : +61 2 9322 4000
Email : matthew.stutsel@freehills.com
Title : Partner
Office : Melbourne
Phone : +61 3 9288 1422
Fax : +61 3 9288 1567
Email : michael.ziegelaar@freehills.com
