Business structures evolve over time. Companies merge to expand operations, acquire new market opportunities, or improve efficiency. Conversely, businesses may demerge to refocus, separate distinct operations, or unlock value for shareholders. These restructures, while often necessary for growth, can create significant tax liabilities, particularly under Capital Gains Tax (CGT) laws.
To support businesses undergoing mergers and demergers, the Australian tax system provides CGT rollover relief, which allows companies and shareholders to defer or eliminate immediate CGT liabilities when certain conditions are met.
This guide explains how CGT rollover relief applies to mergers and demergers, the eligibility requirements, and the key considerations businesses should take into account when planning a restructure.
Business Mergers and Demergers
What is a Business Merger?
A business merger occurs when two or more entities combine to form a single business entity. This can happen through:
- Acquisitions – One company purchases another, either through share acquisition or asset acquisition.
- Statutory Mergers – Companies combine under a new entity.
- Joint Ventures – Two businesses merge resources to create a new operating entity.
In most merger transactions, the acquiring company issues shares or cash in exchange for the target company’s shares or assets. Without rollover relief, this could trigger immediate CGT liability on the sale or exchange of shares and assets.
What is a Business Demerger?
A business demerger involves the separation of a company into two or more distinct entities. This often happens when:
- A parent company spins off a subsidiary to operate independently.
- A division within a company becomes separately listed on the stock exchange.
- The business wants to refocus on its core operations, while divesting non-core divisions.
During a demerger, shareholders of the parent company receive shares in the new entity, often proportionate to their existing holdings. Without CGT rollover relief, this could create capital gains tax liabilities for shareholders who receive new shares in exchange for their old ones.
💡 Related: Small Business Restructure Rollover: A Quick Guide
How CGT Rollover Relief Works for Mergers and Demergers
1. Scrip-for-Scrip Rollover Relief (Subdivision 124-M)
The scrip for scrip rollover provision allows shareholders to defer CGT when they exchange their shares for shares in the acquiring company during a merger. This applies when:
- The exchange is on equal terms, meaning shareholders in the target company receive shares in the acquiring company.
- The acquiring company gains at least 80% ownership of the target company through the share exchange.
2. Demerger Rollover Relief (Subdivision 125-C)
Demerger rollover relief applies when shareholders receive new shares in a demerged company while still holding shares in the parent company. This relief ensures that:
- Shareholders do not trigger CGT immediately when receiving shares in the new entity.
- Any future CGT event (i.e., when the new shares are sold) will be based on the original cost base of the shares before the demerger.
For demerger relief to apply, the demerger must be structured correctly, ensuring shareholders maintain substantially the same ownership in the new and existing entities.
Eligibility Criteria for CGT Rollover in Mergers and Demergers
To qualify for CGT rollover relief, the transaction must meet strict conditions:
For Mergers (Scrip for Scrip Rollover Relief)
- The shares received in the acquiring company must replace shares in the target company.
- The acquiring company must obtain at least 80% of the target company’s shares.
- The merger must not involve significant cash payments (otherwise, partial CGT liability may apply).
For Demergers (Demerger Rollover Relief)
- Shareholders must receive shares in the demerged company in proportion to their existing holdings.
- The demerger must be part of a genuine corporate restructuring, not just a tax avoidance measure.
- The parent company must not receive financial consideration in exchange for the demerged shares.
Failing to meet these criteria may invalidate rollover relief, leading to immediate CGT liabilities.
Practical Benefits of CGT Rollover Relief
For businesses and shareholders, CGT rollover relief in mergers and demergers provides several key benefits:
1- Defers Capital Gains Tax
Shareholders and businesses avoid an immediate CGT bill, preserving cash flow.
2- Encourages Corporate Growth
Facilitates business expansion through acquisitions without creating excessive tax burdens.
3- Supports Business Restructuring
Allows companies to separate or spin off divisions without penalizing shareholders.
4- Maintains Investment Value
Shareholders retain the original cost base of shares, preventing inflated capital gains on future sales.
Key Considerations When Claiming Rollover Relief
Partial Cash Consideration: If shareholders receive cash plus shares in a merger, CGT may apply to the cash portion.
Foreign Shareholders: Some mergers involve international ownership structures that may impact CGT treatment.
Business Purpose vs. Tax Avoidance: The ATO closely scrutinizes demergers that appear to be structured primarily for tax benefits rather than genuine business purposes.
Before proceeding with a merger or demerger, businesses should seek professional tax advice to ensure the restructure qualifies for CGT relief.
How to Apply for CGT Rollover Relief
Applying for scrip for scrip or demerger rollover relief requires a detailed tax assessment. Here’s a step by step approach:
Step 1: Conduct a Business Valuation
Determine the fair market value of shares before and after the merger/demerger.
Step 2: Assess Shareholder Impact
Ensure the transaction meets the 80% ownership requirement for mergers or the proportionate shareholding test for demergers.
Step 3: Report the Rollover in the Tax Return
Indicate CGT rollover election in the company and shareholder tax filings.
Step 4: Maintain Records
Document all transactions, including share exchange agreements, to demonstrate compliance with the ATO’s conditions.
Final Thoughts: Should You Seek Professional Advice?
Mergers and demergers are complex transactions with significant tax consequences. While CGT rollover relief offers businesses and shareholders a way to defer tax liabilities, the eligibility requirements are strict, and incorrect structuring can result in unintended tax liabilities.
Businesses considering a merger or demerger should work closely with tax professionals to ensure:
✅ The transaction meets CGT rollover conditions.
✅ Shareholders do not incur unnecessary tax burdens.
✅ The restructure is aligned with long term business goals.
📞 Need expert guidance? Our team at Blackwattle Tax can assess your eligibility and help structure your merger or demerger for maximum tax efficiency.
Schedule a FREE 30-minute consultation today to discover how we can help you make strategic decisions and streamline your business operations.
Stay informed and empowered by subscribing to our monthly newsletter, where you’ll receive valuable insights on business advice, investment tips, and strategic tax planning.
Disclaimer: We endeavour to make sure the information provided in this guidance is up to date and accurate. Please note, that the information is only intended to be a guide, with a general overview of information. This guidance is not a comprehensive document and should not be interpreted as legal advice or tax advice. The information is general in nature. You should seek the assistance of a professional opinion for any legal and tax issues related to your personal circumstances.
