Division 615 rollovers: Courts provide helpful guidance for capital gains tax (CGT) rollover relief

The High Court’s refusal to grant a taxpayer’s leave to appeal an unwanted capital gains tax (CGT) rollover relief has provided guidance on some unclear rules for Division 615 Business Restructure rollovers. Although in this case the taxpayer did not want the rollover because of their particular circumstances, the decision will provide some certainty for other taxpayers wanting to take advantage of the Division 615 rollover.

The refusal to grant leave to appeal confirmed the Full Federal Court decision in AusNet Services Ltd v Commissioner of Taxation [2025] FCAFC 21 that the taxpayer was entitled to the rollover relief under Division 615 of the Income Tax Assessment Act 1997.

The taxpayer initially elected to apply Division 615 rollover. However, the taxpayer subsequently decided it would be more beneficial if it had not elected for the rollover, so it could obtain the benefit of tax consolidation tax cost base increases that were not available because of the Division 615 rollover. Therefore, it sought to rescind the election, and in the alternative, argued it did not qualify for Division 615 rollover relief. The Full Federal Court rejected these arguments, agreeing that the Division 615 election had been validly made and was irrevocable.

Entitlement to rollover relief is usually a favourable result for taxpayers who elect of rollover to apply, and the decision highlights the following three points that are helpful for those taxpayers wanting the Division 615 rollover to apply:

• The interposed entity is not required to be a ‘shelf company’
• The requirement for exchanging entities to only receive shares, ‘and nothing else’, is only dealing with the consideration received in exchange for the shares and not the other consequences of the scheme
• A scheme for reorganising the affairs of the original entity could apply to a scheme under which all that was changed was the identity of shareholders.

The relevant facts

The AusNet Group was a triple-stapled structure, comprised of two companies, AusNet Services (Transmission) Ltd (‘Transmission’) and AusNet Services (Distribution) Ltd (‘Distribution’), each with their own consolidated groups, and a unit trust, AusNet Services Finance Trust (‘Finance’).

The group un-stapled the interests in the companies and unit trust, and then rolled over the entities into a shelf company, AusNet Services Limited (AusNet Services).

AusNet Services firstly acquired all the shares in Transmission and all the units in Finance for consideration of shares in AusNet Services. Following this, AusNet Services then acquired all the shares in Distribution for consideration of shares in AusNet Services.

The shareholders in Distribution chose to apply Division 615 election for a rollover of the shareholders’ shares for shares in AusNet Services. As a result AusNet Services became the head company of the Distribution consolidated group. 

A material feature of the arrangement was that AusNet Services was not a clean skin company when it acquired the shares in Distribution. This is because it had already acquired all the Transmission shares and Finance units, i.e. there were already shares on issue in AusNet Services.

Unintended and unwanted consequence of Division 615 rollover

An unintended consequence of the election was that Ausnet Services would not be entitled to an uplift in the cost base of assets formerly held by Distribution. If AusNet Services had not made a valid rollover election, it may have been entitled to an uplift in the cost bases of the assets, increasing the entitlement to capital allowance deductions and CGT cost base that could be claimed by AusNet Services.

The Division 615 election

To be entitled to make an election under Division 615, there are a number of conditions that must be satisfied, including:

• The arrangement must be a scheme for the reorganisation of the structure of the group in accordance with Section 615-5(1)(c)
• In consideration for the disposal of their shares, the exchanging shareholders must only receive shares in the interposed entity, ‘and nothing else’
• In accordance with Section 615-20(2), at the completion of the scheme, the proportionate interest of each exchanging member in the market value of the interposed entity is the same as the proportionate interest that exchanging member held in the market value of the original entity, before the scheme.

Full Federal Court - AusNet’s appeal

In its appeals, AusNet Services sought to rescind the election, and failing that, it argued that it was not entitled to make the Division 615 rollover election on the following grounds:

• There was no scheme for reorganisation within the meaning of Section 615-5(1)(c). Instead, what occurred was more accurately described as an amalgamation or merger
• The disposal of Distributions shares was not one where the exchanging shareholders received shares in Ausnet (the interposed company), ‘and nothing else’. They argued shareholders in Distribution received a boost in the value of the shares they held in AusNet as a result of the restructure and because substantial franking credits became available
• The ratio requirement in Section 615-20(2) was not satisfied. The individual shareholders’ interests at the completion time (Section 615-20(2)(a)(i)) included the shares already issued to each shareholder in exchange for their Transmission shares and Finance units. AusNet was a company already in existence - it was not a ‘clean skin’ or shelf company, and therefore, was a company of significant value. Accordingly, the exchanging ratios were not equal because the market value of all AusNet’s shares owned by each exchanging entity was increased - they included the value of the shares AusNet had acquired in the exchanging entities at that moment, because of the reorganisation.

The argument from AusNet, put simply, was that Division 615 rollover relief was intended only to apply to rollovers involving a valuable original entity (to be exchanged), and the interposition of a ‘shelf company’, and could not apply where the interposed company was not a ‘shelf company’.

Full Federal Court - the Court’s view

The Court disagreed with the above, instead arguing that the Division 615 election could not be revoked, and more importantly, that the election was valid. The Court addressed the taxpayer’s arguments as follows:

• Scheme: There was a scheme for reorganising Distribution’s affairs. The wording of Section 615-5(1)(c) took its ordinary meaning and could apply to a scheme under which all that was changed was the identity of shareholders. In addition, Division 615 would be redundant if schemes that also affected the interposed company (i.e. by the interposed entity acquiring the shares of the original entity to be exchanged and issuing new shares to the exchanging shareholders) were also not covered by Division 615.
• Exchanging entities are only to receive shares, ‘and nothing else’: The Court broadly stated that Section 615-5(1)(c) required a focus on that which a shareholder receives under the scheme in exchange for the shares. It does not look to the consequences of the scheme, but rather the consideration received for the disposal of the shares.
  • Whilst this particular scheme constituted a restructure of the affairs of the various entities, the relevant shareholders received one share in AusNet in exchange for the disposal of each share in the original entity, ‘and nothing else’.
  • The critical integer is what the shareholder receives in exchange for their shares or units in the original entity, citing the following: “That language directs attention to consideration in the traditional contractual sense: it is concerned with what tangible benefits pass from the acquirer of the shares or units (the interposed company) to the person disposing of those shares or units. It does not invite a more general inquiry into the consequences of the transaction.”
  • Moreover, any boost in value was irrelevant to Section 615-5(1)(c) being satisfied and any increase in value of the pre-existing AusNet Services shares was a consequence of the original shareholders disposing of their shares to AusNet.
• Interposed entity is not required to be a ‘shelf company’ to fulfil the market value ratio requirement: The Court noted that if Parliament’s “…intention was to limit the coverage of Division 615 to schemes in which the interposed company was a shelf company, that could have been done in a much clearer and more direct way”. Moreover, they declared that Section 615-20(2)(a)(i) should be interpreted to contain “…a qualification limiting each exchanging member’s shares in the interposed company” to shares issued to that member pursuant to the scheme.

BDO comment

One of the more interesting arguments in this case was that the interposed company had to be a shelf company or a clean skin that had no value, a view held by many in relation to selected rollovers as a way of ensuring the shares in the interposed company is the only consideration for the rollover. This view has been addressed and rejected by the Court.

Similarly, the Court found that the wording “scheme for reorganising its affairs”, refers to the arrangement of the business affairs. In this case, it referred to the business affairs of the original entities, not the new parent (AusNet), and that the restructure reorganised those affairs, namely turning the original entities into wholly owned subsidiaries of the interposed company.

The key for taxpayers and practitioners from this case is that whilst rollover relief is generally the preferred option for taxpayers, careful consideration of all impacts of the rollover and its ancillary consequences is necessary to ensure any unintended consequences do not outweigh the benefits of the rollover.

Secondly, the decision provides insight for taxpayers seeking to take advantage of Division 615, and of rollover relief generally.

How BDO can help

Our corporate and international tax specialists can help you assess how Division 615 rollover provisions may apply to your organisation’s structure or future transactions. Reach out to your BDO adviser to explore your options.