2011 legislation relating to corporate 'spinouts' – a process where a company transfers its shares in another company to shareholders of the original parent company.
Section YC 13 of the Income Tax Act 2007
The corporate spinout rules in section YC 13 of the Income Tax 2007 were originally enacted in 2002 to ensure that companies involved in a spinout do not have a shareholder continuity breach and forfeit losses and credits if there is no change in underlying economic ownership as a result of the spinout. A "spinout" is a process whereby a company ("the original parent company") transfers its shares in another company ("the spun-out company") to the shareholders of the original parent company.
The spinout rules treat the spun-out company as holding the ownership interests in a subsidiary that were, before the spinout, deemed to be held by the original parent company on behalf of its small shareholders. Without these spinout rules, the concessionary tracing rules in section YC 11 may treat the restructuring as a substantial change of ownership interests. As a result, unless extensive tracing through to the ultimate natural person shareholders in the original parent company is carried out, the restructuring may prevent the carry forward of losses and credits by the spun-out company and its subsidiaries. This is the case even though, in substance, there has not been a breach of shareholding continuity.
Before the amendment, the concessionary spinout rules were not available if the original parent company did not own 100% of the spun-out company before the spinout despite the spun-out company's immediate shareholding pre- and post- spinout, in substance, being unchanged. In such circumstances, the spinout, in conjunction with section YC 11, may have resulted in a breach of the shareholder continuity requirements for loss and credit carry forward purposes.
Section YC 13(1)(c) has been amended to allow the corporate spinout rules to apply if the original parent company holds more than 50% of the voting interests and, if a market value circumstance exists, market value interests in the spun-out company immediately before the spinout.
This amendment is consistent with the original policy intent which is to ensure the shareholder tracing rules do not adversely affect the companies involved in a spinout to the extent that there is no underlying change in the economic ownership of the spun-out company and its subsidiaries.
The amendment applies from 1 May 2011.