ATO ID 2004/800: Capital Gains Tax: roll-overs - scrip for scrip - arrangement on substantially same terms for owners of interests of a particular type
Date of decision: 21 July 2004
Year of income: Year ended 30 June 2004
Business line: Public Groups and International

Issue
Are all the ordinary shares in a company 'interests of a particular type' for the purposes of paragraph 124-780(2)(c) of the Income Tax Assessment Act 1997 (ITAA 1997) if one shareholder has additional rights in respect of their shares acquired under a shareholders' agreement?

Decision
Yes. All of the ordinary shares are interests of the same type for the purposes of paragraph 124-780(2)(c) of the ITAA 1997 even though one shareholder has collateral rights in relation to their shares.

Facts
The issued share capital of Company A consists of one class of ordinary shares. Company A and its shareholders entered into a shareholders' agreement under which shareholder C acquired ordinary shares in Company A as well as additional rights set out in the agreement. The additional rights granted to C included the following: These rights did not pass with the transfer of C's shares. Company A's constitution does not have a provision dealing with the variation of share rights, nor were any special resolutions of the company made to vary the rights attaching to its ordinary class shares. In the 2003-04 income year Company B made an offer to acquire all of the shares in Company A. The offer provided that all of the members of Company A (except C) would receive ordinary shares in Company B in exchange for their shares in Company A. However, in recognition of their additional rights under the existing shareholders' agreement, C was offered preference shares in Company B in exchange for their shares in Company A.

Reasons for decision
Summary: One of the conditions that must be satisfied for a shareholder to qualify for scrip for scrip roll-over under Subdivision 124-M of the ITAA 1997 is that participation in the scrip for scrip arrangement must have been on substantially the same terms for all the owners of interests of a particular type in the original entity (paragraph 124-780(2)(c) of the ITAA 1997). In this case the offer made to C was different from the offer made to the remaining ordinary shareholders. It is therefore necessary to determine whether the shares owned by C were of a different type to those owned by the other members of Company A. Unless the company's constitution provides otherwise, there is a presumption that all shares in a company have the same rights Birch v. Cropper (1889) 14 App Cas 525 at 543. The procedures to be followed in order to vary rights attaching to shares are set out in section 246B of the Corporations Act 2001 . Generally, in order to vary share rights the company must comply with the variation procedures set out in its constitution or, in the absence of such procedures, pass a special resolution. In this case the share capital of Company A consists of only one class of shares. There is no evidence that as part of the arrangement any change was made to the company's constitution to vary the rights attaching to a particular shareholder's share. Further, no special resolutions of the company were made to change the rights of any ordinary shareholders. The additional rights were granted to C under a separate agreement and do not form part of the rights attaching to the share. As a result, it is considered that all the ordinary shareholders in Company A own interests of the same type. Accordingly, as different offers have been made to C and the remaining ordinary shareholders in Company A, the requirement that each owner of an interest of a particular type is able to participate in the arrangement on substantially the same terms in paragraph 124-780(2)(c) of the ITAA 1997 has not been satisfied in this case. Rollover is not available under Subdivision 124-M of the ITAA 1997 for any of the shareholders.

Legislative references: Corporations Act 2001 section 246B
Case references: Birch v. Cropper (1889) 14 App Cas 525
Related ATO interpretative decisions: ATO ID 2003/177
Subject references: arrangement capital gains CGT roll-over relief scrip for scrip roll-over shareholders