ATO ID 2002/274: CGT: scrip for scrip roll-over - single arrangement.
Date of decision: 19 February 2002
Year of income: Year ending 30 June 2002 Year ending 30 June 2003 Year ending 30 June 2004 Year ending 30 June 2005
Business line: Public Groups and International

Issue
Is the requirement in paragraph 124-780(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) that shares be exchanged in consequence of a single arrangement satisfied when, as a result of one contract, shares are exchanged in two or more stages?

Decision
Yes. The staged exchange is in consequence of a single arrangement as required by paragraph 124-780(1)(b) of the ITAA 1997 because the obligation to undertake all exchanges arose from a single contract. However, roll-over will only be available when the acquiring entity becomes the owner of at least 80% of the voting shares in the original entity as required by paragraph 124-780(2)(a) of the ITAA 1997.

Facts
The taxpayer owns all of the shares in a company (the original entity). Another company (the acquiring entity) wishes to take over the original entity and offers the taxpayer shares in itself in return for the shares the taxpayer holds in the original entity. The acquiring entity and the rulee enter into an agreement whereby the acquiring entity will acquire 50% of the shares in the original entity within 7 days of executing the agreement (stage 1) and the remaining 50% of the shares within a number of months after entering into the agreement (stage 2).

Reasons for decision
Summary: The term 'arrangement' is defined very broadly in section 995-1 of the ITAA 1997: arrangement means any arrangement, agreement, understanding, promise or undertaking, whether express or implied, and whether or not enforceable (or intended to be enforceable) by legal proceedings. While the term 'arrangement' is defined very broadly, there is no definition of the term 'single arrangement'. Paragraph 11.23 of the Explanatory Memorandum to the New Business Tax System (Miscellaneous) Bill (No.2) 2000 provides a number of factors that may assist in determining what constitutes a single arrangement: What constitutes a single arrangement is a question of fact. Relevant factors in determining whether what takes place is part of a single arrangement would include, but not be limited to, whether there is more than one offer or transaction, whether aspects of an overall transaction occur contemporaneously, and the intention of the parties in all the circumstances as evidenced by objective facts. In this case the offer made by the acquiring entity is the same for all shares. More importantly, the obligation to undertake both stages arose from one contract. It is therefore considered that the shares in the original entity will be exchanged in consequence of a single arrangement. However, scrip for scrip roll-over for shares exchanged in step 1 will only become available when step 2 is completed because it is not until that time that the 80% test in paragraph 124-780(2)(a) of the ITAA 1997 is satisfied. The taxpayer will have to include the amount of any capital gain from the shares disposed of under step 1 in the calculation of their net capital gain for the income year in which those shares are disposed of. When the ownership of the remaining 50% of the shares in the original entity changes, the taxpayer will be entitled to seek an amendment of their earlier income tax return.

Legislative references: Income Tax Assessment Act 1997 paragraph 124-780(1)(b) paragraph 124-780(2)(a) section 995-1
Related ATO interpretative decisions: ATO ID 2002/100 | ATO ID 2002/239 | ATO ID 2002/411 | ATO ID 2002/602 | ATO ID 2002/891 | ATO ID 2002/892 | ATO ID 2003/177 | ATO ID 2003/362 | ATO ID 2003/893
Other references: Explanatory Memorandum for Taxation Laws Amendment Act (No. 4) 1994
Subject references: Capital gains tax Capital gains Capital Gains Tax CoE CGT Replacement asset rollover Scrip for scrip rollover 80% control test Arrangement