ATO ID 2003/893: Capital gains tax: scrip for scrip rollover - redeemable preference shares exchanged for ordinary shares
Date of decision: 17 September 2003
Year of income: year ended 30 June 2003
Business line: Public Groups and International

Issue
Is the taxpayer, a shareholder who owned redeemable preference shares in a company, eligible to choose scrip for scrip rollover under Subdivision 124-M of the Income Tax Assessment Act 1997 (ITAA 1997) if they exchanged those shares for ordinary shares in another company?

Decision
Yes. The taxpayer can choose scrip for scrip rollover in respect of the exchange of redeemable preference shares in one company for ordinary shares in another company.

Facts
The taxpayer owned 1,000 redeemable preference shares in a company (the original company) that they acquired after 19 September 1985. The redeemable preference shares are treated as 'debt interests' for the purposes of Division 974 of the ITAA 1997. After 9 September 1999, another company (the acquiring company) acquired all of the shares in the original company under a scheme of arrangement in exchange for the issue of ordinary shares. As a result, the taxpayer received 1,000 ordinary shares in the acquiring company. The taxpayer and the acquiring company dealt with each other at arm's length. The taxpayer satisfied all of the other scrip for scrip rollover requirements in subsection 124-780(1) of the ITAA 1997.

Reasons for decision
Summary: A taxpayer can choose scrip for scrip rollover under paragraph 124-780(3)(d) of the ITAA 1997 if, among other conditions, they exchange: One of the conditions in subsection 124-780(5) is that the replacement shares carry the same kind of rights and obligations as those attaching to the original shares (paragraph 124-780(5)(b)). Paragraph 124-780(1)(d) is not relevant as the taxpayer and the other company were dealing with each other at arm's length. The Explanatory Memorandum to the New Business Tax System (Capital Gains Tax) Act 1999 indicates that rollover is available if 'a share in a company is exchanged for a share in another company ...even if the rights attaching to the share ... are different'. There is nothing in Subdivision 124-M of the ITAA 1997 that prevents shares that are treated as debt interests for Division 974 purposes from being eligible for scrip for scrip rollover. The taxpayer may therefore choose scrip for scrip rollover as all of the requirements in subsection 124-780(1) of the ITAA 1997 are met. The effect of the rollover is that any capital gain arising from the original shares is deferred until a CGT event happens to the replacement shares.

Legislative references: Income Tax Assessment Act 1997 Subdivision 124-M subsection 124-780(1) subparagraph 124-780(1)(a)(i) paragraph 124-780(1)(a) paragraph 124-780(1)(d) paragraph 124-780(3)(d) subsection 124-780(5) paragraph 124-780(5)(b) Division 974
Other references: Explanatory Memorandum to the New Business Tax System (Capital Gains Tax) Act 1999
Subject references: Capital gains tax CGT event CGT exchange of shares in one company for shares in another company CGT roll-over relief Redeemable preference shares Scrip for scrip roll-over