Private ruling: Scrip for scrip roll-over
Date of advice: 20 December 2021
Published: March 2022
Ruling period: Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Can the Company X shareholders choose CGT roll-over relief under Subdivision 124-M of the Income Tax Assessment Act 1997 (ITAA 1997), on the exchange of their shares held in Company X for shares in HoldCo? | A1: Yes.

Relevant facts and circumstances: The proposed share exchange will involve the Company X shareholders exchanging their shares in Company X for shares in HoldCo. The number of HoldCo shares each Company X shareholder will receive under the exchange will directly reflect the market value of the shares each shareholder currently holds in Company X in accordance with a valuation to be undertaken prior to the share exchange. All the Company X shares exchanged under the arrangement will be ordinary shares and they carry the same kind of voting, dividend and capital rights as the ordinary HoldCo shares that will be received in return. All the Company X shareholders will participate in the share exchange. The share exchange has been offered to all the Company X shareholders on the same terms. Apart from the roll-over in Subdivision 124-M of the ITAA 1997, the Company X shareholders would make a capital gain from CGT event A1 when they dispose of their Company X shares under the share exchange in accordance with subsection 104-10(4) of the ITAA 1997. All the eligible Company X shareholders will choose to obtain the roll-over in Subdivision 124-M of the ITAA 1997. All Common stakeholders for the arrangement will notify HoldCo of the cost base of their Company X shares as worked out just before the share exchange. HoldCo will not make a choice to deny roll-over under Subdivision 124-M of the ITAA 1997 to the Company X shareholders.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subdivision 124-M | Income Tax Assessment Act 1997 section 124-780 | Income Tax Assessment Act 1997 subparagraph 124-780(1)(a)(i) | Income Tax Assessment Act 1997 paragraph 124-780(1)(b) | Income Tax Assessment Act 1997 paragraph 124-780(1)(c) | Income Tax Assessment Act 1997 subsection 124-780(2) | Income Tax Assessment Act 1997 paragraph 124-780(2)(a) | Income Tax Assessment Act 1997 paragraph 124-780(2)(b) | Income Tax Assessment Act 1997 paragraph 124-780(2)(c) | Income Tax Assessment Act 1997 subsection 124-780(3) | Income Tax Assessment Act 1997 paragraph 124-780(3)(b) | Income Tax Assessment Act 1997 paragraph 124-780(3)(c) | Income Tax Assessment Act 1997 paragraph 124-780(3)(d) | Income Tax Assessment Act 1997 paragraph 124-780(3)(e) | Income Tax Assessment Act 1997 paragraph 124-780(3)(f) | Income Tax Assessment Act 1997 subsection 124-780(4) | Income Tax Assessment Act 1997 subsection 124-780(5) | Income Tax Assessment Act 1997 section 124-782 | Income Tax Assessment Act 1997 subsection 124-782(1) | Income Tax Assessment Act 1997 subsection 124-785(2 ) | Income Tax Assessment Act 1997 section 124-783 | Income Tax Assessment Act 1997 subsection 124-783(1) | Income Tax Assessment Act 1997 subsection 124-783(3) | Income Tax Assessment Act 1997 subsection 124-783(6) | Income Tax Assessment Act 1997 section 124-795 | Income Tax Assessment Act 1997 paragraph 124-795(2)(a) | Income Tax Assessment Act 1997 paragraph 124-795(2)(b) | Income Tax Assessment Act 1997 subsection 124-795(3) | Income Tax Assessment Act 1997 subsection 124-795(4) | Income Tax Assessment Act 1997 section 975-500

Reasons for decision: Summary: Subdivision 124-M of the ITAA 1997 allows a shareholder to choose roll-over where post-CGT shares are replaced with shares in another entity. Section 124-780 of the ITAA 1997 contains a number of conditions for, and exceptions to, the eligibility of a shareholder to choose scrip for scrip roll-over. The main conditions and exceptions that are relevant in this case are as follows: • shares are exchanged for shares in another company (subparagraph 124-780(1)(a)(i) of the ITAA 1997) • the exchange occurs as part of a single arrangement (paragraph 124-780(1)(b) that satisfies subsection 124-780(2) of the ITAA 1997) • conditions for arrangement are satisfied (subsection 124-780(2) of the ITAA 1997) • conditions for roll-over are satisfied (subsection 124-780(3) of the ITAA 1997) • further conditions are not applicable (subsection 124-780(4) of the ITAA 1997) • exceptions to obtaining scrip for scrip roll-over are not applicable (section 124-795 of the ITAA 1997). | Detailed Reasoning - Shares are exchanged for shares in another company: Subparagraph 124-780(1)(a)(i) of the ITAA 1997 requires an entity to exchange a share in a company for a share in another company. This requirement is satisfied as the Company X shareholders will dispose of their shares in Company X in exchange for shares in HoldCo. | Detailed Reasoning - The exchange occurs as part of a single arrangement: Paragraph 124-780(1)(b) of the ITAA 1997 requires that the exchange of shares is in consequence of a single arrangement that satisfies subsection 124-780(2) or (2A). Whether the Company X shareholders will exchange their shares held in the Company X for shares in HoldCo under a single arrangement and subsection 124-780(2) is considered further below. | Detailed Reasoning - Conditions for arrangement are satisfied: The single arrangement must satisfy the conditions in subsection 124-780(2) of the ITAA 1997 as detailed below: | Detailed Reasoning - a. 80% or more ownership: Paragraph 124-780(2)(a) of the ITAA 1997 requires that the arrangement must result in the acquiring entity, or members of a wholly owned group, becoming the owner of 80% or more of the voting shares of the original entity. This condition is satisfied as HoldCo will acquire more than 80% of the voting shares in the Company X. Accordingly, as a result of the arrangement the acquiring entity will become the owner of 80% or more of the voting shares of the original entity. | Detailed Reasoning - b. All owners of voting shares participate: Paragraph 124-780(2)(b) of the ITAA 1997 requires that the arrangement must be one in which at least all the owners of voting shares in the original entity (apart from the acquiring entity or members of the acquiring entity's wholly owned group) could participate. This condition is satisfied as the proposed share exchange has been offered to all the shareholders in the Company X, (the owners of voting shares in the original entity) and they are all entitled to participate. | Detailed Reasoning - c. Participation is on substantially the same terms: Paragraph 124-780(2)(c) of the ITAA 1997 requires that the arrangement must be one in which the participation is available on substantially the same terms for all the owners of interests of a particular type in the original entity. All shareholders have the same terms for participating in the scrip for scrip transaction thus satisfying the requirement that the arrangement must be one in which participation was available on substantially the same terms for all of the owners of interests of a particular type in the original entity. | Detailed Reasoning - Conditions for roll-over are satisfied: As specified in paragraph 124-780(1)(c) of the ITAA 1997, the arrangement must also satisfy the following conditions for roll-over in subsection 124-780(3). | Detailed Reasoning - a. Original interest is acquired on or after 20 September 1985: Paragraph 124-780(3)(a) of the ITAA 1997 requires the original interests to have been acquired on or after 20 September 1985. As the Company X shareholders acquired their shares in Company X after 20 September 1985, this condition is satisfied. | Detailed Reasoning - b. Shareholder would otherwise make a capital gain: Paragraph 124-780(3)(b) of the ITAA 1997 requires a capital gain to be made from a CGT event happening in relation to the original interest if the roll-over did not apply. CGT event A1 will happen when the Company X shareholders dispose their shares in Company X under the proposed share exchange. The Company X shareholders will make a capital gain under subsection 104-10(4) of the ITAA 1997 apart from the roll-over, therefore this condition is satisfied. The capital gain would equal the difference between the cost base of the Company X shares and the market value of the ordinary shares in HoldCo received in exchange. | Detailed Reasoning - c. Replacement interests in the acquiring entity: Paragraph 124-780(3)(c) of the ITAA 1997 requires that the replacement interest is in the acquiring entity (or the ultimate holding company of the wholly owned group which includes the acquiring entity). As the Company X shareholders will receive replacement shares in HoldCo, this condition is satisfied. | Detailed Reasoning - d. Choice to obtain scrip for scrip roll-over: Paragraph 124-780(3)(d) of the ITAA 1997 requires that the original interest holder chooses to obtain the roll-over, or, if section 124-782 applies, the original interest holder and the replacement entity jointly choose to obtain the roll-over. Section 124-782 applies if an original interest holder is a significant stakeholder or a common stakeholder for the arrangement. In accordance with subsections 124-783(3) and (9) of the ITAA 1997, an entity, or two or more entities, will have a common stake in the original entity just before the arrangement started and in the replacement entity just after the arrangement was completed if the entity or entities, and their associates, between them hold shares carrying 80% or more of the voting, dividend and capital rights of the relevant companies both before and after the arrangement. The Company X shareholders together will hold greater than 80% of the voting, dividend and capital rights of the original and replacement entity before and after the arrangement. Accordingly, they are all common stakeholders for the purpose of section 124-782 of the ITAA 1997. All the Company X shareholders will choose the roll-over, satisfying this condition. | Detailed Reasoning - e. Significant or common stakeholders notify cost base: If section 124-782 of the ITAA 1997 applies, paragraph 124-780(3)(e) requires the original interest holder that is a significant stakeholder or common stakeholders for the arrangement to inform the acquiring entity in writing of the cost base of the original interest worked out just before a CGT event happened in relation to it. If section 124-782 of the ITAA 1997 applies, All Company X shareholders, for the arrangement will notify HoldCo in writing of the cost base of their shares. Accordingly, this condition is satisfied. | Detailed Reasoning - f. Issue of equity or new debt by member of a wholly owned group: Paragraph 124-780(3)(f) of the ITAA 1997 provides that if the acquiring entity is a member of a wholly owned group, no member of the group issues equity, or owes new debt, under the arrangement: (i) to an entity that is not a member of the group; and (ii) in relation to the issuing of the replacement interest. However, under paragraph 1.37 in the Explanatory Memorandum to the Tax and Superannuation Laws Amendment (2015 Measures No. 4) Bill 2015, the condition does not apply to: • the issue of replacement interests themselves • new debt owed or equity issued to an external financier or investor to fund the purchase of original interests under the arrangement; or • new debt owed or equity (including equity other than replacement interests) issued to the original interest holders as consideration for their original interests. As HoldCo will only issue replacement interests, being the HoldCo shares, to the Company X shareholders and it will not issue debt or equity instruments under the arrangement, the condition in paragraph 124-780(3)(f) of the ITAA 1997 is satisfied. | Detailed Reasoning - If the entities are not dealing at arm's length: Subsection 124-780(4) of the ITAA 1997 provides that the additional requirements in subsection 124-780(5) must be satisfied if the original interest holder and the acquiring entity did not deal with each other at arm's length and neither entity had at least 300 members or they were all members of the same linked group just before the arrangement started. The Company X shareholders and HoldCo are not dealing with each other at arm's length and the Company X shareholders and HoldCo do not have 300 members just before the arrangements started. As such, the further conditions for roll-over need to be (and are) met as explored below. | Detailed Reasoning - Further conditions must be satisfied: Consequently, as the requirements in subsection 124-780(4) of the ITAA 1997 are satisfied, the requirements in subsection 124-780(5) must also be satisfied. Paragraph 124-780(5)(a) of the ITAA 1997 requires the market value of the original interest holder's capital proceeds for the exchange to be at least substantially the same as the market value of its original interest. The number of HoldCo shares that each Company X shareholder will receive under the share exchange in return for the disposal of their Company X shares will directly reflect the market value of their Company X shares in accordance with the valuations that will be undertaken prior to the exchange. Therefore, as the market value of the HoldCo shares will be at least substantially same as the relevant Company X shares this requirement is satisfied. Paragraph 124-780(5)(b) of the ITAA 1997 requires the replacement interest to carry the same kind of rights and obligations as those attached to its original interest. The shares in Company X that will be exchanged under the arrangement will be shares with voting, dividend and capital rights. The shares that the Company X shareholders will receive in HoldCo will be ordinary shares with the same kind of voting, dividend and capital rights. Consequently, the requirements of subsection of 124-780(5) of the ITAA 1997 have been met. | Detailed Reasoning - Exceptions to obtaining scrip for scrip roll-over are not applicable: Section 124-795 of the ITAA 1997 sets out the circumstances where roll-over under Subdivision 124-M is not available. Subsection 124-795(1) of the ITAA 1997 provides that the original interest holder cannot obtain the roll-over if it is a foreign resident just before it stops owning the original interest. This exception does not apply as the Company X shareholders are not foreign residents just before the share exchange. Paragraph 124-795(2)(a) of the ITAA 1997 provides that the roll-over is not available if a capital gain the original interest holder might make from the replacement interest would be disregarded, except because of a roll-over. For example, if a capital gain is disregarded because the asset is trading stock. This exception does not apply as the Company X shareholders will hold the HoldCo shares on capital account and therefore any capital gain the Company X shareholders might make from the HoldCo shares will not be disregarded, except because of a roll-over. Paragraph 124-795(2)(b) of the ITAA 1997 provides that the roll-over is not available if the original entity and the acquiring entity are members of the same wholly owned group just before the share exchange and the acquiring entity is a foreign resident. This exception does not apply as the Company X shareholders and HoldCo are not members of the same wholly owned group just before the share exchange and HoldCo is not a foreign resident. The exception under subsection 124-795(3) of the ITAA 1997 does not apply as Company X shareholders cannot choose a roll-over under Division 122 of the ITAA 1997 or Division 615 of the ITAA 1997. The exception under subsection 124-795(4) of the ITAA 1997 does not apply as HoldCo will not make a choice to deny roll-over under Subdivision 124-M to the Company X shareholders. | Detailed Reasoning - Conclusion: As all the requirements outlined above are satisfied, the Company X shareholders are eligible to choose to obtain a roll-over in relation to the exchange of their shares in Company X for shares in HoldCo under Subdivision 124-M of the ITAA 1997. | Detailed Reasoning - Application of Part IVA of the ITAA 1936: It is possible that Part IVA could apply to arrangements which contain artificial or contrived features which appear designed to meet conditions of the Subdivision 124-M rollover. We have not considered the application of Part IVA of the ITAA 1936 to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.