Private ruling: Capital Gains Tax - Event A1 - CGT Rollovers - Scrip for Scrip Rollover
Published: September 2017
Ruling period: Year ended 30 June 2017
Date scheme commenced: 1 July 2016


Relevant facts and circumstances: 1. In 20XX an Australian resident company, (The Company), acquired all the shares in a wholly-owned group. All issued shares and classes of shares acquired are of equal rights. 2. A private equity group approached the shareholders of The Company with a proposal to acquire 100% of The Company. 3. Under the Proposed Sale, Purchaser Co will acquire and own 100% of the shares in The Company. Purchaser Co will be a wholly owned company of Issuer Co. Both Issuer Co and Purchaser Co will be newly incorporated companies. 4. The Purchase Price (PP) is expected to be approximately $X to $Y. The shares to be issued as consideration (the Share Consideration) will be shares in the Issuer Co which will be equal to Z% of the final PP less any external debt funding of the Purchaser Co Group. The difference between the PP and the Share Consideration will be a cash amount (the Cash Consideration). 5. The Cash Consideration will be funded with further investment in Issuer Co by its shareholder such that Purchaser Co will have sufficient funds to pay The Company shareholders. 6. After completion of the Proposed Sale, The Company shareholders will hold Z% in Issuer Co. 7. By way of example, where the PP for The Company was $X and Purchaser Co was funded by $W of external debt, the Share Consideration would be $V (being Z% *($X-$W)) and the Cash Consideration would be $A (being $X-$V). 8. The total consideration received by the The Company shareholders will be in proportion with their respective shareholding percentages in The Company. 9. The Share Consideration for all The Company shareholders will be a combination of ordinary shares and redeemable preference shares (RPS) in Issuer Co. The proportion of ordinary shares and RPS is yet to be confirmed but the proportion will be the same for all The Company shareholders. 10. The Share Sale Agreement is expected to be executed and the sale to be finalised shortly, including The Company shareholders disposing of all their shares to Purchaser Co for the total consideration, on or before DDMMYYYY. 11. After the sale of The Company shares, The Company shareholders will collectively own Z% interest in Purchaser Co through Issuer Co.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 104-10(1), | Income Tax Assessment Act 1997 Subsection 104-10(2), | Income Tax Assessment Act 1997 Subsection 104-10(3), | Income Tax Assessment Act 1997 Subsection 104-10(4), | Income Tax Assessment Act 1997 Section 124-780, | Income Tax Assessment Act 1997 Section 124-782, | Income Tax Assessment Act 1997 Section 124-785, | Income Tax Assessment Act 1997 Section 124-790, and | Income Tax Assessment Act 1997 Section 124-795.

Reasons for decision: Summary: Will CGT event A1, under Subdivision 104-A of the Income Tax Assessment Act 1997 (ITAA 1997), occur in relation to each Head Company (The Company) share at the time the shareholders of the The Company entered into the Share Sale Agreement with Purchaser Co for the sale of their The Company shares for Issuer Co shares? Yes Will the shareholders of the The Company be eligible to choose rollover relief under Subdivision 124-M of the ITAA 1997 in respect of the exchange of their The Company shares? Yes If rollover relief under Subdivision 124-M of the ITAA 1997 is chosen, will the cost base of the ordinary shares and redeemable preference shares acquired in Issuer Co under the Proposed Sale be determined in accordance with section 124-785 of the ITAA 1997 (taking into account the partial rollover provisions of section 124-790 of the ITAA 1997)? Yes | Detailed Reasoning - This ruling applies for the following periods:: Year ended 30 June 2017 | Detailed Reasoning - The scheme commences on:: 1 July 2016 | Detailed Reasoning - Relevant facts and circumstances: 1. In 20XX an Australian resident company, (The Company), acquired all the shares in a wholly-owned group. All issued shares and classes of shares acquired are of equal rights. 2. A private equity group approached the shareholders of The Company with a proposal to acquire 100% of The Company. 3. Under the Proposed Sale, Purchaser Co will acquire and own 100% of the shares in The Company. Purchaser Co will be a wholly owned company of Issuer Co. Both Issuer Co and Purchaser Co will be newly incorporated companies. 4. The Purchase Price (PP) is expected to be approximately $X to $Y. The shares to be issued as consideration (the Share Consideration) will be shares in the Issuer Co which will be equal to Z% of the final PP less any external debt funding of the Purchaser Co Group. The difference between the PP and the Share Consideration will be a cash amount (the Cash Consideration). 5. The Cash Consideration will be funded with further investment in Issuer Co by its shareholder such that Purchaser Co will have sufficient funds to pay The Company shareholders. 6. After completion of the Proposed Sale, The Company shareholders will hold Z% in Issuer Co. 7. By way of example, where the PP for The Company was $X and Purchaser Co was funded by $W of external debt, the Share Consideration would be $V (being Z% *($X-$W)) and the Cash Consideration would be $A (being $X-$V). 8. The total consideration received by the The Company shareholders will be in proportion with their respective shareholding percentages in The Company. 9. The Share Consideration for all The Company shareholders will be a combination of ordinary shares and redeemable preference shares (RPS) in Issuer Co. The proportion of ordinary shares and RPS is yet to be confirmed but the proportion will be the same for all The Company shareholders. 10. The Share Sale Agreement is expected to be executed and the sale to be finalised shortly, including The Company shareholders disposing of all their shares to Purchaser Co for the total consideration, on or before DDMMYYYY. 11. After the sale of The Company shares, The Company shareholders will collectively own Z% interest in Purchaser Co through Issuer Co. | Detailed Reasoning - Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 104-10(1), Income Tax Assessment Act 1997 Subsection 104-10(2), Income Tax Assessment Act 1997 Subsection 104-10(3), Income Tax Assessment Act 1997 Subsection 104-10(4), Income Tax Assessment Act 1997 Section 124-780, Income Tax Assessment Act 1997 Section 124-782, Income Tax Assessment Act 1997 Section 124-785, Income Tax Assessment Act 1997 Section 124-790, and Income Tax Assessment Act 1997 Section 124-795. | Detailed Reasoning - Reasons for decision: All legislative references in this Chapter are to the Income Tax Assessment Act 1997 unless otherwise indicated. | Summary: 1. CGT event A1 will happen under Subdivision 104-A in relation to the disposal of The Company shares to Purchaser Co under the Proposed Sale. The date of the CGT event will be the date on which the Share Sale Agreement is entered into between Purchaser Co (the Buyer) and The Company Shareholders (the Sellers). | Detailed Reasoning - Detailed reasoning: 2. Under subsection 104-10(1) CGT event A1 happens if you dispose of a CGT asset. A disposal happens if a change of beneficial ownership occurs from you to another entity: subsection 104-10(2). 3. A 'CGT asset' is defined in subsection 108-5(1) as any kind of property, or a legal or equitable right that is not property. A share in The Company falls within the definition of a CGT asset. 4. Under the arrangement (the Proposed Sale), Purchaser Co is offering to acquire all of the shares in HC for consideration which consists of shares in Issuer Co and a cash component. The disposal will happen when title and beneficial ownership of the The Company shares passes from the The Company shareholders to Purchaser Co. 5. As the exchange of shares is to be transferred pursuant to a Share Sale Agreement, subsection 104-10(3) states that the time of the event is when the contract is entered into. 6. Under CGT event A1, you make a capital gain if the capital proceeds from the disposal are more than the cost base of the CGT asset. A capital loss happens if the capital proceeds are less than the cost of the CGT asset: subsection 104-10(4). | Detailed Reasoning - Conclusion to Question 1: 7. In relation to the Proposed Sale, CGT event A1 will happen when the The Company shareholders entered into the Share Sale Agreement with Purchaser Co for the sale of their shares. | Summary: 8. Partial scrip for scrip rollover relief under Subdivision 124-M is available to The Company shareholders in respect to the capital gain made in disposing their shares in The Company under the Proposed Sale. | Detailed Reasoning - Detailed reasoning: 9. As a result of a CGT event happening, a capital gain is made if the capital proceeds from the disposal of the CGT asset exceed its cost base. Based on the information provided, The Company Shareholders will make a capital gain when CGT event A1 happens as a result the Proposed Sale. 10. The rules about capital proceeds are contained in subsection 116-20(2). Generally, in a respect to a CGT event happening, it consists of; a). the money received or is entitled to receive, and b). the market value of any property received or is entitled to receive. 11. For The Company shareholders, the capital proceeds will be the sum of the Cash Consideration and the value of the ordinary and redeemable preference shares (RPS) issued in Issuer Co. 12. Subdivision 124-M allows for a rollover of a capital gain subject to the conditions in section 124-780 being satisfied. | Detailed Reasoning - Shares are exchanged for shares in another company: 13. Paragraph 124-780(1)(a) requires an entity (the original interest holder) to exchange a share (the entity's original interest) in a company (the original entity) for a share (the replacement interest) in another company. 14. This requirement is satisfied when The Company Shareholders (the original interest holder), exchange their The Company shares (the original interest) for shares (the replacement interest) in Issuer Co pursuant to the Share Sale Agreement. The inclusion of RPS in the Share Consideration does not prevent scrip for scrip rollover relief from being available to the original interest holders (ATO ID 2003/893). | Detailed Reasoning - The exchange occurs as part of a single arrangement: 15. Paragraph 124-780(1)(b) requires that the exchange of the replacement shares is in consequence of a single arrangement that satisfies subsection 124-780(2) or (2A). 16. The question of what constitute a single arrangement requires consideration of certain factors including 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 (paragraph 32 TR 2005/19). 17. The single arrangement requirement is satisfied as the Proposed Sale will be implemented by way of a single Share Sale Agreement between the The Company shareholders and Purchaser Co. 18. Paragraph subsection 124-780(2)(a) requires that the acquiring entity must become the owner of 80% or more of the voting shares in the original entity. If the acquiring entity is a member of a wholly-owned group it must increase its holdings of shares in the original entity so that group members, including the company, become the owners of at least 80% or more of the shares (emphasis added). 19. Under the Proposed Sale, Purchaser Co is offering to acquire 100% of the shares in The Company. Accordingly, the 80% ownership requirement is satisfied. | Detailed Reasoning - Participation is on substantially the same terms: 20. Paragraph 124-780(2)(b) requires that the arrangement must be one in which at least all owners of voting shares in the original entity could participate. Additionally, Paragraph 124-780(2)(c) requires that participation was available on substantially the same terms for all of the owners of interests of a particular type in the original entity. 21. The terms of the Proposed Sale apply to all The Company shareholders equally. Therefore, both requirements are satisfied. | Detailed Reasoning - Conditions for rollover under subsection 124-780(3): 22. As well as the conditions outlined above, there are further conditions for rollover relief under subsection 124-780(3) which include: (a) the original interest holder acquired its original interest on or after 20 September 1985; and (b) apart from the roll-over, it would make a capital gain from a CGT event happening in relation to its original interest; and (c) its replacement interest is in a company (the replacement entity) that is: (i) the company referred to in subparagraph 124-780(2)(a)(i); or (ii) in any other case - the ultimate holding company of the wholly-owned group; and (d) the original interest holder chooses to obtain the roll-over or, if section 124-782 applies to it for the arrangement, it and the replacement entity jointly choose to obtain the roll-over; and (e) if that section applies, the original interest holder informs the replacement entity in writing of the cost base of its original interest worked out just before a CGT event happened in relation to it; and (f) if an acquiring entity is a member of a wholly-owned group - no member of the group issues equity (other than a replacement interest), 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. 23. The original interests, being the The Company shares, were all issued after 20 September 1985. Under the Proposed Sale, The Company shareholders agreed to dispose their The Company shares to Purchaser Co and receive a mix of ordinary shares, RPS and cash. Purchaser Co is a member of a wholly owned group which Issuer Co is the ultimate holding company. The shares issued in Issuer Co as part of the consideration are replacement interests. 24. The disposal of The Company shares is a CGT A1 event under which the shareholders of The Company are expected to make a capital gain. 25. Under the terms of the Proposed Sale, The Company shareholders agreed to reinvest up to 40% in aggregate of their sale proceeds, being the Share Consideration, into Purchaser Co. Where an entity and its associates hold share interest that carry 30% or more of the voting rights or rights to dividends or distribution of capital of the company, the interest is a significant stake under subsection 124-783(6). 26. The Company shareholders are associates under section 318 of the Income Tax Assessment Act 1936 by virtue of the familial relationship of the individuals who hold both direct and indirect share interests in The Company. 27. The 40% reinvestment into Purchaser Co therefore, means that The Company shareholders will become, between themselves, significant stakeholders in accordance with section 124-783. Therefore, section 124-782 will apply for the purpose of satisfying the conditions under paragraphs 124-780(3)(d) and (e). 28. Information provided about The Company shareholder reinvestment in Purchaser Co shows that the arrangement is subject to receiving “taxation rollover relief”. This indicates that both The Company shareholders and Issuer Co as the replacement entity understand that they must jointly choose to obtain the rollover under Subdivision 124-M. It is stated in the private ruling application that The Company shareholders and Issuer Co will jointly choose to obtain the rollover. Therefore the requirement in paragraph 124-780(3)(d) will be satisfied. 29. It is also stated in the private ruling application that The Company shareholders will inform Issuer Co in writing of the cost base of their The Company shares. Therefore, the requirement in paragraph 124-780(3)(e) will be satisfied. 30. A further condition for rollover relief under paragraph 124-780(3)(f) must be satisfied if under an arrangement the acquiring entity owes new debt or issues equity to an entity outside the wholly-owned group in relation to the issue of replacement interests. 31. However, paragraph 1.37 in the EM to 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. 32. As there is no proposed issue of equity or debt to a member outside the Issuer Co Group in relation to the Proposed Sale, the condition in paragraph 124-780(3)(f) should also be satisfied. | Detailed Reasoning - Further conditions - non arm's length: 33. Subsection 124-780(4) 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: (a) neither the original entity nor the replacement entity had at least 300 members just before the arrangement started, or (b) the original interest holder, the original entity and an acquiring entity were all members of the same linked group just before that time. 34. The information provided as background facts indicates that the Purchaser Co Group and The Company shareholders are dealing with each at arm's length. 35. Purchaser Co is an investment entity under the management of a private equity firm. Purchaser Co and The Company shareholders are not members of the same linked group prior to the implementation of the Proposed Sale. Therefore, the conditions in both subsections 124-780(4) and (5) are not required to be satisfied. 36. For completeness, no The Company shareholders will be a common stakeholder by virtue of subsection 124-783(9) as no entity or entities which owns, alone or together with associates, more than 80% of the voting rights in the original entity (The Company) before the arrangement (the Proposed Sale) and more than 80% of the voting rights in the replacement entity (Purchaser Co) after the arrangement. | Detailed Reasoning - Conclusion on rollover conditions:: 37. On the basis of the facts provided in relation to the Proposed Sale, scrip for scrip rollover relief under Subdivision 124-M will be available to the shareholders of The Company to disregard the capital gain made from the disposal of their The Company shares to Purchaser Co. | Detailed Reasoning - Partial rollover: 38. Rollover relief under Subdivision 124-M only applies to the extent that capital proceeds received in exchange for the original interest are replacement shares in the replacement entity. Where the capital proceeds including something in addition to the replacement shares, that part of the proceeds is an ineligible part. The most common form of ineligible proceeds is cash. There is no rollover relief under subsection 124-790(1) in relation to ineligible part. 39. The cost base of the ineligible part is worked out in accordance with subsection 124-790(2). It is that part of the cost base of the original interest, i.e. the cost base of the The Company share, as it is reasonably attributable to it. See Question 3 Reason for decision 40. Scrip for scrip roll over cannot be chosen if any capital gain made by The Company shareholders from the replacement Issuer Co shares would be disregarded, except because of a roll over (paragraph 124-795(2)(a)). 41. Therefore, if the Proposed Sale proceeds to completion in accordance with the key terms of the transaction, The Company shareholders may only choose partial scrip for scrip rollover under section 124-790 in respect to the replacement shares in Issuer Co. | Detailed Reasoning - Exceptions - rollover relief is not available: 42. In some circumstances rollover relief under Subdivision 124-M is not available. The exceptions are outlined in section 124-795, none of which are currently applicable on the basis of the facts provided in relation to the arrangement under the Proposed Sale. | Detailed Reasoning - Conclusion to Question 2: 43. Subject to the facts provided in relation to the arrangement under the Proposed Sale, the shareholders of The Company may choose partial scrip for scrip rollover of the capital gain they made in disposing their The Company shares for replacement shares in Issuer Co. | Summary: 44. The cost base of the The Company shares disposed to Purchaser Co. is determine in accordance with section 124-785 with reference to subsection 124-790(2) to work out the cost base of the ineligible cash component received. | Detailed Reasoning - Detailed reasoning: 45. Under an arrangement (the single arrangement) where the original interest holder can choose scrip for scrip rollover relief, the rules about the cost base of the replacement shares received are set out in section 124-785. 46. The rules are, under subsection 124-785(2), the original interest holder is taken to have acquired the CGT asset (replacement share interest) for the cost base of the original interest and under subsection 124-785(3), in a case where the original interest holder is only eligible to choose partial rollover relief, the cost base of the original interest will need to be apportioned between the replacement interest and the ineligible part of the capital proceeds (usually the cash component). 47. As stated above, after the completion of the Proposed Sale, The Company shareholders are eligible to choose partial scrip for scrip rollover relief for the replacement shares in Issuer Co. The cost base of the Issuer Co shares received must therefore, be determined according to the rules set out in section 124-785 and with reference to the subsection 124-790(2) in working out the cost of the ineligible cash consideration. | Detailed Reasoning - Conclusion to Question 3: In applying scrip for scrip rollover relief, the cost base of the The Company shares disposed to Purchaser Co. will be determined in accordance with section 124-785. As only partial scrip for scrip rollover is available to The Company shareholders, the cost base of the ineligible cash component is determined in accordance with subsection 124-790(2). In this case, the cost base is also subject to whether scrip for scrip rollover is available in respect to the earlier arrangement.