Private ruling: Scrip for scrip roll-over election
Date of advice: 5 September 2017
Published: January 2018
Ruling period: Income year ending 30 June 2018 | Income year ending 30 June 2019

Ruling: Q1: Will the trustee of the Trust be eligible for CGT roll-over under Subdivision 124-M of the Income Tax Assessment Act 1997 (ITAA 1997) in relation to the exchange of its Coy A’s Ordinary Shares for Ordinary Shares in Coy B? | A1: Yes | Q2: Will the Commissioner make a determination under section 177F of the Income Tax Assessment Act 1936 (ITAA 1936) to cancel the tax benefit obtained by the trustee of the Trust or its beneficiaries, as constituted by the non-inclusion of a net capital gain in their assessable income pursuant to section 102-5 of the ITAA 1997 due to the operation of subsection 124-785(1) of the ITAA 1997? | A2: No | Q3: For the purposes of section 115-25 of the ITAA 1997, will section 115-30 of the ITAA 1997 apply to deem the acquisition date of Coy B Ordinary Shares acquired by the trustee of the Trust in exchange for Ordinary Shares in Coy A to be the same date that the trustee of the Trust acquired their Ordinary Shares in Coy A? | A3: Yes

Relevant facts and circumstances: The group associated with Coy A is preparing to restructure in preparation for an Initial Public Offering (IPO) of shares and listing on the Australian Securities Exchange (ASX). All entities associated with Coy A are Australian residents for income tax purposes. The following steps will be undertaken to facilitate this restructure. 1. A public company will be incorporated and will be used as a listing vehicle (Coy B). 2. Coy A’s share structure will be simplified. Certain shares will be converted into Ordinary Shares or performance shares as permitted by Coy A’s Constitution. 3. There will be a share split of the shares in Coy A to facilitate the listing process. 4. Certain non-core business interests will be divested from Coy A’s business group which may be finalised after the IPO and listing process. 5. Members of the public will subscribe for Ordinary Shares in Coy B. Capital raised under the IPO will fund the purchase of some shares from Coy A’s shareholders by Coy B. 6. Immediately or shortly after, Coy B will acquire 100% of the Ordinary Shares in Coy A and 100% shares of the performance shares in Coy A. Binding agreements between Coy A’s shareholders and Coy B will facilitate the sell down of Ordinary Shares in Coy A and the scrip for scrip acquisition on a 1:1 basis for the remaining Ordinary Shares and performance shares. 7. Shortly after, the Ordinary Shares in Coy B will be admitted to the official list of the ASX and will commence to be publicly traded. The shareholder of Coy A, the Trust, will elect to apply for scrip for scrip roll-over relief in relation to their exchange of their Ordinary Shares in Coy A for Ordinary Shares in Coy B. The Trust (including associates) holds more than 30% of Ordinary Shares in Coy A. All shares were acquired after 20 September 1985. It is expected that the Trust will make a capital gain from the sale of their shares in Coy A to Coy B. Assumptions Coy B will offer to acquire all the Ordinary Shares in Coy A for cash and scrip (on a 1:1 basis). 1. The offer from Coy B will be made available to each holder of Ordinary Shares in Coy A and will enable each shareholder to dispose of each Ordinary Share for either cash or one share in Coy B. 2. The minority holders of Ordinary Shares in Coy A will exchange their shares for Ordinary Shares in Coy B on a 1:1 basis. 3. Coy B will acquire all Platinum Shares in Coy A in exchange for performance shares in Coy B on a 1:1 basis. 4. Prior to the exchange of shares, the majority shareholders and their associates will collectively hold shares in Coy A with approximately 93% of the voting, dividend and capital rights. 5. At the conclusion of the issue of shares to the public under the IPO: a. Coy B will have at least 300 members, and b. the spread of holders of Coy B Ordinary Shares will be such that section 124-810 of ITAA 1997 will not apply to deem Coy B to have less than 300 members. 6. All shareholders of Coy A are residents of Australia for income tax purposes. 7. Coy B will not make a choice referred to under paragraph 124-795(4)(a) of the ITAA 1997. 8. Coy B, along with all ‘significant stakeholders’ (as defined in section 124-783 of ITAA 1997) in Coy B/Coy A, will jointly choose to obtain roll-over relief, pursuant to paragraph 124-780(3)(d) of ITAA 1997. 9. Any and all significant stakeholders in Coy B/Coy A will provide to Coy B in writing the details of their respective cost bases of their shares held in Coy A before the sale of their Coy A shares to Coy B. 10. Any capital losses that currently exist in the Trust will have been fully recouped before taking into account any capital gains. 11. Prior to their conversion to Ordinary Shares, the market value of an A Class Share and a Foundation Share in Coy A is identical (in each case) to the market value of an Ordinary Share. 12. Any valuations of entities or businesses will be undertaken in accordance with the ATO's 'Market valuation for tax purposes' guidelines.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 102-5 | Income Tax Assessment Act 1997 subsection 109-5(1) | Income Tax Assessment Act 1997 subsection 109-10(1) | Income Tax Assessment Act 1997 Subdivision 115-A | Income Tax Assessment Act 1997 section 115-25 | Income Tax Assessment Act 1997 subsection 115-30(1) | Income Tax Assessment Act 1997 Item 2 of the table in subsection 115-30(1) | Income Tax Assessment Act 1997 paragraph 115-34(1)(c) | Income Tax Assessment Act 1997 Subdivision 124-M | Income Tax Assessment Act 1997 subsection 124-785(1) | Income Tax Assessment Act 1997 paragraph 124-780(3) | Income Tax Assessment Act 1936 Part IVA | Income Tax Assessment Act 1936 subsection 177A(1) | Income Tax Assessment Act 1936 subsection 177C(2) | Income Tax Assessment Act 1936 subsection 177D(2) | Income Tax Assessment Act 1936 section 177F

Reasons for decision: Summary: Subdivision 124-M of the ITAA 1997 provides for capital gains tax (CGT) roll-over relief when certain post-CGT interest in companies and trusts are exchanged for interests in another entity. Roll-over relief can only be chosen where a capital gain would have resulted from the exchange of the shares under subsection 124-780(3) of the ITAA 1997. Roll-over relief will be available where: ● a post-CGT share interest is exchanged for a share interest in another company; ● the exchange is in consequence of a "single arrangement" that meets specified criteria; ● the "replacement share interest" is in a specified replacement entity; and ● roll-over is chosen and specific notice requirements fulfilled. Taxpayers must exchange their interests for similar interests in the acquiring company. For example, a taxpayer can exchange an option to acquire a share in the original company for an option to acquire a share in the acquiring company, but cannot exchange an option for share. In this case, each Ordinary Share in Coy A held by the Trust will be exchanged for Ordinary Shares in Coy B. The disposal of shares in Coy A to Coy B and the receipt of replacement shares in Coy B satisfy the abovementioned conditions and exceptions under Subdivision 124-M of the ITAA 1997. Part IVA of the ITAA 1936 allows the Commissioner to make a determination to cancel a tax benefit where such a benefit has been obtained by a taxpayer under a scheme that (objectively determined) was entered into for the dominant purpose of obtaining a tax benefit. Broadly, Part IVA of the ITAA 1936 applies to an arrangement where the following elements exist: a) there is a scheme as defined in subsection 177A(1) of the ITAA 1936, b) there is a tax benefit as defined in subsection 177C(1) of the ITAA 1936 obtained by a taxpayer in connection with the scheme, c) having regard to the eight matters listed in subsection 177D(2) of the ITAA 1936 it would be concluded that a person who entered into or carried out the scheme did so for the dominant purpose of enabling the taxpayer to obtain a tax benefit in connection with the scheme, and d) the Commissioner makes a determination under section 177F of the ITAA 1936 to cancel the relevant tax benefit. In determining whether a tax benefit exists for the purposes of Part IVA of the ITAA 1936, subparagraph 177C(2)(a)(i) of the ITAA 1936 provides a specific exclusion for tax benefits obtained as a consequence of the making of an agreement, choice, declaration, election, notification or option which is expressly provided for in either the ITAA 1936 or ITAA 1997. This exclusion would cover roll-over elections made under Subdivision 124-M. There is a carve-out from the exclusion in subparagraph 177C(2)(a)(i) of the ITAA 1936. If a scheme is structured in this way for the dominant purpose of creating circumstances whereby the relevant choice or election is able to be made, such an arrangement would not be excluded from a tax benefit from which Part IVA of the ITAA 1936 would apply (subparagraph 177C(2)(a)(ii) of the ITAA 1936). In relation to the proposed facts and circumstances, the carve-out from subsection 177C(2) of the ITAA 1936 in subparagraph 177C(2)(a)(ii) of the ITAA 1936 should not operate. Any preparatory steps prior to the exchange of shares, including the simplification of capital structure of Coy A, are all necessary steps to achieve an optimal IPO and ASX listing outcome. Therefore the benefit arising to the Trust or its beneficiaries from an election for roll-over relief to apply under Subdivision 124-M (i.e. the non-inclusion of a net capital gain in the trustee of the Trust’s or its beneficiaries’ assessable income due to the operation of subsection 124-785(1) of the ITAA 1997) is not a tax benefit for the purposes of Pt IVA of the ITAA 1936 pursuant to paragraph 177C(2)(a) of the ITAA 1936. Section 115-25 provides that “[t]o be a *discount capital gain, the *capital gain must result from a *CGT event happening to a *CGT asset that was *acquired by the entity making the capital gain at least 12 months before the CGT event.” Subsection 109-5(1) establishes the general rule as to the timing of acquisition of a CGT asset. It provides that, in general, a CGT asset is acquired when the relevant taxpayer becomes its owner. However, this general rule may be overridden by various other timing rules that are specific to certain CGT events that result the acquisition of the relevant asset. Subsection 109-10(1) includes a table which sets out specific acquisition timing rules for the circumstances in which a taxpayer acquires a CGT asset otherwise than as a result of a CGT event happening. In circumstances where a company issues equity interests in the company to a taxpayer, item 2 of the table in section 109-10 provides that the taxpayer acquires the asset when the contract in respect of the issue of shares was entered into. However, for the purposes of determining eligibility for the CGT discount, special acquisition timing rules in Subdivision 115-A override the rule in subsection 109-10(1). Item 2 of the table in subsection 115-30(1) deals with the circumstance where a CGT asset is acquired by a taxpayer as a replacement asset for a ‘replacement asset roll-over’ (other than a roll-over covered by paragraph 115-34(1)(c)). Item 2 will apply on the basis that the Ordinary Shares in Coy B will be acquired by the Trust as a replacement asset under a Subdivision 124-M roll-over (being a replacement asset roll-over that is not covered by paragraph 115-34(1)(c)). Pursuant to paragraph (a) of item 2 of the table in subsection 115-30(1), the acquirer of the replacement asset is treated as having acquired the CGT asset (being the Ordinary Shares in Coy B) when the acquirer acquired the original asset involved in the roll-over. Therefore, for the Trust who will choose scrip for scrip roll-over to apply in relation to Ordinary Shares in Coy A exchanged for Ordinary Shares in Coy B shares, the acquisition date of its Ordinary Shares in Coy B will be the date they were taken to acquire the Ordinary Shares in Coy A for CGT discount purposes.