Private ruling: Scrip for scrip roll-over
Date of advice: 6 July 2021
Published: September 2021
Ruling period: Income year ended 30 June 20XX | Income year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Can the shareholders of Company X access CGT rollover relief pursuant to Subdivision 124-M of the Income Tax Assessment Act 1997 (ITAA 1997) on the exchange of their shares in Company X for shares in Holding Company? | A1: Yes. | Q2: Will the anti-avoidance provisions contained in Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) apply to the proposed restructure? | A2: No.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. Background Company X operates a business. Four other companies operate the same business in different locations under the same brand (Group Companies). Some of the Company X shareholders also own shares in some of the other Group Companies. To facilitate the restructure of the group a new entity, Holding Company was incorporated. The intention is that Holding Company will become the head entity/parent entity of each Group Company, via a share exchange arrangement. Under this proposed restructure each Group Company will become a wholly owned subsidiary of Holding Company, with each of the shareholders after the restructure then owning shares in Holding Company. It is expected this restructure will provide the opportunity for all current shareholders in each of the Group Companies to participate in the success of the entire Group. Furthermore, having Holding Company as the head entity of the group will provide the ability to grow and attract new members to the group as equity participants and will consolidate the existing equity participants. The current Company X shareholders after the restructure will benefit from operational trading activities as a whole group under Holding Company. The proposed share exchange will involve each of the Company X shareholders exchanging their shares in Company X for shares in Holding Company. The number of $1 Holding Company 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 Holding Company shares that will be received in return. Other matters • 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 significant stakeholders for the arrangement will notify Holding Company of the cost base of their Company X shares as worked out just before the share exchange. • Holding Company 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 subsection 104-10(4) | 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 1936 section 177A | Income Tax Assessment Act 1936 subsection 177A(1) | Income Tax Assessment Act 1936 section 177C | Income Tax Assessment Act 1936 subsection 177C(1) | Income Tax Assessment Act 1936 section 177D | Income Tax Assessment Act 1936 subsection 177D(1) | Income Tax Assessment Act 1936 subsection 177D(2) | Income Tax Assessment Act 1936 section 177F | Income Tax Assessment Act 1936 subsection 177F(1) | Income Tax Assessment Act 1936 subsection 318(3) Question 1 | Summary | The shareholders of Company X will be eligible to access CGT roll-over relief pursuant to Subdivision 124-M of the ITAA 1997. | Detailed reasoning | 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; | • the exchange occurs as part of a single arrangement; | • conditions for arrangement are satisfied; | • conditions for roll-over are satisfied; | • further conditions are not applicable; and | • exceptions to obtaining scrip for scrip roll-over are not applicable. | 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 Holding Company. | 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). As outlined in the draft sale agreement, all the Company X shareholders will exchange their Company X shares for Holding Company shares under a single arrangement and subsection 124-780(2) is considered further below. | Conditions for arrangement are satisfied | The single arrangement must satisfy the conditions in subsection 124-780(2) of the ITAA 1997 as detailed below: | 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 Holding Company will actually acquire 100% of the voting shares in Company X. | 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 Company X shareholders. | 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. | This condition is satisfied as the offer to acquire shares was made by Holding Company to all Company X shareholders in proportion to their shareholdings in Company X and all shareholders are able to participate on the same terms. | 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). | 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. | 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) apart from the roll-over, therefore this condition is satisfied. | 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 Holding Company, this condition is satisfied. | 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. | All the Company X shareholders will choose the roll-over so this condition is satisfied. | 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 applies, all significant and common stakeholders for the arrangement will notify Holding Company in writing of the cost base of their Company X shares so this condition is satisfied. | 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 Holding Company will only issue replacement interests, being the Holding Company 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. | Further roll-over conditions | 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. | As both Company X and Holding Company will have fewer than 300 members before share exchange, subsection 124-780(4) of the ITAA 1997 will apply if the shareholders in Company X and Holding Company did not deal at arm's length in relation to the exchange. | The question of whether the parties are dealing with each other at arm's length is not decided by asking whether the parties were at arm's length to each other. Subsection 995-1(1) of the ITAA 1997 provides that in determining whether parties deal at arm's length, consider any connection between them and any other relevant circumstance. | ATO Interpretative Decision ATO ID 2004/498 considers the situation where a restructure is implemented whereby a new acquiring entity is incorporated for the purpose of acquiring all the shares in the original entity in exchange for the issue of ordinary shares and redeemable preference shares. The original shareholders will own all the shares in the acquiring entity in the same proportion as they did in the original entity. | It is considered that the principles in ATO ID 2004/498 equally apply in this situation as the proposed share exchange also features a company that is being incorporated for the purposes of becoming the acquiring company under a scrip for scrip arrangement. Accordingly, it is considered that the parties did not act at arm's length in respect of the share exchange as Holding Company, being a newly created entity for the purposes of the share exchange, did not have the opportunity to bargain as a party dealing at arm's length with the Company X shareholders. | 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 $1 Holding Company 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 Holding Company shares each shareholder will receive under the share exchange in return for the disposal of their Company X shares will directly relate to the market value of the shares each shareholder currently holds in Company X, it is expected that the market value of the Holding Company shares will be at least substantially same as the relevant Company X shares. | Although some Company X shareholders will also receive additional Holding Company shares under the broader arrangement in exchange for their shares in the other Group Company's, the total market value of the Holding Company shares the Company X shareholders will receive will be at least substantially the same as the market value of their Company X shares. Consequently 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 ordinary shares with voting, dividend and capital rights. The shares that the Company X shareholders will receive in Holding Company will also 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. | 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 Holding Company shares on capital account and therefore any capital gain the Company X shareholders might make from the Holding Company 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 Holding Company are not members of the same wholly-owned group just before the share exchange and Holding Company is not a foreign resident. | The exception under subsection 124-795(3) of the ITAA 1997 does not apply, Company X shareholders cannot choose a roll-over under Division 122 or Division 615, as the shareholders of Company X will not be the sole shareholders of Holding Company after the arrangement and therefore they will not hold the required number of shares in Holding Company after the share exchange under those Divisions. | The exception under subsection 124-795(4) of the ITAA 1997 does not apply as Holding Company will not make a choice to deny roll-over under Subdivision 124-M to the Company X shareholders. | 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 Holding Company under Subdivision 124-M of the ITAA 1997. | The Company X shareholders can disregard any capital gain they make from the disposal of their Company X shares in accordance with subsection 124-785(1) of the ITAA 1997. | Cost base | Cost base of the Holding Company shares received by the Company X shareholders | Subsection 124-785(2) of the ITAA 1997 provides that the first element of the cost base of the Holding Company shares received by the Company X shareholders as a result of the share exchange will be reasonably attributed to the cost base of the original Company X shares. The adjustment to the cost base as outlined in subsection 124-785(3) will not apply in this situation as the Company X shareholders will only be receiving the replacement interests, being the Holding Company shares, under the share exchange and not an ineligible part | Cost base of the Company X shares received by Holding Company | The cost base of the Company X shares received by Holding Company under the share exchange will depend on whether there are any significant or common stakeholders for the arrangement as defined by section 124-783 of the ITAA 1997. | Subsection 124-782(1) of the ITAA 1997 provides that the cost base of the Company X shares received by Holding Company under the share exchange that were originally held by significant or common stakeholders for the arrangement will be the cost base of the original Company X shares. | Note 1 to subsection 124-782(1) of the ITAA 1997 confirms that the cost base of the Company X shares received by Holding Company under the share exchange that were originally held by the Company X shareholders, that are not significant or common stakeholders for the arrangement, will be worked out under the ordinary cost base rules in Divisions 110 and 112. This will generally be the market value of the shares at the time of the share exchange. | Significant and common stakeholders | Subsection 124-783(1) of the ITAA 1997 provides that a Company X shareholder will be a significant stakeholder for an arrangement if it had a significant stake in Company X just before the arrangement started and a significant stake in Holding Company just after the arrangement was completed. | An entity has a significant stake in a company under subsection 124-783(6) of the ITAA 1997 if the entity, or the entity and the entity's associates between them have shares carrying 30% or more of the voting, dividend and capital rights of the company. | Similarly, in accordance with subsections 124-783(3) and (9) of the ITAA 1997, an entity will be a common stakeholder for an arrangement if together with their associates they hold shares carrying 80% or more of the voting, dividend and capital rights of the relevant companies both before and after the arrangement. | None of the Company X shareholders will hold 30% or more of the WBAES shares just before the share exchange and they will also not be associates as defined by section 318 of the ITAA 1936. Therefore there will be no significant or common stakeholders for the share exchange. | Therefore, the cost base of the shares received by Holding Company that were originally held by the | Company X shareholders will be worked out under the ordinary cost base rules in Divisions 110 and 112 of the ITAA 1997. | Question 2 | Summary | The share exchange is not a scheme to which Part IVA of the ITAA 1936 applies. | Detailed reasoning | For the general provisions of Part IVA of the ITAA 1936 to apply, there must be a 'scheme', a tax benefit and a sole or dominant purpose of entering into the scheme to obtain a tax benefit. The arrangement as described in the ruling will constitute a scheme. | Based on the information provided, and having regard to the matters set out in section 177D of the ITAA 1936, it would not be reasonable to conclude that in entering into or carrying out the scheme, the Company X shareholders or any other relevant party demonstrate a dominant purpose of securing a tax benefit.


This ruling applies for the following periods: