Private ruling: Scrip for scrip roll-over
Date of advice: 17 January 2020
Published: March 2020
Ruling period: 1 July 2019 - 30 June 2020
Date scheme commenced: 1 July 2019

Ruling: Q1:  | A1: 

Relevant facts and circumstances: 1. The A Trust is an Australian trust estate. 2. The Trustee holds ordinary shares in Company X, a company incorporated in Australia. 3. Company X only had ordinary shares on issue. 4. Company Y is an Australian incorporated company listed on the Australian Securities Exchange. It is the ultimate holding company of a wholly-owned group and is the head of an income tax consolidated group. 5. Company Y entered into an agreement with the Trustee and all other shareholders in Company X to acquire 100% interest in Company X (Agreement). 6. Company Y made the offer to each shareholder in Company X in proportion to their shareholdings before the transaction. 7. Consideration for the shares in Company X comprised of ordinary shares in Company Y and an amount of $xxx in cash. 8. The shareholders had the choice to elect to receive a mix of shares and cash subject to a maximum scrip threshold. 9. The cash consideration was funded by Company Y undertaking capital raising with external investors on market. 10. The Trustee chose not to receive cash consideration and to receive only shares in Company Y. 11. Neither the Trustee nor any shareholder in Company X was a significant stakeholder or common stake holder for the arrangement under the terms of section 124-783 of the ITAA 1997. 12. All the shareholders in Company X and Company Y dealt with each other at arm's length. 13. The Trustee acquired the shares in Company X after 20 September 1985 and held the shares on capital account. 14. The disposal of the shares in Company X would, but for the application of the roll-over provision under section 124-780 of the ITAA 1997, result in a capital gain to the Trustee. 15. The Trustee cannot choose a roll-over under Division 122 or Division 615 of the ITAA 1997 in respect or the exchange of shares. 16. Company Y will not make a choice to deny a roll-over under Subdivision 124-M of the ITAA 1997 to the shareholders.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 section 124-780 | Income Tax Assessment Act 1997 section 124-782 | Income Tax Assessment Act 1997 section 124-790 | Income Tax Assessment Act 1997 section 124-795

Reasons for decision: Summary: Summary: The Trustee is eligible to choose a capital gains tax (CGT) roll-over relief under Subdivision 124-M of the ITAA 1997 in respect of the exchange of its shares in Company X for shares in Company Y. | Detailed Reasoning - Detailed reasoning: All legislative references are to the ITAA 1997 unless otherwise stated. CGT event A1 under subsection 104-10 will happen when the Trustee disposes of its shares in Company X. Subdivision 124-M allows a shareholder to choose roll-over where post-CGT shares are replaced with shares in another entity. Section 124-780 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. | Detailed Reasoning - Shares are exchanged for shares in another company: Subparagraph 124-780(1)(a)(i) requires an entity to exchange a share in a company for a share in another company. This requirement is satisfied as the Trustee disposed of its shares in Company X in exchange for shares in Company Y. | Detailed Reasoning - The exchange occurs as part of a single arrangement: Paragraph 124-780(1)(b) requires that the exchange of shares is in consequence of a single arrangement that satisfies subsection 124-780(2). The exchange of shares in Company X occurred under a single Agreement and satisfies this requirement. | Detailed Reasoning - Conditions for arrangement are satisfied: The single arrangement must satisfy the conditions in subsection 124-780(2) as detailed below: a. 80% or more ownership Paragraph 124-780(2)(a) requires that the arrangement results 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 Company Y acquired 100% interest in Company X. b. All owners of voting shares participate Paragraph 124-780(2)(b) 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 all the shareholders could participate in the transaction. c. Participation is on substantially the same terms Paragraph 124-780(2)(c) 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. The offer to acquire shares was made by Company Y to each shareholder of Company X in proportion to their shareholdings. All shareholders are, therefore, able to participate on the same terms. | Detailed Reasoning - Conditions for roll-over are satisfied: The arrangement must also satisfy the conditions for roll-over in subsection 124-780(3). a. Original interest is acquired on or after 20 September 1985 As the Trustee acquired its shares in Company X after 20 September 1985, this condition is satisfied. b. Shareholder would otherwise make a capital gain CGT Event A1 would happen to the Trustee when the Agreement for the disposal of shares was executed (subsections 104-10(1), 104-10(2) and 104-10(3)). The Trustee would 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) 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 Trustee will receive replacement shares in Company Y, this condition is satisfied. d. Choice to obtain scrip for scrip roll-over Paragraph 124-780(3)(d) 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 does not apply because none of the shareholders, together with its associates, will hold 30% or more of the total shares in Company Y after the transaction and collectively, all the shareholders and their associates will not hold 80% or more of the total shares in Company Y after the transaction. Accordingly, if the Trustee chooses to obtain roll-over this condition is satisfied. e. Issue of equity or new debt by member of wholly-owned group Paragraph 124-780(3)(f) provides that if any 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 Company Y will issue replacement interests to the shareholders and undertake capital raising by issuing debt or equity instruments to external investors, the condition in paragraph 124-780(3)(f) is satisfied. | Detailed Reasoning - Further roll-over conditions are not applicable: 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. The additional requirements in subsection 124-780(5) do not apply as all parties are unrelated and deal with each other at arm's length. | Detailed Reasoning - Exceptions to obtaining scrip for scrip roll-over are not applicable: Section 124-795 sets out the circumstances where roll-over under Subdivision 124-M is not available. The exception under subsection 124-795(1) does not apply as the Trust and Trustee are not foreign residents before the Transaction. The exceptions under paragraphs 124-795(2)(a) and (b) do not apply as the capital gain the Trustee might make from the Transaction would not be disregarded (except because of a roll-over) and Company X and Company Y are not members of the same wholly-owned group. The exception under subsection 124-795(3) does not apply as the Trustee cannot choose a roll-over under Division 122 or Division 615. The exception under subsection 124-795(4) does not apply as Company Y will not make a choice to deny a roll-over under Subdivision 124-M to the shareholders. | Detailed Reasoning - Conclusion: The Trustee is eligible to choose to obtain roll-over in relation to the exchange of its shares in Company X for shares in Company Y under section 124-780.

Subject: Scrip for scrip roll-over: Question: Will the trustee of the A Trust (Trustee) be eligible to choose scrip for scrip roll-over under Subdivision 124-M of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of the disposal of its shares in Company X in exchange for shares in Company Y?