Private ruling: capital gains tax scrip for scrip rollover
Published: March 2013
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: If the applicants make a capital gain in respect of the proposed disposal of their shares in Company A, will they be eligible to choose scrip for scrip rollover under Subdivision 124-M of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1:  | Q2: Will the value of Company B ordinary shares received by the applicants resulting from the conversion of the performance shares give rise to assessable income to the applicants under section 6-10 of the ITAA 1997 via the capital gains tax (CGT) provisions in Part 3-1 of the ITAA 1997? | A2:  | Q3: Will the value of Company B ordinary shares received by the applicants resulting from the conversion of the performance shares be a dividend as defined in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936) and included in the assessable income of the applicants under subsection 44(1) of the ITAA 1936? | A3:  | Q4: Will the Commissioner make a determination under subsection 45B(3) of the ITAA 1936 that section 45C of the ITAA 1936 applies to the provision of any Company B shares and will any capital benefit be taken to be a dividend for the purposes of subsection 6(1) of the ITAA 1936? | A4: 

Relevant facts and circumstances: The arrangement that is the subject of this ruling is the acquisition by Company B of 100% of the issued shares in Company A. The applicants are residents of Australia for taxation purposes. The applicants are ordinary shareholders in Company A and hold their shares in Company A on capital account. Company A is an unlisted Australian resident private company. Company A has several shareholders. There are no other shares of Company A on issue other than those reflected in schedule 1 of the Share Sale Agreement. There are only ordinary shares on issue in Company A and all shares have equal rights. Company B is an Australian resident and a publicly listed company limited by shares. In Company B's 20XX Annual report is was shown that; · there are no substantial shareholders in Company B · there are over 300 shareholders in Company B · there is only one class of share and all ordinary shareholders have equal voting rights and Company B has no securities that are subject to escrow. Company A does not hold any shares in Company B. Company B did not hold any shares in Company A before the takeover. Company A and Company B have agreed that Company B will acquire 100% of all rights and title in all the issued capital of Company A on the terms and conditions set out in the Share Sale Agreement. The consideration for the purchase of 100% of all the issued capital in Company A is the purchase price comprising the issue on completion date, of the Company B shares and the performance shares to the shareholders of Company A in the proportions set out in schedule 1 of the Share Sale Agreement. The allocation of the Company B ordinary shares and performance shares is proportionate to the number of shares held by each Company A shareholder. Company B will issue a number of ordinary shares and performance shares as consideration for the acquisition of Company A subject to certain milestones set out in schedule 2 of the Share Sale Agreement. The terms and conditions for the issue of performance shares as described in Schedule 2 of the Share Sale Agreement include, but not limited to, the following: · each performance share will be issued post consolidation for nil consideration and will be convertible into a fully paid ordinary share in the capital of Company B; · the performance shares do not carry any voting rights in the purchaser; do not entitle the holder to any dividends and are not transferable subject to ASX escrow requirements; · the performance shares do not confer any right to participate in the surplus profits or assets of the purchaser upon winding up; · the performance shares provide the holder the right to attend general meetings and the right to receive financial reports and accounts of the purchaser; · the performance shares will be reconstructed as appropriate in the event of any reconstruction of the issued capital of the purchaser and the holder of performance shares are not entitled to participate in new issues of securities in the purchaser. You state that there are no significant stakeholders or common stakeholders in relation to the arrangement for the purposes of section 124-783 of the ITAA 1997. You state that for the purposes of subsections 124-780(4) and 124-780(5) of the ITAA 1997, the relevant parties are dealing with each other at arm's length as evidenced by the ongoing negotiations and the replacement entity (Company B) had at least 300 members just before the arrangement. You state that all cash advances made by Company B to Company A do not form part of the consideration for the proposed acquisition of Company A by Company B.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 Subdivision 124-M | Income Tax Assessment Act 1997 Section 124-785 | Income Tax Assessment Act 1997 Section 124-790 | Income Tax Assessment Act 1997 Section 124-780 | Income Tax Assessment Act 1997 Section 995-1 | Income Tax Assessment Act 1997 Section 124-782 | Income Tax Assessment Act 1997 Section 124-795 | Income Tax Assessment Act 1997 Section 124-792 | Income Tax Assessment Act 1997 Division 122 | Income Tax Assessment Act 1997 Subdivision 124-G | Income Tax Assessment Act 1997 Section 108-5 | Income Tax Assessment Act 1997 Section 104-155 | Income Tax Assessment Act 1997 Paragraph 116-20(1)(b) | Income Tax Assessment Act 1997 Division 109 | Income Tax Assessment Act 1997 Section 6-10 | Income Tax Assessment Act 1936 Subsection 6(1) | Income Tax Assessment Act 1936 Subsection 6(4) | Income Tax Assessment Act 1936 Section 44 | Income Tax Assessment Act 1936 Section 45B | Income Tax Assessment Act 1936 Section 45C

Reasons for decision: Detailed Reasoning - Question 1: CGT event A1 happens as a result of the disposal by Company A shareholders of their Company A shares to Company B under the Share Sale and Purchase Agreement to be executed by Company A and Company B (subsections 104-10(1) and 104-10(2) of the Income Tax Assessment Act 1997 (ITAA 1997)). The happening of CGT event A1 is evidenced by Clauses 7.2(a)(ii) and 7.2(b)(i) of the Share Sale Agreement. The time of the event is when the Share Sale Agreement was entered into (paragraph 104-10(3)(a) of the ITAA 1997). Clause 14.2 of the Share Sale Agreement makes it clear that the relevant contract for the purposes of paragraph 104-10(3)(a) of the ITAA 1997 is the Share Sale Agreement itself, rather than the Heads of Agreement. The applicants (as Company A shareholders) will make a capital gain when CGT event A1 happened if the capital proceeds from the disposal of a Company A share exceeded its cost base. The capital gain is the amount of the excess. The applicants will make a capital loss if the capital proceeds were less than the reduced cost base of the Company A share. The capital loss is the amount of the difference (subsection 104-10(4) of the ITAA 1997). | Detailed Reasoning - Availability of scrip for scrip rollover if a capital gain is made: Subdivision 124-M of the ITAA 1997 provides a shareholder with scrip for scrip rollover, which enables the shareholder to disregard a capital gain they make from a share that is disposed of as part of a corporate takeover or merger if the shareholder received a replacement share in exchange (subsection 124-785(1) of the ITAA 1997). A capital gain will be only partially disregarded if, in addition to shares, the capital proceeds include something (ineligible proceeds) other than replacement shares (subsection 124-790(1) of the ITAA 1997). | Detailed Reasoning - Requirements for scrip for scrip rollover: Subdivision 124-M of the ITAA 1997 contains a number of conditions for, and exceptions to, the eligibility of a shareholder to choose scrip for scrip rollover. The main conditions and exceptions that are relevant in this case are: · shares are exchanged for shares in another company; · the exchange occurs as part of a single arrangement; · conditions for rollover are satisfied; · further conditions are not applicable; and · exceptions to obtaining scrip for scrip rollover are not applicable. | Detailed Reasoning - Shares are exchanged for shares in another company: Subparagraph 124-780(1)(a)(i) of the ITAA 1997 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 holder's replacement interest) in another company. In this case, this requirement is satisfied because the applicants (original interest holders) will receive Company B ordinary shares and performance shares (the replacement interest) as capital proceeds for the disposal of their Company A shares (the original interest) under the Share Sale Agreement. | 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 replacement shares is in consequence of a single arrangement that satisfies subsections 124-780(2) or 124-780(2A) of the ITAA 1997. What is considered a single arrangement? Subsection 995-1(1) of the ITAA 1997 defines arrangement as any arrangement, agreement, understanding, promise or undertaking, whether express or implied, and whether or not enforceable (or intended to be enforceable) by legal proceedings. The explanatory memorandum to the New Business Tax System (Miscellaneous) Bill (No. 2) 2000 which introduced amendments to extend the circumstances in which scrip for scrip roll-over is available under Subdivision 124-M of the ITAA 1997 relevantly states: 11.23 What constitutes a single arrangement is a question of fact. Relevant factors in determining whether what takes place is part of a single arrangement would include, but not be limited to, 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. A clause of the Share Sale Agreement provides that the requirements under other particular clauses (about obligations of the vendors at completion) and about obligations of purchaser are interdependent and are to be carried out contemporaneously and, as nearly as possible, simultaneously. Therefore, in this case, it is considered that the Heads of Agreement and the Share Sale Agreement are taken to be a 'single arrangement' for the purposes of paragraph 124-780(1)(b) of the ITAA 1997. Conditions for arrangement in subsection 124-780(2) of the ITAA 1997 80% or more ownership Paragraph 124-780(2)(a) of the ITAA 1997 requires that shares in an entity be exchanged in a single arrangement that results in another entity or members of a wholly-owned group becoming the owner of 80% or more of the voting shares in the original entity. (Company A is the original entity in this case). Subsection 995-1(1) of the ITAA 1997 defines a voting share in a company to mean a voting share as defined in section 9 of the Corporations Act 2001 : Voting share in a body corporate means an issued share in the body that carries any voting rights beyond the following: a) a right to vote while a dividend (or part of a dividend) in respect of the share is unpaid; b) a right to vote on a proposal to reduce the body's share capital; c) a right to vote on a resolution to approve the terms of a buy-back agreement; d) a right to vote on a proposal that affects the rights attached to the share; e) a right to vote on a proposal to wind the body up; f) a right to vote on a proposal for the disposal of the whole of the body's property, business and undertaking; g) a right to vote during the body's winding up. The Company A shares satisfy the definition of a 'voting share' in subsection 995-1(1) of the ITAA 1997. As Company B intended to acquire 100% of Company A shares, the requirement in paragraph 124-780(2)(a) of the ITAA 1997 is satisfied in this case. All voting share owners participate Paragraph 124-780(2)(b) of the ITAA 1997 requires that the exchange of shares is in consequence of a single arrangement in which at least all 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 requirement is satisfied because all of the Company A shareholders participated in the takeover offer by Company B. Participation is on substantially the same terms Paragraph 124-780(2)(c) of the ITAA 1997 requires that the exchange is in consequence of a single arrangement 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. Note 2 to subsection 124-780(2) of the ITAA 1997 states that participation will be on substantially the same terms if, for example, matters such as those referred to in subsections 619(2) and (3) of the Corporations Act 2001 affect the capital proceeds that each participant can receive. In this case, the acquisition would be in proportion to each Company A shareholder's holding so that each shareholder had agreed to sell 100% of their shareholding in Company A - see Schedule 1 of the Share Sale Agreement. Accordingly, the consideration that the applicants would receive is in proportion to their shareholding in the company. The tax agent of the applicants confirmed that all of the shareholders of Company A were offered the same deal. Therefore, on this basis, it is considered that the requirement in paragraph 124-780(2)(c) of the ITAA 1997 is satisfied in this case. | Detailed Reasoning - Conditions for rollover are satisfied: Paragraph 124-780(1)(c) of the ITAA 1997 requires that the conditions for rollover outlined in subsection 124-780(3) of the ITAA 1997 are satisfied. These conditions must be satisfied in relation to each Company A share for which scrip for scrip rollover will be chosen. The Company A shares are post-CGT shares Paragraph 124-780(3)(a) of the ITAA 1997 requires that the original interest holder acquired its original interests on or after 20 September 1985. This requirement is satisfied in this case because all Company A shares were acquired at least no later than September 2011 (time of incorporation of the company). A Company A shareholder would otherwise make a capital gain Paragraph 124-780(3)(b) of the ITAA 1997 requires that, apart from the rollover, the original interest holder would make a capital gain from a CGT event happening in relation to its original interest. A capital gain will be made from the disposal of a Company A share if the capital proceeds for the share are more than its cost base. Whether this condition is met will depend on the individual circumstances of each Company A shareholder. This ruling only applies to the applicants (Company A shareholders) who made a capital gain from the proposed transaction which is the acquisition of their Company A shares. Company A shareholders receive 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). This requirement is satisfied as the Company A shareholders would receive shares in Company B, the acquiring entity. A Company A shareholder must choose to obtain scrip for scrip rollover Paragraph 124-780(3)(d) of the ITAA 1997 requires that the original interest holder chooses the rollover, or if section 124-782 of the ITAA 1997 applies, the original interest holder and the replacement entity jointly choose to obtain the rollover. In this case, the tax agent for the applicants has confirmed that section 124-782 of the ITAA 1997 does not apply because there are no significant stakeholders or common stakeholders under the arrangement. Whether a Company A shareholder chooses to obtain rollover in relation to the disposal of their Company A shares is a matter to be decided by each individual Company A shareholder, subject to their eligibility to the rollover. | Detailed Reasoning - Further rollover conditions are not applicable: Subsection 124-780(4) of the ITAA 1997 provides that the additional requirements in subsection 124-780(5) of the ITAA 1997 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. In this case, the tax agent for the applicants has confirmed that the relevant parties are unrelated and are dealing at arm's length as evidenced by their ongoing negotiations. Company B has over 300 shareholders as reflected in their 20XXAnnual Report. Therefore, on this basis, the additional requirements in subsection 124-780(5) of the ITAA 1997 do not apply. | Detailed Reasoning - Exceptions to obtaining scrip for scrip rollover are not applicable: Section 124-795 of the ITAA 1997 sets out the circumstances where scrip for scrip rollover under Subdivision 124-M of the ITAA 1997 is not available. The exceptions for scrip for scrip rollover are discussed below. Foreign residents Company A shareholders Subsection 124-795(1) of the ITAA 1997 provides that rollover is not available if, just before the disposal, the original interest holder is a foreign resident unless, just after the acquisition of the replacement interest, the replacement interest is taxable Australian property. This exception does not apply to the applicants because they are residents of Australia at the time of the arrangement. A capital gain cannot (apart from the rollover) be otherwise disregarded Paragraph 124-795(2)(a) of the ITAA 1997 provides that the rollover is not available if any capital gain the original interest holder might make from their replacement interest would be disregarded (except because of a rollover), for example, if the shares are trading stock. This exception does not apply to the applicants because it is understood that the applicants hold their Company A shares on capital account at the time of the arrangement. Acquiring entity is not a foreign resident Paragraph 124-792(2)(b) of the ITAA 1997 provides that the rollover is not available if the original interest holder and the acquiring entity are members of the same wholly owned group just before the original interest holder stops owning their original interest and the acquiring entity is a foreign resident. This exception does not apply because Company A and Company B are not members of the same wholly owned group and Company B (the acquiring entity) is not a foreign resident. No rollover is available under Division 122 or Subdivision 124-G of the ITAA 1997 Subsection 124-795(3) of the ITAA 1997 provides that the rollover is not available if a rollover can be chosen under Division 122 or Subdivision 124-G of the ITAA 1997. Division 122 of the ITAA 1997 refers to rollover for the disposal of assets to, or the creation of assets in, a wholly owned company. Subdivision 124-G of the ITAA 1997 sets out when you can obtain a rollover if you own shares in a company and there is a reorganisation of its affairs so that you become the owner of new shares in another company. This exception does not apply because in this case, the circumstances under the arrangement are such that a rollover under Division 122 or Subdivision 124-G of the ITAA 1997 is not available. | Detailed Reasoning - Conclusion: Therefore, in this case, based on the information provided, the applicants will be eligible to choose scrip for scrip rollover under Subdivision 124-M of the ITAA 1997 if they make a capital gain in respect of the proposed disposal of their Company A shares under the Share Sale Agreement. | Detailed Reasoning - Question 2: It is understood that the applicants hold their shares in Company A on capital account at the time of the arrangement. Therefore, the issue as to whether the value of the conversion of the performance shares will give rise to assessable income to the applicants will be considered under the statutory income provisions rather than in the ordinary income provisions. Shares in a company are CGT assets (section 108-5 of the ITAA 1997). The CGT implications of the conversion of the performance shares are discussed below to determine whether it gives rise to assessable income under section 6-10 of the ITAA 1997 referring to other assessable income (statutory income). | Detailed Reasoning - Consolidation of Company B securities: A clause of the Share Sale Agreement defines 'consolidation' to mean the consolidation of the purchaser's securities, as required by the ASX for the purpose of re-complying or as deemed prudent by the purchaser's advisers, on a ratio to be determined following execution of the Share Sale Agreement and as approved by the purchaser's shareholders at the general meeting. Another clause of the Share Sale Agreement defines 'performance shares' to mean (pre consolidation) performance shares comprising the milestones 1, 2 and 3 performance shares, to be issued by the purchaser to the vendors in accordance with clause x and otherwise on the terms and conditions set out in Schedule x, subject to consolidation in the same ratio which applies to the 'consolidation'. Taxation Determination TD 2000/10 expresses the view that no CGT event happens for CGT purposes if a company converts its shares into a larger or smaller number of shares ('the converted shares') in accordance with section 254H of the Corporations Law ('C Law') in that: a) the original shares are not cancelled or redeemed in terms of the C Law; b) there is no change in the total amount allocated to the share capital account of the company; and c) the proportion of equity owned by each shareholder in the share capital account is maintained. In this case, the consolidation of Company B securities for purpose of re-complying appears to have satisfied the conditions explained in TD 2000/10. Therefore, the consolidation will not result in a CGT event happening. | Detailed Reasoning - Conversion of Company B performance shares: It is noted in Schedule Y of the Share Sale Agreement that the performance shares will only be issued post consolidation. The Share Sale Agreement alsoindicates that the purchaser must obtain all necessary regulatory and shareholder approval for the creation of new classes of shares (being the performance shares) pursuant to section 246B of the Corporations Act and section xx of the Company B Constitution, with effect from completion. Therefore, it appears that the performance shares will be a class of shares in the share capital of Company B, and the conversion of a performance share into a Company B ordinary share will involve a variation of the rights attaching to the performance share. Taxation Ruling TR 94/30 rules (at paragraphs 8 and 9) that a variation of rights attaching to shares does not result in a full disposal of the share for the purposes of Part IIIA of the ITAA 1936 (repealed and replaced by Part 3-1 of the ITAA 1997) unless there is a cancellation or redemption of the share. Nor does it result in a part disposal of the share. TR 94/30 also rules (at paragraph 10) that a variation in rights does not constitute a deemed disposal of shares under subsection 160M(6) of the ITAA 1936 (repealed and replaced by section 104-35 of the ITAA 1997 referring to CGT event D1). In this case, it is not known whether Company B cancels or redeems the performance share. The fact that it will be issued for nil consideration as stated in Schedule x of the Share Sale Agreement, it is unlikely that redemption will happen. There seems to be nothing in the Heads of Agreement and/ or the Share Sale Agreement that indicate cancellation of the shares. The tax agent of the applicants said they are unable to comment in respect of Company B because they are not their advisor. | Detailed Reasoning - CGT event H2: Subsection 104-155(1) of the ITAA 1997 provides that CGT event H2 happens if an act, transaction or event occurs in relation to a CGT asset and the act, transaction or event does not result in an adjustment being made to the asset's cost base or reduced cost base. In this case, the variation in the rights attached to the performance share upon conversion is an act, transaction or event in relation to the share. Therefore, CGT event H2 happens. Taxation Ruling TR 95/3 explains (at paragraph 29) that 'consideration' for the purposes of CGT event H2 can include the benefit of mutual promises flowing to parties even if those promises are not 'property' within the meaning of paragraph 116-20(1)(b) of the ITAA 1997. The Company A shareholders will not receive or be entitled to receive money or other consideration in respect of the event happening. The Company A shareholders also will not incur any expenditure relating to the conversion of the performance shares. Therefore, despite CGT event H2 happening in respect of the conversion of the performance shares, the Company A shareholders will not make a capital gain or capital loss as a result of the conversion. Each Company B ordinary share received upon conversion will be taken to have been acquired when the corresponding performance share was acquired at completion date as defined in a certain Clause of the Share Sale Agreement. The combined operation of section 104-155 and Division 109 of the ITAA 1997 does not prescribe any alteration to the acquisition date of an asset to which CGT event H2 happens. Therefore, the Company B ordinary shares converted from the performance shares will retain the same acquisition date as the corresponding performances shares for CGT purposes. | Detailed Reasoning - Conclusion: Therefore, based on the foregoing, the conversion of the performance shares will not give rise to assessable income to the applicants under section 6-10 of the ITAA 1997 via the CGT provisions in Part 3-1 of the ITAA 1997. | Detailed Reasoning - Question 3: The definition of a 'dividend' under subsection 6(1) of the ITAA 1936 includes any distribution made by a company to any of its shareholders but excludes moneys debited against an amount standing to the credit of the share capital account. Pursuant to paragraph (d) of the definition of a dividend in subsection 6(1), moneys debited against an amount standing to the credit of the share capital account are not defined as dividends except to the extent that subsection 6(4) excludes those monies from this definition. Subsection 6(4) of the ITAA 1936 provides that paragraph (d) of the definition of dividend in subsection (1) does not apply if, under an arrangement: a) a person pays or credits any money or gives property to the company and the company credits its share capital account with the amount of the money or the value of the property; and b) the company pays or credits any money, or distributes property to another person, and debits its share capital account with the amount of the money or the value of the property so paid, credited or distributed. An Australian resident shareholder (the registered holder of shares) is assessable on all dividends paid (to the shareholder) by a company (whether the company is a resident or non-resident) out of profits derived from any source (subsection 44(1) of the ITAA 1936). In this case, the performance shares represent part consideration provided by Company B to Company A shareholders in exchange for their Company A shares. The conversion of the performance shares into Company B ordinary shares merely involves a variation of rights attaching to the shares. Therefore, it is considered that the value of Company B ordinary shares received by the applicants resulting from the conversion of the performance shares is not a dividend within the meaning of subsection 6(1) of the ITAA 1936. It is not considered a distribution made by Company B to the performance share holders but rather the conversion is part of the arrangement as agreed by the relevant parties to the Share Sale Agreement. | Detailed Reasoning - Conclusion: Therefore, in this case, the value of the shares received by the applicants resulting from the conversion will not be assessable to the applicants under subsection 44(1) of the ITAA 1936. | Detailed Reasoning - Question 4: Section 45B of the ITAA 1936 applies if certain capital benefits are provided to shareholders in substitution for dividends. Subsection 45B(2) of the ITAA 1936 provides that section 45B of the ITAA 1936 applies where the following conditions are satisfied: · there is a 'scheme' under which a person is provided with a demerger benefit or a capital benefit by a company - see paragraph 45B(2)(a); and · under the scheme a person (the relevant taxpayer), who may or may not be the person provided with the demerger benefit or the capital benefit, obtains a tax benefit - see paragraph 45B(2)(b); and · having regard to the relevant circumstances of the scheme, it would be concluded that the person, or one of the persons, entered into or carried out the scheme, or any part of the scheme for a purpose (other than an incidental purpose) of enabling a taxpayer to obtain a tax benefit - see paragraph 45B(2)(c). Where the conditions of subsection 45B(2) of the ITAA 1936 are met, subsection 45B(3) of the ITAA 1936 provides that the Commissioner may make a determination that either: · section 45BA applies in relation to the whole, or a part, of the demerger benefit; or · section 45C applies in relation to a capital benefit. The reference to a person being provided with a capital benefit is defined in subsection 45B(5) of the ITAA 1936 to include any of the following: a) the provision of ownership interests in a company to the person; b) the distribution to the person of share capital or share premium; c) something that is done in relation to an ownership interest that has the effect of increasing the value of an ownership interest (which may or may not be the same interest) that is held by the person. In this case, the provision of shares in Company B to Company A shareholders under the arrangement constitute a scheme for the provision of a capital benefit for the purposes of paragraph 45B(a) of the ITAA 1936. The meaning of obtaining a tax benefit is defined in subsection 45B(9) of the ITAA 1936 where it states: A relevant taxpayer obtains a tax benefit if an amount of tax payable, or any other amount payable under this Act, by the relevant taxpayer would, apart from this section, be less than the amount that would have been payable, or would be payable at a later time than it would have been payable, if the demerger benefit had been an assessable dividend or the capital benefit had been an assessable dividend. In this case, had the capital benefit notionally been a dividend, Company A shareholders (as the relevant taxpayers) would have been liable to pay tax on the distribution at their relevant rate of tax. Company B had never declared a dividend in a number of years. It is unlikely Company B has a surplus in its franking account so the company wouldn't be expected to be able to frank a dividend if ever it's able to declare one. Company A was incorporated in the 2000's so it's expected that the shareholders of Company A have acquired their Company A shares on or after that date. The cost base of those shares is not known. The consideration being offered by Company B in acquiring the 100% issued capital of Company A is the market value of Company B ordinary shares and performance shares issued to the shareholders of Company A (the vendors) at completion date as defined in the Share Sale Agreement. It is noted in Schedule 1 of the Share Sale Agreement that the exact number of Company B shares and performance shares to be issued to each vendor will not be known until and as set out in the purchaser's notice of meeting (NOM) which will be issued before completion. For the purposes of a certain Clause of the Share Sale Agreement referring to warranties and indemnity, the market value of the purchase price (which is the consideration shares) will be determined by an independent accountant to be appointed by both the vendors and purchaser. The independent accountant will act as an expert and his/ or her decision will be final and binding to the parties.) It is reasonable to assume that the value of the consideration shares for the capital proceeds provision purposes under paragraph 116-20(1)(b) of the ITAA 1997 will also be determined as described in the particular clauseof the Share Sale Agreement. Assuming the market value of the shares received by the vendors is more than the cost base of their Company A shares, they will make a capital gain from the disposal of their Company A shares. In the absence of scrip for scrip rollover in Subdivision 124-M of the ITAA 1997, a capital gain would be assessable to Company A shareholders. Accordingly, the receipt of a capital benefit instead of a dividend would result in Company A shareholders obtaining a tax benefit under the arrangement. As the threshold conditions in paragraphs 45(2)(a) and 45(2)(b) of the ITAA 1936 appear to have been satisfied by Company A shareholders receiving the Company B shares, it becomes necessary to consider the condition in paragraph 45B(2)(c) of the ITAA 1936. In considering paragraph 45B(2)(c) of the ITAA 1936, it may help to examine the relevant policy underlying section 45B of the ITAA 1936 to determine if the circumstances of the arrangement will fall under what has been contemplated in that section. Section 45B of the ITAA 1936 is a specific anti-avoidance provision to ensure that relevant amounts distributed to shareholders of a company are treated as dividends for tax purposes where those payments, allocations and distributions are made in substitution for dividends. Where this occurs, the distribution is to be treated as an unfranked dividend paid by the company to the shareholder. In the present case, the provision of capital benefit in the form of Company B shares is the providing of consideration by Company B to Company A shareholders in exchange for their Company A shares. It does not represent a distribution by a company to its owners as a consequence of an existing ownership interest in the company. The conversion of the performance shares to Company B ordinary shares merely involves a variation of rights attaching to those shares, and in isolation, is not considered to involve payment, allocation or distribution of an amount. The extent to which such a capital benefit provided in the context of the arrangement represents a substituted dividend (which is a type of distribution targeted by section 45B) is not a relevant consideration because in this case, it is the receipt of the relevant capital benefit which provides the Company A shareholders with the relevant ownership interest in Company B. Accordingly, having regard to the relevant circumstances of the arrangement in this case, it is not open to conclude that it is one contemplated by section 45B of the ITAA 1936 or one that possesses a more than incidental purposes of allowing the relevant taxpayer to obtain a tax benefit. | Detailed Reasoning - Conclusion: Therefore, the Commissioner will not make a determination under subsection 45B(3) of the ITAA 1936 that section 45C of the ITAA 1936 will apply in respect of the capital benefit provided by Company B to the applicants as Company A shareholders. The relevant capital benefit is not taken to be a dividend for the purposes of subsection 6(1) of the ITAA 1936.