Private ruling: CGT - disposal of shares
Date of advice: 3 November 2022
Published: 16 January 2023
Date scheme commenced: 23 June 20XX

Ruling: Q1: Pursuant to subsection 104-10(1) of the Income Tax Assessment Act 1997 (ITAA 1997) will CGT event A1 happen when an Original Shareholder disposes of each of their Original Shares under the SPA? | A1: Yes. | Q2: Pursuant to paragraph 104-10(3)(a) of the ITAA 1997, will the time of the CGT event be when the SPA was executed? | A2: Yes. | Q3: Pursuant to subsection 104-10(4) of the ITAA 1997, will an Original Shareholder make a capital gain from CGT event A1 happening when they dispose of their Original Shares if the capital proceeds from the disposal of each Original Share exceeds the cost base for that Original Share? | A3: Yes. | Q4: Pursuant to subsection 116-20(1) of the ITAA 1997, will the capital proceeds from CGT event A1 happening to the Original Shareholder's Original Shares be the total consideration that it receives for their Original Shares being the market value of the ordinary shares it is issued in the Replacement Entity and their Respective Proportion of the Consideration Payment? | A4: Yes. | Q5: Pursuant to paragraph 116-20(1)(b), will the market value of a Consideration Share be worked out at the time of CGT event A1 (being the date the SPA is signed)? | A5: Yes. | Q6: Will a Original Shareholder who makes a capital gain from the disposal of their Original Shares be able to choose to obtain scrip-for-scrip roll-over under Subdivision 124-M for that part of the capital gain attributable to the receipt of the ordinary shares in the Replacement Entity (sections 124-780, 124-785 and 124-790)? | A6: Yes. | Q7: If scrip-for-scrip roll-over is chosen: (a) will that part of the capital gain that is attributable to the receipt of shares in the Replacement Entity be disregarded (subsections 124-785(1) and 124-790(1)); and (b) will that part of the capital gain that is attributable to the receipt of cash, not be disregarded because it is ineligible proceeds for which roll-over is not available (subsection 124-790(1))? | A7: Yes. | Q8: Will the Consideration Shares in the Replacement Entity, acquired in exchange for the Original Shares, be taken to have been acquired on the date the Original Shareholder acquired, for CGT purposes, the corresponding Original Share (item 2 of the table in section 115-30(1))? | A8: Yes. | Q9: Will the first element of the cost base and the reduced cost base of each replacement share in the Replacement Entity that is received, be worked out by reasonably attributing to it the cost base and the reduced cost base (respectively) of the Original Shares for which it was exchanged and for which the roll-over was obtained (subsections 124-785(2) and (4))? | A9: Yes. | Q10: Will Original Shareholders be required to reduce the cost base or reduced cost base of their Original Shares by so much of it that is attributable to the cash component of the capital proceeds they receive in accordance with Schedule 1 of the SPA (subsection 124-785(3))? | A10: Yes. | Q11: Can the Original Shareholders calculate the first element of the cost base and reduced cost base of each replacement share by dividing the aggregate cost base of their Original Shares (as reduced under subsection 124-785(3)) by the number of replacement shares received (subsections 124-785(2) and (4))? | A11: Yes. This private ruling applies for the following period: Year ended 30 June 20XX

Relevant facts and circumstances: 1. The Original Entity (Original) is an Australian private company. 2. The Original Entity is the head entity of a tax consolidated group (TCG). 3. Immediately prior to the acquisition of Original Entity as described in these facts, the Original Entity had X ordinary shares on issue (Original Shares). Each ordinary share carries the same rights in relation to voting power, rights to dividends and rights to capital distributions. 4. A group of the Original Shareholders due to their association each had a significant stake in the Original Entity under subsection 124-783(6) of the ITAA 1997. 5. Each Original Shareholder satisfies the following: • is a resident of Australia (within the meaning of subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936)); • did not hold their Original Shares as a revenue asset (as defined in section 977-50 of the ITAA 1997) nor as trading stock (as defined in subsection 995-1(1) of the ITAA 1997) - that is, the shareholders hold their shares on capital account; • was not subject to the taxation of financial arrangements rules under Division 230 of the ITAA 1997 in respect of their Original Shares; • was not subject to the Investment Manager Regime under Subdivision 842-I of the ITAA 1997 in respect of their Original Shares; • did not acquire their Original Shares pursuant to an employee share plan. 6. The Replacement Entity is an ASX listed entity and an Australian resident for tax purposes. It is the head company of a TCG. Prior to the acquisition of the Original Entity it had over x thousand shareholders. The acquisition of the Original Entity 7. The Original Entity received a Non-binding Indicative Offer (NBIO) from the Replacement Entity to acquire 100% of the ordinary shares in Original Entity (the Original Shares). 8. On a certain date (referred to as the Execution Date), the Replacement Entity and the Original Shareholders entered into a Share Purchase Deed (SPA) whereby the Original Shareholders would receive total purchase consideration (in aggregate) of A$X (the Consideration) for the sale of their Original Shares to the Replacement Entity (or its nominee), comprised of: • Consideration Shares being fully paid ordinary shares in the capital of the Replacement Entity (Replacement Entity's Shares) to the value of $X (50%); and • The Completion Payment being cash of $ (50%). 9. The number of Consideration Shares to be issued by the Replacement Entity was calculated by dividing $X by the VWAP per Replacement Entity's shares rounded down to the nearest whole number of shares. The VWAP is calculated as the daily volume weighted average price at which the Replacement Entity's shares were traded on the ASX in the 60 day period ending on the date that is two Business Days before the date of completion. 10. Under the SPA, on completion each Original Shareholder disposes of their Original Shares and receives its Respective Proportion of the Consideration being: • its Respective Proportion of the Completion Payment (cash): • its Respective Proportion of the Consideration Shares that are issued by the Replacement Entity. 11. The Respective Proportion is the proportion set out next to each Original Shareholder's name in the relevant schedule to the SPA. 12. The disposal of Original Shares by Original Shareholders under the SPA and the payment of the Consideration was completed on the Completion Date. 13. The Acquiring Entity was nominated to acquire the shares in the Original Entity. The Acquiring Entity is a wholly owned subsidiary of the Replacement Entity, and therefore, a member of a wholly owned group as defined in section 975-500 of the ITAA 1997 of which the Replacement Entity is the holding company. Any 100% subsidiaries of the Replacement Entity are members of the wholly owned group. The Replacement Entity is the ultimate holding company under 124-780(7). 14. The Consideration comprised $X paid in cash and the issue of X shares in the Replacement Entity to the Original Shareholders. 15. The Consideration Shares were issued at an issue price of X (rounded) cents per share determined in accordance with the SPA. 16. The shares in the Replacement Entity that were issued to Original Shareholders represents approximately 2% of the enlarged issued capital in the Replacement Entity. 17. None of the Original Shareholders (together with their associates) had a significant stake in the Replacement Entity within the meaning of subsection 124-783(6) of the ITAA 1997 just after the Completion Date. 18. The Replacement Entity funded the cash component of the Consideration out of its existing cash reserves and did not require any external financing for the transaction. 19. Under the arrangement, no member of the wholly owned group of the Replacement Entity has issued equity (other than replacement interests being replacement shares to the Original Shareholders), or owes new debt, under the arrangement to an entity outside the wholly-owned group in relation to the issue of replacement interests. 20. Any shares issued to Original's Shareholders (personally and/or through their related entities) are escrowed for a period of X years from the date of completion. 21. It is anticipated that Original Shareholders will make a capital gain from CGT event A1 on disposal of the Original Shares under the SPA. 22. The Original Shareholders would not be able to disregard a capital gain from the replacement interest but for the availability of a roll-over under subdivision 124-M. 23. The Original Shareholders cannot choose a roll-over under Division 122 or 615 with respect to the exchange of shares. 24. The Replacement Entity did not make an election under subsection 124-795(4) to disallow Original Shareholders the ability to obtain roll-over. 25. The SPA forms part of the facts for this Ruling. Assumption Original Shareholders will make the choice to obtain the scrip-for-scrip roll-over under Subdivision 124-M.


Reasons for decision: Summary: CGT event A1 happened when an Original Shareholder disposed of each of their shares under the SPA. | Detailed Reasoning - Detailed reasoning: 1. CGT event A1 happens if you dispose of a CGT asset: subsection 104-10(1) of the ITAA 1997. 2. You are taken to have disposed of a CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law: subsection 104-10(2) of the ITAA 1997. However, a change of ownership does not occur if you stop being the legal owner of the asset but continue to be its beneficial owner. 3. A CGT asset is defined in subsection 108-5(1) of the ITAA 1997 as any kind of property, or a legal or equitable right that is not property. Shares are a CGT asset. [1] | Detailed Reasoning - Application to your circumstances: 4. Under the SPA, the Original Shareholders exchanged their Original Shares for shares in the Replacement Entity and cash. The ownership of the Original Shares passed from the Original Shareholders to the Acquiring Entity pursuant to the SPA. 5. Consequently, CGT event A1 occurred in relation to the Original Shares as there was a change in ownership of the Original Shares pursuant to the SPA. | Summary: The time of the CGT event A1 for Original Shareholders who disposed of their Original Shares under the SPA is the date the SPA was executed (the Execution Date). | Detailed Reasoning - Detailed reasoning: 6. Subsection 104-10(3) states that the time of CGT Event A1 is when you enter into the contract for the disposal, or if there is no contract, when the change of ownership occurs. | Detailed Reasoning - Application to your circumstances: 7. As the Original Shareholders entered into an agreement, the SPA, to sell their Original Shares to the Replacement Entity (or nominee), the time of the event is the date the SPA was executed. | Summary: An Original Shareholder will make a capital gain pursuant to subsection 104-10(4) of the ITAA 1997, from CGT event A1 happening when they disposed of their Original Shares if the capital proceeds from the disposal of each Original Share exceeded the cost base for that Original Share. | Detailed Reasoning - Detailed reasoning: 8. Subsection 104-10(4) states: You make a capital gain if the *capital proceeds from the disposal are more than the asset's cost base. You make a capital loss if those capital proceeds are less than the asset's *reduced cost base. | Detailed Reasoning - Application to your circumstances: 9. An Original Shareholder that received capital proceeds from disposing of their Original Shares under the SPA that exceeded the cost base of those Original Shares will have made a capital gain in accordance with subsection 104-10(4) of the ITAA 1997. 10. As each of the Original Shareholders acquired their shares after the 20 September 1985, any capital gain or loss made will not be disregarded. [2] | Summary: The capital proceeds from CGT event A1 happening to the Original Shareholder's Original Shares is the consideration that it received for the Original Shares being the market value of the ordinary shares it is issued in the Replacement Entity and their Respective Proportion of the Consideration Payment. This amount can be apportioned to each Original Share sold to determine the capital proceeds per Original Share. | Detailed Reasoning - Detailed reasoning: 11. Subsection 116-20(1) states: The capital proceeds from a *CGT event are the total of: (a) the money you have received, or are entitled to receive, in respect of the event happening, and (b) the *market value of any other property you have received, or are entitled to receive, in respect of the event happening (worked out as at the time of the event). | Detailed Reasoning - Application to your circumstances: 12. Each Original Shareholder received their Relevant Proportion of the Consideration Shares and Consideration Payment. This consists of cash and newly issued shares in the Replacement Entity. 13. Therefore, the capital proceeds from CGT event A1 happening to Original Shareholder's Original Shares is the total of the cash consideration and the market value of ordinary shares issued in the Replacement Entity in respect of the disposal of the Original Shares. 14. The total consideration received can be apportioned to each Original Share sold to determine the capital proceeds per Original Share. | Summary: The market value of a Consideration Share should be worked out at the time of CGT event A1, being the date the SPA is signed. | Detailed Reasoning - Detailed reasoning: 15. Each Original Shareholder received cash and shares in the Replacement Entity for disposing of their Original Shares. 16. As the capital proceeds includes shares, paragraph 116-20(1)(b) states that you must include the market value of those shares, worked out at the time of the event, in the total of the capital proceeds for the disposal. 17. As per question 3, the time of CGT Event A1 happening in respect of the disposal of the Original Shares under the SPA is the Execution Date. | Summary: An Original Shareholder who makes a capital gain from the disposal of their Original Shares is able to choose to obtain scrip-for-scrip roll-over under Subdivision 124-M for that part of the capital gain attributable to the receipt of the ordinary shares in the Replacement Entity (sections 124-780, 124-785 and 124-790). | Detailed Reasoning - Subdivision 124-M - Scrip for scrip roll-over: 18. Subdivision 124-M provides that a taxpayer may choose to roll-over a capital gain where post-CGT shares the taxpayer owns are replaced with other shares, subject to certain requirements. 19. Section 124-780 relevantly provides (and subject to some exceptions): There is a roll-over if: (a) an entity (the original interest holder) exchanges: (i) a *share (the entity's original interest) in a company (the original entity) for a share (the holder's replacement interest) in another company; or ... (b) the exchange is in consequence of a single *arrangement that satisfies subsection (2) or (2A); and (c) the conditions in subsection (3) are satisfied; and (d) if subsection (4) applies, the conditions in subsection (5) are satisfied. 20. The original interest holder can obtain only a partial roll-over if the capital proceeds for its original interest include something other than its replacement interest: see section 124-790. | Detailed Reasoning - Shares are exchanged for shares in another company: 21. Paragraph 124-780(1)(a) is satisfied as the Original Shareholder (the original interest holder) exchanged shares in Original Entity (the original interest) for shares in the Replacement Entity (the replacement interest) pursuant to the SPA. | Detailed Reasoning - The exchange is in consequence of a single arrangement that satisfies subsection 124-780(2): 22. Paragraph 124-780(1)(b) requires that the exchange is in consequence of a single arrangement that satisfies subsection 124-780(2) or (2A). 23. Subsection 124-780(2) relevantly states: The *arrangement must: (a) result in: (i) a company (the acquiring entity ) that is not a member of a *wholly-owned group becoming the owner of 80% or more of the *voting shares in the original entity; or (ii) a company (also an acquiring entity ) that is a member of such a group increasing the percentage of voting shares that it owns in the original entity, and that company or members of the group becoming the owner of 80% or more of those shares; and (b) be one in which at least all owners of *voting shares in the original entity (except a company referred to in paragraph (a)) could participate; and (c) be one 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. | Detailed Reasoning - The exchange occurs as part of a single arrangement: 24. The exchange of the ordinary shares in the Original Entity for the shares in the Replacement Entity will be in consequence of an arrangement. [3] 25. 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. [4] 26. The single arrangement requirement is satisfied, as the sale of the Original Shares is implemented through the SPA, a single contract, between the Original Shareholders and the Replacement Entity. | Detailed Reasoning - The 80% rule: 27. Under the SPA, the Acquiring Entity has acquired 100% of the voting shares in the Original Entity. Taxation Determination TD 2000/51 [5] confirms that a company may increase the percentage of voting shares that it owns in an original entity where it started out owning no voting shares. 28. Therefore, the Acquiring Entity as a member of a wholly owned group has increased its percentage ownership of voting shares in the Original Entity from nil to 100 percent. 29. Accordingly, the requirement in subparagraph 124-780(2)(a)(ii) is satisfied. | Detailed Reasoning - All owners could participate and on substantially the same terms: 30. Paragraphs 124-780(2)(b) and (c) requires that the arrangement must be one in which at least all owners of voting shares in the original entity could participate on substantially the same terms. 31. The SPA applied to all holders of ordinary shares in the Original Entity and on substantially same terms. Therefore, both requirements are satisfied. | Detailed Reasoning - The conditions for rollover in subsection 124-780(3): 32. The relevant conditions for the roll-over under subsection 124-780(3) of the ITAA 1997 are as follows: (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 (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. 33. If section 124-782 applies to the arrangement, the original interest holder and the replacement entity will need to jointly choose to obtain the roll-over. 34. Section 124-782 provides that if the original interest holder is a *significant stakeholder or a *common stakeholder for the arrangement, the cost base of an original interest acquired by an acquiring entity under the arrangement from an original interest holder becomes the first element of the cost base and *reduced cost base of the acquiring entity for the interest. 35. Significant stakeholder and common stakeholder are defined in section 124-783. 36. Relevantly, section 124-783(1) provides: An original interest holder is a significant stakeholder for an *arrangement if it had: (a) a *significant stake in the original entity just before the arrangement started; and (b) a significant stake in the replacement entity just after the arrangement was completed. 37. Significant stake is defined in section 124-783(6) as follows: An entity has a significant stake in a company at a time if the entity, or the entity and the entity ' s *associates between them: (a) have at that time *shares carrying 30% or more of the voting rights in the company; or (b) have at that time the right to receive 30% or more of any *dividends that the company may pay; or (c) have at that time the right to receive 30% or more of any distribution of capital of the company. 38. None of the original interest holders will be significant stakeholders, as they will not hold a significant stake as defined in subsection 284-783(6) in the Replacement Entity just after the arrangement is completed. 39. Subsection 124-783(3) of the ITAA 1997 provides: An original interest holder is a common stakeholder for an * arrangement if it had: (a) a * common stake in the original entity just before the arrangement started; and (b) a common stake in the replacement entity just after the arrangement was completed. 40. An entity, or 2 or more entities, will have a 'common stake' in a company at the relevant times under subsection 124-783(9) if the entity, or entities, and their *associates, between them had: • shares carrying 80% or more of the voting rights in the original entity just before the arrangement started and shares carrying 80% or more of the voting rights in the replacement entity just after completion; • the right to receive 80% or more of any dividends from the original entity just before the arrangement started and the right to receive 80% or more of any dividends from the replacement entity just after completion; or • the right to receive 80% or more of any distribution of capital from the original entity just before the arrangement started and the right to receive 80% or more of any distribution of capital from the replacement entity just after completion. 41. Original Shareholders (together with its associates) will hold approximately 2% of the enlarged issued capital in the Replacement Entity just after the arrangement completes. Therefore, no Original Shareholders will be common stakeholders under the arrangement. 42. Therefore, the above conditions in subsection 124-780(3) are satisfied, as: (a) the Original Shareholders acquired the original interests, being the Original Shares, after 20 September 1985; (b) apart from the rollover, a capital gain was made when CGT event A1 happened upon entering into the SPA that resulted in the Original Shareholders disposing of their shares to the Acquiring Entity; (c) the replacement interests that Original Shareholders received for disposing of their shares in Original are in the ultimate holding company of the wholly owned group, the Replacement Entity; (d) the Original Shareholder's will choose to obtain the rollover; (e) Section 124-782 does not apply to any Original Shareholders; (f) Under the arrangement, no member of the wholly owned group of the Replacement Entity has issued equity (other than replacement interests to the Original Shareholders), or owes new debt, under the arrangement to an entity outside the wholly-owned group in relation to the issue of replacement interests. | Detailed Reasoning - Further roll-over conditions if subsection 124-780(4) applies: 43. Subsection 124-780(4) provides for further roll-over conditions in certain circumstances, as follows: The conditions specified in subsection (5) must be satisfied if the original interest holder and an 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. 44. Subsection 124-780(5) provides: The conditions are: (a) the *market value of the original interest holder ' s *capital proceeds for the exchange is at least substantially the same as the market value of its original interest; and (b) its replacement interest carries the same kind of rights and obligations as those attached to its original interest. 45. We accept that the Original Shareholders and the Replacement Entity (and thus, Acquiring Entity) are dealing at arm's length with respect to the SPA. 46. Therefore, as we accept that the parties were dealing with each other at arm's length, the conditions in subsection 124-780(5) do not need to be satisfied. | Detailed Reasoning - Exceptions: 47. In some circumstances rollover relief under Subdivision 124-M is not available. The exceptions are outlined in section 124-795. None of the exceptions are applicable based on the facts provided in relation to the arrangement under the SPA. | Detailed Reasoning - Only partial roll-over available in certain circumstances - subsection 124-790(1): 48. Subsection 124-790(1) provides: The original interest holder can obtain only a partial roll-over if its capital proceeds for its original interest include something (the ineligible proceeds) other than its replacement interest. There is no roll-over for that part (the ineligible part) of its original interest for which it received ineligible proceeds. | Detailed Reasoning - Conclusion: 49. Therefore, an Original Shareholder who made a capital gain from the disposal of their Original Shares will be able to choose to obtain scrip-for-scrip roll-over under Subdivision 124-M for that part of the capital gain attributable to the receipt of the ordinary shares in the Replacement Entity (sections 124-780, 124-785 and 124-790). | Summary: The Original Shareholders are entitled to a partial roll-over under Subdivision 124-M if they choose to obtain scrip for scrip roll-over. Only the capital gain attributable to the replacement shares will be disregarded. The capital gain attributable to the cash component (the ineligible proceeds) will not be disregarded. | Detailed Reasoning - Detailed reasoning: 50. If an original interest holder chooses roll-over, the capital gain made from disposing of their original interest is disregarded. [6] 51. However, an original interest holder can only obtain a partial roll-over if the capital proceeds received for their original interests include something (the ineligible proceeds) other than the replacement interests. There is no roll-over for that part (the ineligible part) of its original interest for which it received ineligible proceeds. [7] 52. Subsection 124-790(2) provides that the cost base of the ineligible part is that part of the cost base of your original interest as is reasonably attributable to it and provides the following example: Example: Ken owns 100 shares in Aim Ltd. Those shares have a cost base of $2. Ken accepts an offer from LBZ Ltd to acquire those shares. The offer is 1 share in LBZ (market value $4) plus $1 for each Aim share. Ken chooses the roll-over to the extent that he can. The cost base of the ineligible part is [ $100 × $200 ] ÷ $500 = $40. Ken makes a capital gain of $100 - $40 = $60. 53. For disposing of their Original Shares under the SPA, each Original Shareholder received a combination of shares in the Replacement Entity (replacement interests) and cash consideration. 54. Any capital gain made by the Original Shareholders from disposing of their shares under the SPA will be disregarded to the extent it is attributable to the replacement shares in the Replacement Entity. 55. The cash consideration received by each Original Shareholder is ineligible proceeds. Thus, no roll-over is available for the ineligible part. Consequently, the capital gain attributable to the ineligible part will not be disregarded. | Summary: The Consideration Shares in the Replacement Entity, acquired in exchange for the Original Shares, will be taken to have been acquired on the date the Original Shareholder acquired, for CGT purposes, the corresponding Original Share (item 2 of the table in section 115-30(1)). | Detailed Reasoning - Detailed reasoning: 56. Generally, the time of acquisition of a CGT asset is when you become its owner: section 109-5. Generally, you acquire a CGT asset as a result of CGT event A1 happening when the disposal contract is entered into or, if none, when the entity disposing of the asset stops being the asset's owner. Other acquisition rules are set out in section 109-55. 57. However, for the purposes of determining whether a capital gain with respect to the disposal of a replacement share is a discount capital gain, item 2 of the table in subsection 115-30(1) provided that a CGT asset that the acquirer acquired as a replacement asset for a replacement-asset roll-over, is taken to have been acquired when the acquirer acquired the original asset involved in the roll-over. 58. Relevantly, item 2 in the table the subsection 115-30(1) applies as Subdivision 124-M is a 'replacement asset roll-over' as this term is defined in section 112-115, and the roll-over is not one which is covered by paragraph 115-34(1)(c). 59. As such, each Original Shareholder is taken to have acquired their replacement shares in the Replacement Entity on the date the Original Share which was exchanged was acquired. | Summary: The first element of the cost base and the reduced cost base of each replacement share in the Replacement Entity that is received, will be worked out by reasonably attributing to it the cost base and the reduced cost base (respectively) of the Original Shares for which it was exchanged and for which the roll-over was obtained (subsections 124-785(2) and (4). | Summary: The Original Shareholders will need to reduce the cost base or reduced cost base of their Original Shares by so much of it that is attributable to the cash component of the capital proceeds they receive in accordance with the Schedule of the SPA (subsection 124-785(3)). | Detailed Reasoning - Detailed reasoning: 60. Where the original interest holder chooses to obtain roll-over under Subdivision 124-M, subsection 124-785(2) provides that the first element of the cost base of each replacement interest you received as a result of the exchange is worked out by reasonably attributing to it the cost base (or the part of it) of your original interest for which it was exchanged. 61. Subsection 124-785(3) applies to reduce the cost base (or reduced cost base) of your original interest by the part that is attributable to an ineligible part (as described in section 124-790). Therefore, in determining the cost base of the replacement interests under subsection 124-785(2) you reduce the cost base of your original interest (just before you stopped owning it) by so much of the cost base as is attributable to an ineligible part. 62. Subsection 124-785(4) provides that the first element of the reduced cost base of each replacement interest is worked out similarly to the cost base. 63. Example 2.6 in the Explanatory Memorandum to A New Tax System (Capital Gains Tax) Bill 1999 is provided to assist in understanding how to work through the above provisions. Patrick owns 100 shares in Windsor Ltd, each with a cost base of $9. He accepts a takeover offer from Regal Ltd which provides for Patrick to receive one Regal Ltd share plus $10 cash for each share in Windsor. Patrick receives 100 shares in Regal Ltd and $1,000 cash (ineligible proceeds). Just after Patrick is issued with the Regal shares, they are worth $20 each. It is reasonable to allocate a portion of the cost base of the Windsor Ltd shares having regards to the portion that the ineligible proceeds bear to the total proceeds. That is, $1,000 divided by $3,000 multiplied by $900 = $300. The cost base apportioned to the Regal Ltd shares is $600, the cost base of the Windsor Ltd shares ($900) less the cost base reasonably attributed to the ineligible proceeds ($300). 64. Consequently, to work out the first element of the cost base (or reduced cost base) of a replacement share in the Replacement Entity received by an Original Shareholder, the Original Shareholder must reasonably attribute to it the cost base (or the part of it) of the Original Share for which it is exchanged. | Summary: The Original Shareholders can calculate the first element of the cost base and reduced cost base of each replacement share in the Replacement Entity by dividing the aggregate cost base of their Original Shares (as reduced under subsection 124-785(3)) by the number of replacement shares received (subsections 124-785(2) and (4)). | Detailed Reasoning - Detailed Reasoning: 65. Subsection 124-785(2) states that you work out the first element of the cost base of each CGT asset you received as a result of the exchange by reasonably attributing to it the cost base (or the part of it) of your original interest for which it was exchanged and for which you obtained the roll-over. 66. The example provided in Question 11, shows the first element of the cost base of the replacement share can be determined by taking the aggregate cost bases of all the original interest shares (as reduced by subsection 124-785(3)) and dividing by the number of replacement shares received. The aggregate cost base of the Windsor Ltd shares in the example is $600 and it is divided by the number of Regal shares received (the replacement shares). This gives a first element cost base for each Regal share of $6. 67. Therefore, it would be reasonable for the Original Shareholders to calculate the first element of cost base of each replacement share by taking the aggregate cost base of the Original Shares (as reduced by subsection 124-785(3)) and dividing it by the number of shares in the Replacement Entity they received. 68. The reduced cost base of the replacement shares is worked out in a similar manner. [1] Note 1 in subsection 108-5(2). [2] Paragraph 104-10(5)(a). [3] The term 'arrangement' is defined very broadly in section 995-1 of the ITAA 1997. [4] The Explanatory Memorandum to the New Business Tax System (Miscellaneous) Bill (No. 2) 2000, at paragraph 11.23 and paragraph 32 TR 2005/19 Income tax: scrip for scrip roll-over arrangements - application of Subdivision 124-M of the Income Tax Assessment Act 1997 - Part IVA of the Income Tax Assessment Act 1936. [5] Taxation Determination TD 2000/51 Income tax: capital gains: scrip for scrip roll-over: can a company 'increase' the percentage of voting shares that it owns in another company (an original entity), in terms of subparagraph 124-780(2)(a)(ii) of the Income Tax Assessment Act 1997, as a result of an arrangement if it owned no shares in that company before the arrangement? [6] Subsection 124-785(1). [7] Subsection 124-790(1).