Private ruling: CGT - scrip for scrip roll-over
Date of advice: 24 April 2024
Published: 3 June 2024
Date scheme commenced: XXXX

Ruling: Q1: Did you make a choice to apply the roll-over in subdivision 124-M for the purpose of subsection 124-780(3)(d) of the Income Tax Assessment Act 1997 (ITAA 1997) by the time you lodged your Income Tax Return (ITR)on 30 July 20YY? | A1: No. | Q2: If the answer to question 1 is no, will the Commissioner allow further time for you to make such a choice in accordance with subsection 103-25 (1)(b) of the ITAA 1997? | A2: Withdrawn (see matters not ruled on below) | Q3: For the income year ended 30 June XXXX, are you eligible to apply the partial roll­over under subdivision 124-M of the ITAA 1997 in respect of the cancellation of your shares in the originating entity, in exchange for the receipt of shares in the acquiring entity, such that no capital gains tax is payable on the portion of the capital proceeds received, being the shares? | A3: Yes. This private ruling applies for the following period: 1 July XXXX to 30 June XXXX The scheme commenced on: XXXX

Relevant facts and circumstances: You were a contractor for the originating entity in the XXXX year until being made an employee for the latter period between of your engagement. The originating entity was a private company incorporated in another country and its headquarters were in that country. The originating entity provided IT service. As part of your employment with the originating entity, you were granted 'Options' to acquire shares in the originating entity. As the 'Options' were issued with respect to your employment, they were taxed in Australia under Division 83-A of the ITAA 1997. The taxing point arose in the income year XXXX, prior to that there was a real risk-of forfeiture of the 'Options'. You included an assessable amount referrable to the 'Options' in your income tax return for the year ended 30 June XXXX. This assessable amount was based on the Employee Share Scheme Statement provided by the originating entity. You exercised the 'Options' and were granted Common Class Stock B Shares in the originating entity. You were advised the originating entity intended to enter a Plan of Merger' (Merger Agreement) with an acquiring entity, under the agreement the acquiring entity would acquire 100% of the shares in the originating entity. You lodged the necessary documents with the originating entity's solicitor on time, you gave your consent to the merger. The merger agreement had a cash component and a share exchange between the originating entity and the acquiring entity for the shareholders of the originating entity depending on whether the shareholder was an "accredited investor" according to the legislative requirements: • The shareholder was an accredited investor, they received shares of the acquiring entity "common stock" in accordance with the terms of the Merger Agreement; and • the shareholder was not an accredited investor, they received a per share amount of consideration in cash in accordance with the terms of the Merger Agreement, • (Collectively, the Merger Consideration). The Merger Consideration was to be reduced by escrow amounts: a) Indemnity Escrow Amount. b) Stockholder's Representative Escrow (collectively the 'Escrow Amounts'). You were entitled to receive a share of the Indemnity Escrow Amount in accordance with Escrow Participation Percentage (as defined in the Merger Agreement). The parties to the Merger Agreement intended that, for foreign income tax purposes, the Merger would constitute a tax-free "reorganisation" within the meaning of local legislative requirements. You received a Letter of Transmittal regarding the Merger. The Letter of Transmittal confirmed that the Merger had closed and requested that you sign and return documents. You were considered an accredited investor and, therefore, were entitled to receive Common Stock shares together with a cash payment of the Indemnity Escrow Fund. The originating entity shares were cancelled in exchange for shares in the acquiring entity. You lodged your own tax return in the XXXX income year which did not disclose any capital gain or choose to apply a capital gain roll-over relief in respect of the disposal of the Shares and the capital proceeds received in shares because of the entity exchange. You did not make any choice to apply the roll-over in your tax return, you understood that there was a CGT rollover available consistent with the advice provided by foreign advisors. You received a portion of the Escrow Amounts, as follows: • Indemnity Escrow Amount which included interest. • Escrow Expense Fund amount. (Collectively, the Cash Payments) The interest income on the escrow amounts was included in your income tax return. At all relevant times, you have been an Australian resident for tax purposes. You intend to amend you ITR's for the relevant years to reflect omissions that you Voluntary Disclosed relating to the entity exchange arrangement outlined in this private ruling, using the ATO amendment and/or objections process. Assumption It is assumed that the Taxpayer is not a significant or common stakeholder in respect of the merger. Accordingly, this condition is satisfied.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subdivision 124-M | Income Tax Assessment Act 1997 subsection 124-780(3)(d) | Income Tax Assessment Act 1997 subsection 124-790 | Income Tax Assessment Act 1997 subsection 124-785 | Income Tax Assessment Act 1997 subsection 103-25(1)(b) | Income Tax Assessment Act 1997 Subdivision 960-C | Income Tax Assessment Act 1997 Division 83-A Matters we have not ruled on | We have not ruled on this question. This is because you have withdrawn your request for a private ruling on the following question: | Question 2 | Will the Commissioner allow further time for you to make such a choice in accordance with subsection 103-25(1)(b) of the ITAA 1997? | This question was withdrawn in favour of the Commissioner exercising the discretion in the discretion format.

Reasons for decision: Detailed Reasoning - Overview: The exchange of shares in one company for shares in another company as part of a merger or takeover typically triggers a CGT taxing point and the realisation of a capital gain or capital loss. The capital gain or capital loss is generally calculated by reference to the market value of the proceeds for example the replacement shares. The scrip for scrip roll-over, contained in Subdivision 124-M, ensures that CGT is not an impediment to mergers and takeovers. It allows taxpayers exchanging shares in one company for shares in another to defer the realisation of any capital gains from this transaction. Relief is also available for the exchange of trust interests. A taxpayer that receives cash in addition to replacement interests may qualify for a partial roll-over. A merger or takeover arrangement must meet several requirements to qualify for the roll-over. These include: • that all holders of voting interests in the target entity be able to participate in the arrangement; and • that this participation must be on substantially the same terms. These participation requirements differ to some extent and duplicate to some extent the requirements in the Corporations Act 2001 , the principal legislation for regulating member participation. As a result, a merger or takeover arrangement that meets the requirements of the Corporations Act 2001, may not qualify for the scrip for scrip roll-over. • The Corporations Act 2001 , requires that, subject to some limited exceptions, all offers under an off-market takeover bid be the same. This ensures equal participation by members. • Schemes of arrangement provide more flexibility than takeovers and may be used for mergers. A scheme of arrangement is an agreement between a company and its members and/or creditors that may be used as an alternative to a takeover. The Corporations Act 2001 ensures the arrangement becomes legally binding on the company's members and creditors if a court approves it. The scheme of arrangement process, including the role of the court and the Australian Securities and Investments Commission (ASIC), is aimed at protecting members against the scheme operating unfairly. ASIC has a published policy on its role in relation to schemes of arrangement. You are seeking to verify if the choice to apply the roll-over was made in a previous income year. You made an entity exchange agreement in the relevant income year, exchanging shares you acquired in an Employee Share Scheme (ESS) working for the originating entity, for shares in the acquiring entity. Your shares in the originating entity were converted and fully exercised at the time the entity exchange agreement was exercised. The entity exchange agreement also entitled you to an escrow cash component. For reasons of your own you did not declare the Capital Gain from the shares or the cash component that resulted from that entity exchange agreement in your XXXX and XXXX ITR's. You are now seeking to declare the Capital Gain and make a choice to apply a partial script for script roll-over to the part of the transaction that was an exchange of shares. | Detailed Reasoning - Issue 1: Choice to apply a CGT scrip for scrip roll-over. | Detailed Reasoning - Question 1: Did you make a choice to apply the roll-over in subdivision 124-M for the purpose of subsection 124-780(3)(d) of the Income Tax Assessment Act 1997 (ITAA 1997) by the time you lodged your Income Tax Return (ITR)? | Summary: A Taxpayer can make a choice to apply for a roll-over when entering into and entity exchange agreement that involves exchanging shares in one company for shares in another. | Detailed Reasoning - Detailed reasoning: Section 103-25 of the ITAA 1997 sets out how the choice to apply a roll-over is made. 103-25(1) A choice you can make under this Part or Part 3-3 must be made: a) by the day you lodge your income tax return for the income year in which the relevant CGT event happened; or b) within a further time allowed by the Commissioner. | Detailed Reasoning - Application to your circumstances: Your, opportunities to make a choice to apply the roll-over in subdivision 124-M of the ITAA 1997 to your entity exchange agreement transaction, where when you submitted your ITR on XXXX. Again, an opportunity arose in the XXXX income year when you received interest income from the entity exchange, and the Capital Gain and Escrow payment remained undeclared in the ITR's. It is our view that you did not make a choice to apply the roll-over. | Detailed Reasoning - Issue 2: Application of the Commissioners discretion in subsection 103-25(1)(b) of the ITAA 1997. | Detailed Reasoning - Question 2: This question was withdrawn in favour of the Commissioner exercising the discretion in the discretion format. | Detailed Reasoning - Issue 3: Application of a partial CGT scrip for scrip roll-over. | Detailed Reasoning - Question 3: For the income year ended 30 JuneXXXX, are you eligible to apply the partial roll­over under subdivision 124-M of the ITAA 1997 in respect of the cancellation of your shares in the originating entity. In exchange for the receipt of shares in the acquiring entity, such that no capital gains tax is payable on the portion of the capital proceeds received, being the shares in the acquiring entity? | Summary: Generally, taxpayers that exchange shares (original interests) in one company (the originating entity) for shares in another may qualify for the scrip for scrip roll-over if that exchange is in consequence of a single arrangement that meets several requirements. Options and rights to acquire shares in the original entity may also be original interests. Section 124-780 of the ITAA 1997 sets out these rules. | Detailed Reasoning - Detailed reasoning: More broadly Subsection 124-780(1) of the ITAA 1997 states, the single arrangement must result in another company (the acquiring entity): • if it is not a member of a wholly owned group - becoming the owner of at least 80 per cent of the original interests in the original entity; or • if it is a member of a wholly owned group - increasing the percentage of original interests that it owns in the original entity to at least 80 per cent. Paragraph 124-780(2)(a) sets out the rules of the arrangement. 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 the owners of interests of a particular type in the original entity. | Detailed Reasoning - 124-795 of the ITAA 1997 - Exceptions: Broadly speaking you cannot obtain a roll-over if: | Detailed Reasoning - Section 124-795(1): Just before you stop owning your original interest, you are a foreign resident unless, just after you acquire your replacement interest, the replacement interest is taxable Australian property. | Detailed Reasoning - Section 124-795(2): (a) any capital gain you might make from your replacement interest would be disregarded (except because of a roll-over); or (b) you and the acquiring entity are members of the same wholly owned group just before you stop owning your original interest and the acquiring entity is a foreign resident. | Detailed Reasoning - Section 124-795(4): (a) the replacement entity makes a choice to that effect under this subsection; and (b) that entity or the original entity notifies you in writing of the choice before the exchange. Or if you obtain a roll-over under another provision. | Detailed Reasoning - Application to your circumstances: The scheme you have set out in the facts does not breach the rules an arrangement that must be complied with regard to mergers, or the exceptions set out in section 124-795 of the ITAA 1997. Therefore, it is our view you are eligible for a partial roll-over under subdivision 124-M of the ITAA 1997 in respect of the cancellation of your shares in the originating entity. In exchange for the receipt of shares in the acquiring entity.

Reasons for decision: These reasons for decision accompany the Notice of private ruling for the Taxpayer.