Private ruling: Employee share scheme - takeover
Ruling period: Year ended 30 June 2011
Date scheme commenced: 1 July 2010

Ruling: Questions and answers: | 1. Are you entitled to a rollover for shares you acquired in an employee share scheme that you have not made a section 139E election for, which were replaced with shares in a corporate restructure? | Yes | 2. Did you make an assessable gain when you received cash for part of your | consideration for your new shares as a result of the corporate restructure? | Yes

Relevant facts and circumstances: You acquired employee shares in Company A by participating in the Company A Deferred Share Plan (CDSP) before 30 June 2009. The CDSP was an incentive plan that provided employees with an ownership interest in Company A in order to share in its future performance. You were allocated a number of shares annually which were to vest with you if you satisfied certain performance hurdles. Company A was subject to a 100% takeover by Company B after 1 July 2009. You did not make an election under section 139E (139E election) of the Income Tax Assessment Act 1936 and you did not declare the discount on your shareholding prior to takeover. Under the takeover, you received Company B shares together with a cash component as consideration for your holding in Company A. You have continued your employment with Company B. As a result of the takeover, your matching employee share scheme (ESS) interests were ordinary shares. Without any rollover relief, you would have had a cessation time or deferred taxing point resulting from the takeover. At the time you acquired the matching ESS interests a) you did not hold a legal or beneficial interest in more than 5% of the shares in Company B b) you were not in a position to cast, or control the casting of, more than 5% of the maximum number of votes that might be case at a general meeting of Company B. You have given us permission to use publicly available information on Company A takeover by Company B (for example on the internet).

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 139CA. | Income Tax Assessment Act 1936 Section 139B. | Income Tax Assessment Act 1936 Section 139C. | Income Tax Assessment Act 1936 Section 139CD. | Income Tax Assessment Act 1936 Section 139E. | Income Tax Assessment Act 1997 Section 102-20. | Income Tax Assessment Act 1997 Section 104-10. | Income Tax Assessment Act 1997 Section 110-25. | Income Tax Assessment Act 1997 Division 83A. | Income Tax Assessment Act 1997 Section 83A-130. | Income Tax Assessment Act 1997 Section 130-80. | Income Tax (Transitional Provisions) Act 1997 Section 83A-5

Reasons for decision: Summary: A capital gain or capital loss is made if a capital gains tax (CGT) event happens to a CGT asset (section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997)). Shares are CGT assets. The most common CGT event is CGT event A1 which happens when a person disposes of an asset to another party. | Detailed Reasoning - Employee share scheme: A person acquires shares in an employee share scheme (ESS) if they are acquired as a result of employment and are issued at a discount. You acquired employee shares in Company A by participating in the Company A Deferred Share Plan (CDSP) before 30 June 2009. Company A was subject to a 100% takeover by Company B after 1 July 2009. You did not declare the discount on your shareholding prior to takeover. Under the takeover, you received Company B shares together with a cash component as consideration for your holding in Company A. | Detailed Reasoning - Rollover relief: Rollover relief applies to certain types of corporate takeovers or restructures. It applies to 100% takeovers, mergers, demergers or other forms of restructure that result in a person acquiring replacement ESS interests in the new company. Rollover relief has been available since 1 July 2004 provided certain conditions are met, however the tax rules for employee share schemes (ESS) have changed and new rules apply from 1 July 2009 (Division 83A of the ITAA 1997). Under section 83A-5 of the Income Tax (Transitional Provisions) Act 1997 , the new rules apply where a takeover or restructure occurs after 30 June 2009 to ESS interests acquired before 1 July 2009. Thus the new rules will apply to your case as you acquired your ESS interests before 1 July 2009 but the takeover occurred after 30 June 2009. If a person acquires ESS interests, they are required to report the discount as income received at acquisition. However, where specified criteria are met, the person may be eligible to defer declaring the discount. The discount on those ESS interests will be reported at a deferred taxing point (up to seven years from the acquisition date - earlier if certain events happen). If a person has deferred declaring the discount as income and a deferred taxing point has not already occurred in relation to their ESS interests in the old company, they may receive rollover relief under section 83A-130 of the ITAA 1997 where a corporate takeover or restructure results in those ESS interests being replaced by ESS interests in the new company. Rollover relief applies if a person's replacement ESS interests: · match the ESS interests in the old company, and · meet certain conditions under the new ESS provisions. The person's replacement ESS interests in the new company that are matching ESS interests are treated as if they are a continuation of their ESS interests in the old company. The person can continue to defer declaring the discount as income for up to seven years after the time they acquired the original shares in the old company. | Detailed Reasoning - What are matching ESS interests?: Matching ESS interests are the ESS interests a person receives in the new company that replace the ESS interests the person had before the corporate takeover or restructure. To be eligible to continue to defer their discount, the value of matching ESS interests, together with any cash or other consideration provided to the person, should be no more than the value of their ESS interests in the old company immediately before the corporate takeover or restructure happened. In addition, certain conditions must be met. | Detailed Reasoning - Conditions that need to be met for rollover relief to apply: The conditions that need to be met for rollover relief to apply to a person are set out in section 83A-130 of the ITAA 1997 and are as follows: · immediately before the corporate takeover or restructure, the person held shares or rights in the old company that they acquired under an ESS · at or about the time the person acquired the matching ESS interests, they were an employee of the new company (or its holding company or subsidiary) · the person's matching ESS interests are ordinary shares or rights to acquire ordinary shares · without the rollover relief, the person would have had a cessation time or deferred taxing point resulting from the corporate takeover or restructure, and · at the time the person acquired the matching ESS interests a) the person did not hold a legal or beneficial interest in more than 5% of the shares in the new company, and b) the person was not in a position to cast, or control the casting of, more than 5% of the maximum number of votes that might be cast at a general meeting of the new company. | Detailed Reasoning - Rollover relief and receiving cash: Rollover relief applies to the extent that a person's matching ESS interests are regarded as a continuation of their ESS interests in the old company. Rollover relief does not apply to cash or other consideration (subsection 83A-130(5) of the ITAA 1997). An ESS deferred taxing point occurs to the extent that the person receives cash (or other non-qualifying proceeds) for the old interests. In cases where the proceeds of the takeover or restructure comprise part cash and part qualifying new interests, there will be partial "roll-over relief". There will need to be an apportionment of the cost base of the old interests as required under subsections 83A-130(7) and (8) of the ITAA 1997. | Detailed Reasoning - Apportionment of cost base of old interests: Where a person paid an amount to acquire ESS interests in the old company, the payment is apportioned between: · the person's matching ESS interests in the new company, that are treated as a continuation of their ESS interests in the old company, and · anything else that matches their ESS interests in the old company , including a) cash or other consideration received under the takeover, b) other matching ESS interests the person holds in companies immediately after the takeover. The apportionment is based on their market values immediately after the takeover. This allows the person to apportion their payment between their ESS interests in the old company that have rollover relief and those that have a cessation time or deferred taxing point. The steps are as follows: | Detailed Reasoning - Step 1: Identify the following assets: · things acquired in the takeover or restructure (including cash) that can reasonably be regarded as matching the old interests, and · in the case of a restructure only, any ESS interests in the old company held both before and after the restructure, that can reasonably be regarded as matching the old interests. | Detailed Reasoning - Step 2: Determine the total cost base, measured at the time of the takeover or restructure, of: · old interests disposed of in the takeover or restructure, and · in the case of a restructure only, any ESS interests in the old company held both before and after the restructure, that can reasonably be regarded as matching the old interests. | Detailed Reasoning - Step 3: Apportion the total cost base from Step 2 among the assets from Step 1, according to the respective market values of the assets from Step 1 immediately after the takeover or restructure. The amount allocated to each asset is treated as the consideration given by the taxpayer for that asset. | Detailed Reasoning - Your case: In your case, the total cash and shares received as a result of the takeover of Company A did not exceed the value of your matching ESS interests immediately before the takeover. In addition, you have indicated that you satisfy all the conditions as set out in section 83A-130 of the ITAA 1997. Accordingly you are eligible for rollover relief in connection with the shares you acquired in Company B as a result of the takeover. This means the discount on your ESS interests can be reported at a deferred taxing point, up to seven years from the acquisition date or earlier if certain events happen. Rollover relief will not apply to the cash component you received as a result of the takeover. An apportionment will need to be made for the cost base. An example is provided below. | Detailed Reasoning - Example: Application to rollover relief to takeovers - receiving matching ESS interests and cash Steve acquired 1,000 shares in company D under an ESS for $500. He deferred declaring his discount as income. Three years later, company E buys all shares in company D under a takeover providing consideration of 80% shares and 20% cash. Steve's 1,000 shares in company D which had a market value of $1 at the takeover time are replaced with 1,600 shares in company E which had a market value of $0.50 at the takeover time and $200 cash. Following the takeover, Steve is employed by company E. | Detailed Reasoning - Company D: Steve: employed by company D holds 1,000 $1 shares in company D. | Detailed Reasoning - Company E: Steve: employed by company E holds 1,600 $0.50 shares in company E and $200 cash. Steve's tax position after the restructure is: the 1,600 matching shares in company E - rollover relief applies as these shares are treated as if they were a continuation of the 800 shares in company D (80% of 1,000 shares) and his employment with company E is treated as a continuation of his employment with company D. the $200 cash - a cessation time will occur for 200 shares in company D (20% of 1,000 shares) because these shares were replaced by cash. The $200 cash matches the value of the 200 shares in company D (200 shares x $1). As Steve paid $500 for the 1,000 shares in company D, he will apportion this payment as follows: $400 (80% of $500) to the shares in company D that received rollover relief $100 (20% of $500) to the shares in company D that have a cessation time or deferred taxing point. Steve will include a discount of $100 ($200 less $100) in his assessable income in the income year of the takeover.

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