Private ruling: Subdivision 124-M roll-over
Date of advice: 3 December 2019
Published: February 2020
Ruling period: Year ending 30 June XXXX
Date scheme commenced: 1 July XXXX

Ruling: Q1: Pursuant to subsection 104-10(1), will CGT event A1 happen when the NewCo shareholders dispose of their NewCo shares to BidCo under the scheme described in the Share Purchase Agreement (SPA)? | A1: Yes | Q2: Pursuant to paragraph 104-10(3)(a), will the timing of the CGT event be when the SPA for the disposal of the shares in NewCo to BidCo was entered into? | A2: Yes | Q3: Pursuant to subsection 104-10(4), will a NewCo shareholder make a capital gain from CGT event A1 happening if the capital proceeds from the disposal of their NewCo share exceed the cost base for that share? | A3: Yes | Q4: Pursuant to subsection 116-20(1), will the capital proceeds from CGT event A1 happening to each NewCo share be the total of the cash consideration and the market value of ordinary shares to be issued in HoldCo in respect of the disposal of that NewCo share? | A4: Yes | Q5: Pursuant to paragraph 116-20(1)(b), will the market value of an ordinary share to be issued in HoldCo be worked out as at the time of CGT event A1, being the time the SPA was execute? | A5: Yes | Q6: Will a NewCo shareholder who makes a capital gain from the disposal of their NewCo shares be able to choose to obtain scrip for scrip roll-over under Subdivision 124-M for that part of the capital gain that is attributable to the receipt of the ordinary shares in HoldCo? | 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 HoldCo shares be disregarded pursuant to the operation of 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 under subsection 124-790(1))? | A7: (a) Yes (b) Yes | Q8: For the purposes of determining whether each NewCo shareholder will be entitled to the CGT discount in respect of the ineligible proceeds, will the acquisition date of each NewCo share be taken to be at least 12 months before the sale of the NewCo shares to BidCo under subsection 115-34(2)? | A8: Yes | Q9: For the purposes of determining eligibility to make a discount capital gain on a future sale of the replacement HoldCo shares, will the shares in HoldCo acquired in exchange for NewCo shares be taken to have been acquired on the date a NewCo shareholder acquired, for CGT purposes, the corresponding NewCo shares under item 2 of the table in subsection 115-30(1)? | A9: Yes | Q10: Pursuant to subsections 124-785(2) and (4), where scrip for scrip roll-over is chosen, will the first element of the cost base or reduced cost base of a replacement share in HoldCo that is received be worked out by reasonably attributing to it the cost base or reduced cost base (respectively) of the NewCo shares for which it was exchanged and for which the roll-over was obtained? | A10: Yes | Q11: Will NewCo shareholders have to reduce the cost base or reduced cost base under subsection 124-785(3) of their NewCo shares by so much of it that is attributable to the cash component of the capital proceeds they received? | A11: Yes | Q12: Can NewCo shareholders calculate the first element of the cost base or reduced cost base of each replacement HoldCo share by dividing the aggregate cost bases of their NewCo shares (as reduced under subsection 124-785(3)) by the number of replacement HoldCo shares received under subsections 124-785(2) and (4)? | A12: Yes

Relevant facts and circumstances: Coy D is an Australian resident company incorporated on XX/XX/20XX. The shareholders of NewCo entered into a Share Purchase Agreement (SPA) for the sale of 100 percent of NewCo shares. The agreement was executed by the buyer and sellers on XX/XX/20XX. All the NewCo shareholders are Australian tax residents and hold their shares on capital account. The NewCo shareholders acquired their shares in NewCo under an arrangement for which they chose to obtain roll-over under Subdivision 124-N. BidCo, the buyer, is an Australian resident company that is ultimately owned by HoldCo. The Sale agreement Under the SPA the NewCo shareholders agreed to sell their shares in NewCo and BidCo agreed to buy the shares for the Purchase Price. All the NewCo shareholders will be offered cash and shares in HoldCo in their respective portions on the same terms under the SPA. All the NewCo shareholders are associates as defined in Section 318 of the Income Tax Assessment Act 1936. The NewCo shareholders and BidCo have jointly chosen to obtain roll-over under Subdivision 124-M and each of the NewCo shareholders have informed BidCo of the cost base of their NewCo shares. Steps for the proposed acquisition Bare trusts were established for each of the NewCo shareholders. On XX /XX/20XX HoldCo, an Australian resident company was incorporated with shares held by the NewCo shareholders and a third party. BidCo, another company was incorporated in Australia and is its ultimate holding company is HoldCo. All the NewCo shareholders agreed to sell their shares to BidCo in exchange for cash and newly issued shares in HoldCo on the same terms for all shareholders. BidCo funded the cash component from a loan from an external financier and an intracompany loan from HoldCo. HoldCo sourced the funds from the third party. The loan provided by the third party were converted into equity in HoldCo. Following the completion of the arrangement, the third party owned XX percent of the ordinary shares in HoldCo and the remainder were owned by the NewCo shareholders (via bare trusts)

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 104-10(1) | Income Tax Assessment Act 1997 Subsection 104-10(2) | Income Tax Assessment Act 1997 Subsection 104-10(3) | Income Tax Assessment Act 1997 Paragraph 104-10(3)(a) | Income Tax Assessment Act 1997 Subsection 104-10(4) | Income Tax Assessment Act 1997 Subsection 108-5(1) | Income Tax Assessment Act 1997 Subsection 108-5(2) | Income Tax Assessment Act 1997 Section 109-5 | Income Tax Assessment Act 1997 Section 109-55 | Income Tax Assessment Act 1997 Section 115-5 | Income Tax Assessment Act 1997 Section 115-10 | Income Tax Assessment Act 1997 Section 115-15 | Income Tax Assessment Act 1997 Section 115-20 | Income Tax Assessment Act 1997 Section 115-25 | Income Tax Assessment Act 1997 Section 115-30 | Income Tax Assessment Act 1997 Subsection 115-30(1) | Income Tax Assessment Act 1997 section 115-34 | Income Tax Assessment Act 1997 Paragraph 115-34(1)(c) | Income Tax Assessment Act 1997 Subparagraph 115-34(1)(c)(iii) | Income Tax Assessment Act 1997 Subsection 115-34(2) | Income Tax Assessment Act 1997 Section 115-40 | Income Tax Assessment Act 1997 Section 115-45 | Income Tax Assessment Act 1997 Subsection 115-45(3) | Income Tax Assessment Act 1997 Subsection 115-45(4) | Income Tax Assessment Act 1997 Subsection 115-45(5) | Income Tax Assessment Act 1997 subsection 116-20(1) | Income Tax Assessment Act 1997 Paragraph 116-20(1)(b) | Income Tax Assessment Act 1997 Subdivision 124-M | Income Tax Assessment Act 1997 Subdivision 124-N | Income Tax Assessment Act 1997 Section 124-780 | Income Tax Assessment Act 1997 Subsection 124-780(1) | Income Tax Assessment Act 1997 Paragraph 124-780(1)(a) | Income Tax Assessment Act 1997 Paragraph 124-780(1)(b) | Income Tax Assessment Act 1997 Paragraph 124-780(2)(a) | Income Tax Assessment Act 1997 Paragraph 124-780(2)(b) | Income Tax Assessment Act 1997 Paragraph 124-780(2)(c) | Income Tax Assessment Act 1997 Subsection 124-780(3) | Income Tax Assessment Act 1997 Subsection 124-780(4) | Income Tax Assessment Act 1997 Subsections 124-780(5) | Income Tax Assessment Act 1997 Section 124-782 | Income Tax Assessment Act 1997 Subsection 124-785(1) | Income Tax Assessment Act 1997 Subsection 124-785(2) | Income Tax Assessment Act 1997 Subsection 124-785(3) | Income Tax Assessment Act 1997 Subsection 124-785(4) | Income Tax Assessment Act 1997 Section 124-790 | Income Tax Assessment Act 1997 Subsection 124-790(1)

Reasons for decision: Summary: As shares are CGT assets, when the shareholders of NewCo transfer their shares to BidCo, CGT event A1 will happen, as a change in ownership will occur pursuant to the scheme described in the SPA. | Detailed Reasoning - Detailed reasoning: CGT event A1 happens if you dispose of a CGT asset. [1] 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. 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. [2] A CGT asset is defined as any kind of property, or a legal or equitable right that is not property. [3] Shares are specifically included as a CGT asset. [4] Therefore, the NewCo shares are CGT assets. Under the scheme the NewCo shareholders will exchange their NewCo shares for shares in HoldCo and cash. The ownership of the NewCo shares will pass to BidCo from the NewCo shareholders under the SPA. Consequently, CGT event A1 will occur in relation to the NewCo shares as there will be a change in ownership from the relevant NewCo shareholder and BidCo. | Detailed Reasoning - Question 2: Pursuant to paragraph 104-10(3)(a) will the timing of the CGT event be when the SPA for the disposal of the shares in NewCo to BidCo was entered into? | Summary: As stated in paragraph 104-10(3)(a) the time of the CGT event A1 will be when the contract for the disposal of the shares in NewCo to BidCo is entered into. | Detailed Reasoning - Detailed reasoning: Subsection104-10(3) states the time of the event is when you enter into the contract for the disposal, or if there is no contract, when the change of ownership occurs. As the NewCo shareholders entered into the SPA to sell their NewCo shares to BidCo, the time of the event is the date the SPA was executed. | Detailed Reasoning - Question 3: Pursuant to subsection 104-10(4), will a NewCo shareholder make a capital gain from CGT event A1 happening if the capital proceeds from the disposal of their NewCo share exceed the cost base for that share? | Summary: A NewCo shareholder will make a capital gain from CGT event A1 happening if the capital proceeds from the disposal of their NewCo shares exceed the cost base for that share. | Detailed Reasoning - Detailed reasoning: 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 and make a capital loss if those capital proceeds are less than the asset's reduced cost base. Each shareholder in NewCo will receive capital proceeds from disposing of their shares to BidCo that will be more than the shares cost base. Therefore, each NewCo shareholder will make a capital gain in accordance with subsection 104-10(4) from disposing of their NewCo shares. As each of the shareholders of NewCo acquired their shares after the 20 September 1985, any capital gain or loss made will not be disregarded. [5] | Detailed Reasoning - Question 4: Pursuant to subsection 116-20(1), will the capital proceeds from CGT event A1 happening to each NewCo share be the total of the cash consideration and the market value of ordinary shares to be issued in HoldCo in respect of the disposal of that NewCo share? | Summary: The capital proceeds from the CGT event A1 happening to each NewCo share will be total of the cash consideration and market value of the ordinary shares issued in HoldCo. | Detailed Reasoning - Detailed reasoning: 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). Each NewCo shareholder will receive their relevant proportion of the Purchase Price. This consists of cash and newly issued shares in HoldCo on the terms and conditions outlined in the SPA. Therefore, the capital proceeds from CGT event A1 happening to each NewCo share be the total of the cash consideration and the market value of ordinary shares to be issued in HoldCo in respect of the disposal of that NewCo share. | Detailed Reasoning - Question 5: Pursuant to paragraph 116-20(1)(b), will the market value of an ordinary share to be issued in HoldCo be worked out as at the time of CGT event A1, being the time the SPA was signed? | Summary: Each NewCo shareholder will need to include the market value of the HoldCo shares, determined at the date the SPA was executed, in their capital proceeds from the disposal of their NewCo shares. | Detailed Reasoning - Detailed reasoning: Each NewCo shareholder will receive cash and HoldCo shares for disposing of their shares to BidCo. 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 disposing of your shares. | Detailed Reasoning - Question 6: Will a NewCo shareholder who makes a capital gain from the disposal of their NewCo shares be able to choose to obtain scrip for scrip roll-over under Subdivision 124-M for that part of the capital gain that is attributable to the receipt of the ordinary shares in HoldCo? | Summary: Each NewCo shareholder will be able to choose to roll-over, but only in relation to the capital gain that is attributable to the ordinary shares received in HoldCo and not in relation to the cash consideration received. | Detailed Reasoning - Detailed reasoning: Subdivision 124-M allows you to choose a roll-over where post-CGT shares you own are replaced with other shares provided you would have made a capital gain from the exchange and the requirements in section 124-780 are satisfied. Where scrip for scrip roll-over is chosen, the capital gain arising from the exchange of shares is disregarded. [6] Partial roll-over is available where if, in addition to shares, the capital proceeds include something (ineligible proceeds) other than replacement shares. There is no roll-over for that part (the ineligible part) of the interest for which ineligible proceeds are received. [7] | Detailed Reasoning - Shares are exchanged for shares in another company: Paragraph 124-780(1)(a) requires an entity (the original interest holder) exchanges a share (the entity's original interest) in the company (the original entity) for a share (the replacement interest) in another company. This requirement is satisfied as NewCo shareholders (the original interest holder), exchange their NewCo shares (the original interest) for shares in HoldCo under the SPA. The fact that the HoldCo shares issued will be held via a bare trust arrangement does not prevent a NewCo shareholder from satisfying this requirement. This is because the trustee holds the property with no interest in it, other than that existing by reason of the office and the legal title as trustee and the only duty to perform is to convey the property to the beneficiary or beneficiaries as directed by them. [8] | Detailed Reasoning - The exchange occurs as part of a single arrangement: Paragraph 124-780(1)(b) requires that the exchange of the replacement shares is in consequence of a single arrangement that satisfies subsection 124-780(2) or subsection 124-780(2A). 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. [9] The single arrangement requirement is satisfied as the sale of the NewCo shares is implemented through the SPA, a single contract, between the Sellers and BidCo. | Detailed Reasoning - The 80 percent rule: Paragraph 124-780(2)(a) requires that the acquiring entity must become the owner of 80% or more of the voting shares in the original entity. If the acquiring entity is a member of a wholly-owned group it must increase its holdings of shares in the original entity so that group members, including the company, become the owners of at least 80% or more of the shares. Under the SPA, the acquiring entity, BidCo is a member of a wholly owned group will increase its percentage ownership of voting shares in NewCo from nil to 100 percent. [10] Accordingly, the requirement that the wholly-owned group becomes the owner of at least 80 percent of the voting shares in original entity is satisfied. | Detailed Reasoning - All owners could participate and on substantially the same terms: 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. The SPA applies to all NewCo shareholders and on the same terms. Therefore, both requirements are satisfied. | Detailed Reasoning - Conditions in subsection 124-780(3): The third requirement in subsection 124-780(1) is that the following conditions in subsection 124-780(3) are satisfied: (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. The above conditions are satisfied, as: (a) the original interests, being the NewCo shares, were all acquired after 20 September 1985 (b) a capital gain was made when CGT event A1 happened upon entering into the SPA that resulted from the NewCo shareholders disposing of their shares to BidCo (c) the replacement interests that NewCo shareholders will receive for disposing of their shares will be in the ultimate holding company, HoldCo (d) you have advised that NewCo shareholders and HoldCo will jointly choose to obtain roll-over under Subdivision 124-M, as section 124-782 will apply. This is because each of the NewCo shareholders are associates and significant stakeholders for the arrangement. (e) the NewCo shareholders will inform HoldCo in writing of their cost base in the their shares (f) the only debt or equity that will be issued under the arrangement to an entity that is not part of the HoldCo wholly owned group will be the issue of equity to the Investors, which is not in relation to the issue of the replacement interests. [11] | Detailed Reasoning - Further conditions - non arm's length: Subsection 124-780(4) provides additional requirements, contained in subsection 124-780(5), that 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. The evidence provided demonstrated that the parties were deal with each other at arm's length. Further, BidCo and the NewCo were not members of the same linked group prior the sale of the NewCo shares under the SPA. Therefore, as the conditions in subsection 124-780(4) are not satisfied, the conditions in subsection 124-780(5) do not need to be satisfied. | Detailed Reasoning - Exceptions - roll-over relief is not available: In some circumstances roll-over relief under Subdivision 124-M is not available. The main exceptions are outlined in section 124-795, none of which are currently applicable on the basis of the facts provided in relation to the arrangement under the SPA. | Detailed Reasoning - Question 7: If scrip for scrip roll-over is chosen: (a) will that part of the capital gain that is attributable to the receipt of HoldCo shares be disregarded pursuant to the operation of subsections124-785(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 pursuant to subsection 124-790(1)? | Detailed Reasoning - Detailed reasoning: If an original interest holder chooses roll-over, the capital gain made from disposing of their original interest is disregarded. [12] 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. [13] For disposing of their shares to BidCo, each NewCo shareholder received a combination of HoldCo shares (replacement shares) and cash consideration. Any capital gain made by the NewCo shareholders from disposing of their shares to BidCo will be disregarded. The cash consideration received by the NewCo shareholder is ineligible proceeds. Thus, no roll-over is available to the ineligible part. Consequently, the capital gain attributable to the ineligible part will not be disregarded. | Detailed Reasoning - Question 8: For the purposes of determining whether each NewCo shareholder will be entitled to the CGT discount in respect of the ineligible proceeds, will the acquisition date of each NewCo share be taken to be at least 12 months before the sale of the NewCo shares to BidCo under subsection 115-34(2)? | Summary: The NewCo shareholders will be entitled to the CGT discount on the capital gain from the sale of their NewCo shares that roll-over was not available under Subdivision 124-M because subsection 115-34(2) applies to treat each NewCo shareholder to have acquired their NewCo shares at least 12 months before the CGT event for the purposes of sections 115-25 and 115-40. | Detailed Reasoning - Entitlement to the CGT discount: A discount capital gain is a capital gain that meets the requirements in sections 115-10, 115-15, 115-20 and 115-25 are satisfied. [14] To be a discount capital gain, the capital gain must be made by an individual, complying superannuation entity, trust or a life insurance company. [15] To be a discount capital gain, the capital gain must result from a CGT event happening after 21 September 1999 to a CGT asset that was acquired by the entity making the capital gain at least 12 months before the CGT event, unless special rules apply. [16] | Detailed Reasoning - Time of acquisition for certain replacement-asset roll-overs -section 115-34: Section 115-34 provides that where a CGT event happens to your share in a company that you acquired as a replacement asset under Subdivision 124-N (disposal of assets by trusts to a company) [17] and at the time of the CGT event you had owned the shares for less than 12 months, sections 115-25 and 115-40 apply as if you had acquired the share at least 12 months before the CGT event. However, section 115-45 denies you a discount capital gain on your shares if you would not have had discount capital gains on the majority of CGT assets (by cost and by value) underlying the share or interest if: (a) you had owned them for the time the company owned them; and (b) CGT events had happened to them when the CGT event happened to your share. Each of the NewCo shareholders received their NewCo shares as replacement assets under a scheme for which they chose replacement asset roll-over under Subdivision 124-N. Section 115-45 will not deny the CGT discount to the NewCo shareholder, as: (a) each NewCo shareholder (including associates) will not beneficially own at least 10% by value of the shares in NewCo just before the CGT event happened by sale via the SPA [18] (b) subsection 115-45(5) deems the acquisition rules in subsection 115-45(4) to apply to NewCo as if NewCo had acquired its assets when VET had originally acquired its assets, i.e. more than 12 months before the sale of the NewCo shares. Accordingly, the special rule in section 115-34 applies such that sections 115-25 and 115-40 apply as if the NewCo shareholders acquired their shares in NewCo at least 12 months before the disposal of these shares to BidCo. | Detailed Reasoning - Question 9: For the purposes of determining eligibility to make a discount capital gain on a future sale of the replacement HoldCo shares, will the shares in HoldCo acquired in exchange for NewCo shares be taken to have been acquired on the date the NewCo shareholder acquired, for CGT purposes, the corresponding NewCo shares under item 2 of the table in subsection 115-30(1)? | Summary: The shares in HoldCo acquired in exchange for NewCo shares under the SPA and for which roll-over was chosen under Subdivision 124-M are taken to be acquired at the time the NewCo shares were acquired. | Detailed Reasoning - Detailed reasoning: Generally, the time of acquisition of a CGT asset is when you become its owner. Other acquisition rules are set out in section 109-55. The shares in HoldCo were acquired as the replacement asset when each NewCo shareholder disposed of their shares to BidCo (Subdivision 124-M roll-over). The NewCo shares were received by the former unitholders as a replacement asset after the trust transferred its assets to NewCo (Subdivision 124-N roll-over). The first roll-over chosen was Subdivision 124-N, [19] which is a replacement asset roll-over covered by paragraph 115-34(1)(c). Consequently, Item 8C of the table in section 109-55 and paragraph (b) of item 2 in the table in subsection 115-30(1) are not relevant in determining the time the NewCo shares were acquired. Therefore, the general acquisition rules in section 109-5 apply. As CGT event A1 happened when this transfer happened, each NewCo shareholder is taken to have acquired their NewCo shares when the disposal contract (SPA) was entered into. [20] The second roll-over to be chosen is Subdivision 124-M, which is another replacement asset roll-over but not a roll-over covered by paragraph 115-34(1)(c). Therefore, Item 8C of the table in section 109-55 applies and each NewCo shareholder is taken to have acquired the HoldCo shares when they acquired their NewCo shares. Section 109-55 says to see section 115-30. Paragraph (a) of Item 2 in the table in subsection 115-30(1) would apply to the second roll-over (Subdivision 124-M), as the first roll-over chosen was Subdivision 124-N. Therefore, each NewCo shareholder will acquire their HoldCo shares when the disposal contract (SPA) was entered into. | Detailed Reasoning - Question 10: Pursuant to subsections 124-785(2) and (4), where scrip for scrip roll-over is chosen, will the first element of the cost base and reduced cost base of a replacement share in HoldCo that is received be worked out by reasonably attributing to it the cost base and reduced cost base (respectively) of the NewCo shares for which it was exchanged and for which the roll-over was obtained? | Summary: The first element of the cost base and reduced cost base of a replacement share in HoldCo is worked out by reasonably attributing to it the cost base (or the part of it) of the original interest for which it was exchanged and for which roll-over was obtained. | Detailed Reasoning - Detailed reasoning: 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 by reasonably attributing to it the cost base (or the part of it) of your original interest for which it was exchanged. In applying subsection 124-785(2), you must reduce the cost base of your original interest (just before you stop owning it) by so much of that cost base as is attributable to an ineligible part worked out under section 124-790. Subsection 124-785(4) provides that the first element of the reduce cost base of each replacement interest is workout similarly to the cost base. Consequently, to work out the first element of the cost base (or reduced cost base) of a replacement share in HoldCo you received for the exchange by reasonably attributing to it the cost base (or the part of it) of NewCo shares for which it is exchanged. | Detailed Reasoning - Question 11: Will NewCo shareholders have to reduce the cost base and reduced cost base under subsection 124-785(3) of their NewCo shares by so much of it that is reasonably attributable to the cash component of the capital proceeds they received? | Summary: The NewCo shareholders will need to reduce the cost base (or reduced cost base) of their NewCo shares that is reasonably attributed to the cash component (the ineligible part) of the capital proceeds they received, as described in subsection 124-785(3). | Detailed Reasoning - Detailed reasoning: Under the arrangement, the NewCo shareholders will receive cash and shares in HoldCo in exchange for their NewCo shares. The cash consideration forms part of the ineligible proceeds / ineligible part as set out in subsection 124-790(1) and therefore the NewCo shareholders are only entitled to a partial roll-over. 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. Subsection 124-785(4) provides that the first element of the reduce cost base of each replacement interest is workout similarly to the cost base. 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). | Detailed Reasoning - Question 12: Can NewCo shareholders calculate the first element of the cost base and reduced cost base of each replacement HoldCo share by dividing the aggregate cost bases of their NewCo shares (as reduced under subsection 124-785(3)) by the number of replacement HoldCo shares received under subsections 124-785(2) and (4)? | Summary: The NewCo shareholders can calculate the first element of the cost base and reduced cost base of each replacement HoldCo share by dividing the aggregate cost bases of their NewCo shares (as reduced under subsection 124-785(3)) by the number of replacement HoldCo shares received. | Detailed Reasoning - Detailed reasoning: 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. The example used 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 the all the original interest shares (as reduced by subsection 124-785(3)) and dividing by the number of replacement shares received. As the example shows the aggregate cost base of the Windsor Ltd shares $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 per share. Therefore it would be reasonable for the NewCo shareholders to calculate the first element of cost base of each HoldCo share by taking the aggregate cost base of the NewCo shares (as reduced by subsection 124-785(3)) and dividing it by the number of HoldCo shares they received. The reduced cost base of the HoldCo shares is worked out in a similar manner. [1] Subsection 104-10(1) [2] Subsection 104-10(2) [3] Subsection 108-5(1) [4] Note 1 in subsection 108-5(2) [5] Paragraph 104-10(5)(a) [6] Subsection 124-785(1) [7] Subsection 124-790(1) [8] Refer Gummow J in Herdegen v. Federal Commissioner of Taxation (1988) 84 ALR 271 at 281 [9] Paragraph 32 TR 2005/19 [10] Taxation Determination TD 2000/5 [11] Paragraph 1.37 in Explanatory Memorandum to Tax and Superannuation Laws Amendment (2015 Measures No. 4) Bill 2015 states: The new roll-over condition does not apply to: - the issue of replacement interests themselves; - new debt owed or equity issued to an external financier or investor to fund the purchase of original interests under the arrangement; or - new debt owed or equity (including equity other than replacement interests) issued to the original interest holders as consideration for their original interests. [12] Subsection 124-785(1) [13] Subsection 124-790(1) [14] Section 115-05 [15] Section 115-10 [16] Sections 115-20 and 115-25 [17] Subparagraph 115-34(1)(c)(iii) [18] Subsection 115-45(3) [19] When NewCo shares were received by the former unitholders as a replacement asset after the trust transferred its assets to NewCo [20] Subsection 109-5(2), A1 (Case 1)

Reasons for decision: These reasons for decision accompany the Notice of private ruling for the shareholders of NewCo. | While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision. | All legislative references are to the ITAA 1997 unless otherwise indicated.