Private ruling: Scrip for scrip roll-over election
Date of advice: 19 February 2019
Published: May 2019
Ruling period: Income year ending 30 June 2019
Date scheme commenced: During the year ended 30 June 2019

Ruling: Q1: Will the trustee of the X Trust (“the taxpayer”) be eligible to elect for CGT roll-over relief in accordance with Subdivision 124-M of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of the exchange of their ordinary shares in A Pty Ltd for shares in B Ltd pursuant to the contract received at completion in the income tax year ended 30 June 2019? | A1: Yes.

Relevant facts and circumstances: A Pty Ltd 1. A Pty Ltd is an Australian resident private company. 2. A Pty Ltd wholly owns several subsidiaries, but has not formed an Australian tax consolidated group. The Original Interest Holders 3. The taxpayer, the trustee of Trust X, holds XX% of the ordinary shares in A Pty Ltd. The remaining XX% of the ordinary shares are held by the Trustee of Trust Y. 4. Both of the trusts are Australian resident trusts. 5. All shares in A Pty Ltd were acquired after 19 September 1985. Acquisition of A Pty Ltd 6. The taxpayer and The Trustee of Trust Y (“original interest holders”) have entered into a contract with C Ltd, a wholly owned subsidiary of B Ltd. 7. C Ltd proposes to purchase 100% of the ordinary shares in A Pty Ltd. 8. Pursuant to the terms of the contract, consideration for the purchase will be provided in two stages: a) At the completion date as specified in the contract, the original interest holders will be given ordinary fully paid shares in B Ltd to the value of $X million in proportion to their respective shareholdings in A Pty Ltd. b) Two years after the completion date, subject to each of the directors of A Pty Ltd remaining continuously employed by C Ltd or A Pty Ltd or one of its subsidiaries (or, in the event that they cease to be so employed, for the reasons stipulated in the contract), C Ltd will either: i. cause to be delivered to the original interest holders ordinary fully paid B Ltd shares to the value of $X million, or, if this is not possible; ii. pay the original interest holders cash consideration of $X million, in proportion to their respective shareholdings in A Pty Ltd. 9. The payment of the consideration above is proposed to be effected, in general, by the acquisition through on-market purchases of B Ltd shares by an independent third party financial institution funded by C Ltd; and by the subsequent delivery of those shares to the original interest holders at the direction of C Ltd. They will not be newly issued shares.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subdivision 124-M

Reasons for decision: Summary: Subdivision 124-M provides a shareholder with scrip for scrip roll-over, which allows the shareholder to disregard a capital gain from the disposal of shares in one entity in exchange for shares in another entity. Section 124-780 contains a number of conditions for, and exceptions to, the eligibility of a shareholder to choose scrip for scrip roll-over. The main conditions and exceptions that are relevant in this case are: ● Shares are exchanged for shares in another company; ● The exchange occurs as part of a single arrangement; ● Conditions for arrangement are satisfied; ● Conditions for roll-over are satisfied; ● Further conditions are not applicable; and ● Exceptions to obtaining scrip for scrip roll-over are not applicable. Only partial roll-over will be available if, in addition to shares, the capital proceeds include something (ineligible proceeds) other than replacement shares. | Detailed Reasoning - Shares are exchanged for shares in another company: Subparagraph 124-780(1)(a)(i) requires an entity to exchange a share in a company for a share in another company. In this case, the taxpayer will exchange its shares in A Pty Ltd for shares in B Ltd under the contract. Therefore, this requirement is satisfied. | Detailed Reasoning - The exchange occurs as part of a single arrangement: Paragraph 124-780(1)(b) requires that the exchange of shares is in consequence of a single arrangement. Subsection 998-1(1) defines an arrangement as ‘any arrangement, agreement, understanding, promise or undertaking, whether express or implied, and whether or not enforceable (or intended to be enforceable) by legal proceedings’. The explanatory memorandum to the New Business Tax System (Miscellaneous) Bill (No.2) 2000, which introduced amendments to extend the circumstances in which scrip for scrip roll-over is available under Subdivision 124-M, relevantly states as paragraph 11.23: What constitutes a single arrangement is a question of fact. Relevant facts in determining whether what takes place is part of a single arrangement would include, but not be limited to, whether there is more than one offer or transaction, whether aspects of an overall transaction occur contemporaneously, and the intention of the parties in all the circumstances as evidenced by objective facts. ATO ID 2002/274 sets out the ATO view on whether the requirement that shares be exchanged in consequence of a single arrangement is satisfied when, as a result of one contract, shares are exchanged in two or more stages. It stipulates that such staged exchanges are in consequence of a single arrangement as required by paragraph 124-780(1)(b) because the obligation to undertake all exchanges arose from a single contract. Notwithstanding that the taxpayer may receive B Ltd shares in consideration for it’s A Pty Ltd shares in 2 stages over a period of 3 income years, as the proposed transaction will be undertaken under the single contract; it is considered that the proposed exchange will occur under a single arrangement. | Detailed Reasoning - Conditions for arrangement are satisfied: The single arrangement must satisfy the conditions in subsection 124-780(2). 80% or more ownership Paragraph 124-780(2)(a) requires that the arrangement results in the acquiring entity, or members of a wholly-owned group, becoming the owner of 80% or more of the voting shares of the original entity. Under the proposed arrangement, C Ltd will acquire 100% of the voting shares in A Pty Ltd. Accordingly, this condition is satisfied. All voting share owners participate Paragraph 124-780(2)(b) requires that the arrangement must be one in which at least all the owners of voting shares in the original entity (apart from the acquiring entity or members of the acquiring entity’s wholly owned group) could participate. As the proposed offer has been made to both shareholders of A Pty Ltd, this condition is satisfied. Participation is on substantially the same terms Paragraph 124-780(2)(c) requires that the arrangement must be one in which the participation is available on substantially the same terms for all the owners of interests of a particular type in the original entity. There is only one class of shares in A Pty Ltd, being ordinary shares. The offer to acquire shares is made to each shareholder of A Pty Ltd in proportion to their shareholding. The terms of the contract apply equally to both original interest holders. Accordingly, this condition is satisfied. | Detailed Reasoning - Conditions for roll-over are satisfied: The arrangement must also satisfy the conditions for roll-over in subsection 124-780(3). Original interest is acquired on or after 20 September 1985 Paragraph 124-780(3)(a) requires the original interest holder to have acquired its original interest on or after 20 September 1985. A Pty Ltd was incorporated on xx xxxx 20XX and all the shares in A Pty Ltd were issued to the shareholders at this time. Accordingly, this condition is satisfied. Shareholder would otherwise make a capital gain Paragraph 124-780(3)(b) requires that, apart from the roll-over, the original interest holder would make a capital gain from a CGT event happening in relation to its original interest. Apart from the roll-over, CGT Event A1 will happen to the taxpayer when the contract for disposal of the A Pty Ltd shares is executed by the shareholders and C Ltd (subsections 104-10(1), 104-10(2) and 104-10(3)). The taxpayer will make a capital gain under subsection 104-10(4) apart from the roll-over. Therefore this condition is satisfied. Replacement interests in the acquiring entity Paragraph 124-780(3)(c) requires that the replacement interest is in the acquiring entity (or the ultimate holding company of the wholly-owned group which includes the acquiring entity). The taxpayer will receive replacement shares in B Ltd which is the ultimate holding company of C Ltd. Therefore, this condition is satisfied. Choice to obtain scrip for scrip roll-over Paragraph 124-780(3)(d) requires that the original interest holder chooses to obtain the roll-over, or, if section 124-782 applies, the original interest holder and the replacement entity jointly choose to obtain the roll-over. The taxpayer is neither a significant stakeholder nor a common stakeholder for the transaction for the purposes of section 124-783, therefore section 124-782 does not apply. Accordingly, if the taxpayer chooses to obtain the roll-over, this condition is satisfied. Issue of equity or new debt by member of wholly-owned group Paragraph 124-780(3)(f) provides that if any 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. This condition is satisfied in this case as under the arrangement, no member of the B Ltd company group will issue equity or owe new debt to an entity that is not a member of the group and in relation to the issuing of the replacement interest under the terms of subparagraph 124-780(3)(f). | Detailed Reasoning - Further roll-over conditions are not applicable: Subsection 124-780(4) provides that the additional requirements in subsection 124-780(5) 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. B Ltd, the replacement entity, is a listed company with more than 300 members. The taxpayer, A Pty Ltd and C Ltd are not members of the same linked group prior to the commencement of the proposed arrangement. On this basis, the additional requirements in subsection 124-780(5) do not apply. | Detailed Reasoning - Exceptions to obtaining scrip for scrip roll-over are not applicable: Section 124-795 sets out the circumstances where scrip for scrip roll-over under Subdivision 124-M is not available. The exceptions for scrip for scrip roll-over are discussed below. Foreign resident shareholders Subsection 124-795(1) provides that roll-over is not available if, just before the disposal, the original interest holder is a foreign resident unless, just after the acquisition of the replacement interest, the replacement interest is taxable Australian property. This exception does not apply as the taxpayer is not a foreign resident before the proposed disposal. Capital gain cannot otherwise be disregarded Paragraph 124-795(2)(a) provides that roll-over is not available if any capital gain the original interest holder might make from their replacement interest would be disregarded (except for a roll-over). This exception does not apply as the taxpayer’s capital gain will not be disregarded. Foreign resident acquiring entity Paragraph 124-795(2)(b) provides that roll-over is not available if the original interest holder and the acquiring entity are members of the same wholly-owned group just before the original interest holder stops owning their original interest and the acquiring entity is a foreign resident. This exception does not apply because the taxpayer and C Ltd are not members of the same wholly-owned group and C Ltd is not a foreign resident. Roll-over available under Division 122 or Division 615 Subsection 124-795(3) provides that roll-over is not available if a roll-over can be chosen under Division 122 or Division 615. In this case, a roll-over under Division 122 or Division 615 is not available. Accordingly, this exception does not apply. Choice by replacement entity against roll-over Subsection 124-795(4) provides that roll-over is not available if the replacement entity makes a choice against roll-over and the replacement entity or the original entity notifies the original interest holder in writing of the choice before exchange. This exception does not apply because B Ltd will not make a choice to deny a roll-over to the taxpayer. | Detailed Reasoning - Conclusion: In this case, based on the information provided, the taxpayer will be eligible to choose scrip for scrip roll-over relief under Subdivision 124M of the ITAA 1997 in respect of the exchange of their ordinary shares in A Pty Ltd for shares in B Ltd.

Other Relevant Facts: 10. The offer is made to each original interest holder in proportion to their shareholding immediately before the transaction. | 11. B Ltd is an Australian company listed on the ASX, with more than 30 0 members. | 12. The taxpayer is not a significant stakeholder for the arrangement under the terms of section 124-783 of the ITAA 1997. | 13. The taxpayer is not a common stakeholder for the arrangement under the terms of section 124-783 of the ITAA 1997. | 14. The original unitholders and C Ltd will deal with each other at arm’s length. | 15. The original interest holders will choose to obtain a roll-over under Subdivision 124-M of the ITAA 1997. | 16. B Ltd will not make a choice to deny a roll-over to the original interest holders under Subdivision 124-M of the ITAA 1997. | 17. The disposal of the shares in A Pty Ltd would, but for the application of the roll-over provision under section 124-780 of the ITAA 1997, result in a capital gain to each original interest holder. | 18. Under the arrangement, no member of the B Ltd company group will issue equity or owe new debt to an entity that is not a member of the group and in relation to the issuing of the replacement interest under the terms of subparagraph 124-780(3)(f). | 19. The taxpayer, A Pty Ltd and C Ltd are not members of the same linked group under the terms of section 170-260 of the ITAA 1997. | 20. The taxpayer cannot choose a roll-over under Division 122 or Division 615 in respect of the exchange of its shares.