Private ruling: Scrip for scrip roll-over
Date of advice: 15 May 2024
Published: 24 June 2024
Ruling period: Period End 30 June 20XY
Date scheme commenced: August 20XY

Ruling: Q1: Will section 124-782 apply to the roll-over in respect of the exchange by the Company A shareholder selling their shares in Company A for the replacement shares in the Company B as part of the transaction set out in the share purchase agreement? | A1: Yes. | Q2: For the purposes of applying section 124-782(1)(a) to Company B, is a roll-over available for the Company A Shareholder exchanging their shares in Company A for the replacement shares in Company B technology as part of the transaction set out in the share purchase agreement. | A2: Yes.

Relevant facts and circumstances: Background Company A (Company A) owns and operates a technology services business. The Company A Shareholders have agreed terms with Company B (Company B), an Australian company, for it to acquire all the shares in Company A. Prior to the transaction, the shareholders of Company A were as follows: • Trust X: X Ordinary shares (50%) • Trust Y: Y Ordinary shares (45%) • Trust Z: Z Ordinary shares (5%) The Company A Shareholders are discretionary trusts and are represented by the following individuals: • Trust X: Person X • Trust Y: Person Y • Trust Z: Person Y Person Y as the manager of a family's home office. Each of the individuals and trusts are Australian residents for Australian income tax purposes. Person X and Person Y are not related and carry on their affairs, and the affairs of their associated entities, independently of each other. Transaction Company B is a member of a wholly owned group and sought to acquire 100% of the shares in Company A. As at September 20XY, Company B had x ordinary shares on issue. The Company A Shareholders were made an identical offer August 20XY. The offer provided for consideration in a mix of shares and cash and the same offer was made to each Company A Shareholder. The offer included an election form for the Company A Shareholders to choose their preferred mix of the available consideration. The parties executed the offer agreement, and the Company A Shareholders elected their preferred form of consideration as follows: • Trust X elected 100% share consideration. • Trust Y elected 100% cash consideration, and • Trust Z elected 100% cash consideration. Under the share purchase agreement: Company B acquired 100% of the shares in Company A; consideration was a mixture of cash, ordinary shares and convertible redeemable preference shares issued in Company B (together, the "replacement shares"); the same offer was made to all Company A Shareholders. consideration for the Company A Shares will be as follows: the "cash consideration sellers" (in their respective proportions) will receive: i) cash consideration; and ii) deferred payment (including, any interest accrued on that amount under the loan agreement); the following shares to be issued to the "share consideration seller" (Trust X): iii) x fully paid ordinary shares in Company B; and iv) y convertible redeemable shares in Company B. In respect of the deferred payment of cash (including, any interest accrued on that amount under the loan agreement), this amount may be funded by Company B by way of further equity financing through the issuance of new shares in Company B prior to the deferred consideration being due. Immediately after the transaction, Trust X will hold greater than 30% of the ordinary shares in Company B. Subsequently, on issuance of any new shares to fund the deferred payments, Trust X may hold less than 30% of the ordinary shares in Company B. The share purchase agreement provides as follows: Company B warrants and represents: participation in the transaction is offered and made available to all the Company A Shareholders on substantially the same terms; Company B will not make a choice under section 124-795(4) in respect of the transaction; and if section 124-782 applies to the transaction, Company B and the relevant Company A Shareholder will provide a joint election as required under section 124-780(3)(d). Assumptions Trust X holds its shares in Company A on capital account and will make a capital gain on the disposal of its shares in Company A. Trust X acquired its shares in Company A on or after 20 September 1985, but more than 12 months before the transaction was executed. the total of the cost bases of the assets that Company A owned at the time of the transaction (i.e. when the draft agreement was signed) and had acquired less than 12 months before the CGT event, was not more than half of the total of the cost bases of the assets owned by Company A at the time of the CGT event. Company B did not, in relation to the issuance of the replacement shares: i) issue equity, other than the replacement shares, or ii) owe new debt. for the purposes of section 124-780(3)(f): the Company A Shareholders and Company B, did not undertake any dealing, in connection with or as part of the transaction, that was not on an arm's length basis. Company B did not make any choice under section 124-795(4) to not apply the roll-over, and did not provide any notice to that effect to Trust X; and Company A Shares are not 'Indirect Australian Real Property Interests', as defined in subdivision 855-25.

Relevant legislative provisions: Income Tax Assessment Act 1997 subdivision 124-M | Income Tax Assessment Act 1997 subsection 124-780 | Income Tax Assessment Act 1997 subsection 124-781 | Income Tax Assessment Act 1997 subsection 124-782 | Income Tax Assessment Act 1997 subsection 124-783

Reasons for decision: Summary: Yes. Section 124-782 will apply to the shares acquired by Company B from Trust X under the transaction. | Detailed Reasoning - Detailed reasoning: Subdivision 124-M, provides for a scrip for scrip roll-over where certain requirements are met. The subdivision allows a choice of a roll-over where post-CGT shares or trust interests are replaced with other shares or trust interests. The provisions of subdivision 124-M are primarily directed to the original interest holder and the availability of a roll-over relating to the receipt of the replacement interest. In addition, there are potential consequences for the acquiring entity as well that may impact upon the cost base for shares acquired by the acquiring entity under a scrip for scrip arrangement. For the acquiring entity, the cost base of the interests acquired will generally be determined under the ordinary cost base rules, however, in circumstances where the original interest holder meets the requirements as either a 'significant stakeholder' or a 'common stakeholder' for the arrangement, the first element of the cost base of the interest acquired will be the original interest holder's cost base in that original interest. Section 124-782 provides that the cost base of an original interest acquired by an acquiring entity for a scrip for scrip roll-over becomes the first element of the cost base and reduced cost base of the acquiring entity for the interest if "the holder is a *significant stakeholder or a *common stakeholder for the arrangement" (S124-782(1)(a)). Section 124-782 provides: Transfer or allocation of cost base of shares acquired by acquiring entity etc. Transfer of cost base (1) 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 if: (a) the original interest holder obtains a roll - over; and (b) the holder is a *significant stakeholder or a *common stakeholder for the arrangement. Note 1: For other interests, for example, interests for which the roll - over is not chosen, the cost base will be worked out under the ordinary cost base rules in Divisions 110 and 112. Note 2: There is a special rule to determine the cost base of equity or debt given to a member of an acquiring wholly - owned group by another member of the group under an arrangement: see section 124 - 784. Allocation of cost base in cancellation case (2) The *cost base and *reduced cost base of any interests (the new interests) issued by the original entity to an acquiring entity under the * arrangement is worked out under subsection (3) if: (a) original interests of an original interest holder are cancelled under the arrangement; and (b) the holder obtains a roll - over for the cancellation; and (c) the holder is a *significant stakeholder or a *common stakeholder for the arrangement. (3) The first element of the *cost base and *reduced cost base of the new interests of an acquiring entity is that part of the cost base of the cancelled interests as can be reasonably allocated to the new interests, having regard to: (a) the nature of the *arrangement; and (b) the number, type and relative *market values of the cancelled interests and the new interests; and (c) any other relevant matters. (4) The amount allocated to a new interest under subsection (3) must not be more than its * market value just after the * arrangement was completed. Section 124-783 provides the definition of a significant stakeholder and significant stake: Significant stakeholder (1) 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. (2) Also, if an original interest holder is an acquiring entity, any other original interest holder is a significant stakeholder for an arrangement if it: (a) had a significant stake in the original entity just before the arrangement started; and (b) is an associate of the replacement entity just after the arrangement was completed. ... Significant stake (6) 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. Prior to the arrangement, the Trust X held 50% of the ordinary shares in Company A which carried voting rights, dividend rights and capital distribution rights. Under the 'arrangement' between the parties, outlined in the share purchase agreement, Trust X was issued with x ordinary shares, amounting to more than 30% of the ordinary shares on issue. The 'replacement interest' includes both Company B ordinary shares and convertible redeemable preference shares, however the ordinary shares alone will amount to more than 30% of the ordinary shares on issue. Trust X will meet the requirement to be a 'significant stakeholder' under the provisions just before and just after the arrangement was completed. Consequently section 124-782 will apply and impact on the cost base of the Company A shares acquired under the arrangement. | Detailed Reasoning - Question 2: For the purposes of applying section 124-782(1)(a) to Company A, is a roll-over available for the Company A Shareholder exchanging their shares in Company A for the replacement shares in Company B as part of the transaction set out in the share purchase agreement? | Summary: Yes. There will be a roll-over available under s124-M for the Company A shareholder under the transaction. | Detailed Reasoning - Detailed reasoning: For the purposes of determining whether s124-782(1)(a) applies, it is necessary to determine whether the scrip for scrip roll-over under subdivision 124-M is available to the Company A that participated in the scrip for scrip arrangement (Trust X). Section 124-780 provides: Replacement of shares (1) 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 (ii) an option, right or similar interest (also the holder's original interest) issued by the original entity that gives the holder an entitlement to acquire a share in the original entity for a similar interest (also the holder's replacement interest) in another company; and (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. Note 1: There are some exceptions: see section 124 - 795. Note 2: 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. Note 3: A trustee who gets a roll - over under this Subdivision for an original interest consisting of shares issued as part of a demutualisation may be eligible for a further roll - over under Subdivision 126 - E when a beneficiary becomes absolutely entitled to the replacement shares. Conditions for arrangement (2) 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. Note 1: The 80% or more requirement is satisfied if the acquiring entity ends up owning at least 80% of the voting shares in the original entity. This may include shares held before the arrangement started. Note 2: Participation will be on substantially the same terms if, for example, matters such as those referred to in subsections 619(2) and (3) of the Corporations Act 2001 affect the capital proceeds that each participant can receive. Conditions for arrangement--takeover bids and arrangements (2A) The *arrangement must: (a) satisfy paragraph (2)(a); and (b) be, be part of, or include one or more of the following: (i) a takeover bid (within the meaning of the Corporations Act 2001 ) for the original interests by the acquiring entity that is not carried out in contravention of the provisions mentioned in paragraphs 612(a) to (g) of that Act; Note: For exemption and modification of provisions by ASIC (and review by the takeovers panel) see Part 6.10 of the Corporations Act 2001 . For Court declarations excusing contraventions see section 1325D of that Act. (ii) a compromise or arrangement entered into by the original entity under Part 5.1 of the Corporations Act 2001 , approved by order of a court made for the purposes of paragraph 411(4)(b) of that Act. Conditions for roll - over (3) The conditions are: (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. Note: If the original interest holder also exchanges a CGT asset that it acquired before 20 September 1985, the cost base of any interest received in exchange for it is worked out under section 124 - 800. Further roll - over conditions in certain cases (4) 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. Note: There are some cases where a company will not be regarded as having 300 members: see section 124 - 810. (5) 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. CUFS (6) This section applies to the holder of a Chess Unit of Foreign Security as if the holder held the underlying interests that the unit represents. Note: A Chess Unit of Foreign Security is an interest, traded on the stock market operated by ASX Limited, in a foreign share, unit or interest. (7) A company is the ultimate holding company of a *wholly - owned group if it is not a *100% subsidiary of another company in the group. | Detailed Reasoning - Exchange of shares (s124-780(1)(a)): Company A shares are being exchanged for shares in the buyer (Company B). The 'replacement interest' includes both Company B ordinary shares and convertible redeemable preference shares. In ATO ID 2003/893 [1] the Commissioner considered the issue of shares that are redeemable preference shares stating: The taxpayer can choose scrip for scrip rollover in respect of the exchange of redeemable preference shares in one company for ordinary shares in another company. The buyer and the seller are dealing with each other at arm's length. Sections 124-780(4) and (5), which place requirements on the rights and obligation on the replacement interest where the original interest holder and the acquiring entity are not dealing with each other at arm's length will not have application in this case. | Detailed Reasoning - Single Arrangement satisfying certain requirements (s124-780(b)): The exchange of shares must be in consequence of a single arrangement that satisfies s124-780(2) or (2A). Broadly, the arrangement: • must result in the acquiring entity becoming the owner of 80% or more of the voting shares of the original entity; • must be one in which all owners of voting shares could participate and; • must be one in which participation was available on substantially the same terms for all the owners of a particular type of interest. Company B acquired 100% of the issued shares in Company A. The offer by Company B was made to all Company A shareholders through an identical offer. | Detailed Reasoning - Conditions for roll-over (s124-780(3)): Section 124-780(3) conditions are met as follows: • The original interest holder (Company A) acquired its interest on or after 20 September 1985 (s124-780(3)(a)). • Apart from this roll-over, the company A shareholder would make a gain on the disposal of the Company A shares (s124-780(3)(b)). • The replacement interests are in Company B in accordance with s124-780(3)(c)(i); • The buyer (Company B) and the seller shareholders seeking the roll-over (Trust X) will choose to apply the roll-over (s124-780(3)(d)). • The original interest holder (Trust X) will inform the replacement entity (Company B) in writing of the cost base of its original interest worked out just before a CGT event happened to it (s124-780(3)(e)). • Under the arrangement no member of the of the group issues equity (other than a replacement interest) or owes new debt to an entity that is not a member of the group and in relation to the issuing of the replacement interests (s124-780(3)(f)). There are new interests issued (capital raising) concurrently with the replacement interest, however in this case they would not be considered to be 'in relation to the issuing of the replacement interests. The Explanatory Memorandum to the Tax And Superannuation Laws Amendment (2015) Measures No. 4 Act 2015 provides in respect of the issue of new debt or equity: 1.36 The debt or equity will be 'in relation to the issue of replacement interests' where it is new debt owed or equity issued, directly or indirectly, to compensate the issuer of the replacement interests for that issue. This rule will prevent scenarios where the acquiring entity issues debt or equity to another member of the group through an interposed entity that is not part of the wholly-owned group. 1.37 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. | Detailed Reasoning - Further Roll-over Conditions (s124-780(4): Section 124-780(4) outlines further roll-over conditions where the original interest holder (Company A) and the acquiring entity (Company B) did not deal with each other at arm's length. Company A shareholders and Company B are dealing with each at arm's length and these provisions won't apply. | Detailed Reasoning - Conclusion: The Company A Shareholders meet the requirements for the scrip for scrip roll-over and will obtain a roll-over in respect of the exchange of their shares in Company A for the replacement shares in Company B. [1] ATO ID 2003/893 Income Tax Capital gains tax: scrip for scrip rollover - redeemable preference shares exchanged for ordinary shares

Subject: Scrip for scrip roll-over: In this private ruling, all legislative references are to the Income Tax Assessment Act 1997 unless otherwise stated. | Does IVA apply to this private ruling?: Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or diverted profits tax benefit in connection with an arrangement. | If Part IVA applies, the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax. | We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part. | If you want us to rule on whether Part IVA applies, we will need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply. | For more information on Part IVA, go to our website ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select 'Part IVA: the general anti-avoidance rule for income tax'. | Reasons for decision: These reasons for decision accompany the Notice of private ruling for Company B. | In these reasons, all legislative references are to the Income Tax Assessment Act 1997 unless otherwise stated. | Question 1: Will section 124-782 apply to the roll-over in respect of the exchange by the Company A shareholder selling their shares in Company A for the replacement shares in Company B as part of the transaction set out in the share purchase agreement?