Private ruling: CGT - roll-overs for business restructure
Date of advice: 17 June 2022
Published: September 2022
Ruling period: Income year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will the issue of Hold Co shares in exchange for the cancellation of your Voting B Shares in the Company satisfy the requirements of CGT rollover under Division 615 of the Income tax Assessment Act 1997? | A1: Yes.

Relevant facts and circumstances: • X ordinary share held by the managing director (Managing Director) of the Company that is a voting share: and • Cumulative redeemable participating preferences shares comprising: o A shares (A Shares) that are non-voting; and o B shares which are: ­ voting where they are held by current ABC group (the Group) employees (Voting B Shares); and, ­ are non-voting when they are held by a former Group employee (Non-Voting B Shares). Proposed transactions (Proposed Transactions) Cancellation of the one Company ordinary share on issue Sale of shares by Exiting Members Cancellation of Exiting Members shares 16. At this stage, only Exchanging Members will hold shares in the Company (immediately prior to the subsequent steps below occurring). Hold Co shares exchanged for the cancellation of Voting B shares Cancellation of Hold Co share and issue of one Company share • the Company will issue X ordinary shares to Hold Co, the issue price being $X; and • The X ordinary share in Hold Co issued on incorporation to the Company will be cancelled for the original contribution of $X, removing circular ownership. Reason for restructure • the implementation of, and the issue of shares in Hold Co to participants in, a new employee share plan; • the issue of shares in Hold Co to a strategic investor who would then hold around X% of Hold Co; and • the obtaining of a new borrowing facility by the Group to fund the future development of the group and, possibly, the payment by Hold Co of amounts due to the Exiting Members for the shares. The Company is of the view that the existing share structure is a material impediment to the future development of the Group's business and has proposed a reorganisation of its structure, to address this issue. Identified problems with the Existing Structure include that: • it is an impediment to the Company being able to raise capital needed for the future development of the Group's business; • the inability to raise capital limits the Group's ability to gear the business which further impacts the future development of the business; • it imposes a material financial burden on current and future employees such that the Group is unable easily to retain and attract senior employees which was a key reason for the establishment of the ESP; and • as a consequence, the ESP represents a material constraint on the Group's ability to grow its business, and to attract and retain senior employees.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 615 | Income Tax Assessment Act 1997 Section 615-10 | Income Tax Assessment Act 1997 Subsection 615-10(1) | Income Tax Assessment Act 1997 Subsections 615-10(1) (a) -(e) | Income Tax Assessment Act 1997 Subdivision 615-B | Income Tax Assessment Act 1997 Section 615-15 | Income Tax Assessment Act 1997 Section 615-20 | Income Tax Assessment Act 1997 Subsection 615-20(1) | Income Tax Assessment Act 1997 Subsection 615-20(2) | Income Tax Assessment Act 1997 Subsection 615-20(3) | Income Tax Assessment Act 1997 Section 615-25 | Income Tax Assessment Act 1997 Section 615-30 | Income Tax Assessment Act 1997 Subsection 615-30(2) | Income Tax Assessment Act 1997 Section 615-65 | Income Tax Assessment Act 1997 Section 960-130 | Income Tax Assessment Act 1997 Subsection 995-1(1)

Reasons for decision: Summary: All references are to the Income tax Assessment Act 1997 unless otherwise specified . 32. Division 615 states that you can choose for transactions under a scheme for reorganising the structure of a company to be tax neutral if, under the scheme you cease to own shares in the company and, in exchange, you become the owner of new shares in another company. 33. Subsection 615-10(1) provides that you can choose to obtain the roll-over if you are a member of a company (the original entity), and under a scheme for reorganising its affairs: (a) a company (the interposed company ) acquires one or more, but not all, of the shares in the original entity; and (b) these are the first shares that the interposed company acquires in the original entity; and (c) you and at least one other entity (the exchanging members ) own all the remaining shares or units in the original entity; and (d) those remaining shares or units are redeemed or cancelled; and (e) each exchanging member receives shares (and nothing else) in the interposed company in return for their shares or units in the original entity being redeemed or cancelled; and the requirements in Subdivision 615-B are satisfied. 34. Subsection 995-1(1) states that a 'member', in relation to an entity, has the meaning given by section 960-130. Section 960-130 states that where an entity is a company, a stockholder is a member of the company. 35. The Exchanging Members hold shares in the Company and are thus members of the Company. ...the expression 'scheme for the reorganisation of the affairs of a unit trust' must be interpreted in the context in which that expression appears. What is meant is the interposition of a company between the unit trust and its unitholders... • The Exchanging Members receive Hold Co shares in exchange for the cancellation of their Voting B Shares and nothing else. • The Company issues X new ordinary shares to Hold Co. (a) Under Step 2 of the Proposed Transaction, Hold Co acquires the Exiting Member's shares in the Company, which constitute one or more but not all of the shares in the Company; and (b) these are the first shares that Hold Co acquires in the Company; and (c) As the ordinary share owned by the Managing Director is cancelled at the same time as the Exiting Member's shares are acquired, the Exchanging Members own all the remaining shares in the original entity (the Company); and (d) The Voting B Shares are cancelled; and (e) each of the Exchanging Members receive shares (and nothing else) in Hold Co in return for their shares in the Company being cancelled. | Detailed Reasoning - Section 615-15 - interposed company must own all the original interests: 45. Section 615-15 states: The interposed company must own all the *shares or units in the original entity immediately after the time (the completion time) all the exchanging members have had their shares or units in the original entity disposed of, redeemed or cancelled under the *scheme. 46. Under the Proposed Transaction, Hold Co (the interposed company) will own all the shares in the Company immediately after the completion time, satisfying the requirements of section 615-15. | Detailed Reasoning - Section 615-20 - requirements relating to your interests in the original entity: 47. Section 615-20 states: (1) Immediately after the completion time, each exchanging member must own: (a) a whole number of shares in the interposed company; and (b) a percentage of the shares in the interposed company that were issued to all the exchanging members that is equal to the percentage of the shares in the original entity that were: i. owned by the member; and ii. disposed of, redeemed or cancelled under the *scheme. (2) The following ratios must be equal: (a) the ratio of: i. the *market value of each exchanging member's *shares in the interposed company; to ii. the market value of the shares in the interposed company issued to all the exchanging members (worked out immediately after the completion time); (b) the ratio of: i. the market value of that member 's shares or units in the original entity that were disposed of, redeemed or cancelled under the *scheme; to ii. the market value of all the shares or units in the original entity that were disposed of, redeemed or cancelled under the scheme (worked out immediately before the first disposal, redemption or cancellation). (3) Either: (a) you are an Australian resident at the time your *shares or units in the original entity are disposed of, redeemed or cancelled under the *scheme; or... • own a whole number of shares in Hold Co, and • as the Hold Co shares are issued on a 1:X ratio, they will hold a percentage of Hold Co shares issued to the Exchanging Members equal to the percentage of the shares they held in the Company that were cancelled under the scheme. • the Exchanging Members are the only shareholders of each company, • each Exchanging Member will hold the same proportion of the total shares in both companies, • the Company shares held by the Exchanging Members that are cancelled under the scheme all have the same rights, and • the Hold Co shares issued to each of the Exchanging Members will all have the same rights. | Detailed Reasoning - Section 615-25 - requirements relating to the interposed company: 53. Section 615-25 states: (1) The shares issued in the interposed company must not be redeemable shares. (2) Each exchanging member who is issued shares in the interposed company must own the shares from the time they are issued until at least the completion time. (3) Immediately after the completion time: a. the exchanging members must own all the shares in the interposed company; or b. entities other than those members must own no more than 5 shares in the interposed company, and the market value of those shares expressed as a percentage of the market value of all the shares in the interposed company must be such that it is reasonable to treat the exchanging members as owning all the shares. 54. Section 615-15 defines the completion time as immediately after all exchanging members have had the shares in the original entity disposed of or cancelled under the scheme. 55. Under the Proposed Transaction: • the shares issued by Hold Co are not redeemable shares. • the Exchanging Members will own the shares in Hold Co from the time they are issued until at least the completion time. • Immediately after the completion time, the Exchanging Members will own all the shares in Hold Co. 56. The requirements of section 615-25 are satisfied. | Detailed Reasoning - Section 615-30 - interposed company must make a particular choice: 57. An entity is taken to have chosen the roll-over if immediately before the completion time the original entity is the head entity of a consolidated group and immediately after the completion time the interposed entity is the head company of the group (subsection 615-10(2). 58. Under subsection 615-30(2), the interposed company must choose within 28 days that a consolidated group continues in existence at and after the completion time with the interposed company as it head (subsection 615-30(2). 59. This requirement will be satisfied if Hold Co chooses that the Company tax consolidated group continued in existence at and after completion time with Hold Co as the head company of the tax consolidated group. This choice would be made within 28 days of completion time.

Relevant facts and circumstances: ABC Pty Ltd (the Company) has the following share classes on issue: | Shareholders of the A Shares and Non-Voting B Shares are referred to collectively as 'Exiting Members' and the shareholders of the Voting B Shares are referred to as 'Exchanging Members'. | These are the only shares on issue in the Company. Shares can only be issued to qualified Group employees under a scheme contained in the Company's Constitution which is intended to benefit the Group business by, among other matters, attracting and retaining senior employees (Existing structure). | The Company is the holding company of DEF Ltd (DEF) and holds 100% of the shares in DEF. | You hold Voting B Shares. | You are an Australian resident for tax purposes. | A new holding company (Hold Co) will be established at the commencement of the Proposed Transactions. The Company will hold the ordinary share in Hold Co's capital which will represent its entire issued share capital, issued for $X. | Exchanging Members holding X% in number of the Voting B Shares will approve the disposal / sale / exchange of all of the shares on issue in the capital of the Company to Hold Co as follows: | The X ordinary share in the Company held by the Managing Director in their individual capacity will be cancelled for no consideration (per the terms of the Company Constitution and requisite shareholder's resolutions) before or at the same time as the sale of the shares by the Exiting Members. | Holders of A Shares will dispose of their shares to Hold Co, the proceeds calculated as $X for each A Share held plus the formula amount to which they are entitled under the Constitution,and they will be paid in cash (initially outstanding as Hold Co's liability subsequently funded out of future capital raising / financing, likely from an external investor). | A Shares make up X of the shares issued in the Company, representing $X of capital contributed to the Company. | Holders of Non-Voting B Shares will dispose of their shares to Hold Co, the proceeds calculated as $X for each Non-Voting B Share held plus the formula amount to which they are entitled under the Company Constitution, and they will be paid in cash (initially outstanding as Hold Co's liability subsequently funded out of future capital raising / financing, likely from an external investor). | Non-Voting B shares make up X of the shares issued by the Company, representing $X of capital contributed to the Company. | The formula under the Company's Constitution prescribes an exit value or proxy formula for calculating the exit value / equivalent market value for the above steps. | The A Shares and Non-Voting B Shares in the Company then held by Hold Co will be cancelled for the original prescribed subscription amount. | In exchange for the cancellation of Voting B Shares, the Exchanging Members will receive an allotment of ordinary shares in Hold Co having a percentage ownership proportionately equal to the amount of their existing ownership of Voting B Shares immediately prior to the rollover (the Exchange). | The Voting B Shares all have equal rights. | Hold Co's ordinary shares will all have equal rights. | Concurrent with the Exchange, the Voting B Shares in the Company will be cancelled for nil cash consideration per the terms of the Company's Constitution and requisite shareholder's resolutions. | Currently there are X Voting B shares on issue in the Company and Hold Co will issue X ordinary shares as part of the Exchange. | At the same time as the cancellation of the Voting B Share: | It is expected that the simplified structure for Hold Co will facilitate future capital raisings and investment from external shareholders and allow a competitive new employee share plan. | As part of the Proposed Transactions, the Company will obtain an independent valuation of its business. That valuation will assess the enterprise value of the business on a market basis and be used for the purposes of determining the exit value of Exiting Members, and the remaining value for Exchanging Members (that will be exchanged proportionately for shares in Hold Co under the Proposed Transactions). | Following the Proposed Transactions outlined above, the intention is for: | The reason for the Proposed Transactions is due to the following key commercial considerations: | The Company's shareholders hold their Company shares on a capital account for tax purposes. | The proposed cancellation of the various shares noted above would be in line with the requirements and timing under the Corporations Act 2001 , the Company's Constitution, and any shareholder resolutions. | Any resolutions made to enact the Proposed Transactions would be made in accordance with the Company's Constitution. | The Company would form an income tax consolidated group with its wholly owned subsidiary as the sole joining entity, prior to the Proposed Transactions. | Hold Co would choose that the tax consolidated group continue in existence at and after completion time with Hold Co as the head company of the tax consolidated group. This choice would be made within 28 days of completion time. | Section 995-1 provides that 'scheme' means 'any arrangement,' or 'any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise.' | The phrase 'scheme for reorganising its affairs' is not described or defined in | section 615-10. However, a similar phrase 'reorganisation of the affairs' (of a unit trust or a company) was used in former sections 160ZZPA, 160ZZPB, 160ZZPC and 160ZZPD of the ITAA 1936. | The ATO discussed the meaning of these provisions in Taxation Ruling TR 97/18 Income tax: capital gains: roll-over relief following reorganisation of the affairs of a unit trust or company - sections 160ZZPA, 160ZZPB, 160ZZPC and 16OZZPD ('TR 97/18'). | In the 'explanations' section, Paragraph 26 of TR 97/18 says: | The interposition of Hold Co between the Company and the Exchanging Members in these steps is a scheme for reorganising the affairs of the Company. | The requirements of subsections 615-10(1) (a) -(e) are met as follows: | The further requirements under Subdivision 615-B are set out in sections 615-15 to 615-30. | In exchange for their shares in the Company being cancelled, the Exchanging Members will receive an allotment of X ordinary shares in Hold Co for every one Voting B Share, they held in the Company. | Accordingly, the requirements of subsection 615-20(1) will be satisfied as immediately after the completion time each of the Exchanging Members will: | The market value ratio of each Exchanging Members Hold Co shares immediately after completion time will equal the market value ratio they held of the Company shares immediately before the first transfer, as at the relevant test times: | Accordingly, the requirements of subsection 615-20(2) will be satisfied | The Exchanging Members will at all relevant times be Australian tax residents, including at the time their shares are transferred to Hold Co. The requirement in subsection 615-20(3) will thus be satisfied.