• Scrip for scrip roll-over*

    Attention

    Warning:

    This information may not apply to the current year. Check the content carefully to ensure it is applicable to your circumstances.

    End of attention

    * At the time of printing, changes to the law relating to scrip for scrip roll-over were still before Parliament. This information is indicative advice based on the proposed legislation.

    You may be eligible for scrip for scrip roll-over if you exchange shares in a company, a unit or other interest in a fixed trust, or other interests such as options for a similar interest in another entity. This situation would typically arise because of a takeover. Roll-over is not available if a share is exchanged for a unit or other interest in a fixed trust, or if a unit or other interest in a fixed trust is exchanged for a share.

    You can only choose the roll-over if you have made a capital gain from such an exchange on or after 10 December 1999. Roll-over does not apply to a capital loss.

    Roll-over is only available if the exchange is in consequence of an arrangement that results in the acquiring entity (or the wholly owned company group of which it is a member) becoming the owner of 80 per cent or more of the original company or trust.

    An entity (or group) can become the owner of 80 per cent or more of the relevant interests in the original entity as a result of an acquisition of additional interests or the cancellation of interests held by others.

    For companies, the arrangement must be one in which at least all owners of voting shares in the original entity can participate. For trusts, it must be one in which at least all owners of trust voting interests in the original entity (or, where there are no voting interests, of units or other fixed interests) can participate.

    There are special rules if a company or trust has a small number of shareholders or beneficiaries or there is a significant common stakeholder.

    You will need to seek information from the company or trust about whether the conditions listed have been satisfied.

    The roll-over allows you to disregard the capital gain made from the original shares, units or other interest. You are taken to have acquired the replacement shares, units or other interest for the cost base or a portion of the cost base of the original interest. The cost base of the original interest is apportioned if an original interest is not exchanged for a single replacement interest. For example, one share may be exchanged for 2 shares.

    Example

    Lila owns ordinary shares in Reef Ltd. On 29 February 2000 she accepts a takeover offer from Heron Ltd under which she receives one ordinary share and one preference share for each Reef share. The market value of the Heron shares just after Lila acquires them is $20 for each ordinary share and $10 for each preference share.

    The cost base of each Reef share just before Lila ceased to own them was $15.

    The offer made by Heron Ltd satisfies all the requirements for scrip for scrip roll-over.

    If roll-over did not apply, Lila would have made a capital gain per share of:

    Capital proceeds

    $30

    Less cost base

    $15

    Capital gain

    $15

    Scrip for scrip roll-over allows Lila to disregard the capital gain and the cost base of the Heron shares is the cost base of the Reef Ltd shares.

    Note: As the exchange is 1 share in Reef Ltd for 2 shares in Heron Ltd, the cost base of the Reef share needs to be apportioned between the ordinary share and the preference share.

    Cost base of ordinary share: ($20/$30) x $15 = $10

    Cost base of preference share: ($10/$30) x $15 = $5

    You may only be eligible for partial roll-over if you exchange shares, units or interests for similar interests in another entity plus something else, usually cash. Roll-over does not apply to the extent that an offer provides for the payment of something else other than the replacement interest. The cost base of the original interest must be apportioned between the replacement interest and the proceeds not eligible for roll-over.

    Example

    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 share plus $10 cash for each share in Windsor. Patrick receives 100 shares in Regal and $1,000 cash. Just after Patrick is issued shares in Regal each is worth $20.

    Patrick has received $10 cash for each of his 100 Windsor shares and so has ineligible proceeds of $1,000.

    In this case it is reasonable to allocate a portion of the cost base of the original shares having regard to the proportion that the cash bears to the total proceeds. That is:

    $1,000
    $3,000

    x $900 = $300

    Patrick makes a capital gain of:

    Ineligible proceeds (cash)

    $1,000

    Less cost base

    $300

    Capital gain

    $700

    The cost base of each of Patrick's Regal shares is calculated as follows:

    $900 -$300
    100

    = $6

    If your original shares, units or other interest were acquired prior to 20 September 1985, you acquire the replacement interest at the time of the exchange. The interest is no longer a pre-CGT asset. However, the cost base of the replacement interest is its market value just after the acquisition.

    There is a limited form of roll-over if disposal of a pre-CGT interest results in a capital gain.

    Last modified: 18 Sep 2009QC 18323