• Takeovers and mergers, scrip-for-scrip rollover

    If a company in which you own shares is taken over or merges with another company, you may have a capital gains tax (CGT) obligation.

    When a company launches a takeover bid by buying shares in the market, they offer money in return for shares. If a company launches an off-market takeover bid, they don’t always offer cash in return for shares – they can either offer money or scrip (shares), or a combination of these.

    The CGT implications for investors depend on the way the takeover or merger is carried out and whether special rules (scrip-for-scrip rollover) apply. When a takeover involves you receiving shares (or a mixture of shares and cash), you may be able to defer paying CGT until a later CGT event happens under the scrip-for-scrip rollover.

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    CGT treatment when scrip-for-scrip rollover doesn't apply

    When scrip-for-scrip rollover does not apply, you have a CGT event when you exchange (dispose of) your existing shares.

    To correctly calculate the capital gain or loss for your original shares, you'll need to keep records (in addition to the usual records) showing the parties to the arrangement, the conditions of the arrangement, and the capital proceeds. As each takeover or merger arrangement is different, you need to obtain full details of the arrangement from the parties involved.

    Your capital proceeds for your original shares are the total of:

    • the market value of the shares you received at the time of the takeover, and
    • the money you received (if any).

    The cost of acquiring the shares in the takeover or merged company is the market value of your original shares at the time you acquire the other shares, reduced by any cash proceeds.

    See also:

    Example: Takeover where shares were exchanged for shares with a cash proceed and the scrip-for-scrip rollover doesn't apply

    In October 2010, Desiree bought 500 shares in DEF Ltd. These shares are currently worth $2 each. Their cost base is $1.50.

    XYZ Ltd offers to acquire each share in DEF Ltd for one share in XYZ Ltd and 75 cents cash. The shares in XYZ Ltd are valued at $1.25 each. Accepting the offer, Desiree receives 500 shares in XYZ Ltd and $375 cash.

    The capital proceeds received for each share in DEF Ltd is $2 ($1.25 market value of each XYZ Ltd share plus 75 cents cash). Therefore, as the cost base of each DEF Ltd share is $1.50, Desiree will make a capital gain of 50 cents ($2 − $1.50) on each share – a total of $250.

    The cost base of the newly acquired XYZ Ltd shares is the market value of the shares in DEF Ltd ($2) less the cash amount received ($0.75); that is, $1.25 each or a total of $625 (500 × $1.25).

    End of example

    Scrip-for-scrip rollover

    If a company in which you owned shares was taken over and you received new shares in exchange for your original shares, you may be entitled to a scrip-for-scrip rollover. The rollover allows you to defer paying CGT until a later CGT event happens (for example you later dispose of the shares you acquired in the takeover). The rollover doesn't apply if you made a capital loss.

    The rollover can be a full rollover, or a partial rollover if you received a combination of shares and money in exchange for your original shares.

    You may also be eligible for this rollover if you exchange a unit or other interest in a fixed trust for a similar interest in another fixed trust. However, the rollover 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.

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

    For companies, the arrangement may qualify for the scrip-for-scrip rollover if:

    • holders of voting interests in the target entity can participate in the merger or takeover on substantially the same terms
    • it includes a takeover bid that does not contravene key provisions in Chapter 6 of the Corporations Act 2001, or
    • if the target entity is a company – it includes a scheme of arrangement approved by a court under Part 5.1 of the Corporations Act.

    For trusts, an arrangement may qualify if:

    • all owners of trust voting interests in the original entity or, where there are no voting interests, all owners of units or other fixed interests can participate, or
    • it includes a takeover bid that does not contravene the Corporations Act.

    There are special rules if a company or trust has a small number of shareholders or beneficiaries or there is a significant common stakeholder. If the company or trust doesn't let you know, you will need to ask them whether these conditions have been met.

    The rollover 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 of the original interest.

    You can apply the CGT discount when you dispose of new shares, providing the combined period in which you owned the original shares and the new shares is at least 12 months. The same applies to units in a trust. Note that you have to deduct any capital losses (including unapplied net capital losses from earlier years) from your capital gains before applying the CGT discount.

    Example: Scrip-for-scrip rollover

    Stephanie owns ordinary shares in Reef Ltd. On 28 February 2017, she accepted a takeover offer from Starfish Ltd of one ordinary share and one preference share for each Reef Ltd share. The market value of the Starfish Ltd shares just after Stephanie acquired them was $20 for each ordinary share and $10 for each preference share.

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

    The offer made by Starfish Ltd satisfied all the requirements for scrip-for-scrip rollover.

    If the rollover didn't apply, Stephanie would have made a capital gain per share of:

    $30 capital proceeds minus $15 cost base = $15 capital gain

    The scrip-for-scrip rollover allows Stephanie to disregard the capital gain. The cost base of the Starfish Ltd shares is the cost base of the Reef Ltd shares.

    Note: Apportioning the cost base

    As the exchange is one share in Reef Ltd for two shares in Starfish Ltd, the cost base of the Reef Ltd share needs to be apportioned between the ordinary share and the preference share.

    Cost base of ordinary share:
    $20 ÷ $30 × $15 = $10

    Cost base of preference share:
    $10 ÷ $30 × $15 = $5

    End of example

    Partial rollover

    You may only be eligible for a partial rollover if you exchange shares, units or interests for similar interests in another entity (replacement interest) plus something else, usually cash.

    This is because the rollover applies only to the replacement interest. You'll need to apportion the cost base of the original interest between the replacement interest and the cash (or other proceeds not eligible for rollover).

    If your original shares, units or other interests were acquired before 20 September 1985 (pre-CGT), you're not eligible for scrip-for-scrip rollover. Instead, you acquire the replacement interest at the time of the exchange and the replacement interest is no longer a pre-CGT asset. However, if the arrangement is one that would otherwise qualify for scrip-for-scrip rollover, the cost base of the replacement interest is its market value just after the acquisition.

    Example: Partial scrip-for-scrip rollover

    Gunther owns 100 shares in Windsor Ltd, each with a cost base of $9. He accepts a takeover offer from Regal Ltd of one Regal share plus $10 cash for each share in Windsor. Gunther receives 100 shares in Regal and $1,000 cash. Just after he is issued shares in Regal, each share is worth $20.

    Gunther has received $10 cash for each of his 100 Windsor shares and so has $1,000 to which the rollover doesn't apply.

    In this case, it's 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 (cash plus value of shares received). That is:

    Cash

    $1,000

    Divided by total proceeds: cash and value of shares received

    $3,000

    Multiplied by the cost base

    $900

    Equals proportion of cost base for which cash was received

    $300

    Gunther's capital gain is as follows:

    $1,000 cash − $300 cost base = $700 capital gain

    Gunther calculates the cost base of each of his Regal shares as follows:

    ($900 − $300) ÷ 100 = $6

    End of example
    Last modified: 17 Jul 2017QC 52225