• 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

    If a company in which you owned shares was taken over and you received new shares in the takeover company, you may be entitled to scrip-for-scrip roll-over. You may also be eligible for this roll-over if you exchange a unit or other interest in a fixed trust, for a similar interest in another entity.

    Scrip-for-scrip 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 group of which it is a member) becoming the owner of 80 per cent or more of the original company or trust.

    For companies, the arrangement must be one in which all owners of voting shares in the original entity can participate. For trusts, this means 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.

    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 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 of the original interest.

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

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

    If your original shares, units or other interests were acquired before 20 September 1985 (pre-CGT), you are not eligible for scrip-for-scrip roll-over. Instead, you acquire the replacement interest at the time of the exchange and the replacement interest is no longer a pre-CGT asset. However, the cost base of the replacement interest is its market value just after the acquisition.

    Example

    Partial scrip-for-scrip roll-over

    Gunther owns 100 shares in Windsor Ltd, each with a cost base of $9. He accepts a takeover offer from Regal Ltd which provides for Gunther to receive one Regal share plus $10 cash for each share in Windsor. Gunther receives 100 shares in Regal and $1,000 cash. Just after Gunther 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 ineligible capital 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

    Gunther's capital gain is as follows:

    $1,000

    -

    $300

    =

    $700

    Ineligible proceeds (cash)

     

    cost base

     

    capital gain

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

    $900 -$300   100 = $6

    Example

    Scrip-for-scrip roll-over

    Stephanie owns ordinary shares in Reef Ltd. On 29 February 2002, she accepted a takeover offer from Starfish Ltd under which she received one ordinary share and one preference share for each Reef share. The market value of the Starfish shares just after Stephanie acquired them was $20 for each ordinary share and $10 for each preference share.

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

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

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

    $30

    -

    $15

    =

    $15

    Capital proceeds

     

    cost base

     

    capital gain

    Scrip-for-scrip roll-over allows Stephanie to disregard the capital gain. The cost base of the Starfish 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 2 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 X $15 = $10

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

    Last modified: 06 Oct 2009QC 27417