ATO Interpretative Decision
ATO ID 2003/893
Income Tax
Capital gains tax: scrip for scrip rollover - redeemable preference shares exchanged for ordinary sharesFOI status: may be released
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Is the taxpayer, a shareholder who owned redeemable preference shares in a company, eligible to choose scrip for scrip rollover under Subdivision 124-M of the Income Tax Assessment Act 1997 (ITAA 1997) if they exchanged those shares for ordinary shares in another company?
Decision
Yes. 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.
Facts
The taxpayer owned 1,000 redeemable preference shares in a company (the original company) that they acquired after 19 September 1985. The redeemable preference shares are treated as 'debt interests' for the purposes of Division 974 of the ITAA 1997.
After 9 September 1999, another company (the acquiring company) acquired all of the shares in the original company under a scheme of arrangement in exchange for the issue of ordinary shares.
As a result, the taxpayer received 1,000 ordinary shares in the acquiring company.
The taxpayer and the acquiring company dealt with each other at arm's length.
The taxpayer satisfied all of the other scrip for scrip rollover requirements in subsection 124-780(1) of the ITAA 1997.
Reasons for Decision
A taxpayer can choose scrip for scrip rollover under paragraph 124-780(3)(d) of the ITAA 1997 if, among other conditions, they exchange:
- •
- shares in a company (the original shares) for shares in another company (the replacement shares) - subparagraph 124-780(1)(a)(i), and
- •
- if the taxpayer and the other company do not deal with each other at arm's length, the conditions in subsection 124-780(5) are satisfied (paragraph 124-780(1)(d)).
One of the conditions in subsection 124-780(5) is that the replacement shares carry the same kind of rights and obligations as those attaching to the original shares (paragraph 124-780(5)(b)).
Paragraph 124-780(1)(d) is not relevant as the taxpayer and the other company were dealing with each other at arm's length.
The Explanatory Memorandum to the New Business Tax System (Capital Gains Tax) Act 1999 indicates that rollover is available if 'a share in a company is exchanged for a share in another company ...even if the rights attaching to the share ... are different'.
There is nothing in Subdivision 124-M of the ITAA 1997 that prevents shares that are treated as debt interests for Division 974 purposes from being eligible for scrip for scrip rollover.
The taxpayer may therefore choose scrip for scrip rollover as all of the requirements in subsection 124-780(1) of the ITAA 1997 are met. The effect of the rollover is that any capital gain arising from the original shares is deferred until a CGT event happens to the replacement shares.
Date of decision: 17 September 2003Year of income: year ended 30 June 2003
Legislative References:
Income Tax Assessment Act 1997
Subdivision 124-M
subsection 124-780(1)
subparagraph 124-780(1)(a)(i)
paragraph 124-780(1)(a)
paragraph 124-780(1)(d)
paragraph 124-780(3)(d)
subsection 124-780(5)
paragraph 124-780(5)(b)
Division 974
Other References:
Explanatory Memorandum to the New Business Tax System (Capital Gains Tax) Act 1999
Keywords
Capital gains tax
CGT event
CGT exchange of shares in one company for shares in another company
CGT roll-over relief
Redeemable preference shares
Scrip for scrip roll-over
ISSN: 1445-2782