ATO Interpretative Decision
ATO ID 2004/800
Income tax
Capital Gains Tax: roll-overs - scrip for scrip - arrangement on substantially same terms for owners of interests of a particular typeFOI 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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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
Are all the ordinary shares in a company 'interests of a particular type' for the purposes of paragraph 124-780(2)(c) of the Income Tax Assessment Act 1997 (ITAA 1997) if one shareholder has additional rights in respect of their shares acquired under a shareholders' agreement?
Decision
Yes. All of the ordinary shares are interests of the same type for the purposes of paragraph 124-780(2)(c) of the ITAA 1997 even though one shareholder has collateral rights in relation to their shares.
Facts
The issued share capital of Company A consists of one class of ordinary shares.
Company A and its shareholders entered into a shareholders' agreement under which shareholder C acquired ordinary shares in Company A as well as additional rights set out in the agreement. The additional rights granted to C included the following:
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- shareholders of Company A could not vote to alter any of the rights attaching to the shares, declare or pay an interim or final dividend, change the name of the company or list the company on a stock exchange without the prior consent of C
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- on winding up of Company A, C had the right to receive funds in priority to any distribution to other shareholders, and
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- shareholders of Company A could not dispose of any of their shares without the prior written consent of C.
These rights did not pass with the transfer of C's shares.
Company A's constitution does not have a provision dealing with the variation of share rights, nor were any special resolutions of the company made to vary the rights attaching to its ordinary class shares.
In the 2003-04 income year Company B made an offer to acquire all of the shares in Company A. The offer provided that all of the members of Company A (except C) would receive ordinary shares in Company B in exchange for their shares in Company A. However, in recognition of their additional rights under the existing shareholders' agreement, C was offered preference shares in Company B in exchange for their shares in Company A.
Reasons for Decision
One of the conditions that must be satisfied for a shareholder to qualify for scrip for scrip roll-over under Subdivision 124-M of the ITAA 1997 is that participation in the scrip for scrip arrangement must have been on substantially the same terms for all the owners of interests of a particular type in the original entity (paragraph 124-780(2)(c) of the ITAA 1997).
In this case the offer made to C was different from the offer made to the remaining ordinary shareholders. It is therefore necessary to determine whether the shares owned by C were of a different type to those owned by the other members of Company A.
Unless the company's constitution provides otherwise, there is a presumption that all shares in a company have the same rights Birch v. Cropper (1889) 14 App Cas 525 at 543. The procedures to be followed in order to vary rights attaching to shares are set out in section 246B of the Corporations Act 2001. Generally, in order to vary share rights the company must comply with the variation procedures set out in its constitution or, in the absence of such procedures, pass a special resolution.
In this case the share capital of Company A consists of only one class of shares. There is no evidence that as part of the arrangement any change was made to the company's constitution to vary the rights attaching to a particular shareholder's share. Further, no special resolutions of the company were made to change the rights of any ordinary shareholders. The additional rights were granted to C under a separate agreement and do not form part of the rights attaching to the share. As a result, it is considered that all the ordinary shareholders in Company A own interests of the same type.
Accordingly, as different offers have been made to C and the remaining ordinary shareholders in Company A, the requirement that each owner of an interest of a particular type is able to participate in the arrangement on substantially the same terms in paragraph 124-780(2)(c) of the ITAA 1997 has not been satisfied in this case. Rollover is not available under Subdivision 124-M of the ITAA 1997 for any of the shareholders.
Date of decision: 21 July 2004Year of income: Year ended 30 June 2004
Legislative References:
Corporations Act 2001
section 246B
Subdivision 124-M
paragraph 124-780(2)(c)
Case References:
Birch v. Cropper
(1889) 14 App Cas 525
ATO ID 2003/177
Keywords
arrangement
capital gains
CGT roll-over relief
scrip for scrip roll-over
shareholders
ISSN: 1445-2782