Edited version of private ruling

Authorisation Number: 1011471025858

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Ruling

Subject: Roll-over relief

Question 1

Can the rulee choose roll-over relief under Subdivision 124-G of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of the exchange of its shares of Company A and Company B?

Answer

Yes

Question 2

Can the rulee choose roll-over relief under Subdivision 124-M of the ITAA 1997 in respect of the exchange of its shares of Company C?

Answer

Yes

This ruling applies for the following period

1 July 2009 to 30 June 2011

The scheme commenced on

The scheme has not yet commenced

Relevant facts

Company A, Company B and Company C are Australian resident companies.

The shares in Company A and Company B are held in the same proportion by a number of entities ('the original interest holders'), of which, the rulee is one of these entities.

Company B is the legal and beneficial owner of a number of shares in Company C. The remaining shares are owned by the original interest holders in the same proportion as their respective interests in Company A and Company B.

Each original interest holder's interest in Company A, Company B and Company C was acquired on or after 20 September 1985 (that is, they are post-CGT interests).

The Proposed Restructure

The parties propose to undertake a restructure (the proposed restructure) in which a newly incorporated company (Company D) will be interposed between the original interest holders and Company A, Company B and Company C. The creation of the interposed company is to facilitate future investment in the business and simplify the business structure.

The proposed restructure will be implemented by the following steps:

Step 1

Company D will be incorporated. At the time of its incorporation, its issued share capital will comprise a number of ordinary shares (the original Company D shares) which initially will be held by nominees.

Step 2

Company D will issue a number of shares to the original interest holders in exchange for all of their shares in Company A and Company B. The number of Company D shares received by each original interest holder will be in proportion with their holdings in each of Company A and Company B.

The original Company D shares will also be redeemed for their nominal value before the completion of Step 2.

Step 3

Company D will issue shares to the original interest holders in exchange for their shares in Company C. Original interest holders will receive shares in proportion with their holdings in Company D received at Step 2 of the scheme.

The market value of shares issued by Company D will equal the market value of the Company C shares exchanged by the original interest holders.

Company D will not acquire any shares in Company C that are currently owned by Company B.

Choice of Roll-over

Each original interest holder will, jointly with Company D, choose roll-over under section 124-780 of the ITAA 1997 in respect of their exchange of shares in Company C.

Each original interest holder will inform Company D in writing of the CGT cost base of its shares in Company B worked out just before the disposal.

Other Information

All of the shares issued by Company D are fully paid shares, are non-redeemable, and carry the same rights and obligations as those attaching to the shares in Company A, Company B and Company C.

For the purposes of section 318 of the Income Tax Assessment Act 1936 (ITAA 1936), a number of the original interest holders are considered associates.

Each of the original interest holders will make a capital gain from the exchange of its shares in Company A, Company B and Company C.

The original interest holders are all residents at the time of the exchange of their shares in Company A and Company B.

A capital gain an original interest holder may make from its Company C shares will not be disregarded otherwise than because of a roll-over.

Company D will not make a choice under subsection 124-795(4) of the ITAA 1997 that scrip for scrip rollover will not apply to the original interest holder's interest when they exchange their Company C shares for replacement shares in Company D.

The market value of Company C is less than 80% of the combined market values of Company A, Company B and Company C.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 124-G

Income Tax Assessment Act 1997 Subdivision 124-M

Income Tax Assessment Act 1936 Section 318

Reasons for decision

All legislative references hereafter are to the Income Tax Assessment Act 1997 unless otherwise indicated.

Question 1

Summary

As the proposed restructure meets the requirements of Subdivision 124-G, the original interest holders in Company A and Company B can choose roll-over relief under Subdivision 124-G.

Detailed reasoning

Division 124 prescribes the circumstances in which a replacement asset roll-over is available. A replacement asset roll-over allows a taxpayer to defer the making of a capital gain or loss from one CGT event until a later CGT event happens. It involves the taxpayer's ownership of one CGT asset ending and the taxpayer acquiring another one.

Requirements for roll-over ¥ Subdivision 124-G

Subdivision 124-G deals with the exchange of shares in one company (the original company) for shares in another company (the interposed company), and allows roll-over relief to the shareholders of a company where there is a reorganisation of the company's affairs so that another company is interposed between the company and its shareholders.

A reorganisation for the purposes of 124-G can be effected in two ways;

· by the disposal of shares in the original company in exchange for the issue of shares in the interposed company; or

· by the redemption or cancellation of shares in the original company in exchange for the shares in the interposed company.

The proposed restructure falls into the first of these categories.

An entity can choose roll-over for a reorganisation involving a disposal if the following conditions are satisfied:

(a) there is a disposal of shares which meets the requirements of section 124-360;

(b) the 'other requirements' of section 124-365 are satisfied; and

(c) the further requirements of section 124-380 are satisfied.

These conditions are explained below.

Disposal of shares meeting the requirements of section 124-360

The requirements of section 124-360 are that an entity can choose roll-over in the following circumstances:

(a) Entity is a member of a company

Paragraph 124-360(1)(a) requires the presence of an entity that is a member of a company (the original company).

For the purposes of this provision, each original interest holder is a member of Company A and Company B, each of which is an 'original company' for the purposes of paragraph 124-360(1)(a).

(b) Exchanging members own all the shares in the original company

Paragraph 124-360(1)(b) requires that the entity and at least one other entity (the exchanging members) own all the shares in the original company.

The original interest holders are 'exchanging members' who collectively own all the shares in Company A and Company B.

(c) Exchange of shares in original company under a scheme for reorganising its affairs

Paragraph 124-360(1)(c) requires that, under a scheme for reorganising its affairs, the exchanging members dispose of all their shares in the original company to another company (the interposed company) in exchange for shares in the interposed company (and nothing else).

The proposed restructure involves two schemes for reorganising the affairs of a company: a scheme for reorganising the affairs of Company A and a scheme for reorganising the affairs of Company B.

The requirements of paragraph 124-360(1)(c) are satisfied because, under the two schemes, the exchanging members will dispose of all their shares in Company A and Company B to Company D (the interposed company) in exchange for shares in Company D. They receive nothing else from the exchange apart from those shares.

It is noted that, under Subdivision 124-G, roll-over is not precluded where two schemes for reorganising the affairs of a company are undertaken concurrently. This is evident from paragraph 6 of the Addendum to Taxation Ruling TR 97/18. That Ruling also states (in paragraph 2) that, although the conditions for roll-over are expressed in the singular form, this does not mean that the reorganisation of the affairs of more than one entity will be ineligible for relief. Rather, it is considered that the legislation intended for each entity to be tested for compliance with the roll-over requirements independently of any other entity whose affairs are also reorganised and interposes the same shelf company.

Requirements of section 124-365

The requirements of section 124-365 are as follows:

(a) Interposed company owns all the shares in the original company at completion time

Subsection 124-365(1) requires that the interposed company must own all the shares in the original company just after all the exchanging members have disposed of their shares in the original company (the completion time).

This requirement is satisfied as the interposed company (Company D) will own all the shares in Company A and Company B just after the exchanging members have disposed of the shares in those companies.

(b) Number and percentage of shares in the interposed company

Subsection 124-365(2) requires that just after the completion time, each exchanging member must own:

(a) a whole number of shares in the interposed company; and

(b) a percentage of the shares in the interposed company that were issued to all the exchanging members that is equal to the percentage of the shares in the original company (that were disposed of to the interposed company) that the member owned.

This condition is satisfied as each original interest owner is an exchanging member who will own a whole number of shares in Company D, and the percentage of shares in Company D that will be issued to all original interest holders will equal the percentage of shares they originally held in Company A and Company B.

(c) Ratio of market values of shares owned by exchanging members

Subsection 124-365(3) requires that the ratio of:

the market value of each exchanging member's shares in the interposed company to the market value of the shares in the interposed company issued to all the exchanging members (worked out just after the completion time);

is equal to the ratio of:

the market value of that member's shares in the original company that were disposed of to the interposed company to the market value of all the shares in the original company that were disposed of to the interposed company (worked out just before the first disposal).

This condition is satisfied in the present case as each exchanging member will receive shares in the interposed company in the same proportion as their holding in both Company A and Company B, the original company. As each share issued by the original company carries the same rights and obligations, it follows that the proportionate market value of the shares acquired by each original interest holder in Company D will be the same as that entity's shares in Company A and Company B.

(d) Residency requirement

Subsection 124-365(4) also imposes certain additional requirements for exchanging members who are foreign residents at the time of the disposal. These conditions do not apply to the proposed restructure as none of the original interest holders will be a foreign resident at that time.

Further requirements of section 124-380

The applicable requirements of section 124-380 are as follows:

(a) Shares in the interposed company must not be redeemable

Subsection 124-380(1) requires that shares in the interposed company must not be redeemable shares.

This condition is satisfied as the shares that will be issued by Company D will not, according to the definition of 'redeemable shares' in section 995-1, be 'liable to be redeemed' either at the option of Company D or otherwise.

(b) Shares in interposed company owned until completion time

Subsection 124-380(2) requires that each exchanging member who is issued shares in the interposed company must own the shares from the time they are issued to the completion time.

This condition is satisfied as each exchanging member who is issued shares in Company D will own the shares from the time they are issued to the completion time (that is, just after all the exchanging members dispose of their shares in Company A and Company B).

(c) Exchanging members own (or can be taken to own) all the shares in the interposed company

Subsection 124-380(3) requires alternatively that just after the completion time:

(a) the exchanging members must own all the shares in the interposed company; or

(b) entities other than those members must own no more than 5 shares in the interposed company and the market value of those shares expressed as a percentage of the market value of all the shares in the interposed company is such that it is reasonable to treat the exchanging members as owning all the shares.

The proposed restructure will satisfy the first alternative. As the two original Company D shares will have been redeemed before the completion time the exchanging members will collectively own all the shares in Company D just after this time.

Consequences of choosing roll-over

The consequences under Subdivision 124-G for an original interest holder who chooses roll-over will be as follows:

(a) any capital gain or capital loss that is made on the disposal of the shares in exchange for Company D shares is disregarded (subsection 124-10(2)); and

(b) the first element of the cost base and reduced cost base of each Company D share acquired under the exchange is equal to the sum of the cost bases of the corresponding Company A and Company B share for which it was exchanged (subsection 124-10(3)).

Question 2

Summary

As the conditions in Subdivision 124-M have been satisfied, Company C shareholders will be eligible to choose scrip for scrip roll-over relief under Subdivision 124-M.

Detailed reasoning

Requirements for scrip for scrip roll-over - Subdivision 124-M

Subdivision 124-M contains a number of conditions for, and exceptions to, a shareholder being eligible to choose scrip for scrip roll-over. The main conditions and exceptions that are relevant to the circumstances of the proposed restructure are:

(a) shares are exchanged for shares in another company;

(b) the exchange occurs as part of a single arrangement;

(c) conditions for roll-over are satisfied;

(d) further conditions are not applicable; and

(e) exceptions to obtaining scrip for scrip roll-over are not applicable.

These conditions are explained below.

Shares are exchanged for shares in another company

Subparagraph 124-780(1)(a)(i) requires an entity to exchange a share in a company for a share in another company.

This requirement is satisfied as, under the proposed restructure, each original interest holder will receive shares in Company D in exchange for the disposal of their shares in Company C.

The exchange occurs as part of a single arrangement

Paragraph 124-780(1)(b) requires that shares in an entity be exchanged in consequence of a single arrangement. In the context of the scrip for scrip roll-over provisions, the proposed restructure (which includes the acquisition by Company D of the shares in Company C) constitutes a single arrangement. The single arrangement must also satisfy the conditions set out below.

(a) 80% ownership

Paragraph 124-780(2)(a) requires that shares in an entity be exchanged as a consequence of a single arrangement that results in another entity becoming the owner of 80% or more of the voting shares in the original entity.

Subparagraph 124-780(2)(a)(ii) provides that this requirement will be satisfied if one or more companies that are members of a wholly-owned group increase the percentage of voting shares they hold in the original entity to 80% or more.

For the purposes of sub-paragraph 124-780(2)(a)(ii) Company D will, at the relevant time, be a member of a wholly-owned group that includes Company B. Accordingly, the arrangement will result in Company D (the acquiring entity) and members of its wholly-owned group (namely, Company B) together becoming the owner of more than 80% of the voting shares in Company C. The ordinary shares in Company C satisfy the definition of 'voting share' in subsection 995-1(1).

Therefore, the requirements of subparagraph 124-780(2)(a)(ii) have been met under the proposed restructure.

(b) All voting share owners participate

Paragraph 124-780(2)(b) requires that the exchange of shares must be in consequence of a single arrangement in which at least all owners of voting shares in the original entity (apart from the acquiring entity or members of the acquiring entity's wholly-owned group) could participate.

This requirement is satisfied because all the owners of voting shares in Company C will be entitled to participate in the proposed restructure (apart from Company B which, at the relevant time, will be a member of the same wholly-owned group as the acquiring entity).

(c) Participation is on substantially the same terms

Paragraph 124-780(2)(c) requires that the exchange is in consequence of an arrangement in which participation is available on substantially the same terms for all of the owners of interests of a particular type in the original entity.

This requirement is satisfied because the proposed restructure will be conducted on identical terms for each of the original interest holders.

Conditions for roll-over are satisfied

Paragraph 124-780(1)(c) requires that the conditions for roll-over outlined in subsection 124-780(3) must be met. These conditions must be met in relation to each Company C share for which scrip for scrip roll-over is chosen.

The conditions in subsection 124-780(3) are set out below.

(a) The original interests are post-CGT shares

Paragraph 124-780(3)(a) requires the original interest holder to have acquired its original interest on or after 20 September 1985 (that is, post-CGT).

This requirement is satisfied as each original interest holder acquired their Company C shares on or after 20 September 1985.

(b) An original interest holder would otherwise make a capital gain

Paragraph 124-780(3)(b) requires that, apart from the roll-over, the original interest holder would make a capital gain from a CGT event happening in relation to its original interest.

This condition is satisfied as the capital proceeds from the disposal of each Company C share will be more than its cost base in the hands of the relevant original interest holder.

(c) The original interest holders receive replacement interests in the acquiring entity or the ultimate holding company

Paragraph 124-780(3)(c) requires that the replacement interest is in the acquiring entity or the ultimate holding company of the wholly-owned group which includes the acquiring entity.

This requirement is satisfied as the original interest holders will receive shares in Company D which, at the relevant time, will be both the acquiring entity and the ultimate holding company of a wholly-owned group as that term is defined in section 995-1.

(d) An original interest holder can choose scrip for scrip roll-over

Paragraph 124-780(3)(d) requires that the original interest holder chooses the roll-over or, if section 124-782 applies to it for the arrangement, the original interest holder and the replacement entity jointly choose to obtain the roll-over. Section 124-782 provides special rules that apply if an original interest holder is a significant stakeholder or a common stakeholder for an arrangement.

Relevantly, an original interest holder is a common stakeholder for an arrangement if it had a common stake in the original entity just before the arrangement started and a common stake in the replacement entity just after the arrangement was completed: subsection 124-783(3). According to subsection 124-783(9), a common stake is present when two or more entities have 80% or more of the voting, dividend and capital rights in both the original entity and the replacement entity.

Under the proposed restructure:

· the original interest holders, together with Company B, own 100% of the voting, dividend and capital rights of original entity (Company C); and

· the original interest holders, together with Company B, will own 100% of the voting, dividend and capital rights of the replacement entity (Company D).

Accordingly, each of the original interest holders is a common stakeholder for the arrangement.

Further to the above, it is noted that Company B is, according to the test in section 318 of the ITAA 1936, an 'associate' of a number of the original interest holders. The 'common stake' test in subsection 124-783(9) is applied on an associate-inclusive basis. Therefore, Company B's interest is counted as part of the 80% or more common holding of interests in Company C just before the arrangement started. This is an additional basis for concluding that the original interest holders are common stakeholders for the arrangement.

Under the proposed restructure each of the original interest holders will choose to obtain the roll-over jointly with Company D. Further, each of the original interest holders will inform Company D in writing of its cost base of its shares in Company C worked out just before the exchange. Accordingly, the original interest holders will satisfy the additional conditions in paragraphs 124-780(3)(d) and (e).

Further conditions are not applicable

Subsection 124-780(4) provides that the additional requirements in subsection 124-780(5) must be satisfied if the original interest holder and the acquiring entity did not deal with each other at arm's length and:

(a) neither the original entity nor the replacement entity had at least 300 members just before the arrangement started (paragraph 124-780(4)(a)); or

(b) the original interest holder, the original entity and the acquiring entity were all members of the same linked group just before the arrangement started (paragraph 124-780(4)(b)).

Under the proposed restructure, neither the original entity (Company C) nor the replacement entity will have at least 300 members just before the arrangement starts. Accordingly, the application of the additional requirements in subsection 124-780(5) will turn on whether original interest holders dealt with each other at arm's length.

The definition of 'arm's length' is informed by subsection 995-1(1) which provides that:

In determining whether parties deal at arm's length, consider any connection between them and any other relevant circumstances.

The Commissioner is therefore required to consider not only the relationship or connection between the shareholder and the acquiring entity but also the nature and the circumstances of the dealing.

When determining whether the shareholder dealt with the acquiring entity at arm's length it is the collective bargaining power of the group of shareholders against the acquiring entity which must be considered (Elmslie and Others v. Commissioner of Taxation (1993) 26 ATR 611).

As the proposed restructure will occur in accordance with terms and conditions that will be agreed between the original interest holders, it is considered that Company D will not bargain as a party dealing at arm's length with the original interest holders.

Accordingly, for the original interest holders to be able to choose scrip for scrip roll-over, they must satisfy the conditions of subsection 124-780(5). Those conditions are:

(a) the market value of the original interest holder's capital proceeds for the exchange is at least substantially the same as the market value of its original interest; and

(b) the original interest holder's replacement interest must carry the same kind of rights and obligations as those attached to its original interest.

Under the proposed restructure, Company D shares will be equal in market value to Company C shares for which they are exchanged. Further, the Company C and Company D shares will have identical rights and obligations attaching to them. Accordingly, the requirements of subsection 124-780(5) are satisfied.

Exceptions to obtaining scrip for scrip roll-over are not applicable

Section 124-795 contains a number of exceptions where scrip for scrip roll-over cannot be chosen. The exceptions in subsection 124-795 are as follows:

(a) Residency requirement

Subsection 124-795(1) provides that a roll-over is not available if, just before the disposal, the original interest holder was a foreign resident, unless just after the acquisition of the replacement interest, the replacement interest is 'taxable Australian property' as defined in section 855-15.

This requirement is not applicable as none of the original interest holders is a foreign resident. It is unnecessary to consider whether the replacement interests are taxable Australian property.

(b) A capital gain cannot (apart from a roll-over) be otherwise disregarded

Paragraph 124-795(2)(a) provides that the roll-over is not available if any capital gain you might make from your replacement interest would be disregarded (except because of a roll-over).

This condition is satisfied as any capital gains that the original interest holders may make from the disposal of their replacement shares in Company D cannot be otherwise disregarded.

Paragraph 124-795(2)(b) provides that roll-over is not available if the original interest holder and the acquiring entity are members of the same wholly-owned group just before the original interest holder stops owning their original interest, and the acquiring entity is a foreign resident.

This exception does not apply as the original interest holders and Company D will not be members of the same wholly-owned group just before the proposed restructure will be implemented. In addition, Company D is not a foreign resident company.

(c) No roll-over available to Company C shareholders under either Division 122 or Subdivision  124-G

Subsection 124-795(3) provides that scrip for scrip roll-over is not available if a roll-over can be chosen under Division 122 or Subdivision 124-G.

This exception does not apply as neither of the roll-overs in Division 122 or Subdivision 124-G are available to the original interest holders in respect of the disposal of their Company C shares under the proposed restructure.

(d) No roll-over available to Company C shareholders if Company D chooses that it will not apply

Subsection 124-795 (4) provides that you cannot obtain roll-over in relation to the exchange of your qualifying interests if the replacement entity chooses to make this election and the replacement entity or original entity notifies you in writing of that choice before the exchange (paragraphs 124-795(4)(a) and (b)).

This exception does not apply as Company D will not make a choice under subsection 124-795(4) that roll-over will not apply.

Consequence of when an arrangement is a restructure

If an arrangement is a restructure under section 124-784A, the first element of the cost base and reduced cost base of interests in the original entity acquired under the arrangement is worked out under section 124-784B.

Section 124-784A does not apply to the arrangement as the market value of Company C is less than 80% of the market value of all shares on issue by Company D at the completion time (incorporating the market values of Company A, Company B and Company C).

Consequences of choosing roll-over

Capital gain disregarded

Scrip for scrip roll-over enables a shareholder to disregard all or part of a capital gain from a share that is disposed of as part of a corporate takeover or merger if the shareholder receives a replacement share in exchange.

If the only capital proceeds the shareholder receives in respect of the disposal are replacement shares, and the requisite conditions are satisfied, the capital gain is disregarded completely (subsection 124-785(1)).

Under the proposed restructure, the original interest holders will receive only ordinary shares in respect of the disposal of their Company C shares (that is, no ineligible proceeds for the purposes of subsection 124-790(1) will be received). As a consequence, Company C shareholders will be eligible to choose scrip for scrip roll-over. As a result of making that choice, they will disregard the entire amount of the capital gain made under CGT event A1 which will happen on the disposal of their Company C shares.

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