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Edited version of your private ruling
Authorisation Number: 1012377484218
Ruling
Subject: scrip for scrip rollover
Question
Are you eligible to choose scrip for scrip roll-over under Subdivision 124-M of the Income Tax Assessment Act 1997 (ITAA 1997) to the extent that the consideration for the sale of your shares in Company X was shares in Company Y?
Answer
No
This ruling applies for the following periods:
Year ended 30 June 2012
The scheme commenced on:
1 July 2011
Relevant facts and circumstances
You acquired shares in Company X post 20 September 1985.
Another portion of the shares in the company were owned by an unrelated investor. The remaining shares were held by the two working directors of the company, individually and through their related trusts.
100% of the issued share capital was sold to a public company, Company Y.
The sale agreement provided that the purchase price of the shares in Company X consisted of the cash paid to each of the shareholders, the consideration shares in Company Y issued to each shareholder and the deferred consideration shares.
The deferred consideration shares were additional shares in Company Y that were to be issued to the two working directors under the agreement at selected dates on the condition that the net profit of the company reached a certain threshold.
Relevant legislative provisions
Income Tax Assessment Act 1997 Subdivision 124-M
Income Tax Assessment Act 1997 Section 124-780
Income Tax Assessment Act 1997 Paragraph 124-780(2)(c)
Reasons for decision
Summary
The sale of the Company X shares was not an arrangement in which participation was available on substantially the same terms for all owners. Accordingly, the requirements contained in section 124-780 of the ITAA have not been met and you are not eligible to apply scrip for scrip rollover.
Detailed reasoning
To be eligible for scrip for scrip roll-over contained in Subdivision 124-M of the ITAA 1997, a number of conditions must be satisfied. In this regard, subsection 124-780(1) of the ITAA 1997 initially states there is a roll-over if:
(a) an entity (the original interest holder) exchanges:
(i) a share (the entity's original interest) in a company (the original entity) for a share (the holder's replacement interest) in another company; or
(ii) an option, right or similar interest (also the holder's original interest) issued by the original entity that gives the holder an entitlement to acquire a share in the original entity for a similar interest (also the holder's replacement interest) in another company; and
(b) the exchange is in consequence of a single arrangement that satisfies subsection (2); and
(c) the conditions in subsection (3) are satisfied; and
(d) if subsection (4) applies, the conditions in subsection (5) are satisfied.
The conditions the single arrangement must meet to be able to access the rollover are contained in subsection 124-780(2) of the ITAA 1997. The conditions are that the arrangement must:
a) result in:
i. a company (the acquiring entity) that is not a member of a *wholly-owned group becoming the owner of 80% or more of the *voting shares in the original entity; or
ii. a company (also an acquiring entity) that is a member of such a group increasing the percentage of voting shares that it owns in the original entity, and that company or members of the group becoming the owner of 80% or more of those shares; and
b) be one in which at least all owners of *voting shares in the original entity (except a company referred to in paragraph (a)) could participate; and
c) be one in which participation was available on substantially the same terms for all of the owners of interests of a particular type in the original entity.
In this case, the first two conditions are satisfied. However, it must be determined if the arrangement was one in which participation was available on substantially the same terms for all of the owners. To determine this, we must first consider if the deferred consideration share payment to the directors will be considered part of the same single arrangement.
The term 'arrangement' is defined broadly in section 995-1 of the ITAA 1997 to mean any arrangement, agreement, understanding, promise or undertaking, whether express or implied, and whether or not enforceable (or intended to be enforceable) by legal proceedings.
Paragraph 11.23 of the Explanatory Memorandum pertaining to section 124-780 of the ITAA 1997 makes the following comments in relation to the meaning of 'single arrangement' (see also Taxation Ruling TR 2005/19 paragraph 32):
What constitutes a single arrangement is a question of fact. Relevant factors in determining whether what takes place is part of a single arrangement would include, but not be limited to, whether there is more than one offer or transaction, whether aspects of an overall transaction occur contemporaneously, and the intention of the parties in all the circumstances as evidenced by objective facts.
In this case a single sale agreement was created between Company Y and all of the owners of Company X for the sale of the Company X shares. In this agreement it is provided that the purchase price for the sale of the Company X shares is:
· the cash consideration and the consideration shares (shares in Company Y); and
· the deferred consideration shares (if any).
The cash consideration and consideration shares were available on the same terms to all of the Company X shareholders. However, the deferred consideration shares refer to the additional Company Y shares that will be made available to the two directors in the following years if profit targets are met.
You contend that the deferred consideration shares are in fact in respect of services to be rendered by the directors as they continue to work for Company Y rather than in respect of the sale of the shares. However, it remains that the sale agreement specifically states that the deferred consideration shares form part of the purchase price of the Company X shares.
We consider that the payment of the deferred consideration shares forms part of the same single arrangement as the sale of the Company X shares. As this payment is only available to two of the ordinary class shareholders of Company X the arrangement is not one in which participation was available on substantially the same terms for all owners.
Accordingly, the requirement contained in paragraph 124-780(2)(c) of the ITAA 1997 is not met, and you are not eligible to apply scrip for scrip rollover.
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