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Ruling

Subject: CGT small business concessions and scrip for scrip rollover

Question 1

Can you access the small business concessions in relation to the disposal of your shares in Company A?

Answer

No

Question 2

Are you eligible to choose scrip for scrip rollover under Subdivision 124-M of the Income Tax Assessment Act 1997 (ITAA 1997) in relation to the disposal of your class G shares in Company A?

Answer

No

Question 3

Are you eligible to choose a partial scrip for scrip rollover under Subdivision 124-M of the ITAA 1997 in relation to the disposal of your class F shares in Company A?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 2012

The scheme commences on:

1 July 2011

Relevant facts and circumstances

You held a substantial volume of shares in Company X. These shares were subsequently exchanged for shares in Company Y.

You chose to apply scrip for scrip rollover to this arrangement.

Subsequently, Company Y shareholders sold all their shares in Company Y to Company A. You received cash and shares in Company A in exchange for your shares in Company Y.

You chose to apply partial scrip for scrip rollover in relation to this arrangement also.

The shares you held in Company A consisted of class G shares and class F shares.

The small business participation percentage you held in Company A was less than 20%.

You were advised of an offer from a company to acquire all of the shares in Company A. The proposed sale involved the following:

· An offer was made to all Company A shareholders.

· The offer was to acquire all of the equity in Company A (following a restructure of the share capital in Company A to leave only class F shares on issue)

o The restructure involved a buyback of the Company A class G shares on issue for a value that reflected the share's face value, plus the accumulated dividend entitlement on the share. This restructure would result in only class F shares in Company A being on issue at the time of the sale of Company A to Company B's wholly owned subsidiary, Company C. The offer stated that you would receive 100% cash for the buyback of the class G shares.

· Under the offer, Company A shareholders would receive cash and/or new class J and class K shares in Company B. Each shareholder could choose whether they wanted to receive cash only, Company B shares only or a mix of cash and Company B shares (the Company A shareholders could choose a percentage of shares or cash).

You elected to exchange your Company A shares for a mix of cash and shares in Company B.

Company B is the ultimate holding company of a wholly owned group.

You and the relevant entities dealt at arms length.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 152-10

Income Tax Assessment Act 1997 Subsection 152-10(2)

Income Tax Assessment Act 1997 Section 152-60

Income Tax Assessment Act 1997 Subdivision 124-M

Income Tax Assessment Act 1997 Subsection 124-780(1)

Income Tax Assessment Act 1997 Subsection 124-780(2)

Income Tax Assessment Act 1997 Subsection 124-780(3)

Income Tax Assessment Act 1997 Subsection 124-780(4)

Income Tax Assessment Act 1997 Subsection 124-780(5)

Income Tax Assessment Act 1997 Section 124-790

Reasons for decision

Small business concessions

To qualify for the small business capital gains tax (CGT) concessions, you must satisfy several conditions that are common to all the concessions. These are called the 'basic conditions'. Where the CGT asset is a share in a company, subsection 152-10(2) of the ITAA 1997 sets out an additional basic condition that must be satisfied just before the CGT event:

· the entity claiming the concession must be a CGT concession stakeholder in the company, or

· CGT concession stakeholders in the company or trust together have a small business participation percentage in the interposed entity of at least 90% (the 90% test).

A CGT concession stakeholder is a significant individual that holds a small business participation percentage in the company of at least 20%. A CGT concession stakeholder can also be the spouse of a significant individual, where the spouse holds a small business participation percentage in the company that is greater than zero.

You have indicated that your small business participation percentage in Company A was less than 20%. Accordingly, you were not a CGT concession stakeholder in Company A.

The 90% test only applies where there is an interposed entity between the CGT concession stakeholders and the company in which the shares are held. Accordingly, the 90% test does not apply in this case.

You do not meet the requirements contained in subsection 152-10(2) of the ITAA 1997. Accordingly, you will not meet the basic conditions and are not eligible to apply the small business concessions to the capital gain made on the disposal of your shares in Company A.

Scrip for scrip rollover

To be eligible for scrip for scrip rollover 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 states there is a rollover 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.

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'.

Under the agreement, the class G shares you held in Company A were bought back for a cash payment; you did not receive any replacement shares in consideration for the class G shares. The gain made on the disposal of the class G shares is not eligible for scrip for scrip rollover as the requirement in paragraph 124-780(1)(a) of the ITAA 1997 has not been met.

However, you exchanged a portion of your class F shares in Company A for shares in Company B in satisfaction of paragraph 124-780(1)(a) of the ITAA 1997. Additionally, the arrangement satisfies the requirements of subsection 124-780(2) as:

· it resulted in Company C, a member of a wholly owned group, becoming the owner of more than 80% of the shares in Company A

· all Company A ordinary shareholders where included in the offer; and

· the offer to the Company A shareholders was made on the same terms.

The requirements contained in subsection 124-780(3) of the ITAA 1997 require that:

(a) the original interest holder acquired its original interest on or after 20 September 1985; and

(b) apart from the roll-over, it would make a capital gain from a CGT event happening in relation to its original interest; and

(c) its replacement interest is in a company (the replacement entity) that is:

(i) the company referred to in subparagraph (2)(a)(i); or

(ii) in any other case - the ultimate holding company of the wholly-owned group; and

(d) the original interest holder chooses to obtain the roll-over or, if section 124-782 applies to it for the arrangement, it and the replacement entity jointly choose to obtain the roll-over; and

(e) if that section applies, the original interest holder informs the replacement entity in writing of the cost base of its original interest worked out just before a CGT event happened in relation to it.

You acquired your class F shares in Company A after 20 September 1985, and the disposal of the shares would, apart from the scrip for scrip rollover, have resulted in a capital gain. You satisfy paragraph 124-780(3)(ii) of the ITAA 1997 as Company B, the entity you received replacement interests in, is the ultimate holding company of a wholly owned group. You have also indicated that you wish to choose the rollover.

In this case, the parties dealt at arms length, so subsections 124-780(4) and 124-780(5) of the ITAA 1997 do not apply.

Accordingly, you satisfy all of the requirements contained in section 124-780 of the ITAA 1997 and are eligible to choose scrip for scrip rollover for the disposal of your class F shares in Company A. However, as you received a mixture of cash and shares, you are only entitled to a partial rollover (section 124-790 of the ITAA 1997).

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