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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

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Edited version of your private ruling

Authorisation Number: 1012523684431

Ruling

Subject: Scrip for scrip rollover

Question 1

If you make a capital gain in respect of the proposed disposal of your Company A shares, will you be eligible to choose scrip for scrip rollover under Subdivision 124-M of the ITAA 1997?

Answer:

Yes

Question 2

Will you be able to obtain market value cost base in the Company B shares you acquired in exchange for your Company A shares?

Answer:

Yes

This ruling applies for the following period

Year ended 30 June 2012

The scheme commenced on

1 July 2011

Relevant facts and circumstances

You are a director of Company B and you were a director and significant shareholder In Company A.

Company A is an unlisted public Australian resident company incorporated in the 2000's.

You are a director of Company B and you were a director and significant shareholder in Company A.

Company B acquired 100% of the issued shares in Company A

The consideration was one (1) Company B ordinary share for one (1) Company A ordinary share.

Company B is a widely held company for the purposes of Subdivision 124-M of the ITAA 1997 as it had at least 300 members just before the share exchange.

No cash advances were made by Company B to Company A as part of the consideration for the exchange.

You held your Company A shares on capital account at the time of the arrangement.

You are a resident of Australia for taxation purposes.

Company A and Company B are not members of the same wholly owned group.

Company B is not a foreign resident company.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Subdivision 124-M

Income Tax Assessment Act 1997 Section 124-785

Income Tax Assessment Act 1997 Section 124-790

Income Tax Assessment Act 1997 Section 124-780

Income Tax Assessment Act 1997 Section 995-1

Income Tax Assessment Act 1997 Section 124-782

Income Tax Assessment Act 1997 Section 124-795

Income Tax Assessment Act 1997 Section 124-792

Income Tax Assessment Act 1997 Division 122

Income Tax Assessment Act 1997 Subdivision 124-G

Reasons for decision

Question 1

If you makes a capital gain in respect of the proposed disposal of your shares in Company A, will you be eligible to choose scrip for scrip rollover under Subdivision 124-M of the ITAA 1997?

CGT event A1 happens as a result of the disposal by you of your Company A shares to Company B (subsections 104-10(1) and 104-10(2) of the ITAA 1997.

The time of the event is the day that you entered into the contract to dispose of their Company A shares to Company B (paragraph 104-10(3)(a) of the ITAA 1997).

You will make a capital gain when CGT event A1 happened if the capital proceeds from the disposal of a Company A share exceeded its cost base. The capital gain is the amount of the excess. You will make a capital loss if the capital proceeds were less than the reduced cost base of the Company A share. The capital loss is the amount of the difference (subsection 104-10(4) of the ITAA 1997).

Availability of scrip for scrip rollover if a capital gain is made

Subdivision 124-M of the ITAA 1997 provides a shareholder with scrip for scrip rollover, which enables the shareholder to disregard a capital gain they make from a share that is disposed of as part of a corporate takeover or merger if the shareholder received a replacement share in exchange (subsection 124-785(1) of the ITAA 1997).

A capital gain will be only partially disregarded if, in addition to shares, the capital proceeds include something (ineligible proceeds) other than replacement shares (subsection 124-790(1) of the ITAA 1997).

Requirements for scrip for scrip rollover

Subdivision 124-M of the ITAA 1997 contains a number of conditions for, and exceptions to, the eligibility of a shareholder to choose scrip for scrip rollover. The main conditions and exceptions that are relevant in this case are:

Conclusion

Based on the information provided, you are eligible to choose scrip for scrip rollover under Subdivision 124-M of the ITAA 1997 if you make a capital gain in respect of the disposal of your Company A shares.

Question 2

Will you be able to obtain market value cost base in the shares you acquired in exchange for your shares?

Section 124-782 of ITAA 1997 contains the rules for transferring the cost base of an original interest to a replacement interest.

Prior to the amendment of the scrip for scrip roll-over provisions that took effect from 10 December 1999, scrip for scrip roll-over rules did not specify the acquisition cost of the original interest in the hands of the acquiring entity.

The general CGT rules usually treated the cost base of such interests as equal to their market value and the ordinary cost base rules in Div 110 and 112 applied. These general provisions will continue to guide the calculation of the cost base unless the provisions of section 124-782 of the ITAA 1997 apply. This view is confirmed by Taxation Ruling TR 2005/19 (paragraph 7).

Subsection 124-782(2) of the ITAA 1997 sets out the rules for determining the cost base where:

· the original interests of an original interest holder are cancelled under the arrangement; and

· the holder receives a roll-over for the cancellation; and

· the holder is a significant or common stakeholder in relation to the arrangement.

If this section applies, the acquisition cost for the purposes of calculating the cost base or reduced cost base of any (new) interests issued to the acquiring entity by the original entity, is that part of the cost base as can be reasonably allocated to the new interests.  

However, section 124-782 of the ITAA 1997 will not apply if shareholders in Company A are significant or common stakeholders.

Accordingly, as no shareholder in Company A is a significant or common stakeholder in relation to the exchange of interests section 124-782 of the ITAA 1997 has no application.

You will be able to obtain market value cost base you acquired in exchange for your shares.

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