Edited version of private advice

Authorisation Number: 1051574701431

Date of advice: 30 August 2019

Ruling

Subject: Application of the Subdivision 124-M of the Income Tax Assessment Act 1997 CGT roll-over relief to the sale of shares

Question

Will the Taxpayer be eligible to elect CGT roll-over relief, or partial roll-over relief, under Subdivision 124-M of the Income Tax Assessment Act 1997 ('ITAA 1997') in respect of the exchange of their ordinary shares and preference shares in ABC Pty Ltd for shares in Public Pty Ltd pursuant to the Share Purchase Agreement?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2019

The scheme commences on:

21 August 2018

Relevant facts and circumstances

Relevant legislative provisions

Reasons for decision

The Taxpayer holds X amount of ordinary shares ('Ordinary Shares') and Y amount of preference shares ('Preference Shares') in ABC Pty Ltd ('ABC Co'), an Australian resident company principally conducting its business in Australia.

The Taxpayer is the sole director, sole ordinary shareholder, and is one of several preference shareholders in ABC Co. The Taxpayer's ABC Co shares were acquired after 19 September 1985.

a.   The general terms of the Ordinary Shares include voting rights. Pursuant to ABC Co's Constitution there are no restrictions with regards to the voting rights of the ordinary shareholder.

The general terms of the Preference Shares include voting rights. Pursuant to the Constitution, preference shareholders have voting rights in relation to:

                                     i.        a proposal to wind up the Company or reduce the share capital of the Company or to dispose of all the property, business and undertaking of the Company;

                                   ii.        periods during which a dividend or part of a dividend in respect of the preference shares is in arrears;

                                  iii.        a resolution to approve the terms of a buy-back agreement;

                                  iv.        a proposal that affects rights attached to the share; or

                                   v.        matters during the winding up of the Company.

On XX date, a Share Purchase Agreement ("SPA") was entered into for the sale of 100% of the Ordinary and Preference Shares in ABC Co to Acquirer Pty Ltd ('Acquirer'). Acquirer is a wholly-owned subsidiary company of Public Pty Ltd ('Public Co'), an Australian Securities Exchange listed company.

The Taxpayer was appointed by each shareholder of ABC Co to be their agent to sign the SPA on their respective behalf.

The SPA was completed on XX date and exchange of shares occurred on that same day.

Before the arrangement was entered into, the Taxpayer and their associates held over 30% of the shares in ABC Co.

After the arrangement, the taxpayer and their associates will hold less than 30% of the shares in Public Co.

Pursuant to the SPA and following completion, the ABC Co shareholders may receive non-share consideration and shares in Public Co, including cash proceeds on completion.

In addition, consideration in the form of shares in Public Co was offered to all ABC Co preference shareholders and the ordinary shareholder. The number of shares to be issued is calculated by reference to the terms in the SPA.

The offer made by Public Co to all ABC Co preference shareholders and the ordinary shareholder for the acquisition of their shares in ABC Co is detailed under the SPA.

The SPA lists the sellers involved in the sale, which are all the shareholders of ABC Co.

As a consequence of the share roll-over, the Taxpayer will receive a significant number of shares in Public Co and separately, will also become a Public Co board member.

Public Co requires the Taxpayer to undertake to not sell their shares in Public Co for an agreed period.

The various parties to the SPA dealt with each other at arm's length.

Assumptions

If the roll-over was not available, the shareholders in ABC Co would have made a capital gain under CGT Event A1 upon the disposal of their shares.

The taxpayer will choose to apply the rollover under paragraph 124-780(3)(d) of the ITAA 1997.

Relevant legislative provisions

Subdivision 124-M of the Income Tax Assessment Act 1997 (Cth)

Reasons for Decision

Exchange of shares

The original interest holder needs to exchange their share in a company for a share in another company. Under the arrangement, the shareholders in ABC Co will exchange their shares in ABC Co for:

1.   Shares in Public Co;

2.   Non share consideration including cash proceeds on completion.

As a result there will be a non-scrip consideration for the ABC Co shares.

Section 124-790 of the ITAA 1997 deals with the consequences of a taxpayer receiving something other than a replacement interest (e.g. cash or other consideration) in an acquiring entity in exchange for the original interest in the original company or trust. It states that the original interest holder can obtain only a partial roll-over if its capital proceeds for its original interest include something (the ineligible proceeds) other than its replacement interest. There is no roll-over for that part (the ineligible part) of its original interest for which it received ineligible proceeds. The cost base of the ineligible part is that part of the cost base of the original interest as is reasonably attributable to it.

The cash proceeds will be treated as consideration for the purposes of calculating a capital gain realised by each of the ABC Co shareholders. Any deferred cash proceeds received will also be included for the purposes of calculating the capital gain realised by the shareholders.

As a result, the original interest holders will be able to claim a partial roll-over relief, if the other conditions are met.

Single Arrangement

The exchange of shares is in consequence of a single arrangement that satisfies subsection 124-780(2) of the ITAA 1997. The requirements for a single arrangement are listed below:

·        The arrangement results in the acquiring entity becoming the owner of 80% or more of the voting shares in the original entity; and

·        The arrangement is one in which at least all of the owners of voting shares in the original entity could participate; and

·        The arrangement is 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.

First requirement

The Acquirer will acquire 100% of the shares in ABC Co. Therefore the first requirement stated above for a single arrangement has been met.

Second requirement

The offer was made to all the shareholders of ABC Co, which are listed in the SPA.

As a result, the second requirement for a single arrangement has been met.

Third requirement

ABC Co has two classes of shares, ordinary and preference shares. For this requirement to be met the offer for all of these different classes needs to be on substantially the same terms.

The terms of the offer were made to both the ordinary and preference shareholders of ABC Co. The terms for all of the shareholders were the same. As a result, this requirement has been met as the arrangement is 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.

Conditions for roll-over

The conditions for the roll-over under subsection 124-780(3) of the ITAA 1997 need to be met. These are analysed below.

Post CGT

The shareholders in ABC Co need to have acquired their original interest on or after 20 September 1985. The ABC Co shareholders acquired their shares in ABC Co after 20 September 1985. As a result this condition has been met.

Would have otherwise made a gain

Apart from roll-over, the original interest holder would have made a capital gain from a CGT event happening in relation to its shares in the original entity. If the roll-over was not available, the shareholders in ABC Co would have made a capital gain under CGT Event A1 upon the disposal of their shares. As a result, this condition has been met.

Replacement interest

The replacement interest must be one in the acquiring company, or its ultimate parent company. To the extent the rollover may be available; the ABC Co shareholders will receive shares in Public Co, being the head company of the Public Co Group. As a result this requirement has been met.

Significant or common stakeholder

Paragraph 124-780(3)(d) of the ITAA 1997 provides that, if section 124-782 of the ITAA 1997 applies to the original interest holder, scrip for scrip roll-over is available only if the original interest holder that is a significant or common stakeholder and the replacement entity jointly choose to obtain the roll-over.

Section 124-782 of the ITAA 1997 provides special rules that apply for the purposes of scrip for scrip roll-over if an original interest holder is a significant stakeholder or a common stakeholder for an arrangement. An original interest holder is a significant stakeholder for an arrangement if it had a significant stake in the original entity before the arrangement started and a significant stake in the replacement entity after the arrangement was completed. In addition, if the acquiring entity for an arrangement is an original interest holder in the original entity before the arrangement, its associates may be significant stakeholders.

An entity will have a significant stake in a company if the entity or the entity's associates between them have shares carrying 30% or more of the voting rights, dividend rights or rights to distribution of capital in the company.

Before the arrangement was entered into, the Taxpayer and their associates held over 30% of the shares in ABC Co. After the arrangement, the Taxpayer and their associates will hold less than 30% of the shares in Public Co. As a result, the Taxpayer does not have a significant stake or a common stake for the purpose of section 124-782 of the ITAA 1997.

Therefore the taxpayer will be eligible to choose to apply the roll-over under paragraph 124-780(3)(d) of the ITAA 1997.

Arm's Length

Subsection 124-780(4) of the ITAA 1997 provides that further conditions need to be satisfied if the original interest holder and the acquiring entity did not deal with each other at arm's length in relation to the exchange of shares and neither the original entity or the replacement entity had at least 300 members or the original interest holder, original entity and the acquiring entity were all members of the same linked group.

As stated in the facts above, the entities were dealing with each other at arm's length. As a result, Subsection 124-780(4) of the ITAA 1997 does not apply and this condition has been met.

Conclusion

All of the conditions of Subdivision 124-M of the ITAA 1997 have been met.

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