Edited version of private advice

Authorisation Number: 1051752813172

Date of advice: 07 October 2020

Ruling

Subject: The Australian tax consequences for Entity A following the merger of Entity B and Entity C.

Question 1

Was any part of the cash payment made for Entity A's shares in Entity B a dividend for Australian income tax purposes?

Answer

No.

Question 2

Is partial scrip for scrip roll-over available to Entity A under Subdivision 124-M of the Income Tax Assessment Act 1997 (ITAA 1997) to the extent that Entity A received Entity C shares as part of the capital proceeds of a CGT event happening?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 20XX.

The scheme commences on:

20 XX 20XX.

Relevant facts and circumstances

Entity A acquired shares in Entity B after 20 September 1985.

Under the scheme, Entity C acquired all the voting shares in Entity B in exchange for cash or Entity C shares or a combination of both on arm's length terms.

At no relevant time were Entity A or Entity C members of the same wholly owned group.

Entity A received a combination of cash and XX Entity C shares under the scheme.

Before entering into the scheme, Entity A held XX shares in Entity B at a total cost of XX.

Entity A is not a foreign resident.

Entity A was neither a 'significant stakeholder' or 'common stakeholder' of Entity B under section 124-783 of the ITAA 1997.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 6(1)

Income Tax Assessment Act 1997 subsection 104-10(1)

Income Tax Assessment Act 1997 subsection 104-10(2)

Income Tax Assessment Act 1997 Division 112

Income Tax Assessment Act 1997 Division 122

Income Tax Assessment Act 1997 Subdivision 124-M

Income Tax Assessment Act 1997 section 124-780

Income Tax Assessment Act 1997 paragraph 124-780(1)(a)

Income Tax Assessment Act 1997 paragraph 124-780(1)(b)

Income Tax Assessment Act 1997 paragraph 124-780(1)(c)

Income Tax Assessment Act 1997 paragraph 124-780(1)(d)

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

Income Tax Assessment Act 1997 paragraph 124-780(2)(a)

Income Tax Assessment Act 1997 paragraph 124-780(2)(b)

Income Tax Assessment Act 1997 paragraph 124-780(2)(c)

Income Tax Assessment Act 1997 subsection 124-780(2A)

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

Income Tax Assessment Act 1997 paragraph 124-780(3)(a)

Income Tax Assessment Act 1997 paragraph 124-780(3)(b)

Income Tax Assessment Act 1997 paragraph 124-780(3)(c)

Income Tax Assessment Act 1997 paragraph 124-780(3)(d)

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

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

Income Tax Assessment Act 1997 section 124-782

Income Tax Assessment Act 1997 subsection 124-785(1)

Income Tax Assessment Act 1997 section 124-790

Income Tax Assessment Act 1997 subsection 124-790(1)

Income Tax Assessment Act 1997 subsection 124-790(2)

Income Tax Assessment Act 1997 section 124-795

Income Tax Assessment Act 1997 subsection 124-795(1)

Income Tax Assessment Act 1997 subsection 124-795(2)

Income Tax Assessment Act 1997 subsection 124-795(4)

Income Tax Assessment Act 1997 Division 125

Income Tax Assessment Act 1997 Division 615

All subsequent references in this document are to the ITAA 1997 unless otherwise indicated.

Reasons for decision

Question 1 Summary

Was any part of the cash payment made for the Entity A's shares in Entity B, a dividend for Australian income tax purposes?

Detailed reasoning

Subsection 6(1) of the ITAA 1936 defines 'dividend' as any distribution made by a company to any of its shareholders whether in money or property and any amount credited by a company to any of its shareholders as shareholders - except where the distribution or credit is debited against an amount standing to the credit of the share capital account of the company.

In this case the cash payment was made to Entity A by Entity C. However, Entity A was not a shareholder of Entity C when the cash payment was made. On this basis, the definition of dividend in subsection 6(1) of the ITAA 1936 is not satisfied.

Therefore, none of the cash payment received by Entity A for its Entity B shares is a dividend for Australian income tax purposes.

Question 2 Summary

Is partial scrip for scrip roll-over available to Entity A under Subdivision 124-M of the ITAA 1997 to the extent that Entity A received new Entity C shares for the disposal of their Entity B shares under the merger transaction?

Detailed reasoning

CGT event A1 happens to Entity A when they dispose of their Entity B shares in exchange for cash and new Entity C shares (subsections 104-10(1) and (2)).

Availability of scrip for scrip roll-over

Scrip for scrip rollover in Subdivision 124-M allows a shareholder to disregard a capital gain made from a share that is disposed of as part of a corporate restructure if the shareholder receives a replacement share in exchange. There are special rules for calculating the cost base and reduced cost base of the replacement share.

The capital gain is disregarded entirely if the only capital proceeds the shareholder receives are replacement shares. If the shareholder receives something other than replacement shares, the capital gain will be only partially disregarded.

Conditions for scrip for scrip roll-over

Subdivision 124-M contains a number of conditions for a shareholder being entitled to choose scrip for scrip roll-over. The conditions in section 124-780 which are relevant to the scheme that is the subject of this ruling are as follows:

·   shares in a company are exchanged for shares in another company (paragraph 124-780(1)(a));

·   the exchange happens as part of a single arrangement that satisfies subsection 124-780(2);

·   the relevant conditions for rollover in subsection 124-780(3) are satisfied (paragraph 124-780(1)(c));

·   further conditions in subsection 124-780(4) are not applicable (paragraph 124-780(1)(d)); and

·   exceptions to obtaining scrip for scrip rollover are not applicable.

(a)  Shares are exchanged for shares in another company

Paragraph 127-780(1)(a) requires an entity (the original interest holder) to exchange a share (the entity's original interest) in a company (the original entity) for a share in another company (the replacement interest).

This condition is satisfied as Entity A (as an interest holder in Entity B) exchanged their shares in Entity B for shares in Entity C.

(b)  The exchange is in consequence of a single arrangement that satisfies subsection (2) or (2A)

Paragraph 124-780(1)(b) requires that the exchange of replacement shares is in consequence of a single arrangement that satisfies subsections 124-780(2) or 124-780(2A). This requirement is satisfied under the scheme.

80 percent ownership

Paragraph 124-780(2)(a) requires that the arrangement must result in the acquiring entity becoming the owner of 80 percent or more of the voting shares in the original entity.

This paragraph is satisfied as under the scheme Entity C acquired all of the voting shares in Entity B.

All voting share owners participate

Paragraph 124-780(2)(b) requires that the arrangement must be one in which at least all owners of voting shares in the original entity could participate.

This requirement is satisfied as all Entity B shareholders could participate in the exchange of their shares in Entity B for shares in Entity C.

Participation is on substantially the same terms

Paragraph 124-780(2)(c) requires that the arrangement 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.

This requirement is satisfied as participation was available on substantially the same terms for all Entity B shareholders.

(c)  Conditions for roll-over under subsection 124-780(3) are satisfied

Paragraph 124-780(1)(c) requires that the conditions for roll-over outlined in subsection 124-780(3) are satisfied.

Entity B shares are post-CGT shares

Paragraph 124-780(3)(a) requires that the original interest holder acquired its original interests on or after 20 September 1985.

This condition is satisfied as Entity A acquired all its Entity B shares after 20 September 1985.

Entity A 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.

A capital gain would be made from the disposal of Entity B shares by Entity A as the capital proceeds for the shares exceed their cost base.

Therefore this condition is satisfied.

Entity A receives replacement interests in the replacement entity

Paragraph 124-780(3)(c) requires that the replacement interest is in the replacement entity.

This requirement is satisfied because Entity A received shares in Entity C.

Entity A 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, the original interest holder and the replacement entity jointly choose to obtain the roll-over.

Section 124-782 does not apply as Entity A was not a significant stakeholder or common stakeholder for the arrangement.

This requirement is satisfied as Entity A can choose the roll-over (to the extent possible) and no joint choice between the relevant entities is required.

(d)  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:

            (i)           neither the original entity nor the replacement entity had at least 300 members just before the arrangement started; or

           (ii)           the original interest holder, the original entity and the acquiring entity were all members of the same linked group just before the arrangement started.

These further conditions do not apply because all parties were dealing with each other at arm's length in relation to the arrangement.

(e)  Partial roll-over under section 124-790 applies

Subsection 124-790(1) applies to allow partial roll-over if the capital proceeds for Entity B shares (original interest) include something (ineligible proceeds) other than Entity C shares (replacement interest). In this case, there is no roll-over for the cash component received under the arrangement. The cost base of the ineligible part is that part of the cost base of the original Entity B interest as is reasonably attributable to it (subsection 124-790(2)).

(f)   Exceptions to obtaining scrip for scrip roll-over are not applicable

Section 124-795 sets out other circumstances where scrip for scrip roll-over under Subdivision 124-M is not available. These exceptions are outlined in the following paragraphs.

Foreign resident shareholder

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

Entity A was a resident of Australia at all relevant times and this exception is not applicable.

A capital gain cannot (apart from the roll-over) be otherwise disregarded, and original entity and acquiring entity are not members of the same wholly owned group before the arrangement

Subsection 124-795(2) provides that the roll-over is not available if: any capital gain the original interest holder might make from their replacement interest would be disregarded (except because of a roll-over); or the original interest holder and the acquiring entity are members of the same wholly-owned group just before the original interest holder stops owning the interest and the acquiring entity is a foreign resident.

These exceptions are not applicable. The capital gain Entity A makes from the replacement interest would not be disregarded under any other circumstances (i.e. the shares are not owned as trading stock). Further, Entity A and Entity C were not members of the same wholly owned group before or after the entering into of the scheme.

No roll-over is available under Division 122 or Division 615

Subsection 124-795(3) provides that the roll-over is not available if a roll-over can be chosen under Division 122 or Division 615 for that event.

This exception does not apply because roll-over under Division 122 or Division 615 are not available for this event.

Election for no roll-over

Subsection 124-795(4) provides that roll-over is not available in relation to the exchange of qualifying interest if the replacement entity makes a choice to that effect; and the original interest holders were advised of this election before the exchange of shares.

Entity C did not make such an election; thus, the exception does not apply in this case.

Conclusion

Entity A can choose partial roll-over for the Entity C shares they received in exchange for their Entity B shares.

If Entity A chooses scrip for scrip roll-over, the capital gain made from the disposal of Entity B shares is disregarded to the extent that they received replacement Entity C shares for the disposal of their Entity B shares (eligible proceeds) (subsection 124-785(1)).

The capital gain is not disregarded to the extent that Entity A received cash for the disposal of their Entity B shares (ineligible proceeds) (subsection 124-790(1)).

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