Edited version of private advice

Authorisation Number: 1051831281223

Date of advice: 23 April 2021

Ruling

Subject: Scrip for scrip roll-over relief

Question 1

Did CGT event A1 in section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997), occur in relation to the transfer of shares in the original company held by the original interest holder to the acquiring entity?

Answer

Yes

Question 2

Is the original interest holder eligible to choose CGT roll-over relief under Subdivision 124-M of the ITAA 1997 in relation to the shares received in the ultimate holding company in exchange for the transfer of its original company shares to the acquiring entity?

Answer

Yes

Question 3

Is the first element of the cost base of shares acquired in the ultimate holding company determined in accordance with sections 124-785 and 124-790 of the ITAA 1997?

Answer

Yes

This ruling applies for the following period

1 July 2019 to 30 June 2020

The scheme commenced on

1 July 2019

Relevant facts and circumstances

1.            The original interest holder is a privately owned business that is a resident of Australia for tax purposes. It held shares in the original company just prior to the Implementation Date of the Scheme of Arrangement between the original company and its shareholders.

2.            The original company was formerly a publicly listed company on the Australian Stock Exchange.

3.            The original interest holder, along with other entities formed a consortium and held between 10-15% of the original company shares.

4.            All original company shares owned by the original interest holder were acquired after 19 September 1985 and were held on capital account.

5.            The original company had over 100m ordinary shares on issue and no convertible securities.

6.            According to the 2018 Annual Report, there were over 300 original company shareholders.

7.            The top 20 individual shareholders of the original company did not have 75% or more of the share capital in the original company.

8.            The Scheme Implementation Deed (SID) sets out the Scheme of Arrangement, whereby the acquiring entity acquired 100% of the shares in the original company, under Part 5.1 of the Corporations Act 2001.

9.            As a Relevant Shareholder under the SID, the original interest holder had the right to receive consideration of cash consideration per original company share, acquire shares in the ultimate holding company, or a combination of both. This option was not available to non-Relevant Shareholders, who were only eligible to receive cash.

10.          The ultimate holding company is the head entity of a wholly-owned group established by the consortium to implement the arrangement. It is an Australian resident for tax purposes.

11.          The acquiring entity, also an Australian resident for tax purposes, is a wholly owned subsidiary of the ultimate holding company, albeit held indirectly

12.          The original interest holder exchanged a portion of its original company shares for shares in the ultimate holding company, with the remaining shares being exchanged for cash consideration. The other members of the consortium elected to receive 100% cash.

13.          For every original company share that the original interest holder elected to exchange for the ultimate holding company shares, it was entitled to receive ordinary shares in the ultimate holding company and preference shares in the ultimate holding company.

14.          The arrangement took effect in 2019 (Implementation Date). That is, the transfer of the original company shares from its shareholders to the acquiring entity occurred at this time.

15.          The original interest holder made a capital gain in relation to its exchange of shares in the original company for shares in the ultimate holding company.

16.          Following the Implementation Date, the original interest holder now holds 10-15% of the share capital in the ultimate holding company, while the original company became directly held by the acquiring entity and a member of the wholly-owned group.

17.          If available, the original interest holder will choose roll-over relief pursuant to Subdivision 124-M of the ITAA 1997 in relation to the capital gain made from the exchange of shares in the original company for shares in the ultimate holding company.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 122

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 104-10

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

Income Tax Assessment Act 1997 section 108-05

Income Tax Assessment Act 1997 Subdivision 124-M

Income Tax Assessment Act 1997 section 124-780

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

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

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

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 subparagraph 124-780(2)(a)(ii)

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

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

Income Tax Assessment Act 1997 subparagraph 124-780(2A)(b)(ii)

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 paragraph 124-780(3)(e)

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

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

Income Tax Assessment Act 1997 paragraph 124-780(4)(a)

Income Tax Assessment Act 1997 paragraph 124-780(4)(b)

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

Income Tax Assessment Act 1997 section 124-782

Income Tax Assessment Act 1997 subsection 124-783(5)

Income Tax Assessment Act 1997 subsection 124-783(8)

Income Tax Assessment Act 1997 section 124-785

Income Tax Assessment Act 1997 subsection 124-785(2)

Income Tax Assessment Act 1997 subsection 124-785(3)

Income Tax Assessment Act 1997 subsection 124-785(4)

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(3)

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

Income Tax Assessment Act 1997 Division 615

Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision

All legislative references are to the ITAA 1997 unless otherwise noted.

Question 1

Did CGT event A1 in section 104-10 occur in relation to the transfer of the original company shares held by the original interest holder to the acquiring entity?

Summary

CGT event A1 happened when the original interest holder disposed of the original company shares under the Scheme of Arrangement.

Detailed reasoning

1.           You make a capital gain or capital loss if a CGT event happens to a CGT asset.[1] Each original company share is considered to be a CGT asset.[2]

2.            CGT event A1 happens if you dispose of your ownership interest in a CGT asset.[3]

3.            CGT event A1 happens when a contract to dispose of a CGT asset is entered into, or in the event there is no contract, when the change of ownership occurs.

4.            As the original interest holder transferred its shares in the original company to the acquiring entity under a court approved Scheme of Arrangement, there was no disposal of shares under a contract. Rather, CGT event A1 happened at the time there was a change in ownership from the original interest holder to the acquiring entity, which happened on the Implementation Date.

Question 2

Is the original interest holder eligible to choose CGT roll-over relief under Subdivision 124-M in relation to the shares received in the ultimate holding company in exchange for the transfer of the original company shares to the acquiring entity?

Summary

The original interest holder is eligible to choose roll-over relief under Subdivision 124-M in respect of the portion of proceeds received by way of the ultimate holding company ordinary shares and preference shares for the exchange of the original company shares.

Detailed reasoning

5.            Subdivision 124-M allows a taxpayer to choose roll-over relief where the taxpayer's post-CGT shares are replaced with other shares. A taxpayer can choose to obtain roll-over when interests held in one entity (the original interests in the original entity) are exchanged by the taxpayer for replacement interests in another entity. This roll-over defers recognition of any capital gain (but not a capital loss) until a CGT event happens to the replacement interests.

6.            Subsection 124-780(1) sets out the conditions that must be satisfied to obtain scrip for scrip roll-over, as follows:

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) or (2A); and

(c)           the conditions in subsection (3) are satisfied; and

(d)          if subsection (4) applies, the conditions in subsection (5) are satisfied.

Note 1: There are some exceptions: see section 124-795.

Note 2: The original interest holder can obtain only a partial roll-over if the capital proceeds for its original interest include something other than its replacement interest: see section 124-790.

Paragraph 124-780(1)(a)

7.            The original interest holder exchanged the original company shares (original interest) for ordinary and preference shares in the ultimate holding company (replacement interest). Subsection 995-1(1) defines a 'share' in a company to be a 'share in the capital of the company and includes stock'. Given both the ordinary and preference shares in the ultimate holding company are "shares in the capital of the company', the requirement in subparagraph 124-780(1)(a)(i) is satisfied.

Paragraph 124-780(1)(b)

8.            Paragraph 124-780(1)(b) requires the shares in an entity to be exchanged in consequence of a single arrangement that satisfies subsection 124-780(2) or (2A).

9.            The term 'arrangement' is defined in subsection 995-1(1) as follows:

Arrangement means any arrangement, agreement, understanding, promise or undertaking, whether express or implied, and whether or not enforceable (or intended to be enforceable) by legal proceedings.

10.          While the term 'arrangement' is defined very broadly, there is no definition of the term 'single arrangement'. Paragraph 11.23 of the Explanatory Memorandum to the New Business Tax System (Miscellaneous) Bill (No.2) 2000 details a number of factors that may assist in determining what constitutes a single arrangement:

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 objectives facts.

11.          The arrangement was implemented by way of a Scheme of Arrangement under Part 5.1 of the Corporations Act 2001. As the original company only had shares on issue, there is only one scheme under the arrangement, being the scheme under which the acquiring entity offered to acquire 100% of the shares of the original company in exchange for issuing the original company shareholders the scheme consideration. There was no separate scheme or offer in relation to the original company convertible securities as there are no such securities on issue. The scheme arose under a single arrangement, being the Scheme of Arrangement. On implementation of the scheme, all aspects of the transaction occurred contemporaneously. The exchange therefore constitutes a 'single arrangement' for the purposes of section 124-780.

12.          Paragraph 124-780(2)(a) states that the arrangement must result in:

(i)            the 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;

13.          Subsection 124-780(2A) states that the arrangement must:

(a)          satisfy paragraph (2)(a); and

(b)          be, be part of, or include one or more of the following:

(i)            a takeover bid (within the meaning of the Corporations Act 2001) for the original interests by the acquiring entity that is not carried out in contravention of the provisions mentioned in paragraphs 612(a) to (g) of that Act;

(ii)           a compromise or arrangement entered into by the original entity under Part 5.1 of the Corporations Act 2001, approved by order of a court made for the purposes of paragraph 411(4)(b) of that Act.

14.          The acquiring entity is a member of a wholly-owned group established by the consortium. The acquiring entity acquired 100% of the shares in the original company, thus satisfying the 80% requirement in subparagraph 124-780(2)(a)(ii).

15.          The arrangement also satisfies the requirement that the acquiring entity increase the percentage of voting shares that it owns in the original entity, despite the acquiring entity not initially owning any shares in the original company.

16.          Taxation Determination TD 2000/51 states:

Subparagraph 124-780(2)(a)(ii) requires that the arrangement result in the company which is the acquiring entity increasing the percentage of voting shares that it owns in the original entity. The subparagraph therefore requires a comparison between the ownership of voting shares before the arrangement and after it starts. If the acquiring entity owns no voting shares in the original entity before the arrangement but as a result of the arrangement owns voting shares in the original entity, the acquiring entity will have increased the percentage of voting shares it owns in the original entity. In terms of subparagraph 124-780(2)(a)(ii), the arrangement will result in the acquiring entity increasing its percentage ownership of voting shares in the original entity.

17.          As the requirement in subparagraph 124-780(2)(a)(ii) has been satisfied, means that the requirement in paragraph 124-780(2A)(a) is also satisfied.

18.          The arrangement was entered into under Part 5.1 of the Corporations Act 2001.It was approved in 2019 by a court order made for the purposes of paragraph 411(4)(b) of that Act. Consequently the requirement in subparagraph 124-780(2A)(b)(ii) is satisfied.

19.          Therefore, all the requirements in subsection 124-780(2A) are satisfied.

20.          Since the Scheme of Arrangement constitutes a single arrangement and satisfies the requirements of subsection 124-780(2A), the requirements in paragraph

21.          124-780(1)(b) have been satisfied.

Paragraph 124-780(1)(c)

22.          Paragraph 124-780(1)(c) requires that the conditions for roll over outlined in subsection 124-780(3) are satisfied. These conditions must be met in relation to each original company share for which scrip for scrip roll-over is chosen.

23.          The requirements contained in subsection 124-780(3) are set out below:

(a)          The original interests are post-CGT shares

24.          Paragraph 124-780(3)(a) requires the original interest holder to have acquired its original interest on or after 20 September 1985 (that is, post-CGT).

25.          This requirement is satisfied as the original interest holder acquired the original company shares in 2019.

(b)          An original interest holder would otherwise make a capital gain

26.         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.

27.         This condition is satisfied as the original interest holder would otherwise have made a capital gain when disposing of their original company shares.

(c)           The original interest holders receive replacement interests in the acquiring entity or the ultimate holding company

28.          Paragraph 124-780(3)(c) requires that the replacement interest is in the acquiring entity or the ultimate holding company of the wholly-owned group which includes the acquiring entity.

29.          This requirement is satisfied as the original interest holder received shares in the ultimate holding company, which is the ultimate holding company of the wholly-owned group.

(d) An original interest holder chooses scrip for scrip roll-over

30.         Paragraph 124-780(3)(d) requires that the original interest holder chooses the roll-over or, if section 124-782 applies to it for the arrangement, the original interest holder and the replacement entity jointly choose to obtain the roll-over.

31.         Section 124-782 provides special rules for the allocation of cost base of the shares acquired by the replacement entity. The rules apply if an original interest holder is a 'significant stakeholder' or 'a common stakeholder' in the original entity just before the scheme arrangement and in the replacement entity just after the scheme arrangement. The rule does not apply if the company has 300 or more members just before the arrangement started.[4]

32.         The original interest holder did not hold a significant or common stake in the original company just before the transaction or just after the transaction, as the original interest holder together with its associates did not have 30% or more share capital in the original company. Regardless, the original company had greater than 300 members, meaning the original interest holder was unable to be either a significant stakeholder or common stakeholder. Consequently, section 124-782 does not apply to the arrangement.

33.         The original interest holder will choose to apply the roll-over if it is available. Therefore, the requirement in paragraph 124-780(3)(d) is satisfied.

(e) 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

34.         Paragraph 124-780(3)(e) applies only if section 124-782 applies. It has been established that section 124-782 does not apply, therefore paragraph 124-780(3)(e) has no application.

(f) if an acquiring entity is a member of a wholly-owned group - no member of the group issues equity (other than a replacement interest), or owes new debt under the arrangement

35.          Paragraph 124-780(3)(f) requires that where the acquiring entity is a member of a wholly-owned group, no member of the group issues equity (other than a replacement interest), or owes new debt under the arrangement to an entity that is not a member of the wholly-owned group and in respect to the issuing of the replacement interest.

36.          The acquisition by the acquiring entity of the original company shares was funded by contributions from the consortium equity investors, as well as unrelated third party debt financing.

37.          In relation to the third party debt financing, paragraph 1.37 of the Explanatory Memorandum to Tax and Superannuation Laws Amendment (2015 Measures No. 4) Bill 2015 states that where new debt or equity is owed to an external financier to fund the purchase of original interests under the arrangement, paragraph 124-780(3)(f) does not apply.

38.          Neither the acquiring entity or the ultimate holding company issued any new equity (other than a replacement interest) or debt in respect to the issuing of the replacement interests, under the arrangement.

39.          Therefore, the requirement in paragraph 124-780(3)(d) is satisfied.

40.          All the requirements in subsection 124-780(3) have been met. Consequently, the requirement in paragraph 124-780(1)(c) will be satisfied.

Paragraph 124-780(1)(d)

41.          Paragraph 124-780(1)(d) requires that subsection 124-780(5) must be satisfied if subsection 124-780(4) applies.

42.          Subsection 124-780(4) provides that the conditions 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:

(a)          neither the original entity nor the replacement entity had at least 300 members just before the arrangement started (paragraph 124-780(4)(a)), or

(b)          the original interest holder, the original entity and the acquiring entity were all members of the same linked group just before the arrangement started (paragraph 124-780(4)(b)).

43.          You have stated that the original interest holder, as the original interest holder, and the ultimate holding company, as the acquiring entity, dealt with each other at arm's length. Regardless, paragraph 124-780(4)(a) would not apply, as the original company had more than 300 shareholders immediately prior to the arrangement and they were not members of the same linked group.

44.          Since subsection 124-780(4) does not apply to the arrangement, subsection 124-780(5) does not need to be satisfied. Consequently, the requirement in paragraph 124-780(1)(d) is satisfied.

45.          As all of the conditions prescribed in subsection 124-780(1) have been satisfied, the original interest holder is eligible to choose to obtain roll-over relief under Subdivision

46.          124-M.

Exceptions

47.          Section 124-795 sets out the exceptions in which scrip for scrip roll-over is not available under Subdivision 124-M. None of the exemptions would apply, as:

(a)          The original interest holder is an Australian resident company for taxation purposes[5]

(b)          The original interest holder is not able to disregard the capital gain under any other provision of the Income Tax Assessment Acts and the original interest holder and the ultimate holding company are not part of the same wholly-owned group[6]

(c)           Division 122 and 615 are not applicable to the arrangement[7]

(d)          notification in writing was not received before the exchange that the original interest holder cannot obtain roll-over[8]

Question 3

Is the first element of the cost base of shares acquired in the ultimate holding company determined in accordance with sections 124-785 and 124-790?

Summary

The cost base of shares acquired in the ultimate holding company is determined in accordance with sections 124-785 and 124-790. The cost base is the portion of the cost base of the initial original company shares as is reasonably attributable to the replacement interests of ordinary and preference shares in the ultimate holding company.

Detailed reasoning

48.          Subsections 124-785(2) and (4) set out the methodology for working out the first element of the cost base and reduced cost base of each replacement share received as a result of the exchange of shares. In the original interest holder's case, the first element of the cost base or reduced cost base of each replacement ultimate holding company share received is calculated by reasonably attributing to it the cost base and reduced cost base of the original company shares for which it was exchanged.

49.          Subsection 124-785(3) sets out that you must reduce the cost base of your original interest (just before you stop owning it) by so much of that cost base as is attributable to an ineligible part under section 124-790.

50.          Section 124-790 deals with partial roll-over. At subsection 124-790(1) it explains that:

the original interest holder can only obtain 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.

51.          Subsection 124-790(2) states that the cost base of the ineligible part is that part of the cost base of your original interest as is reasonably attributable to it.

52.          Under the arrangement, the original interest holder received both cash consideration (ineligible proceeds) and the ultimate holding company shares (the replacement interest) in exchange for the original company shares. The original interest holder cannot obtain roll-over for the original company shares exchanged in return for the ineligible proceeds, as these constitute the ineligible part of its original interest. As per subsection 124-785(3) the cost base of the original company shares must be reduced by this portion when attributing the cost base of the replacement ultimate holding company shares to it.

53.          Partial roll-over relief applies under the arrangement, meaning that section 124-790 must be factored into the calculation of the original interest holder's cost base for the ultimate holding company shares when applying subsection 124-785(2). The cost base is the portion of the cost base of the initial the original company shares as is reasonably attributable to the replacement interests of ordinary and preference shares in the ultimate holding company.

[1] Section 102-20

[2] Section 108-5

[3] Subsection 104-10(1)

[4] Subsections 124-783(5) and (8)

[5] Subsection 124-795(1)

[6] Subsection 124-795(2)

[7] Subsection 124-795(3)

[8] Subsection 124-795(4)

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