Edited version of private advice

Authorisation Number: 1052285522605

Date of advice: 13 August 2024

Ruling

Subject: Scrip for scrip roll-over relief

Question

Will the taxpayer be eligible for the CGT scrip for scrip roll-over relief under Subdivision 124-M of the Income Tax Assessment Act 1997 (ITAA 1997) for any capital gain in respect of the proposed exchange of his shares in Company A for shares in the Company B?

Answer

The taxpayer is eligible to access the roll-over relief pursuant to Subdivision 124-M of the ITAA 1997.

This ruling applies for the following period:

Period ending 30 June 2025

The scheme commenced on:

1 July 2024

Relevant facts and circumstances

The taxpayer

•         The Taxpayer is a resident of Australia for taxation purposes.

•         The taxpayer is a minority shareholder in Company A.

•         The shares in Company A are held on capital account.

Company A

•         Company A was incorporated in Australia in 2021 as a proprietary company.

•         Company A is not a member of a wholly owned group.

•         All Company A shares currently on issue are ordinary shares.

•         No shareholder together with associates have shares that carry 30% or more of the voting rights, or the rights to receive 30% or more of the dividends, or the right to receive 30% or more of the distributions of capital of the company.

Company B

•         Company B was incorporated in Australia in 2017.

•         Company B is not a member of a wholly owned group.

•         All Company B shares currently on issue are ordinary shares, there are currently options on issue which will be exercised immediately prior to the acquisition of Company A.

Company A and Company B intend on merging their businesses under a common ownership structure.

Proposed transaction steps

Company B will acquire all of Company A's shares from Company A's shareholders.

All shareholders of Company A are participating on the same terms.

In consideration of the transfer, each of shareholders in Company A will receive newly issued shares in Company B.

The shares in Company B will be issued in the same proportion of the shareholding in Company A and will have a market value substantially the same as the market value of their shares in Company A.

The shareholders in Company will elect to apply for scrip for scrip roll-over and no party will decline.

Following the transaction both the original shareholders in Company A and Company B will be equal shareholders in Company B.

Company B will change its name, which will be a new brand representing both businesses.

Purpose of the merger

The companies intend to merge due to their complementary service offerings, internal knowledge and client bases. The merge is intended to achieve business synergy and leverage each party's existing competitive advantages.

Both companies are engaged in similar business activity. The constant development in the industry and technology world present both companies with significant market and growth opportunities to disrupt and challenge traditional large global service provider models.

Driven by the growing demand from customers seeking to transform and adopt next-generation technologies, Company and Company B are merging to deliver advanced solutions to a wider range of enterprises and government organisations in Australia.

The integration of the two businesses will enable the new entity to deliver a new generation of innovative and integrated business solutions.

A valuation process has been undertaken for both Company A and Company B, the companies are or will be substantially the same value at the time of the transaction.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 124-M

Income Tax Assessment Act 1997 section 995-1

Income Tax Assessment Act 1936 section 318

Does IVA apply to this private ruling?

Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or diverted profits tax benefit in connection with an arrangement.

If Part IVA applies, the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies, we will need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select 'Part IVA: the general anti-avoidancerule for income tax'.

Reasons for decision

All legislative references herein this are to the Income Tax Assessment Act 1997, unless otherwise indicated.

Subdivision 124-M allows a shareholder to choose roll-over where post-CGT shares are replaced with shares in another entity.

A taxpayer may obtain a roll-over under section 124-785 if the conditions in section 124-780 are satisfied. Section 124-780 contains a number of conditions for, and exceptions to, the eligibility of a shareholder to choose scrip for scrip roll-over. The main conditions and exceptions that are relevant in this case are as follows:

•         shares are exchanged for shares in another company;

•         the exchange occurs as part of a single arrangement;

•         conditions for arrangement are satisfied;

•         conditions for roll-over are satisfied;

•         further conditions are not applicable; and

•         exceptions to obtaining scrip for scrip roll-over are not applicable.

Shares are exchanged for shares in another company

Subparagraph 124-780(1)(a)(i) requires an entity to exchange a share in a company for a share in another company.

In order to obtain roll-over relief, the exchange must be in the legal form of 'shares' in a company. A share in a company has the meaning given by subsection 995-1(1) and means a share in the capital of the company and includes stock.

Company A and Company B are both companies, and the equity interest held in each entity are considered 'shares' within the definitions included in section 995-1.

Accordingly, this condition is satisfied as the taxpayer will receive shares in Company B in exchange for his shares.

The exchange is in consequence of a single arrangement

Paragraph 124-780(1)(b) requires that the exchange of shares is in consequence of a single arrangement that satisfies subsection 124-780(2) or (2A).

There is no legislative guidance as to when an exchange would occur 'in consequence of' an arrangement for the purposes of the scrip for scrip roll-over provisions. The term 'arrangement' is defined very broadly in section 995-1 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.

The Explanatory Memorandum to the New Business Tax System (Miscellaneous) Bill (No. 2) 2000, at paragraph 11.23, states:

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,

•         the intention of the parties in all the circumstances as evidenced by the objective facts.

As outlined in the proposed transaction, the offer will be made to all the shareholders in Company A. All shareholders will exchange their shares for shares in Company B under a single arrangement.

Conditions for arrangement are satisfied

The single arrangement must satisfy the conditions in subsection 124-780(2). Subsection 124-780(2) requires that the shares are exchanged 'in consequence of a single arrangement' that:

a)    results in the acquiring entity becoming the owner of at least 80% of the voting shares in the original entity; and

b)    is one in which all of the owners of voting shares are able to participate; and

c)    is one in which participation is available on substantially the same terms for all interest holders of a particular type.

80% or more ownership

Paragraph 124-780(2)(a) requires that the arrangement must result in the acquiring entity, or members of a wholly owned group, becoming the owner of 80% or more of the voting shares of the original entity.

This condition is satisfied as Company B will acquire 100% of the ordinary shares in Company A.

All owners of voting shares participate

Paragraph 124-780(2)(b) requires that the arrangement must be one in which at least all the owners of voting shares in the original entity (apart from the acquiring entity or members of the acquiring entity's wholly owned group) could participate.

This condition is satisfied as the proposed share exchange has been offered to all shareholders in Company A and all shareholders in this case will participate.

Participation is on substantially the same terms

Paragraph 124-780(2)(c) requires that the arrangement must be one in which the participation is available on substantially the same terms for all the owners of interests of a particular type in the original entity.

This condition is satisfied as the offer to acquire shares was made by Company B to Company A shareholders in proportion to their shareholdings in Company A. As discussed earlier, all shareholders will participate on the same terms.

The relevant conditions for rollover in subsection 124-780(3) are satisfied

As specified in paragraph 124-780(1)(c), the arrangement must also satisfy the following conditions for roll-over in subsection 124-780(3).

•         that the original interest was acquired on or after 20 September 1985 (paragraph 124-780(3)(a)),

•         that apart from the roll-over a capital gain would be made from a CGT event in relation to the original interest (paragraph 124-780(3)(b)),

•         the replacement shares are in the acquiring entity or an ultimate holding company (paragraph 124-780(3)(c)),

•         the original interest holder chooses to obtain the rollover and section 124-782 does not apply (paragraph 124-780(3)(d)), and

•         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 to an entity that is not a member of the group and in relation to the issuing of the replacement interest (paragraph 124-780(3)(f)).

Acquisition date

Paragraph 124-780(3)(a) requires the original interests to have been acquired on or after 20 September 1985. Company A was incorporated in 2021. Accordingly, the shares in Company A are post-CGT shares pursuant to paragraph 124-780(3)(a).

Capital gain

Paragraph 124-780(3)(b) requires a capital gain to be made from a CGT event happening in relation to the original interest if the roll-over did not apply. CGT event A1 will happen when the taxpayer and the shareholders in Company A dispose of their shares in Company A under the proposed share exchange.

A valuation process has been undertaken for both companies. The companies are or will be substantially the same value at the time of the transaction. It is expected that the taxpayer will make a capital gain on disposing of his shares in Company in exchange for shares in Company B, hence this condition is satisfied.

Replacement interest

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).

The replacement shares to be received by the taxpayer will be in Company B. Company B is an entity in which no other entity owns 100% of the shares. Hence, this condition is satisfied.

Roll-over choice

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

All of Company A's shareholders will elect to apply for scrip for scrip roll-over under the proposed merger.

Section 124-782 applies if an original interest holder is a significant stakeholder or a common stakeholder for the arrangement, which is discussed in the succeeding paragraphs.

Additional conditions (paragraph 124-780(3)(d) and section 124-782)

Certain integrity provisions seek to limit the inappropriate use of roll-over relief under subdivision 124-M where the same person or group has influence over both the acquired entity and the acquiring entity.

Where the original interest holders satisfy certain conditions generally related to their interests in the original entity and their replacement interests in the replacement entity, they may be considered either 'significant stakeholders' or 'common stakeholders'.

Significant or common stakeholders

Paragraph 124-780(3)(d) provides that, if section 124-782 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 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.

Subsection 124-783(1) provides that an original interest holder will be a significant stakeholder for an arrangement if it had a significant stake in the original entity just before the arrangement started and a significant stake in the replacement entity just after the arrangement was completed.

An entity has a significant stake in a company under subsection 124-783(6) if the entity, or the entity and the entity's associates between them have shares carrying 30% or more of the voting, dividend and capital rights of the company.

Similarly, in accordance with subsections 124-783(3) and (9), an entity will be a common stakeholder for an arrangement if together with their associates they hold shares carrying 80% or more of the voting, dividend and capital rights of the relevant companies both before and after the arrangement.

Following the proposed transaction both the original shareholders in Company A and Company B will be equal shareholders in Company B.

No shareholder of Company A holds more than 16.40% and none of the shareholders are associates. After the transaction, no shareholder will hold 30% or more in Company B.

No shareholder together with associates have shares that carrying 30% or more of the voting rights, or the rights to receive 30% or more of the dividends, or the right to receive 30% or more of the distributions of capital of the company.

Therefore, the taxpayer is not a significant stakeholder.

None of the shareholders in Company will hold 80% or more of the Company A shares just before the share exchange and they will also not be associates as defined by section 318 of the Income Tax Assessment Act 1936. Hence, there will be no common stakeholders for the share exchange.

As a result, section 124-782 will not apply.

Arm's length dealing

Subsection 124-780(4) provides:

The conditions specified in subsection (5) must be satisfied if the original interest holder and an 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; or

(b) the original interest holder, the original entity and an acquiring entity were all members of the same * linked group just before that time.

Subsection 124-780(5) provides:

The conditions are:

(a)  the * market value of the original interest holder's * capital proceeds for the exchange is at least substantially the same as the market value of its original interest; and

(b)  its replacement interest carries the same kind of rights and obligations as those attached to its original interest.

Section 995-1 defines 'arm's length' to mean the following:

"in determining whether parties deal at arm's length, consider any connection between them and any other relevant circumstance"

Whether the parties are dealing with each other will be determined by considering the terms of the dealing and any other relevant consideration including an analysis of the manner in which the parties conduct themselves in forming the transaction. In this ruling we have not fully assessed whether the conditions under subsection 124-780(5), rather we have included in our assumption that the parties are dealing with each other at arm's length.

Exceptions to roll-over

Under section 124-795, roll-over is not available where:

•         just before the exchange, the taxpayer is a foreign resident unless the replacement interest is taxable Australian property.

•         any capital gain that may arise from the replacement asset would not be subject to CGT (other than because of a roll-over).

•         The original interest holder and the acquirer are part of the same tax consolidated group and the acquiring entity is a foreign resident.

•         A roll-over would otherwise be available under Division 122 or Division 615.

•         the replacement entity chooses not to apply the roll-over and the taxpayer is notified in writing of this choice prior to the exchange.

The taxpayer is not a foreign resident. The taxpayer would also not be able to disregard a capital gain from the replacement interest but for the availability of a roll-over.

Company A and Company B are not members of the same wholly owned group prior to the exchange of shares. A roll-over under Division 122 and 615 will not apply in the proposed transaction. No parties in the transaction will choose to prevent the roll-over.

Accordingly, none of the exceptions apply.

Conclusion

The taxpayer can access the CGT roll-over relief under subdivision 124-M with respect to the exchange of shares detailed in the relevant facts and circumstances.

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