Senate

New Business Tax System (Miscellaneous) Bill (No. 2) 2000

Revised Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)
This Memorandum takes account of amendments made by the House of Representatives to this Bill as introduced.

Chapter 11 - Scrip for scrip roll-over

Outline of Chapter

11.1 This Chapter explains the amendments, to be made by Schedule 5 to this Bill, relating to the CGT scrip for scrip roll-over provisions in Subdivision 124-M of the ITAA 1997. Subdivision 124-M was inserted in the ITAA 1997 by the Capital Gains Tax Act, which received Royal Assent on 10 December 1999.

11.2 Subdivision 124-M allows a CGT roll-over when original equity interests (original interests) in one entity are exchanged for replacement equity interests (replacement interests), typically because of a takeover. This roll-over defers recognition of any capital gain (but not a capital loss) until a CGT event happens to the replacement interests.

Context of Reform

11.3 The Government introduced the scrip for scrip roll-over to remove an impediment to corporate acquisition activity in Australia.

11.4 In Treasurer's Press Release No. 87 of 10 December 1999, the Treasurer indicated that the Government was assessing options to deal with the cost base of original interests to the acquiring entity. It also indicated that the Government was considering submissions on other aspects associated with the implementation of the roll-over.

Summary of new law

Extending the roll-over

11.5 The amendments will extend the circumstances in which scrip for scrip roll-over is available.

11.6 The amendments will ensure that roll-over may be available for takeovers undertaken by way of a scheme of arrangement where that scheme may not have been covered under the current law.

11.7 If the acquiring entity is a member of a wholly-owned group, roll-over will also be extended to situations ('downstream' acquisitions) where the original interest holder receives replacement interests in the ultimate holding company of the wholly-owned group.

11.8 A limited form of roll-over will be introduced for pre-CGT original interests, if the disposal of the interest results in a capital gain under CGT event K6. That event applies on the disposal of interests in certain private companies and trusts if at least 75% of the net value of the company or trust is represented by post-CGT acquired property.

Cost base rules for acquiring entity

11.9 The amendments will provide cost base rules for interests acquired by an acquiring entity.

11.10 The normal cost base rules will generally apply to determine the acquisition cost of interests acquired by an acquiring entity in the original entity. There will be an exception where an interest holder, together with associates, has either:

a 30% or more stake in the original entity and in the entity in which the replacement interest is issued; or
at least part of an 80% or more holding common to both entities (but only if both entities are not widely-held).

11.11 In these cases, if the original interest holder and the replacement entity jointly elect for the roll-over, the cost base is to be transferred from the original interest holders to the acquiring entity.

11.12 The rules are modified if an acquiring entity is an original interest holder at the start of the arrangement.

Roll-overs involving non-resident companies

11.13 The amendments will limit the availability of roll-over in an arrangement where both the acquiring and original companies are non-residents.

11.14 Scrip for scrip roll-over for arrangements involving a non-resident original company and a non-resident acquiring company will only be available if:

the original company has at least 300 members; or
the acquiring company has at least 300 members or is a wholly-owned subsidiary of a non-resident ultimate holding company that has at least 300 members.

Other changes

11.15 The amendments will also make several technical changes and clarifications.

Comparison of key features of new law and current law
New Law Current Law
The roll-over will clearly apply to schemes of arrangement and cases where there is a cancellation of original interests and a new issue of interests. The current law may not allow the roll-over in these cases.
The roll-over will be available in certain downstream acquisitions. At present, an original interest must be exchanged for an interest in the acquiring entity itself.
There will be a limited form of roll-over arising from the exchange of a pre-CGT interest if a gain arises under CGT event K6. There is currently no roll-over in these circumstances.
Special cost base rules for interests acquired by the acquiring entity will be introduced. Under the current law, these interests have an acquisition cost equal to the market value of interests issued by the acquiring entity in return for the original interests (this is often equal to the market value of the original interests).
Scrip for scrip roll-over will be allowed for arrangements involving a non-resident original company and a non-resident acquiring company but only if:

the original company has at least 300 members; or
the acquiring company has at least 300 members or is a wholly owned subsidiary of a non-resident ultimate holding company that has at least 300 members.

Scrip for scrip roll-over is allowed for all arrangements involving a non-resident original company and a non-resident acquiring company.

Detailed explanation of new law

11.16 Currently, section 124-780 deals with company and trust interests. The amendments will split the provision into section 124-780 dealing with company interests and new section 124-781 dealing with trust interests.

Extending and clarifying the scope of the roll-over

Extension of roll-over

11.17 Under the current law, an acquiring entity must make 'an offer' to acquire specified interests in the original entity (existing paragraph 124-780(1)(b)). It has been argued that this requirement is inappropriate because it means that roll-over will not apply, for example, where:

a takeover is achieved by way of a scheme of arrangement, as there is generally no 'offer' by the acquiring entity; or
a transaction involves the cancellation/redemption of interests held by the original interest holders, as there is no acquisition by the acquiring entity.

11.18 The amendments will ensure that the roll-over does clearly apply in these cases.

11.19 An acquiring entity will no longer be required to make an offer. It will now be sufficient that the exchange be in consequence of an arrangement that results in an entity (an acquiring entity ) becoming the owner of 80% or more of the specified interests in the original entity. In the context of a wholly-owned group of companies, the arrangement must result in a company in the group (an acquiring entity ) increasing the percentage of voting shares that it owns in the original entity and the members of the group becoming the owners of 80% or more of those interests. [Schedule 5, item 4, paragraphs 124-780(2)(a) and 124-781(2)(a)]

11.20 An increase in the ownership of interests in an entity can result from an acquisition of additional interests or the cancellation of interests held by others. If an entity (or group) held 80% or more of the relevant interests prior to the start of the arrangement, roll-over will be available if that holding is increased.

11.21 For company cases, the arrangement must be one in which at least all owners of voting shares in the original entity can participate [Schedule 5, item 4, paragraph 124-780(2)(b)] . For trust cases, it must be one in which at least all owners of trust voting interests (or, where there are no voting interests, of units or other fixed interests) in the original entity can participate. [Schedule 5, item 4, paragraph 124-781(2)(b)]

11.22 Participation in the arrangement must have been on substantially the same terms for all of the owners of interests of a particular type in the original entity. [Schedule 5, item 4, paragraphs 124-780(2)(c) and 124-781(2)(c)]

11.23 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 objective facts. The following examples illustrate this point.

Example 11.1 Green Bottles Ltd proposes a scrip for scrip takeover for Tincans Ltd. Tincans has 2 classes of voting shares and options on issue. In respect of each type of interest Green Bottles makes an identical takeover offer to each holder. Green Bottles acquires 62% of the shares in Tincans through acceptances of the offer. Roll-over is not available to the shareholders in Tincans as Green Bottles did not acquire 80% of the shares under this arrangement.Six months later Green Bottles makes a second scrip for scrip offer to Tincans shareholders (a new arrangement) and as a consequence increases its shareholding to 85%. Co-incidentally the terms of the offer are substantially the same as the original arrangement. The shareholders in Tincans who accepted the offer under the second arrangement are eligible for scrip for scrip roll-over. Roll-over is still not available for the shareholders that participated in the first arrangement as the 80% threshold was not reached as a result of that arrangement even though both arrangements were on substantially the same terms.

Example 11.2 Jumbo Ltd makes a takeover offer for shares in Hippo Ltd (both are resident companies listed on the Australian Stock Exchange). Jumbo offers 2 of its shares for every 10 Class A Hippo shares and 1 share for every 20 Class B Hippo shares. As the offer in respect of both classes of shares are made concurrently they are considered to form part of one arrangement for the purposes of the roll-over.Jumbo obtains ASIC approval to establish a nominee sale arrangement for odd-lot shareholders. Shares in Jumbo that would otherwise be allocated to former Hippo shareholders are allocated to a nominee for sale if the shares do not constitute a marketable parcel. This does not prevent the arrangement being on substantially the same terms for all shareholders of a particular type.

Roll-over extended to 'downstream' acquisitions in company cases

11.24 At present, the law requires that taxpayers exchange their shares in the original entity for shares in the acquiring entity.

11.25 It is said to be common commercial practice, however, for a subsidiary of a group of companies to acquire the shares in the original entity, with shares in its ultimate holding company being issued as consideration. These arrangements are known as 'downstream' acquisitions.

11.26 It has been decided that scrip for scrip roll-over should be available for certain 'downstream' acquisitions. The amendments will ensure that the roll-over is available if an acquiring entity is a 100% subsidiary of another member of its wholly-owned company group and the replacement interest is a share or other relevant interest in the ultimate holding company. [Schedule 5, item 4, paragraph 124-780(3)(c)]

11.27 A consequential amendment is to be made to ensure that roll-over is not available for a non-resident who acquires replacement interests in a non-resident ultimate holding company entity. [Schedule 5, item 7, subsection 124-795(1)]

11.28 This measure is limited to companies. Its extension to trusts will be reviewed in association with the introduction of the consistent entity regime.

Limited form of roll-over for pre-CGT original interests

11.29 Roll-over was introduced to alleviate cash flow problems that arose in relation to meeting a tax liability resulting from a scrip for scrip transaction. Roll-over was not extended to the disposal of an original interest that was acquired prior to 20 September 1985 because there is generally no liability in these cases.

11.30 However, a liability can arise if the disposal of a pre-CGT original interest results in a capital gain under CGT event K6. That event applies on the disposal of interests in certain private companies and trusts if at least 75% of the net value of the company or trust is represented by post-CGT acquired property.

11.31 A modified form of roll-over is to be provided in this case. The roll-over will:

disregard a capital gain under CGT event K6 to the extent that roll-over would have been available had the original interest been acquired on or after 20 September 1985 [Schedule 5, item 2, subsection 104-230(10)] ;and
effect a cost base reduction of the replacement interests by the amount of the CGT event K6 gain that is disregarded [Schedule 5, item 10, subsection 124-800(2)] .

Cost base of interests acquired by acquiring entity

Why are cost base rules required?

11.32 At present Subdivision 124-M does not specify the first element of the cost base (i.e. acquisition cost) of an original interest in the hands of the acquiring entity. The effect of the general CGT cost base rules is that usually these interests will have an acquisition cost equal to their market value.

11.33 A 'step-up' to market value for an acquisition cost where no capital gain has been recognised creates a structural CGT issue involving potential tax deferral. For example, there is a deferral opportunity because the acquiring entity (in which original interest holders have an interest) can choose to sell the interests in the original trust or company (that have a market value cost base) rather than their underlying assets (on which a greater gain may be realised). This would allow the original interest holders to benefit from the reinvested untaxed gains attributable to gains on the assets of the original entity. Other jurisdictions (USA and Canada) do not allow a market value cost base.

11.34 The Treasurer's Press Release No. 87 of 10 December 1999 recognises that a market value cost base for the acquiring entity is generally not appropriate where a capital gain is not recognised for the transfer. However, it also recognises that requiring a cost base transfer from original interest holders may impose significant compliance costs, especially where the original entity is widely held.

11.35 The proposed amendments will require a cost base transfer only from original interest holders that are likely to have some influence over the acquiring entity.

How will the cost base rules operate?

11.36 Generally, the first element of the cost base of interests acquired by an acquiring entity will be determined under the general rules about cost base in Divisions 110 and 112 of the ITAA 1997. However, a cost base transfer will apply to interests in respect of which a roll-over was obtained in 2 cases only.

11.37 The first case is where, on an associate-inclusive basis, an entity has a 30% or more stake (significant stake) in the original entity before the arrangement and in the entity in which its replacement interests are held just after the arrangement. [Schedule 5, item 4, subsection 124-782(1) and subsections 124-783(1), (6) and (7)]

11.38 For a widely-held entity (generally one with 300 or more shareholder/beneficiaries), it will be assumed that no interest holder has a 'significant stake' in it if that assumption is reasonable. It would not be reasonable to make that assumption if, for example, evidence is available from which a reasonable person would conclude that there may be an interest holder with a 'significant stake'. [Schedule 5, item 4, subsection 124-783(8)]

Example 11.3 Yellow Co has 3 million ordinary shares on issue of which Brown Co holds 1 million. Mr Brown owns all the shares in Brown Co.A 1:3 takeover offer is made by Green Co for all the ordinary shares in Yellow Co. Before the takeover, Green Co has 1 million ordinary shares on issue. Mr Brown owns 600,000 ordinary shares in Green Co. Brown Co receives 333,333 shares in Green Co as part of the takeover arrangement.Immediately before the takeover arrangement, Brown Co owned 33% of the original entity Yellow Co. This is a significant stake.Immediately after the takeover arrangement, Brown Co and Mr Brown (an associate of Brown Co) together own 933,333 shares out of the 2 million shares on issue in Green Co. Again this is a significant stake.In order for roll-over to be obtained on the transfer of the shares by Brown Co to Green Co, there must be a joint roll-over choice by these companies. If this occurs, the cost base of the shares for Brown Co will become the first element of their cost base for Green Co.

Example 11.4 If Mr Brown had only 10,000 shares in Green Co just before the takeover arrangement, then the significant stake test would not be satisfied. Although Brown Co owned a 33% stake in Yellow Co before the arrangement, Brown Co and Mr Brown would own only 343,333 shares out of the 2 million shares in the acquiring company (Green Co) immediately thereafter. This is less than 30%. There would be no cost base transfer in this case.

11.39 An additional significant stake test applies if an acquiring entity for an arrangement is an original interest holder. In this case any other original interest holder may also be a significant stakeholder if:

it had a significant stake in the original entity before the arrangement; and
just after the arrangement it is an associate of the entity in which it holds replacement interests.

[Schedule 5, item 4, subsection 124-783(2)]

11.40 This test operates on an equivalent basis to the primary test taking into account associate interests that may not be appropriately counted where the acquiring entity is an original interest holder.

Example 11.5 Shares in Adventure Co are held as follows:

Atlantis Co - 45%;
Euphoria Co - 25%; and
widely-held by 500 unrelated entities - 30%.

Ivory Tower Co owns 90% of the shares in Atlantis Co and 75% of the shares in Euphoria Co. Atlantis Co makes an offer to acquire shares it does not hold in Adventure Co in exchange for shares in Atlantis Co.Atlantis Co is an associate of Euphoria Co just before the arrangement (see section 318 of the ITAA 1936). On an associate-inclusive basis Euphoria Co had a 70% stake (45% 25%) in Adventure Co prior to the arrangement. This is a significant stake.If Euphoria Co and Atlantis Co jointly elect for roll-over on Euphoria's shares in Adventure Co, their cost base will be transferred to Atlantis Co regardless of whether or not it has a significant stake in Atlantis Co immediately after the arrangement. This is because Euphoria Co and Atlantis Co are associates just after the arrangement.As Adventure Co is widely-held just before the arrangement the common stake test (see paragraph 11.41) will not apply.

11.41 The second case where a cost base transfer may be required is where an interest is part of an 80% or more common holding (a common stake) of interests (determined on an associate-inclusive basis) in a non-widely-held original entity just before the arrangement and in a non-widely-held replacement entity just after the arrangement. [Schedule 5, item 4, subsection 124-782(1) and subsections 124-783(3), (5), (9) and (10)]

Example 11.6 Charles, Ian, Peter and David, who are unrelated businessmen, each holds 25% of the 100 units in a small unit trust (Print Trust) which runs a printing business. Each unit has a market value of $250.They wish to reorganise the business by setting up a 'holding' trust (Hold Trust) that they, and their spouses, will control and in which they will all have an investment.Hold Trust is capitalised with $10 million and 50 units are issued to each of the 4 businessmen and their spouses. The trustee of Hold Trust makes an offer to each of Charles, Ian, Peter and David to acquire their units in Print Trust in exchange for units in Hold Trust. The market value of the replacement units is substantially the same as the original units.None of the stakes held by Charles, Ian, Peter and David qualifies as a significant stake.However, they each have a common stake in Print Trust and Hold Trust, because together they, with their associated spouses, have 100% of the rights to income and capital of both trusts.Provided Charles, Ian, Peter and David elect with Hold Trust for roll-over, the first element of cost base of their replacement interests in Hold Trust will be the cost base of their original interests in Print Trust. The first element of Hold Trust's interests in Print Trust will be the cost base of those same original interests in Print Trust.

11.42 An additional test applies if an acquiring entity for an arrangement is an original interest holder. Reflecting the fact that in this case direct and indirect interests in the original entity are maintained, another original interest holder (i.e. apart from the acquiring entity) may also have a common stake if the:

original entity is not widely-held just before the arrangement; and
replacement entity is not widely-held just after the arrangement.

[Schedule 5, item 4, subsection 124-783 (4) and (5)]

Example 11.7 Adventure Co has 3 non-associated shareholders:

Atlantis Co with 70% of its ordinary shares;
Euphoria Co with 15% of its ordinary shares; and
Capable Co with 15% of its ordinary shares.

All the shares in Atlantis Co are held by Ivory Tower A Co and B Co.Atlantis Co makes an offer to Euphoria Co and Capable Co to buy out their minority interests in Adventure Co in exchange for shares in Atlantis Co. Atlantis Co obtains a 15% holding from Euphoria Co and 5% from Capable Co, taking it to an 90% interest in Adventure Co.Neither Euphoria Co nor Capable Co had a significant stake in Adventure Co prior to the arrangement so the significant stakeholder test will not apply.However, Adventure Co was not widely-held before the arrangement and Atlantis Co was not widely-held after the arrangement. Because Atlantis Co was an original interest holder, there will be a cost base transfer in respect of the shares acquired from Euphoria Co and Capable Co.

11.43 In determining whether the above percentage tests for cost base transfer are met, all pre and post-CGT interests will be taken into account. However, as noted at paragraph 11.36 there is a cost base transfer only for those interests for which roll-over is obtained.

11.44 An original interest holder with a 'significant stake' or 'common stake', can obtain the scrip for scrip roll-over only where a joint election is made with the replacement entity in respect of the interest. While cost base transfer is not an issue that will directly affect the replacement entity in a downstream arrangement, it is considered appropriate to require it (as the ultimate holding company of the wholly-owned group) to make the election. The ultimate holding company will be part of the overall arrangement and would be expected to consult closely with the acquiring entity, or entities if more than one. In some cases involving cancellation of interests there may be more than one acquiring entity and the original interest holder would be unable to determine with which entity it was required to make a joint election. [Schedule 5, item 4, paragraphs 124-780(3)(d) and 124-781(3)(c)]

11.45 If a joint roll-over election is made, there will be a transfer of cost base from the original interest holder to the acquiring entity. The joint election will not need to be lodged with the Commissioner but must be in writing and include the interest holder's cost base details so that the acquiring entity can properly determine its acquisition cost. [Schedule 5, item 4, paragraphs 124-780(3)(e) and 124-781(3)(d)]

11.46 If a joint election is not made in respect of an interest forming part of a significant or common stake, scrip for scrip roll-over will not apply to it and the acquiring entity will determine its first element of cost base for it under the normal cost base rules. The acquiring entity may indicate to interest holders that have a significant stake or common stake its unwillingness to make a joint election at the start of the scrip for scrip arrangement. This may occur, for example, because the acquiring entity does not want to take on a potential tax liability that belonged to the holder of a significant stake or common stake.

11.47 For a downstream acquisition where the acquiring subsidiary issues debt or equity to the ultimate holding company, the acquisition cost to the ultimate holding company for that debt or equity will be based on the acquisition cost (as set out in paragraphs 11.36 to 11.46) for the shares in the original company that the subsidiary acquires. [Schedule 5, item 4, section 124-784]

Example 11.8 Target Co has 3 associated shareholders Able Co, Better Co and Competent Co that each holds 300 shares. Each share has a cost base of $200 and a market value of $333.Sub Co (a 100% subsidiary of Parent Co which holds 200 shares) makes a 1:3 offer to acquire all the shares in Target Co in exchange for shares in Parent Co. Before the takeover, Parent Co is worth $300,000 and is owned by 2 shareholders, Dependable Co and Efficient Co, each with 150 shares. Sub Co is worth $300,000. As part of the arrangement, Sub Co issues 200 shares to Parent Co making the total number of shares on issue to Parent Co 400.Able Co, Better Co and Capable Co each has (on an associate inclusive basis) a significant stake in Target Co before the arrangement and in Parent Co after the arrangement. They choose, with Parent Co, for roll-over.Each of the 900 shares acquired by Sub Co obtains a first element of cost base of $200. The total of these cost bases ($180,000) is reasonably apportioned to the 200 shares issued by Sub Co to Parent Co as follows: $180,000/200 = $900 per share.

11.48 In a downstream arrangement, a loan may be recorded by the ultimate holding company to the acquiring entity representing the value of the replacement interests issued by it. Under the cost base transfer rules, the cost base allocated to the debt (an asset of the ultimate holding company) may be less than its market value. If that debt is assigned to an independent third party for cash, so that the group indirectly realises the value of the original entity, it is not inappropriate that a capital gain arises on that transaction. However, if the loan is merely repaid by the acquiring entity, any capital gain made on the debt from that repayment is disregarded. This is appropriate because, within the group, there has been no realisation of any value of the original entity. [ Schedule 5, item 4, subsection 124-784(3)]

Limitation of scrip for scrip roll-over for arrangements involving non-resident companies

11.49 Currently, scrip for scrip roll-over is available for arrangements involving a non-resident original company and a non-resident acquiring company. Allowing roll-over for these arrangements could, however, facilitate the tax free repatriation of low taxed profits under the exemption for foreign dividends (section 23AJ of the ITAA 1936).

11.50 The exemption for foreign dividends is intended to reduce compliance costs under the foreign tax credit system by exempting from tax dividends received by an Australian company where little or no Australian tax would be payable after allowing a credit for foreign taxes. As such, it follows that the exemption for foreign dividends is intended to apply only to dividends paid from profits that have been taxed without concession in a listed comparable tax country.

11.51 The integrity of the exemption for foreign dividends could be compromised if scrip for scrip roll-over is allowed for arrangements involving closely-held foreign companies. Scrip for scrip roll-over could, for instance, be used to channel low taxed profits through a listed comparable tax country to obtain the exemption for foreign dividends.

Availability of the roll-over to be limited

11.52 To protect the exemption for foreign dividends, scrip for scrip roll-over for arrangements involving a non-resident original company and a non-resident acquiring company will only be available if:

the original company has at least 300 members; or
the acquiring company has at least 300 members or is a wholly-owned subsidiary of a non-resident ultimate holding company that has at least 300 members.

[Schedule 5, item 9, subsections 124-795(4) and (5)]

11.53 The roll-over will not be limited, however, where there is a cancellation of interests in the original company without new interests being issued to the acquiring company. Only where the acquiring company acquires an interest in the original company as a result of the arrangement will the roll-over be limited.

11.54 Roll-over will continue to be available for entities with over 300 members because the risk of abuse of the exemption for foreign dividends is lower where entities are not closely-held.

Foreign source income review

11.55 In Treasurer's Press Release No. 74 of 11 November 1999, it was announced that a comprehensive review will be undertaken of the foreign source income rules. It is proposed that the application of the scrip for scrip roll-over to arrangements involving non-resident companies be further considered as part of that review.

Technical amendments

11.56 This Bill makes a number of minor technical amendments to clarify the scope of and correct unintended outcomes arising from the current scrip for scrip roll-over provisions

Chess Units of Foreign Securities

11.57 Chess Units of Foreign Securities (CUFS) are a type of depositary interest developed by the Australian Stock Exchange to facilitate the transferring and holding of foreign securities.

11.58 CUFS are units of beneficial ownership in foreign securities. Legal title in the securities is held by an Australian depositary entity on behalf of and for the benefit of the CUFS holders.

11.59 For the purposes of scrip for scrip roll-over, the holder of a CUFS is to be treated as the owner of the security that the CUFS represents. For example, the exchange of a share in a company for a CUFS that relates to a share in another company may qualify for roll-over. [Schedule 5, item 4, subsections 124-780(6) and 124-781(5)]

Non arm's-length dealings

11.60 The roll-over conditions that apply in certain non arm's-length dealing are to be amended to provide:

that the market value of the capital proceeds for the exchange be at least substantially the same as the market value of the original interest; and
the replacement interests have the same kind of rights and obligations as the original interests.

[Schedule 5, item 4, subsections 124-780(5) and 124-781(4)]

11.61 These amendments will make the conditions easier to satisfy in practice without detracting from the integrity they give to the scrip for scrip measures.

Interaction with other roll-overs

11.62 The explanatory memorandum to the Capital Gains Tax Act that introduced Subdivision 124-M indicated at paragraph 2.47 that scrip for scrip roll-over does not apply in respect of a CGT event that qualifies for roll-over under Subdivision 124G.

11.63 The law will now make it clear that roll-over is not available in this case or in respect of a transaction that qualifies for roll-over under Division 122. [Schedule 5, item 8, subsections 124-795(3)]

11.64 Where the circumstances are such that roll-over would ordinarily be sought under those provisions, those provisions and not Subdivision 124-M should apply. Attempts to 'disqualify' arrangements from relief under those provisions (to secure a better, or different, relief under Subdivision 124-M) may attract the general anti-avoidance provisions in Part IVA of the ITAA 1936.

Partial roll-over where ineligible proceeds received

11.65 Only a partial roll-over is available if an original interest holder receives something (referred to in the legislation as 'ineligible proceeds') other than a replacement interest. The legislation will be amended to make it clearer that the 'ineligible proceeds' are not limited to cash. [Schedule 5, item 5, subsections 124-790(1)]

11.66 As there is no partial roll-over for an original interest that would have given rise to a capital loss there is no need to provide rules for determining the reduced cost base of the ineligible part. Therefore, subsection 124-790(3) is to be repealed. [Schedule 5, item 6, repealed subsection 124-790(3)]

Cost base of interest received for pre-CGT interest

11.67 The cost base rules for interests acquired in exchange for pre-CGT interests arguably only applies if the interest holder qualifies for roll-over in respect of a post-CGT interest. Section 124-800 is to be amended to make it clear that it applies to an original interest holder who exchanges pre-CGT original interests whether or not the interest holder otherwise qualifies for roll-over. [Schedule 5, item 10, subsection 124-800(1)]

Assets having the necessary connection with Australia

11.68 The note in subsection 124-795(1) of the ITAA 1997 indicates that if a non-resident's replacement interest is an interest in an Australian resident company or trust, it is treated as having the 'necessary connection with Australia'. This ensures that the replacement asset is a taxable asset when the non-resident later disposes of it.

11.69 Whilst item 9 in the table in section 136-25 of the ITAA 1997 indicates that certain replacement interests are treated as having the necessary connection with Australia, the operative provision in section 136-10 does not refer to this category of asset. Section 136-10 is to be amended so that a capital gain or loss can arise when a CGT event happens to an asset listed in item 9 of section 136-25. [Schedule 5, items 13 to 29, section 136-10]

11.70 Section 136-25 (item 9) will also be amended to include relevant replacement interests comprising options, rights and similar interests. [Schedule 5, item 30, section 136-25]

Application and transitional provisions

11.71 With the exception of the measure dealing with non-resident companies, the amendments will apply to CGT events that happen on or after 10 December 1999 - the commencement date of the scrip for scrip roll-over. The amendments were foreshadowed by Treasurer's Press Release No. 87 of the 10 December 1999 and generally will extend the scope of the roll-over. [Schedule 5, subitem 34(1)]

11.72 The amendment to limit the availability of roll-over where non-resident companies are involved will apply to CGT events that occur on or after 13 April 2000. [Schedule 5, subitem 34(2)]

11.73 Original interest holders who have obtained a roll-over under Subdivision 124-M before the date on which this Bill receives Royal Assent and who, as a result of amendments contained in this Bill are required to inform the acquiring entity of their cost base, must do so within 28 days from the day on which this Bill receives Royal Assent. [Schedule 5, item 31]

Consequential amendments

11.74 Amendments are made to the ITAA 1997 to reflect the changes that are being made to the scrip for scrip roll-over.

11.75 A note has been added to subsection 104-25(5) as a signpost to subsection 124-784(3) which disregards a capital gain in certain circumstances. [Schedule 5, item 1, subsection 104-25(5)]

11.76 Section 112-53 is inserted as a signpost to cost base rules in Subdivision 124-M. [Schedule 5, item 3, section 112-53]

11.77 Section 124-805 is deleted as the definition of 'trust voting interest' is now contained in subsection 124-781(6) [Schedule 5, item 11, repealed section 124-805] . The definition of trust voting interest in subsection 995-1(1) is also amended to reflect this change [Schedule 9, item 61, subsection 995-1(1)] .

11.78 Section 124-810 is amended as the rules it contains now operate for the whole of Subdivision 124-M. [Schedule 5, item 12, subsections 124-810(1) and (2)]

11.79 Subsection 995-1(1) is amended to include a definition of 'ultimate holding company'. [Schedule 9, item 62, subsection 995-1(1)]

11.80 Amendments are also made to subsections 396(3) and 406(3) of the ITAA 1936 to ensure a controlled foreign company is treated as a non-resident for the purpose of determining whether any interests it holds in a company or trust, as a result of choosing scrip for scrip roll-over, have the necessary connection with Australia. [Schedule 5, items 32 and 33, subsections 396(3) and 406(3)]


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