Edited version of private ruling

Authorisation Number: 1011761568048

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Ruling

Subject: Employee share scheme - capital gains tax - scrip for scrip rollover - 50% discount

Question 1: Will the cost base of your replacement shares acquired as part of the takeover be the market value of the shares on the date of the takeover?

Answer: No.

Question 2: Will you be eligible to apply the 50% discount to any capital gain made on the disposal of your replacement shares?

Answer: Yes.

This ruling applies for the following period:

Income year ended 30 June 2011

The scheme commenced on:

1 July 2010

Relevant facts and circumstances

You commenced employment with Company A after 20 September 1985.

Company A is registered as a foreign company in Australia, and is a subsidiary of an overseas parent entity, Company B. Company B is an unlisted company.

You were offered a number of employee shares by your employer as a reward for your services, and to encourage you to remain in their employment. As a result of this offer, you were granted number of shares in a number of income years.

The shares were offered not offered to all employees of Company A.

The shares were ordinary shares in Company B.

You did not pay any consideration to acquire the shares.

You did not make a section 139E election in relation to the shares.

Company C entered into a takeover agreement to acquire the outstanding equity of Company A with the takeover being completed a number of months later.

As a result of the takeover you received cash consideration and shares in Company C.

You will elect that scrip for scrip will apply.

You remained in the employment of Company A after the takeover.

You disposed of your Company C shares the following year after the holding restrictions were lifted.

You have provided a copy of copy of an extract from the Share Purchase Agreement between Company C and Company B. This document should be read in conjunction with, and forms part of your private ruling.

Reasons for decision

Scrip for scrip rollover

You may make a capital gain when a capital gains tax (CGT) event occurs to a CGT asset. The most common CGT event A1 happens when you dispose of an asset to someone else.

Where a company in which you own shares is taken over by another company, scrip for scrip rollover may be available under certain conditions. Where the conditions for the rollover are met, the capital gain made on the disposal of the original shares is disregarded until a later CGT event happens to the new shares. You are taken to have acquired the replacement shares for the cost base of the original shares.

The capital proceeds received for the disposal of the original shares will be the market value of the replacement shares plus any other consideration that you may have received as a result of the takeover.

When the original shares are exchanged for like shares plus something else, usually cash, you may be only eligible for a partial rollover because the roll-over only applies to the replacement interest. In this situation, the cost base of the original shares must be apportioned between the replacement shares and the cash, or other proceeds not eligible for rollover.

In your situation, you participated in an employee share scheme offered by your employer Company A. Under this scheme you were granted a number of shares in Company B on a number of occasions.

Company C entered into a takeover agreement to acquire the outstanding equity of Company B. As a result of the takeover you received a number of shares in Company C and a cash consideration amount.

Your shares in Company B were non-qualifying employee shares and the discount in relation to those shares should have been included in the income years in which they were granted. As the taxing point for those shares has passed, the Employee Share Scheme (ESS) rollover provisions will not apply and the CGT rollover provisions should be considered.

CGT event A1 happened when your Company B shares were taken over by Company C. Your capital proceeds for the disposal of the Company B shares consisted of the market value of the Company C shares you received in exchange for your Company B shares, and the cash consideration you received.

In this situation, the conditions for scrip for scrip rollover have been met in respect of the Company C shares that you received, and you have chosen to apply the rollover. This means that you are able to defer any capital gain that you made on these shares until a future CGT event happened to them, for example when you disposed of the Company C shares.

Cash consideration

Any capital gain made in respect of cash consideration received as part of the takeover arrangement should be included in your assessable income.

To calculate the capital gain, the cost base of the original shares will need to be apportioned, on a reasonable basis between the cash and the shares that you received. The Commissioner accepts that it is reasonable to use the following formula:

Cost base of X Cash consideration received___________________

shares Value of the share consideration plus the cash consideration

In your case you received cash consideration as part of the takeover arrangement and must apportion the cost base of your Company A shares to determine the capital gain you have made on the receipt of the cash consideration.

The cost base of your Company A shares is their market value on the date they were granted.

You must include the capital gain made in respect of the cash consideration in your assessable income in the income year in which it was received. As you are an individual who had owned the Company A shares for at least 12 months prior to the CGT event happening, and the CGT event happened after 21 September 1999, you are able to apply the CGT 50% discount to the capital gain you have made on the disposal of your Company A shares.

Cost base of replacement shares

The cost base of the replacement shares when partial scrip for scrip rollover applies can be calculated using the following formula:

Cost base of original shares Less Portion of cost base for cash consideration

Number of original shares

In your case, the cost base of your Company C shares will be calculated using the above formula.

Disposal of Company C shares

You disposed of your Company C shares. The cost base of these shares is based on the cost base of your original Company B shares. Therefore, you made a capital gain on the disposal of your Company B shares which must be included in your income tax return in the income year in which the shares were disposed of.

The combined period that you owned your original Company B and Company C shares was longer than 12 months. Therefore, you can apply the 50% CGT discount to the capital gain made on the disposal of your Company C shares.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-20
Income Tax Assessment Act 1997 Section 104-10
Income Tax Assessment Act 1997 Section 115-10
Income Tax Assessment Act 1997 Section 115-15
Income Tax Assessment Act 1997 Section 115-20
Income Tax Assessment Act 1997 Section 115-25
Income Tax Assessment Act 1997 Section 115-100
Income Tax Assessment Act 1997 Section 116-20
Income Tax Assessment Act 1997 Section 124-780
Income Tax Assessment Act 1997 Section 124-785
Income Tax Assessment Act 1997 Section 124-790
Income Tax Assessment Act 1997 Section 130-80