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Ruling

Subject: Scrip for Scrip Rollover

This ruling applies to Company A

Question 1

Will Company A, as head company of the Company A tax consolidated group, be eligible to unilaterally choose to obtain roll-over pursuant to section 124-780 of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of the exchange of shares in Company B1 for shares in Company F?

Answer

Yes

Question 2

Will the way in which Company A, as head company of the Company A tax consolidated group, prepares and lodges its income tax return for the year ended 30 June 20XX, be sufficient evidence of the making of its choice to obtain rollover pursuant to section 124-780 of the ITAA 1997?

Answer

Yes

This ruling applies for the following periods:

1 July 20XX - 30 June 20XX

The scheme commences on:

20XX

Relevant facts and circumstances

Company A is a publicly listed company and the head company of the Company A tax consolidated group.

Prior to the transactions which are the subject of this private ruling, the Company A tax consolidated group included the following businesses and investments:

1. Company B business ("the Company B Sub-Group")

Company A had a X% economic interest in the Company B Sub-Group.

2. Company F

Company A had a X% shareholding in Company F. Company F is a publicly listed company.

Transaction Background

Company A and Company B were separate accounting consolidated groups. By virtue of Company A owning 100% of the ordinary shares (the membership interests) issued by Company B, the Company B Sub-Group formed part of the Company A tax consolidated group.

Overall Transaction

The overall transaction commenced on XX and was completed on XX. It comprised of the following distinct but inter-connected parts:

1. the transactions that formed part of the Company C Restructure as defined by the share sale agreement dated XX (SSA);

2. the refinancing transactions within the Company B sub-group; and

3. the steps outlined in the timetable of events in the SSA.

1. The Company C Restructure

In accordance the SSA the Company C Restructure means the transfer of the Company B Group's shareholding in Company C (the Company C Shares) to Company B4 X.

2. Warranty provided at clause 4.4

SSA provides that Company A warrants that as at completion there will be no outstanding loans owed by any company B Group Company to any Company A Group company, other than the agreed Loan.

3. The time table of events in the SSA

i) Clause X of the SSA and clause X of the SSA

The completion steps (as contained in the SSA) include the following:

1. Company B was issued X% ordinary shares in Company F as part consideration for 100% of the shares in Company B1 ;

2. First Stage of Company G Investment - Company G was also issued some ordinary shares in Company F. ;

3. Acquisition of beneficial interest in the Sale shares by Company A;

4. Company F conducted the public offering and allocated and issued new ordinary Company F shares to successful applicants and registered those applicants as the holders of the corresponding Company F shares;

5. Company A Sell Down of its existing X% holding of Company F ordinary shares became unconditional.;

6. Second Stage of Company G Investment - Company G was issued with further Company F ordinary shares;

7. Repayment of Agreed Loan.

After completion of the SSA

· Company F had approximately X ordinary shares on issue of which Company A held X. Company A held X% of Company F ordinary shares.

· Company G, and others hold approximately X% of the ordinary shares in Company F.

· Institutional and retail investors hold approximately X% of the ordinary shares in Company F.

Company G and Company A are not associates for the purposes of section 318 of the ITAA 1936.

X shares in Company F were held by entities that were associates of Company A for the purposes of section 318 of the ITAA 1936. The shares held by these associated entities represent less than 0.1% of the shares in Company F.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 103-25

Income Tax Assessment Act Subdivision 124M

Income Tax Assessment Act 1997 section 124-780

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 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(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 section 124-782

Income Tax Assessment Act 1997 subsection 124-783(1)

Income Tax Assessment Act 1997 subsection 124-783(3)

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

Income Tax Assessment Act 1997 paragraph124-780(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 subsection 124-783(6)

Income Tax Assessment Act 1997 subsection 124-783(9)

Income Tax Assessment Act 1997 section 124-795

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

Income Tax Assessment Act 1997 paragraph 124-795(2)(a)

Income Tax Assessment Act 1997 paragraph 124-795(2)(b)

Income Tax Assessment Act 1997 subsection 124-795(3)

Income Tax Assessment Act 1997 Subdivision 124-G

Income Tax Assessment Act 1997 Division 122

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

Income Tax Assessment Act 1936 section 318

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

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 first 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 www.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-avoidance rule for income tax'.

Reasons for decision

Question 1

Scrip for scrip rollover enables a shareholder to disregard all or part of a capital gain they make from a share that is disposed of as part of a corporate restructure, including a merger, if the shareholder receives a replacement share in exchange.

Requirements for scrip for scrip rollover

Subdivision 124M contains a number of conditions for, and exceptions to, the eligibility of Company A to choose scrip for scrip rollover. The main conditions and exceptions that are relevant to the arrangement that is the subject of this Ruling are:

(a) shares are exchanged for shares in another company (subparagraph 124-780(1)(a)(i) of the ITAA 1997);

(b) the exchange occurs as part of a single arrangement (paragraph 124-780(1)(b) of the ITAA 1997);

(c) conditions for roll-over are satisfied (paragraph 124-780(1)(c) of the ITAA 1997);

(d) further conditions are not applicable (subsection 124-780(4)) of the ITAA 1997); and

(e) exceptions to obtaining scrip for scrip rollover are not applicable (section 124-795 of the ITAA 1997).

Shares are exchanged for shares in another company

Scrip for scrip roll-over is available if an entity (the original interest holder) exchanges a share in a company for a share in another company; subparagraph 124-780(1)(a)(i) of the ITAA 1997.

The exchange of shares in Company B1 from Company A to Company F satisfies the requirement in subparagraph 124-780(1)(a)(i) of the ITAA 1997 as shares in Company B1 were exchanged for shares in Company F. In this case, the legal nature of the replacement interest is the same as the original interest.

The exchange occurs as part of a single arrangement

Paragraph 124-780(1)(b) of the ITAA 1997 and subsection 124-780(2) of the ITAA 1997 require that the shares are exchanged 'in consequence of a single arrangement' that:

· Results in the acquiring entity (Company F) becoming the owner of at least 80% of the voting shares in the original entity (Company B1);

· Is one in which all of the owners of the voting shares in Company B1 are able to participate; and

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

The term 'arrangement' is defined in subsection 995-1 (1) of the ITAA 1997 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.

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.

The acquiring entity must acquire the shares 'in consequence' of a single arrangement. An exchange of shares occurs in consequence of a single arrangement if it occurs 'as a result of' the single arrangement; Reseck v Federal Commissioner of Taxation 75 ATC 4213; (1975) 5 ATR 538.

In the context of the scrip for scrip rollover provisions, the exchange of shares in Company B1 for shares in Company F is considered to be in consequence of a single arrangement.

The arrangement commenced on XX and was completed on XX.

Due to their contractual inter-dependence the arrangement includes the following:

· the transactions that form part of the Company C Restructure as defined by the SSA; and

· the steps outlined in the timetable of events in the SSA.

The single arrangement must also satisfy the following conditions.

(a)Acquiring entity becoming the owner of 80% or more of the voting rights in the original entity.

Paragraph 124-780(2)(a) of the ITAA 1997 requires that shares in an entity be exchanged in a single arrangement that results in another entity becoming the owner of 80% or more of the voting shares in the original entity.

This requirement is satisfied as Company B1 has only one class of shares on issue and on completion of the arrangement Company F became the owner of 100% of the ordinary shares in Company B1.

(b)All of the owners of voting shares in the original entity are eligible to participate in the arrangement

Paragraph 124-780(2)(b) of the ITAA 1997 requires that the exchange of shares is in consequence of a single arrangement in which at least all owners of the voting shares in the original entity (apart from the acquiring entity or members of the acquiring entity's wholly-owned group) could participate.

This requirement is satisfied because Company A was the only shareholder in Company B1 and all of the shares were disposed of by Company A in satisfaction of paragraph 124-780(2)(b) of the ITAA 1997.

(c)Participation available on substantially the same terms

Paragraph 124-780(2)(c) of the ITAA 1997 requires that the exchange is in consequence of a single arrangement in which participation is available on substantially the same terms for all of the owners of interests of a particular type in the original entity.

As Company A was the only shareholder of Company B1 participation in the arrangement was available to all of the owners on substantially the same terms as required under paragraph 124-780(2)(c) of the ITAA 1997.

Conditions for rollover are satisfied

Paragraph 124-780(1)(c) of the ITAA 1997 requires that the conditions for rollover outlined in subsection 124-780(3) of the ITAA 1997 are met.

The conditions in subsection 124-780(3) of the ITAA 1997 are as follows:

(a)Original interests acquired by the original interest holder on or after 20 September 1985.

Paragraph 124-780(3)(a) of the ITAA 1997 requires that the original interest holder acquired their original interests on or after 20 September 1985.

In this case, Company A acquired its shares in Company B1 after 20 September 1985. Accordingly the requirement in paragraph 124-780(3)(a) of the ITAA 1997 has been satisfied.

(b)Apart from roll-over a capital gain would have been made by the original interest holder on a CGT event happening to its original interest.

Paragraph 124-780(3)(b) of the ITAA 1997 requires that, apart from the rollover, the original interest holder would have made a capital gain from a CGT event happening in relation to its original interest.

It is assumed for the purposes of this ruling that the cost base of the Company B1 shares was less than the market value of the Company F ordinary shares that formed the capital proceeds in respect of the CGT event that occurred as a consequence of the arrangement. Accordingly it is assumed that this condition for rollover is satisfied.

(c)The replacement interest acquired by the original interest holder is a share in the acquiring entity or an ultimate holding company.

Paragraph 124-780(3)(c) of the ITAA 1997 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.

This requirement will be satisfied as Company A will receive shares in Company F, the acquiring entity under the arrangement.

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

Paragraph 124-780(3)(d) of the ITAA 1997 provides that the original interest holder must choose to obtain scrip for scrip roll-over or, if section 124-782 of the ITAA 1997 applies to it for the arrangement, it and the replacement entity must jointly choose to obtain the rollover.

The taxpayer's intention is to unilaterally choose scrip for scrip rollover, if section 124-782 of the ITAA 1997 is not applicable.

Significant Stakeholder

Section 124-782 of the ITAA 1997 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.

Pursuant to subsection 124-783(1) of the ITAA 1997 an original interest holder is a significant stakeholder for an arrangement if it had a significant stake in the original entity before the arrangement started and a significant stake in the replacement entity after the arrangement was completed.

Subsection 124-783(6) of the ITAA 1997 provides that an entity will have a significant stake in a company if the entity or the entity and the entity's associates between them:

(a) have at that time shares carrying 30% or more of the voting rights in the company; or

(b) have at that time the right to receive for their own benefit 30% or more of any dividends that the company may pay; or

(c) have at that time the right to receive for their own benefit 30% or more of any distribution of capital of the company.

Before the arrangement was entered into, Company A owned 100% of the shares in Company B1. At this time, Company A is considered to have had a significant stake in Company B1 for the purposes of subsection 124-783(6) of the ITAA 1997.

After the arrangement was completed Company A held X% of Company F shares. A further X shares in Company F were held by entities that were associates of Company A. The shares held by these associated entities represents less than 0.1% of the shares in Company F.

Consequently, after the arrangement was completed Company A, on an associate inclusive basis, holds an interest in Company F that entitles it to:

· less than 30% of the voting rights;

· less than 30% of the rights to capital; and

· less than 30% entitlement to dividends.

Whilst Company A had a significant stake in the original entity it does not have a significant stake in the replacement entity after the arrangement is completed. Therefore Company A is not considered to be a significant stakeholder.

Common stakeholder

Pursuant to subsection 124-783(3) of the ITAA 1997 an original interest holder is a common stakeholder for an arrangement if it had a common stake in the original entity just before the arrangement started and a common stake in the replacement entity just after the arrangement was completed.

Subsection 124-783(9) of the ITAA 1997 provides that if the original entity and the acquiring entity are companies, an entity, or two or more entities, have a common stake in the original entity just before the arrangement started and in the acquiring entity just after the arrangement was completed if the entity or the entities, and their associates between them:

(a) had 80% or more of:

(i) the voting rights in the original entity just before the arrangement started; and

(ii) the voting rights in the replacement entity just after the arrangement was completed; or

(b) had the right to receive for their own benefit 80% or more of;

(i) any dividends that the original entity may pay just before the arrangement started; and

(ii) any dividends that the replacement entity may pay just after the arrangement was completed; or

(c) had the right to receive for their own benefit 80% or more of:

(i) any distribution of capital of the original entity just before the arrangement started; and

(ii) any distribution of capital of the replacement entity just after the arrangement was completed.

The common stakeholder test does not apply to Company A as, whilst it had a common stake in Company B1, it did not have a common stake in the replacement entity, Company F. Therefore, Company A is not considered a common stakeholder.

Given that Company A is neither a significant stakeholder nor a common stakeholder, section 124-782 of the ITAA 1997 has no application. Consequently, Company A can unilaterally choose to obtain scrip for scrip rollover under paragraph 124-780(3)(d) of the ITAA 1997.

Further conditions are not applicable

Subsection 124-780(4) of the ITAA 1997 provides that the additional requirements in subsection 124-780(5) of the ITAA 1997 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 (Company B1) nor the replacement entity (Company F) had at least 300 members just before the arrangement started (paragraph 124-780(4)(a) of the ITAA 1997); 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) of the ITAA 1997).

Regardless of whether Company A and Company F dealt with each other at arm's length paragraphs 124-780(4)(a) and 124-780(4)(b) of the ITAA 1997 will not apply as Company F had at least 300 members just before the arrangement started and Company A, Company B1 and Company F were not all members of the same linked group just before the arrangement started.

Therefore, the further conditions in subsection 124-780(5) of the ITAA 1997 are not relevant.

Exceptions to obtaining scrip for scrip rollover are not applicable

Section 124-795 of the ITAA 1997 contains a number of exceptions where scrip for scrip rollover cannot be chosen. The exceptions where scrip for scrip rollover cannot be chosen are as follows:

(a) Original interest holder is a resident of Australia

Subsection 124-795(1) of the ITAA 1997 provides that rollover 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 not taxable Australian property.

Company A is a resident of Australia at the time of the arrangement. As a consequence, the exception in subsection 124-795(1) of the ITAA 1997 will not apply to limit this ruling in that regard.

(b) A capital gain cannot (apart from the rollover) be otherwise disregarded

Paragraph 124-795(2)(a) of the ITAA 1997 provides that the rollover is not available if any capital gain the original interest holder might make from their replacement interest would be disregarded (except because of a rollover). The facts provided in support of this ruling application do not indicate that this exception is applicable.

(c) Acquiring entity is not a foreign resident

Paragraph 124-795(2)(b) of the ITAA 1997 provides that the rollover is not available if the original interest holder and the acquiring entity are members of the same wholly owned group just before the original interest holder stop owning their original interest and the acquiring entity is a foreign resident.

This exception will not apply as Company A and Company F were not members of the same wholly - owned group just before the arrangement was implemented. In addition, Company F is not a foreign resident entity.

(d) No rollover is available under Division 122 or Subdivision 124-G

Subsection 124-795(3) of the ITAA 1997 provides that the rollover is not available if a rollover can be chosen under Division 122 or Subdivision 124-G of the ITAA 1997.

This exception will not apply as the circumstances of this arrangement are such that a rollover pursuant to Division 122 or Subdivision 124-G of the ITAA 1997 is not available.

Availability of Scrip for Scrip rollover for Company A

Company A, as head company of the Company A tax consolidated group, will be eligible to unilaterally choose to obtain roll-over pursuant to section 124-780 of the ITAA 1997 in respect of the exchange of shares in Company B1 for ordinary shares in Company F.

Company A is considered to be neither a significant stakeholder nor a common stakeholder for the purposes of section 124-782 of the ITAA 1997. Accordingly, section 124-782 of the ITAA 1997 has no application in this instance and Company A can unilaterally choose to obtain scrip for scrip rollover under paragraph 124-780(3)(d) of the ITAA 1997.

The requirements contained in Subdivision 124M of the ITAA 1997 are all considered to be satisfied.

Question 2

The way in which Company A, as head company of the Company A tax consolidated group, prepares and lodges its income tax return for the year ended 30 June 2011, will be sufficient evidence of the making of its choice to obtain rollover pursuant to section 124-780 of the ITAA 1997. This is in accordance with section 103-25 of the ITAA 1997.

Please note that an entity which made a capital gain during the year is required to complete a Capital Gains Tax (CGT) Schedule. "Part K" in the 2011 Schedule (NAT 3423-6.2011), requires an entity to report details regarding scrip for scrip rollover.