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Ruling

Subject: Scrip for scrip roll-over additional conditions

Question 1

Do the replacement interests in Company F carry the same kind of rights and obligations as those attached to the original interests held by the Taxpayer in Company E for the purposes of satisfying paragraph124-780(5)(b) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2013

The scheme commences on:

The scheme is in contemplation

Relevant facts and circumstances

Company E has only one class of unclassified ordinary shares on issue. These shares have rights to dividends, voting and to share in the distribution of surplus upon the winding up of the company.

The constitution of Company E provides the directors with the power to issue additional classes of shares and to declare a dividend to one class of share over another, if different classes of shares are on issue.

Company F has various classes of ordinary shares on issue. These shares all have rights to voting and to share in the distribution of surplus upon the winding up of the company and dividends (subject to a dividend being declared in respect of that class).

The articles of association of Company F provides the directors with the power to issue further classes of 'letter' designated ordinary shares that will rank equally with the other classes of ordinary shares in all aspects, subject to the approval of the 'X' class shareholder.

The directors also have the power to declare a dividend to one class of share over another, thereby excluding one or more shareholders from participating in the distribution.

Company F is proposing to acquire the remaining ordinary shares in Company E that it does not already own, in return for issuing replacement shares in Company F to Company E shareholders.

Assumptions

The conditions for roll-over outlined in paragraphs124-780(1) (a), 124-780(1)(b) and 124-780(1)(c) of the ITAA 1997 are satisfied.

Company E and Company F will not be dealing with each other at arm's length.

One or both of paragraphs 124-780(4) (a) and 124-780(4)(b) of the ITAA 1997 are satisfied.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 124-M

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)(d)

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

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

Income Tax Assessment Act 1997 paragraph 124-780(5)(b)

Reasons for decision

All subsequent references are to the ITAA 1997 unless otherwise indicated.

Summary

The replacement shares to be issued in Company F do not carry the same kind of rights and obligations as those attached to the original interests held by the Taxpayer in Company E for the purposes of paragraph124-780(5)(b).

Detailed reasoning

Subdivision 124-M allows capital gains tax (CGT) roll-over where shareholders in companies, unitholders in unit trusts or beneficiaries of fixed trusts, exchange these membership interests for comparable interests in an acquiring entity, usually as part of a takeover (see the Explanatory Memorandum to the New Business Tax System (Capital Gains Tax) Bill 1999) .

Scrip for scrip roll-over

A taxpayer can choose scrip for scrip roll-over under paragraph 124-780(3)(d) if the conditions in section 124-780 are satisfied. Relevantly these conditions include the requirement that:

a) shares in a company (the original shares) are exchanged for shares in another company (the replacement shares) (subparagraph 124-780(1)(a)(i)); and

b) if the taxpayer and the other company do not deal with each other at arm's length, the conditions in subsection 124-780(5) are satisfied (paragraph 124-780(1)(d)).

For the purposes of this Ruling it is assumed that Company E and Company F will not be dealing with each other at arm's length and that either paragraphs 124-780(4)(a) or 124-780(4)(b) will be met such that the additional requirements of subsection 124-780(5) will need to be satisfied.

Same rights and obligations

One of the conditions in subsection 124-780(5) is that the replacement shares carry the same kind of rights and obligations as those attaching to the original shares (paragraph 124-780(5) (b)).

In the present circumstances the Taxpayer will receive replacement shares in Company F with limited rights to voting and dividends, for its ordinary shares in Company E. Specifically the shares held by the Taxpayer in Company E have a full entitlement to the right to vote and the right to dividends.

In respect of the dividend rights, Company F's articles of association afford the directors the discretion to declare a dividend to one or more classes of share on issue at the exclusion of one or more other classes. Therefore, if a dividend is declared by the Company, the replacement shares may be excluded from participating in the distribution.

In contrast, whilst the directors of Company E have the power to declare a dividend to one class of share over another, by virtue of their constitution, Company E has only one class of unclassified ordinary shares currently on issue. Therefore, if a dividend is declared by Company E, the Taxpayer has an unqualified right to participate in the distribution and obtain the dividend entitlement.

Further, the unclassified ordinary shares in Company E entitle the Taxpayer to a pro rata entitlement to vote. The replacement shares in Company F on the other hand confer less than a pro rata entitlement given the holder of the 'X' class share is entitled to multiple votes per 'X' class share held.

Accordingly, the Taxpayer does not meet the requirement in paragraph 124-780(5)(b) as the replacement shares in Company F do not carry the same kinds of rights and obligations as those attached to the Taxpayers original shares in Company E.