Edited version of your private ruling

Authorisation Number: 1012536534491

Ruling

Subject: Scrip for scrip roll-over

Question 1

Does the Commissioner consider that the scrip for scrip roll-over requirement regarding choice contained in paragraph 124-780(3)(d) of the Income Tax Assessment Act 1997 (ITAA 1997) has been met?

Answer

No.

Question 2

Will the Commissioner allow an extension of time until XX/XX/20XX for the joint choice required under paragraph 124-780(3)(d) of the ITAA 1997 to be made?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

B Co sold its wholly owned subsidiary C Co to D Co by exchanging all its shares in C Co for X shares in D Co.

The CGT event in relation to the transaction occurred in the year ended 30 June 20XX and resulted in a capital gain.

B Co is a 'significant stakeholder' in relation to the arrangement for the purposes of section 124-783 of the ITAA 1997.

B Co has not informed D Co in writing of the cost base of the C Co shares worked out just before the CGT event.

D Co has not sold any of the C Co shares.

B Co believes that it made the choice to obtain the scrip for scrip roll-over relief pursuant to Subdivision 124-M of the ITAA 1997 and lodged its income tax return for the year ended 30 June 20XX consistent with this by not including the capital gain.

It was only recently when B Co's advisors were investigating previous transactions prior to a proposed arrangement was it determined that whether or not the choice had been made for the purposes of paragraph 124-780(3)(d) was a matter that required further consideration. 

The Commissioner was informed that, despite B Co's recollection that all relevant choices had been made, no written documentation, except for the way in which the parties lodged their income tax returns, could be retrieved. This was despite B Co's recent efforts to retrieve that written documentation from its own records and also by making requests of D Co and its advisors. B Co's advisors were of the view, which was accepted by B Co, that the prudent course of action was to obtain a ruling from the Commissioner in respect of whether the relevant choice had been made or alternatively request that the Commissioner grant an extension of time to B Co to make the choice.

Apart from the requirements contained in paragraphs 124-780(3)(d) and (e) of the ITAA 1997, all the other requirements for scrip for scrip roll-over relief have been met.

Note: This private ruling is issued based on the facts you have provided above that the other requirements have been met and that the relevant CGT event occurred in the year ended 30 June 20XX. The Commissioner has not considered these matters.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 Paragraph 124-780(3)(e).

Income Tax Assessment Act 1997 Section 103-25.

Reasons for decision

All legislative references that follow are to the Income Tax Assessment Act 1997.

Where there is a takeover, CGT roll-over relief may be available under Subdivision 124-M for the shareholders of the target company who exchange their shares in the target company for shares in the acquiring company.

Where the shareholder of the target company is a 'significant stakeholder' for the purposes of section 124-783, the acquiring company inherits the shareholder's historic cost base for the shares if the roll-over is chosen (section 124-782).

The scrip for scrip roll-over conditions that require discussion in this case are contained in paragraphs 124-780(3)(d) and (e) which state the following:

(d) the original interest holder chooses to obtain the roll-over or, if section 124-782 applies to it for the arrangement, it and the replacement entity jointly choose to obtain the roll-over; and

(e) if that section applies, the original interest holder informs the replacement entity in writing of the *cost base of its original interest worked out just before a CGT event happened in relation to it.

The choice to obtain the roll-over must be made by the day the relevant income tax return is lodged (paragraph 103-25(1)(a)) or within a further time allowed by the Commissioner (paragraph 103-25(1)(b)).

Subsection 103-25(2) states that the way the relevant income tax return is prepared is sufficient evidence of the making of the choice.

In the present case, section 124-782 applies. Therefore, for the conditions in paragraphs 124-780(3)(d) and (e) to be met, the choice to obtain the scrip for scrip roll-over must have been made jointly by B Co and D Co; and B Co must have informed D Co in writing of its historic cost base for the C Co shares worked out just before the CGT event.

The way B Co prepared its tax return (by not including the capital gain) was consistent with making the choice.

However, as D Co has not sold any of its C Co shares, the way it prepared its tax returns sheds no light on whether it has made the choice. Also, before D Co could make an informed choice, it would be expected that it would have been informed in writing of B Co's historic cost base for the C Co shares (as required under paragraph 124-780(3)(e)). The fact that this did not occur points to D Co not having made the choice. Therefore, without any written evidence that D Co has made the choice, it is not considered that the requirement under paragraph 124-780(3)(d) for a joint choice to be made has been met.

Extension of time

With respect to the exercise of the discretion contained in paragraph 103-25(1)(b) the Commissioner considers the following factors:

(1) there should be evidence of an acceptable explanation for the period of extension requested and that it would be fair and equitable in the circumstances to provide such an extension

(2) account must be had to any prejudice to the Commissioner which may result from the additional time being allowed, however the mere absence of prejudice is not enough to justify the granting of an extension

(3) account must be had of any unsettling of people, other than the Commissioner, or of established practices

(4) there must be a consideration of fairness to people in like positions and the wider public interest

(5) whether there is any mischief involved; and

(6) a consideration of the consequences to the taxpayer in granting an extension.

B Co believed that the choice to obtain the scrip for scrip roll-over had been made. It was only recently when B Co's advisors were investigating previous transactions prior to a proposed arrangement was it determined that whether or not the choice had been made for the purposes of paragraph 124-780(3)(d) was a matter that required further consideration. 

If additional time was allowed, there would be no prejudice to the Commissioner, nor would there be any unsettling of people or of established practices. Anyone in a similar position would be able to request a similar extension and there was no mischief involved in the request. The consequence of allowing further time is that the scrip for scrip roll-over would be available, enabling B Co to take advantage of the choice allowed in the legislation (if it also meets the further requirement of informing D Co of its historic cost base for the C Co shares).

Having regard to all the circumstances, it is considered reasonable for the Commissioner to allow under paragraph 103-25(1)(b) an extension of time until XX/XX/20XX for the choice under paragraph 124-780(3)(d) to be made.

It should be noted that the choice must be made jointly by B Co and D Co.

Also, as discussed previously, in order to meet paragraph 124-780(3)(e) B Co must inform D Co in writing of its historic cost base for the C Co shares.