Edited version of your written advice

Authorisation Number: 1012825647387

Date of advice: 19 June 2015

Ruling

Subject: Capital gains tax roll-over

Question 1

Can the shareholder obtain the roll-over under subdivision 124-M of the Income Tax Assessment Act 1997 (ITAA 1997) as a consequence of the arrangement to exchange shares held in Company A for shares issued by a new incorporated entity, Company B?

Answer

Yes

Question 2

If the answer to Question 1 is yes, will the capital gain on the shareholder's disposal of the Company A shares be disregarded under section 124-785(1); and will the first element of the cost base of the Company B shares for each shareholder be the same as the first element of the cost base of the exchanged Company A shares under section 124-785(2) and (3)?

Answer

Yes

Question 3

If the answer to Question 1 is yes, will the first element of the cost base of the Company A shares held by Company B (after the arrangement) be worked out under section 124-784B of the ITAA 1997?

Answer

Yes

This ruling applies for the following periods:

Year of income ended 30 June 2015

Year of income ended 30 June 2016

The scheme commences on:

1 July 2014

Relevant facts and circumstances

The taxpayer is a current shareholder of Company A.

All the Company A shares are post-CGT assets.

Under a single arrangement (the Arrangement) all the shareholders of Company A will exchange all of their fully paid Company A shares with a new company to be formed, (Company B) in return for the issue of fully paid shares in Company B in the same proportion as the Company A shareholdings.

There will be no other consideration provided by either party for the share exchange under the Arrangement.

A copy of the draft Share Exchange Agreement has been provided.

As a result of the share exchange under the Arrangement:

• Company B will hold 100% of the shares issued in Company A;

• the new shares issued in Company B to the current shareholders of Company A (under the Arrangement) will carry the same rights and obligations as those currently attached to the Company A shares.

• in the absence of a roll-over concession, the Taxpayer would make a capital gain from the disposal of the Company A shares which cannot be disregarded (except because of a roll-over).

The Company A shareholder chooses to obtain the roll-over pursuant to paragraph 124-780(3)(d) of the ITAA 1997 and will inform Company B in writing of the cost base of its shares worked out just before the CGT event happening in relation to it.

Company B, Company A and the shareholders of Company A will not choose to obtain the roll-over concessions under either Division 615 or Division 122 of the ITAA 1997.

Relevant legislative provisions

Income Tax Assessment Act 1997 Sub-division 124-M.

Reasons for decision

CGT event A1 happens as a result of the disposal by an Company A shareholder of their Company A shares to Company B (subsections 104-10(1) and 104-10(2) of the ITAA 1997.

The Company A shareholder will make a capital gain when CGT event A1 happened if the capital proceeds from the disposal of a Company A share exceeded its cost base. The capital gain is the amount of the excess. The Company A shareholder will make a capital loss if the capital proceeds were less than the reduced cost base of the Company A share. The capital loss is the amount of the difference (subsection 104-10(4) of the ITAA 1997).

The first element of the cost base of the Company A shares held by Company B (after the arrangement) will be worked out under section 124-784B of the ITAA 1997.

Availability of scrip for scrip rollover if a capital gain is made

Scrip for scrip rollover in Subdivision 124-M of the ITAA 1997 allows a shareholder to disregard a capital gain made from a share that is disposed of as part of a corporate restructure if the shareholder receives a replacement share in exchange. There are special rules for calculating the cost base and reduced cost base of the replacement share.

A capital gain will be only partially disregarded if, in addition to shares, the capital proceeds include something (ineligible proceeds) other than replacement shares (subsection 124-790(1) of the ITAA 1997).

Requirements for scrip for scrip rollover

Subdivision 124-M of the ITAA 1997 contains a number of conditions for, and exceptions to, the eligibility of a shareholder to choose scrip for scrip rollover. The main conditions and exceptions that are relevant in this case are:

• shares in a company are exchanged for shares in another company (paragraph 124-780(1)(a)

• the exchange happens as part of a single arrangement that satisfies subsection 124-780(2) (paragraph 124-780(1)(b))

• the relevant conditions for rollover in subsection 124-780(3) are satisfied (paragraph 124-780(1)(c))

• further conditions in subsection 124-780(4) are not applicable (paragraph 124-780(1)(d)

• exceptions to obtaining scrip for scrip rollover

The proposed arrangement satisfies all the requirements specified in paragraphs 124-780(1)(a), 124-780(1)(b), 124-780(1)(c) and 124-780(1)(d) of the ITAA 1997 and none of the exceptions in subdivision 124-M are relevant.

Therefore, if a Company A shareholder makes a capital gain from the disposal of their Company A shares to Company B under the scheme, they can choose scrip for scrip roll-over.

If the Company A shareholder chooses scrip for scrip roll-over, the capital gain that they make from the disposal of their Company A shares to Company B is disregarded (subsection 124-795(1)).

In accordance with subsections 124-785(2) and (3) of the ITAA 1997 the first element of the cost base of the Company B shares received will be the same as the first element of the cost base of the Company A shares exchanged.

In accordance with Section 124-784A of the ITAA 1997:

• Company B knows that a roll-over under subdivision 124-M will be obtained in relation to the arrangement (subparagraph 124-78A(1)(a)(i));

• there is a 'common stakeholder' for the arrangement (as defined in section 124-783) (subparagraph 124-78A(1)(a)(ii));

• the market value of the Company A shares held in Company B plus all shares issued by Company B in previous arrangements is more than 80% of the market value of all the shares (options, rights and similar interests) issued by Company B after the restructure (subsection 124-784A(2)).

Accordingly, the first element of the cost base of the Company A shares held by Company B immediately after the arrangement will be determined in accordance with the method statement under section 124-784B of the ITAA 1997.