Edited version of your written advice

Authorisation Number: 1012917774115

Date of advice: 14 December 2015

Ruling

Subject: Scrip for scrip roll-over.

Question 1

Is the receipt of shares in NewCo in exchange for shares in ACo assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) as ordinary income?

Answer

No.

Question 2

Can OldCo choose roll-over relief under Division 615 of the ITAA 1997 for disposing of their ordinary shares in ACo in exchange for ordinary shares in NewCo?

Answer

Yes.

Question 3

Is the consideration received for the disposal of shares in NewCo by OldCo into the Initial Public Offering (IPO) assessable under section 6-5 of the ITAA 1997 as ordinary income?

Answer

No.

Question 4

Is the consideration received for the disposal of shares in BCo by OldCo to NewCo assessable under section 6-5 of the ITAA 1997 as ordinary income?

Answer

No.

Question 5

Can OldCo choose partial roll-over relief under Subdivision 124-M of the ITAA 1997 for exchanging their ordinary shares in BCo for ordinary shares in NewCo?

Answer

Yes, the arrangement for the exchange of shares in BCo for shares in NewCo satisfies the conditions in Subdivision 124-M of the ITAA 1997, and none of the exclusions apply. Therefore, OldCo can choose partial roll-over for the NewCo shares they received in exchange for their BCo shares (i.e. to the extent it does not relate to ineligible proceeds).

This ruling applies for the following periods:

Year ending 30 June 2016

Year ending 30 June 2017

Year ending 30 June 2018

Year ending 30 June 2019

Year ending 30 June 2020

The scheme commences on:

1 July 2015

Relevant facts and circumstances

Group before the Restructure and IPO

OldCo is a discretionary trust which owns shares in less than five companies.

The entities in which OldCo own shares are part of a wider group. The various companies in the group trade under a common brand name but have different shareholders.

Each of the group of companies was incorporated in Australia.

All of the shares in the group are post CGT assets. All the shareholders of the group are residents of Australia under subsection 6(1) of the Income Tax Assessment Act 1936.

When originally established, the group of companies was structured into a number of silos.

As the group of companies continues to grow, the directors have decided it would be more efficient to restructure the group of companies into a single ownership structure.

Old Co

OldCo owned shares in ACo.

The total issued shares in ACo (ACo shares) were less than five ordinary shares in which OldCo held 1 share. The ACo shareholders (including OldCo) acquired their ACo shares after 19 September 1985.

OldCo also owned shares in BCo.

The total issued shares in BCo were X ordinary shares (BCo shares), held as follows:

• OldCo - 50 % or 50 shares; and

• Other entity - 50% or 50 shares.

The BCo shareholders (including OldCo) acquired their BCo shares after 19 September 1985.

OldCo was not a shareholder of DCo.

Group Restructure and IPO

It was always the intention to restructure the group into a single ownership and operational structure.

The directors also decided to list a minority interest in the group on the Australian Stock Exchange (ASX) to raise cash to increase the group's working capital and fund expansion opportunities.

The steps to effect the restructure and IPO are as follows:

(a) Step 1: Interposition of NewCo.

(i) OldCo and the other shareholders enter into a deed to exchange all their ACo shares for ordinary shares in NewCo.

(ii) The percentage ownership interests in NewCo are the same as they were in ACo.

The total issued shares in NewCo (NewCo Shares) were Y ordinary shares (less than five ordinary shares issued at incorporation, plus the Z ordinary shares issued under Step 1 pursuant to a deed), in which OldCo owned 25%.The NewCo shareholders acquired their NewCo shares after 19 September 1985.

(a) Step 2: NewCo is listed and sell down of shares in NewCo.

(i) The former shareholders of ACo, sell down some of their NewCo shares into the IPO.

(ii) NewCo issues new shares to investors in return for cash.

Prior to the sell down of NewCo shares into the IPO, a share split of the NewCo shares was undertaken. The purpose of the share split was to ensure the NewCo shareholders held the applicable number of shares in NewCo based on the number of shares sold under the Prospectus.

(b) Step 3A: Transfer of BCo to NewCo

(i) The shareholders of BCo enter into a deed to exchange all their BCo shares for a mix of NewCo shares and cash.

(a) Step 3B: transfer of DCo to NewCo (OldCo is not a shareholder of DCo).

(i) The shareholders of DCo enter into a deed to exchange all their DCo shares for a mix of NewCo shares and cash.

All the steps regarding the restructure of the group and IPO have occurred.

There is no significant stakeholder (as defined in subsection 124-783(1) of the ITAA 1997) or common stakeholder (as defined in subsection 124-783(3) of the ITAA 1997) in NewCo just after the arrangement is completed.

All entities are dealing at arm's length in relation to the arrangement.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 6(1)

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 subsection 6-5(2)

Income Tax Assessment Act 1997 subsection 104-10(1)

Income Tax Assessment Act 1997 subsection 104-10(2)

Income Tax Assessment Act 1997 Division 122

Income Tax Assessment Act 1997 Division 124

Income Tax Assessment Act 1997 Subdivision 124-A

Income Tax Assessment Act 1997 Subdivision 124-M

Income Tax Assessment Act 1997 paragraph 124-780(1)(a)

Income Tax Assessment Act 1997 paragraph 124-780(1)(b)

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(2A)

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 subsection 124-780(5)

Income Tax Assessment Act 1997 section 124-782

Income Tax Assessment Act 1997 section 124-784A

Income Tax Assessment Act 1997 subsection 124-784A(2)

Income Tax Assessment Act 1997 section 124-784B

Income Tax Assessment Act 1997 section 124-784C

Income Tax Assessment Act 1997 subsection 124-785(1)

Income Tax Assessment Act 1997 section 124-790

Income Tax Assessment Act 1997 subsection 124-790(1)

Income Tax Assessment Act 1997 subsection 124-790(2)

Income Tax Assessment Act 1997 section 124-795

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

Income Tax Assessment Act 1997 subsection 124-795(2)

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

Income Tax Assessment Act 1997 subsection 124-795(4)

Income Tax Assessment Act 1997 Division 615

Income Tax Assessment Act 1997 Subdivision 615-B

Income Tax Assessment Act 1997 section 615-1

Income Tax Assessment Act 1997 section 615-5

Income Tax Assessment Act 1997 subsection 615-5(1)

Income Tax Assessment Act 1997 paragraph 615-5(1)(a)

Income Tax Assessment Act 1997 paragraph 615-5(1)(b)

Income Tax Assessment Act 1997 paragraph 615-5(1)(c)

Income Tax Assessment Act 1997 section 615-15

Income Tax Assessment Act 1997 subsection 615-20(1)

Income Tax Assessment Act 1997 subsection 615-20(2)

Income Tax Assessment Act 1997 subsection 615-20(3)

Income Tax Assessment Act 1997 paragraph 615-20(3)(a)

Income Tax Assessment Act 1997 section 615-25

Income Tax Assessment Act 1997 subsection 615-25(1)

Income Tax Assessment Act 1997 subsection 615-25(2)

Income Tax Assessment Act 1997 subsection 615-25(3)

Income Tax Assessment Act 1997 paragraph 615-25(3)(a)

Income Tax Assessment Act 1997 section 615-30

Income Tax Assessment Act 1997 subsection 615-30(1)

Income Tax Assessment Act 1997 subsection 615-30(2)

Income Tax Assessment Act 1997 section 615-40

Income Tax Assessment Act 1997 section 615-65

Income Tax Assessment Act 1997 section 960-130

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

Reasons for decision

Question 1

Summary

The receipt of shares in NewCo in exchange for shares in ACo is not assessable under section 6-5 of the ITAA 1997 as ordinary income.

Detailed reasoning

Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of an Australian resident includes the ordinary income derived directly or indirectly from all sources, whether in or out of Australia.

Ordinary income is defined in section 6-5 of the ITAA 1997 to mean income according to ordinary concepts. The legislation does not provide any specific guidance on what is meant by income according to ordinary concepts. However, a substantial body of case law has evolved over time that identifies various factors that are taken into account in determining when an amount is income according to ordinary concepts.

Ordinary income includes income that arises in the normal scope of a taxpayer's business. In addition, in limited circumstances, gains from isolated transactions, not within the ordinary scope of the taxpayer's business may form part of ordinary income.

Taxation Ruling 92/3 Income tax: whether profits on isolated transactions are income
(TR 92/3) provides guidance in determining whether profits from isolated transactions are income and therefore assessable under section 6-5 of the ITAA 1997.

Paragraph 6 of TR 92/3 explains that a profit from an isolated transaction will generally be income when both of the following elements are present:

(a) the intention or purpose of the taxpayer in entering into the transaction was to make a profit or gain; and

(b) the transaction was entered into, and the profit was made, in the course of carrying on a business or in carrying out a business operation or commercial transaction.

If a transaction involves the sale of property (e.g. shares), it is usually necessary that the taxpayer has the requisite purpose at the time of acquiring the property. Accordingly, for a profit or gain on the sale of the property to be categorised as ordinary income, it is usually necessary for a taxpayer to have a profit-making intention at the time the shares were acquired.

At the time OldCo acquired the ACo shares, it did not have the intention of subsequently selling those shares at a profit as part of a commercial transaction. The investment in ACo was made for the purpose of holding the shares over the long term and potentially deriving dividend income.

The following factors further support the conclusion that the shares were held on capital account:

(a) OldCo is not in the business of share trading or undertakes other material investment activities;

(b) the shares have been held for a number of years; and

(c) OldCo does not turn over its assets on a regular basis.

Accordingly, any profit or gain on the sale of ACo shares by OldCo to NewCo under the deed is not ordinary income and instead it is capital in nature and subject to the capital gains tax provisions of the ITAA 1997.

Question 2

Summary

Yes, OldCo can choose roll-over relief under Division 615 of the ITAA 1997 for disposing their ordinary shares in ACo in exchange for ordinary shares in NewCo.

Detailed reasoning

Section 615-1 of the ITAA 1997 states:

You can choose for transactions under a scheme to restructure a company's or unit trust's business to be tax neutral, if under the scheme:

(a) You cease to own shares in the company or units in the unit trust; and

(b) In exchange, you become the owner of new shares in another company.

Subsection 615-5(1) of the ITAA 1997 states that you can choose to obtain the roll-over if:

(a) you are a member of a company (the original entity), and

(b) you and at least one other entity (the exchanging members) own all of the shares in it, and

(c) under the scheme for reorganising its affairs the exchanging members dispose of all their shares to an interposed company in exchange for shares in the interposed company (and nothing else), and

(d) the requirements of Subdivision 615-B are satisfied.

Subsection 995-1(1) of the ITAA 1997 states that a 'member', in relation to an entity, has the meaning given by section 960-130. Section 960-130 of the ITAA 1997 states that where an entity is a company, a stockholder is a member of the company.

OldCo and the other shareholders (the exchanging members) were ordinary shareholders of ACo (the original entity), and they owned all the shares in ACo, and therefore the conditions in paragraph 615-5(1)(a) and (b) of the ITAA 1997 are satisfied.

Paragraph 615-5(1)(c) of the ITAA 1997 requires that, under a scheme for reorganising its affairs, the exchanging members dispose of all their shares in the original company to another company (the interposed company) in exchange for shares in the interposed company (and nothing else).

Under the deed, the ACo shareholders (being OldCo and the shareholders) transferred all their ACo shares to NewCo in exchange for NewCo shares (and nothing else). The ordinary shares in NewCo were issued in the same ratio as those previously owned by OldCo and the other shareholders. Therefore, the requirement in paragraph 615-5(1)(c) of the ITAA 1997 is satisfied.

Further requirements are imposed by Subdivision 615-B of the ITAA 1997. They are:

• the interposed company must own all the original interests (section 615-15 of
the ITAA 1997);

• there are special requirements relating to your interests in the original entity (subsections 615-20(1),(2) and (3) of the ITAA 1997)

• there are special requirement relating to the interposed company (section 615-25 of the ITAA 1997), and

• the interposed company must make a particular choice (section 615-30 of the
ITAA 1997 does not apply in this case).

Section 615-15 of the ITAA 1997 states that the interposed company must own all of the shares in the original entity immediately after the time (the completion time) all the exchanging members have had their shares in the original entity disposed of, redeemed or cancelled under the scheme.

This requirement is satisfied because NewCo owns all the shares in ACo immediately after the exchanging members disposed of the shares in ACo.

• Subsection 615-20(1) of the ITAA 1997 requires that just after the completion time, each exchanging member must own:

• a whole number of shares in the interposed company; and

• a percentage of the shares in the interposed company that were issued to all the exchanging members that is equal to the percentage of the shares in the original company (that were disposed of to the interposed company) that the member owned.

These requirements are also satisfied because each original ACo shareholders (including OldCo) owns a whole number of shares in NewCo equal to the percentage of shares they originally held in ACo.

Subsection 615-20(2) of the ITAA 1997 requires that the ratio of the market value of each exchanging member's shares in the interposed company to the market value of the shares in the interposed company issued to all the exchanging members (worked out just after the completion time) is equal to the ratio of the market value of that member's shares in the original company that were disposed of to the interposed company to the market value of all the shares in the original company that were disposed of to the interposed company (worked out just before the first disposal).

This condition is satisfied in the present case.

Paragraph 615-20(3)(a) of the ITAA 1997 is also satisfied because all the ACo shareholders (including OldCo) to which this roll-over applies are Australian residents.

Section 615-25 of the ITAA 1997 imposes requirements specifically relating to the interposed company. Subsection 615-25(1) states that shares in the interposed company must not be redeemable shares. The shares issued in NewCo were not redeemable shares. Therefore this condition is satisfied.

Subsection 615-25(2) of the ITAA 1997 requires that each exchanging member who is issued shares in the interposed company must own the shares from the time they are issued to the completion time. This condition is satisfied as each NewCo shareholder (including OldCo) who was issued NewCo shares held those shares from the time they were issued until at least the completion time.

Additionally, subsection 615-25(3) of the ITAA 1997 requires that just after the completion time:

(a) the exchanging members must own all the shares in the interposed company; or

(b) entities other than those members must own no more than 5 shares in the interposed company and the market value of those shares expressed as a percentage of the market value of all the shares in the interposed company is such that it is reasonable to treat the exchanging members as owning all the shares.

Paragraph 615-25(3)(a) of the ITAA 1997 is satisfied in this case. All the original ACo shareholders held all the issued NewCo shares at completion time.

Furthermore, subsection 615-30(2) of the ITAA 1997 does not apply in this case because ACo is not the head company of a consolidated group immediately before the completion date. Instead, NewCo chooses that section 615-65 of the ITAA 1997 applies (subsection 615-30(1) of the ITAA 1997).

Section 615-40 of the ITAA 1997 outlines the CGT consequences of the roll-over under
Division 615 of the ITAA 1997. It states that the consequences set out in Subdivision 124-A of the ITAA 1997 apply to this roll-over as if that roll-over were a roll-over covered by Division 124 of the ITAA 1997. The capital gains tax consequences are as follows:

• For ACo shareholders (including OldCo), any capital gain or capital loss made from the disposal of ACo shares under the exchange is disregarded (section 615-40 and subsection 124-15(2) of the ITAA 1997).

• For ACo shareholders (including OldCo) the first element of the cost base and reduced cost base of each NewCo share they acquired under the exchange will be the total cost bases of all the ACo shares (worked out when the ACo shareholders dispose of their shares) apportioned over the number of NewCo shares (subsection 124-15(3) of the ITAA 1997).

Conclusion

OldCo can choose roll-over relief under Division 615 of the ITAA 1997. All the conditions under this Division are satisfied.

Question 3

Summary

The consideration received for the disposal of shares in NewCo by OldCo into the Initial Public Offering (IPO) is not assessable under section 6-5 of the ITAA 1997 as ordinary income.

Detailed reasoning

In Question 1, it was concluded that the ACo shareholders held their shares on capital account. They were holding those shares for long-term investment purposes.

The next question to consider is whether the disposal of NewCo shares as part of the arrangement may be taken to result in re-characterising the asset as being revenue in nature.

In McClelland v Federal Commissioner of Taxation 70 ATC 4115, the Privy Council held that the question to be answered was whether the facts revealed a mere realisation of capital, albeit in an enterprising way, or whether they justify a finding that the taxpayer went beyond this and engaged in a trade of dealing in the asset, albeit on one occasion only.

The issue was summarised in Californian Copper Syndicate v Harris (1904) 5 TC 159
(at p 165) by the Lord Justice Clerk:

It is quite a well settled principle, in dealing with questions of assessment of income tax, that where the owner of an ordinary investment chooses to realise it, and obtains a greater price for it than he originally acquired it at, the enhanced price is not profit... assessable to tax. But it is equally well established that enhanced values obtained from realisation or conversion of securities may be so assessable where what is done is not merely a realisation or change of investment, but an act done in what is truly the carrying on or carrying out of a business ... What is the line which separates the two classes of cases may be difficult to define, and each case must be considered according to its facts; the question to be determined being - is the sum of the gain that has been made a mere enhancement of values by realising a security, or is it a gain made in an operation of business in carrying out a scheme of profit-making?

In Ducker v Rees Roturbo Development Syndicate Ltd [1928] AC 132 and London Australia Investment Co Ltd v Federal Commissioner of Taxation (1977) 138 CLR 106, the same test was also applied. Furthermore, the dicta of the Lord Justice Clerk in Californian Copper Syndicate v Harris (1904) was quoted with approval by three out of the four High Court judges in Whitfords Beach Pty Ltd v Federal Commissioner of Taxation 82 ATC 4031. Particularly, Gibbs CJ who said (at p 4034):

When the owner of an investment chooses to realize it, and obtains a greater price for it than he paid to acquire it, the enhanced price will not be income within ordinary usages and concepts, unless, to use the words of the Lord Justice Clerk in Californian Copper... 'what is done is not merely a realisation or change of investment, but an act done in what is truly the carrying on, or carrying out, of a business'.

In contrast, there are other case-laws that concluded a particular transaction went beyond what was 'mere' realisation of a capital asset. Those cases include:

• Federal Commissioner of Taxation v The Myer Emporium Ltd (1987) 163 CLR 199;

• Case 16/98 98 ATC 209;

• Case W59 89 ATC 538; and

• Rotherwood Pty Ltd v Commissioner of Taxation 96 ATC 4203.

However, the facts in those cases are distinguished from this case.

It is considered that the disposal of NewCo shares into the IPO still remains a realisation of assets on capital account. This view is supported by the following factors:

• The objectives of the restructure and the IPO were: restructuring the entities into a single ownership and operational structure; and to raise cash to fund expansion opportunities for the group;

• the shareholders (including OldCo) have implemented steps to allow the business to achieve the best outcomes based on the present opportunities; and

• these shareholders have collectively maintained their majority interests going forward and are focused on building the business.

The fact that the shareholders applied themselves in an enterprising way to the realisation of a capital asset does not necessarily make the proceeds either profit from an undertaking or scheme, or income from a business. The facts in this case do not show that there was a prevailing intention to capture profits arising from the value of NewCo shares only. The fact that OldCo have not abandoned their original intention to hold their investments on capital account and develop the business, the selling down of NewCo shares is considered to be part of the overall scheme to take advantage of the current business opportunities and achieve their preferred business structure/strategy. Therefore, any profit generated from the disposal of NewCo shares is on capital account.

Question 4

Summary

The consideration received for the disposal of shares in BCo by OldCo to NewCo is not assessable under section 6-5 of the ITAA 1997 as ordinary income.

Detailed reasoning

OldCo holds their BCo shares on capital account. The same guidance and principles regarding the distinction between income and capital discussed in Question 1 apply here too.

The facts in this case demonstrate that at the time that OldCo acquired their BCo shares, it did not have the intention to sell those shares at a profit as part of a commercial transaction. The investment in BCo was made for the purpose of holding these shares over the long term and potentially deriving dividend income.

The following factors also support this conclusion:

(a) OldCo is not in the business of share trading or undertakes other material investment activities;

(b) The BCo shares have been held for a number of years; and

(c) OldCo does not turn over its assets on a regular basis.

Accordingly, it is concluded that the disposal of BCo shares by OldCo is not assessable under section 6-5 of the ITAA 1997 as ordinary income.

Question 5

Summary

Yes, the arrangement for exchange of shares in BCo for shares in NewCo satisfies the conditions in Subdivision 124-M of the ITAA 1997, and none of the exclusions apply. Therefore, OldCo can choose partial roll-over for the NewCo shares they received in exchange for their BCo shares (i.e. to the extent it does not relate to ineligible proceeds).

Detailed reasoning

CGT event A1 happens to the when they dispose of their BCo shares in exchange for cash and NewCo shares (subsections 104-10(1) and (2) of the ITAA 1997).

Scrip for scrip roll-over may be available under Subdivision 124-M of the ITAA 1997 when shares held in one company are exchanged for replacement shares in another company.

If scrip for scrip roll-over is available, the capital gain arising from the exchange of shares is disregarded until a future disposal of the replacement shares (subsection 124-785(1) of the ITAA 1997).

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 roll-over. The main conditions and exceptions that are relevant to the arrangement are:

(a) shares are exchanged for shares in another company;

(b) the exchange occurs as part of a single arrangement that satisfies subsection 124-780(2) of ITAA 1997;

(c) conditions for roll-over under subsection 124-780(3) of the ITAA 1997 are satisfied;

(d) further conditions are not applicable;

(e) does the restructure rules in sections 124-784A to 124-784C of the ITAA 1997 apply to the arrangement;

(f) does section 124-790 of the ITAA 1997 apply to ineligible proceeds received as part of the arrangement; and

(g) exceptions to obtaining scrip for scrip roll-over are not applicable.

(a) Shares are exchanged for shares in another company

Paragraph 124-780(1)(a) of the ITAA 1997 requires an entity (the original interest holder) to exchange a share (the entity's original interest) in a company (the original entity) for a share (the replacement interest) in another company.

This requirement is satisfied as OldCo (as an interest holder in BCo), exchange their BCo shares for shares in NewCo.

(b) The exchange occurs as part of a single arrangement that satisfies
subsection 124-780(2) of the ITAA 1997

Paragraph 124-780(1)(b) of the ITAA 1997 requires that the exchange of replacement shares is in consequence of a single arrangement that satisfies subsections 124-780(2) or 124-780(2A) of the ITAA 1997. This requirement is satisfied.

80 percent ownership

Paragraph 124-780(2)(a) of the ITAA 1997 requires that the arrangement must result in the acquiring entity becoming the owner of 80 percent or more of the voting shares in the original entity.

NewCo has become the owner of 100 percent of the shares in BCo and all shares in BCo are voting shares. The requirement of paragraph 124-780(2)(a) of the ITAA 1997 is satisfied.

All voting share owners participate

Paragraph 124-780(2)(b) of the ITAA 1997 requires that the arrangement must be one in which at least all owners of voting shares in the original entity could participate.

This requirement is satisfied because all BCo shareholders participated in the exchange of their shares in BCo for shares in NewCo.

Participation is on substantially the same terms

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

The interest in BCo comprises of ordinary shares only. There were a number of BCo shareholders holding ordinary shares and they both participated in the exchange on the same terms. The requirement is therefore satisfied.

(c) Conditions for roll-over under subsection 124-780(3) are satisfied

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

BCo shares are post-CGT shares

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

This condition is satisfied as OldCo acquired all its BCo shares after 20 September 1985.

OldCo would otherwise make a capital gain

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

A capital gain is made from the disposal of BCo shares by OldCo if the capital proceeds for the shares are more than the cost base.

OldCo receives replacement interests in the replacement entity

Paragraph 124-780(3)(c) of the ITAA 1997 requires that the replacement interest is in the replacement entity.

This requirement is satisfied because OldCo receives shares in NewCo.

OldCo can choose scrip for scrip roll over

Paragraph 124-780(3)(d) of the ITAA 1997 requires that the original interest holder chooses the roll-over, or, if section 124-782 of the ITAA 1997 applies, the original interest holder and the replacement entity jointly choose to obtain the roll-over.

Section 124-782 of the ITAA 1997 does not apply because there are no significant stakeholders or common stakeholders in NewCo just after the arrangement is complete. This requirement is therefore satisfied.

(d) 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:

(i) neither the original entity nor the replacement entity had at least 300 members just before the arrangement started; or

(ii) the original interest holder, the original entity and the acquiring entity were all members of the same linked group just before the arrangement started.

These further conditions do not apply because all parties were dealing with each other at arms' length in relation to this arrangement.

(e) The restructure rules in sections 124-784A and 124-784B of the ITAA 1997 do not apply to the arrangement

Section 124-784A of the ITAA 1997 applies in relation to a single arrangement if, the replacement entity for the arrangement knows, or could reasonably be expected to know:

• that a roll-over under section 124-780 of the ITAA 1997 has been obtained; and

• that there is a common stakeholder for the arrangement; and

• subsection 124-784A(2) of the ITAA 1997 is satisfied for the arrangement.

Section 124-784A of the ITAA 1997 does not apply because there is no common stakeholder for the arrangement.

Section 124-784B of the ITAA 1997 does not apply in this case as well.

(f) Partial roll-over under section 124-790 of the ITAA 1997 applies

Subsection 124-790(1) of the ITAA applies to allow partial roll-over if the capital proceeds for the BCo shares (original interest) include something (ineligible proceeds) other than NewCo shares (replacement interest). In this case there is no roll-over for the cash component received under the arrangement. The cost base of the ineligible part is that part of the cost base of the original BCo interest as is reasonably attributable to it (subsection 124-790(2) of the ITAA 1997).

(g) Exceptions to obtaining scrip for scrip roll-over are not applicable

Section 124-795 of the ITAA 1997 sets out other circumstances where scrip for scrip roll-over under Subdivision 124-M of the ITAA 1997 is not available. These exceptions are outlined in the following paragraphs.

Foreign resident shareholder

Subsection 124-795(1) of the ITAA 1997 provides that roll-over 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 taxable Australian property.

OldCo is a resident of Australia at all times and this exception is not applicable.

A capital gain cannot (apart from the roll-over) be otherwise disregarded, and original entity and acquiring entity are not members of the same wholly owned group before the arrangement

Subsection 124-795(2) of the ITAA 1997 provides that the roll-over is not available if: any capital gain the original interest holder might make from their replacement interest would be disregarded (except because of a roll-over); or the original interest holder and the acquiring entity are members of the same wholly-owned group just before the original interest holder stops owning the interest and the acquiring entity is a foreign resident.

These exceptions are not applicable. The capital gain OldCo makes from the replacement interest would not be disregarded under any other circumstances. Further, OldCo and NewCo are not members of the same wholly-owned group before the arrangement, and NewCo is not a foreign resident.

No roll-over is available under Division 122 or Division 615 of the ITAA 1997

Subsection 124-795(3) of the ITAA 1997 provides that the roll-over is not available if a roll-over can be chosen under Division 122 or Division 615 of the ITAA 1997 for that event.

This exception does not apply because roll-over under Division 122 or Division 615 of the ITAA 1997 are not available for this event.

Election for no roll-over

Subsection 124-795(4) of the ITAA 1997 provides that roll-over is not available in relation to the exchange of qualifying interest if the replacement entity makes a choice to that effect; and the original interest holders were advised of this election before the exchange of shares.

NewCo did not make such an election; thus, the exception does not apply in this case.

Conclusion

OldCo can choose partial roll-over for the NewCo shares they received in exchange for their BCo shares.

If OldCo chooses scrip for scrip roll-over, the capital gain made from the disposal of BCo shares is disregarded to the extent that they received replacement NewCo shares for the disposal of their BCo shares (eligible proceeds) (subsection 124-785(1) of the ITAA 1997).

The capital gain is not disregarded to the extent that OldCo received cash for the disposal of their BCo shares (ineligible proceeds) (subsection 124-790(1) of the ITAA 1997).