Edited version of your written advice

Authorisation Number: 1012917846530

Date of advice: 16 December 2015

Ruling

Subject: Scrip for scrip roll-over.

Question 1

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

Answer

No.

Question 2

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

Answer

Yes, the arrangement for the exchange of shares in DCo 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 DCo 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 one company.

The entity 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.

All the shares in the group are post CGT assets.

All the shareholders of the group are resident of Australia under subsection 6(1) of the Income Tax Assessment Act 1936.

When originally established, the group of companies was structured into less than five 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.

OldCo

OldCo owned shares in DCo.

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

• OldCo - % or A shares;

• Other discretionary trust -% or B shares; and

• Other discretionary trust -% or A shares

The DCo shareholders acquired their DCo shares after 19 September 1985.

OldCo was not a shareholder of ACo or BCo.

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 of the group and the IPO are as follows:

(a) Step 1: Interposition of NewCo.

(i) Shareholders of ACo 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 at incorporation, plus Z ordinary shares issued under Step 1 pursuant to a deed).

The NewCo shareholders acquired their 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 selldown 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 upon the number of shares sold under the Prospectus.

(b) Step 3A: Transfer of BCo to NewCo (OldCo is not a shareholder of BCo).

(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

(i) The shareholders of DCo (including OldCo) 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 the 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 competed.

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

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 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 Subdivision 124-A

Income Tax Assessment Act 1997 Subdivision 124-M

Income Tax Assessment Act 1997 section 124-780

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 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(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

Reasons for decision

Question 1

Summary

Consideration received for the disposal of shares in DCo by OldCo to NewCo 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 that OldCo acquired the DCo shares, it did not have the intention of subsequently selling those shares at a profit as part of a commercial transaction. The investment in DCo 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 DCo shares by the OldCo to NewCo as part of the arrangement under the deed is not ordinary income and instead is capital in nature and subject to the capital gains tax provisions of the ITAA 1997.

Question 2

Summary

Yes, the arrangement for exchange of shares in DCo 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 DCo shares (i.e. to the extent it does not relate to ineligible proceeds).

Detailed reasoning

CGT event A1 happens to OldCo when they dispose of their DCo 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 DCo), exchange their DCo 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 DCo and all shares in DCo 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 DCo shareholders participated in the exchange of their shares in DCo 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 DCo comprises of ordinary shares only. There were 3 DCo shareholders holding ordinary shares and they 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.

DCo 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 DCo 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 DCo 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 DCo 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 DCo 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 DCo shares.

If OldCo chooses scrip for scrip roll-over, the capital gain made from the disposal of DCo shares is disregarded to the extent that they received replacement NewCo shares for the disposal of their DCo 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 DCo shares (ineligible proceeds) (subsection 124-790(1) of the ITAA 1997).