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Edited version of your written advice
Authorisation Number: 1051342191790
Date of advice: 23 February 2018
Ruling
Subject: Company A shares
Question 1
Is the cash consideration received regarded as the capital proceeds when calculating your capital gain in respect of the cash consideration of the Company C-Company A Scheme of Arrangement?
Answer:
Yes.
Question 2
Is the cost base of your new Company A shares reduced by the cost base of the cash consideration?
Answer:
Yes.
This ruling applies for the following period
Year ended 30 June 2018
The scheme commenced on
1 July 2017
Relevant facts
You are an Australian resident for taxation purposes.
You are not in the business of share trading. Your shares are not regarded as trading stock.
You purchased shares in Company B when the company’s shares were first floated.
Company B merged with Company C (Company C Group).
In December 2017 Company C and Company A Scheme of Arrangement was implemented and you ended up with Company A shares, plus 26.5 cents per Company C share as cash consideration.
You chose scrip-for-scrip rollover relief in relation to the disposal of the Company C shares and receipt of the Company A shares.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 104-10
Income Tax Assessment Act 1997 Section 108-5
Income Tax Assessment Act 1997 Subdivision 124-M
Income Tax Assessment Act 1997 Section 124-785
Income Tax Assessment Act 1997 Section 124-790
Reasons for decision
A capital gain or capital loss may arise if a CGT event happens to a CGT asset. Section 108-5 of the Income Tax Assessment Act 1997 (ITAA 1997) states that a CGT asset is any kind of property, or a legal or equitable right that is not property.
Shares are a CGT asset.
Section 104-10 of the ITAA 1997 makes the disposal of a CGT asset a CGT event. You dispose of an asset when a change of ownership occurs from you to another entity. A sale of an asset is therefore a CGT event (CGT event A1). You make a capital gain if the capital proceeds from the disposal are more than the asset's cost base. You make a capital loss if those capital proceeds are less than the asset's reduced cost base.
In your case, a CGT event occurred when you disposed of your Company C shares to Company A pursuant to the scheme.
The capital proceeds are the cash consideration and the market value of any new Company A shares received for the Company C shares.
Shareholders who made a capital gain and received part of their proceeds in the form of new Company A shares may choose scrip-for-scrip rollover for that part of the capital gain.
Subdivision 124-M of the ITAA 1997 provides a shareholder with scrip for scrip rollover, which enables the shareholder to disregard a capital gain they make from a share that is disposed of as part of a corporate takeover or merger if the shareholder received a replacement share in exchange (subsection 124-785(1) of the ITAA 1997).
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).
Therefore in your case, you have chosen the scrip-for-scrip rollover which allows you to defer paying capital gains tax until a later CGT event occurs (for example, you sell the shares you acquired in the takeover).
Where scrip for scrip rollover is chosen, the first element of the cost base and reduced cost base of a replacement new Company A share is worked out by attributing to it parts of the cost base of the Company C shares for which it was exchanged.
However as the capital proceeds also included a cash consideration, the associated capital gain cannot be disregarded.
Therefore the cost base of your new Company A shares received as part of the scheme consideration should be equal to the cost base of the original Company C shares, reduced by the amount of the cost base that is reasonably attributable to the cash proceeds.
Please note that as you have had your shares for more than 12 months, you are generally entitled to the 50% CGT discount.