Edited version of private advice

Authorisation Number: 1051570190507

Date of advice: 23 August 2019

Advice

Subject: Scrip-for-scrip roll-over

Question 1

In relation to the arrangement, if a roll-over is chosen under Subdivision 124-M of the Income Tax Assessment Act 1997 ('ÍTAA 1997'), will the cost base of shares held by Holding Company in by Old Head Company ('OHC') be the cost base and reduced cost base of the original shareholder as worked out under section 124-782 of the ITAA 1997?

Answer

Where a roll-over is chosen by original shareholders of OHC and the requirements under subsection 124-780(1) have been satisfied in relation to these shares, the first element of the cost base and reduced cost base of the shares will be the cost base of the original shareholder as worked out under section 124-782(1) if:

1.    that original shareholder is a significant stakeholder or a common stakeholder as defined in section 124-783 of the ITAA 1997, and

2.    the original interest held by the original shareholder has not been cancelled under the arrangement.

Question 2

In relation to the arrangement, will the way in which Holding Company prepares and lodges its tax return be evidence of the making of its choice to obtain a roll-over pursuant to section 124-780 of the ÍTAA 1997?

Answer

Yes, where section 124-782 of the ITAA 1997 applies to the original shareholders of OHC in relation to the arrangement.

Relevant facts and circumstances

Old Head Company ('OHC')

OHC is currently the head company of a tax consolidated group.

Share classes in OHC

As at immediately prior to the imposition of a new holding company, there will be numerous share classes in OHC, including ordinary shares and redeemable preference shares.

The constitution of OHC provides a formula for calculating the value of shares.

Current members of OHC

As at immediately prior to the imposition of a new holding company, there will be numerous members of OHC.

The arrangement

Under the arrangement, a newly incorporated Australian private company ('Holding Company') is being interposed between OHC and its shareholders. When the arrangement is completed the new Holding Company will own 100% of the shares in OHC and the original shareholders of OHC will have replacement interests in the Holding Company that correspond with their former OHC interests. OHC does have common stakeholders (as defined in subsection 124-783(3) of the ITAA 1997) and all entities are dealing at arm's length.

Under the arrangement, no consideration is payable by Holding Company to the shareholders of OHC as their shares will be transferred over to the new Holding Company.

A proposal to participate in the arrangement will be made to all current shareholders of OHC. It is understood that all current shareholders of OHC will participate in the arrangement.

Relevant legislative provisions

Section 103-25 of the Income Tax Assessment Act 1997

Subsection 103-25(1) of the Income Tax Assessment Act 1997

Subsection 103-25(2) of the Income Tax Assessment Act 1997

Subdivision 124-Mof the Income Tax Assessment Act 1997

Section 124-775 of the Income Tax Assessment Act 1997

Section 124-780 of the Income Tax Assessment Act 1997

Subsection 124-780(1) of the Income Tax Assessment Act 1997

Paragraph 124-780(1)(c) of the Income Tax Assessment Act 1997

Subsection 124-780(3) of the Income Tax Assessment Act 1997

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

Section 124-782 of the Income Tax Assessment Act 1997

Subsection 124-782(1) of the Income Tax Assessment Act 1997

Subsection 124-782(2) of the Income Tax Assessment Act 1997

Subsection 124-782(3) of the Income Tax Assessment Act 1997

Section 124-783 of the Income Tax Assessment Act 1997

Subsection 124-783(1) of the Income Tax Assessment Act 1997

Subsection 124-783(3) of the Income Tax Assessment Act 1997

Subsection 124-783(6) of the Income Tax Assessment Act 1997

Subsection 124-783(9) of the Income Tax Assessment Act 1997

Reasons for decision

Question 1

A person or entity may choose a Subdivision 124-M roll-over where post-CGT shares or trust interests it owns are replaced with other shares or trust interests, for example, where there is a company takeover. A person or entity can only choose the roll-over if they would have made a capital gain from the exchange.

Under the arrangement, the scrip for scrip roll-over would be available to original shareholders of OHC if their shares were considered post-CGT shares (that is, if they are taken to have acquired them on or after 20 September 1985), subject to satisfying other requirements in Subdivision 124-M of the ITAA 1997. There would be no roll-over available in relation to shares if an original shareholder of OHC had acquired those shares before 20 September 1985, as the requirements in paragraph 124-780(1)(c) and subsection 124-780(3) would not be satisfied in relation to those shares.

You have advised us the following in relation to the arrangement:

(a)  When the arrangement is completed the new Holding Company will own 100% of the shares in OHC and the original shareholders of OHC will have replacement interests in the Holding Company that correspond with their former OHC interests.

(b)  OHC does have common stakeholders (as defined in subsection 124-783(3) of the ITAA 1997).

(c)  All participants in the arrangement are dealing at arm's length.

(d)  No consideration is payable by Holding Company to the shareholders of OHC as their shares will be transferred over to the new Holding Company.

(e)  A proposal to participate in the arrangement will be made to all current shareholders of OHC. It is understood that all current shareholders of OHC will participate in the arrangement.

Paragraph 124-780(3)(d) of the ITAA 1997 provides that, if section 124-782 of the ITAA 1997 applies to the original interest holder, scrip for scrip roll-over is available where the original interest holder and the replacement entity jointly choose to obtain the roll-over.

Section 124-782 of the ITAA 1997 provides special rules that apply for the purposes of scrip for scrip roll-over if an original interest holder (in this arrangement, the original shareholders of SCPL) is a significant stakeholder or a common stakeholder for an arrangement.

An original interest holder is a significant stakeholder for an arrangement if it had a significant stake in the original entity before the arrangement started and a significant stake in the replacement entity after the arrangement was completed. An entity will have a significant stake in a company if the entity or the entity's associates between them have shares carrying 30% or more of the voting rights, dividend rights or rights to distribution of capital in the company.

An original interest holder is a common stakeholder for an arrangement if it had a common stake in the original entity just before the arrangement started and a common stake in the replacement entity just after the arrangement was completed. A common stake is 80% or more of the voting, dividend and capital rights in both the original entity and the replacement entity.

In this arrangement there are common stakeholders. Where the original interest holder of OHC shares is a common stakeholder, the original interest holder and the replacement entity must jointly choose for the original interest holder to obtain the roll-over. The following applies in relation to the Holding Company's interest in OHC acquired from the original interest holder:

·  where the original interest has not been cancelled under the arrangement, the acquiring entity's cost base in the original interest is transferred from the cost base of the original interest holder. In other words, in relation to any shares that Holding Company has acquired from the original shareholders of OHC who are common stakeholders, the first element of the cost base and reduced cost base of these OHC shares is the cost base of the original interest for the original shareholders of OHC, and

·  where the original interest has been cancelled under the arrangement, the acquiring entity's cost base and reduced cost base is worked out under subsection 124-782(3) of the ITAA 1997.

If the original interest holders of OHC shares are not common stakeholders or significant stakeholders, Holding Company cannot use section 124-782 of the ITAA 1997 to work out the cost base and reduced cost base of OHC interests it acquired from the original interest holders of OHC shares.

Question 2

Under this arrangement:

·  the original shareholders of OHC will receive replacement shares in Holding Company, and

·  Holding Company will acquire all shares in OHC.

As such, where the conditions of the scrip-for-scrip rollover have been satisfied, the original shareholders of OHC will be choosing to obtain the roll-over or, if section 124-782 applies to the original shareholders for the arrangement, the original shareholder and the replacement entity will jointly choose to obtain the roll-over.

Section 103-25 explains how a person or entity can make choices under Part 3-1 or 3-3 of the ITAA 1997. Note that Subdivision 124-M is contained in Part 3-3 of the ITAA 1997.

A choice a person or entity can make under Part 3-3 of the ITAA 1997 must be made:

·  by the day that person or entity lodges its income tax return for the income year in which the relevant CGT event happened; or

·  within a further time allowed by the Commissioner.

The way that a person or entity (and any other entity making the choice) prepares their income tax returns is sufficient evidence of the making of the choice.

Where the conditions for the scrip for scrip roll-over under Subdivision 124-M have been satisfied by an original shareholder of OHC in relation to their original interests in OHC, and if section 124-782 applies to an original shareholder of OHC, the way in which these original shareholders of OHC together with Holding Company prepare their income tax returns for the income year in which the CGT event(s) relating to the arrangement happened is sufficient evidence of the making of the choice to use the scrip-for-scrip roll-over.