Edited version of private advice

Authorisation Number: 1051604841037

Date of advice: 12 November 2019

Ruling

Subject: Income tax - capital gains tax - subdivision 124-M

Question 1

Whether the pre-bid disposal of Company X shares to Company Y was part of a 'single arrangement' under paragraph 124-780(1)(b) of the Income Tax Assessment Tax 1997 ('ITAA 1997')?

Answer

Yes.

Question 2

Can Company A claim rollover relief under Subdivision 124-M of the ITAA 1997 Act in respect of the sale of its Company X shares to Company Y in exchange for Company Y shares?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XY

The scheme commences on:

31 May 20XX

Relevant facts and circumstances

Company A

Company A is an Australian tax resident. It is a share investor and a share trader.

It is 100% beneficially owned by Individual. All the Company A shares were acquired for $2 each and after 20 September 1985.

Company A acquired all its Company X shares on or after 20 September 1985. The shares in Company X were held on capital account.

Company Y

Company Y is an Australian resident company. It is also an ASX listed investment company. The principal activities are investments in cash and securities.

Just before the arrangement took place, Company A had a controlling stake in Company Y (with 40+% ownership interests).

Just before the arrangement, Company Y had one class of shares on issue only (i.e. ordinary shares).

Company Y

Company Y is a company limited by shares and is incorporated in Australia.

Company Y's principal activity is investing for profit. It is a listed investment company.

Takeover Synergies between Company Y and Company X

In May 20XX, an Individual announced that they were retiring from Company X's Board. As part of this retirement, the Individual agreed to instruct Company A to sell a blocking stake in Company X to Company Y, in consideration for Company Y shares.

In May 20XX, Company Y entered into a contract to acquire those Company X shares from Company A (Blocking Stake) pursuant to a share swap. This acquisition by Company Y was announced through the Australian Stock Exchange ('ASX') in June 20XX.

Under the agreement, Company Y issued new fully paid ordinary shares to Company A in consideration for its Company X shares. The number of Company Y shares issued was equal to the number of Company X shares acquired multiplied by an exchange ratio. The exchange ratio was 0.X of Company Y share for one Company X share. The sale agreement did not stipulate any conditions precedent. The acquisition of Company A's stake in Company X inherently and simultaneously provided Company Y with a blocking and/or facilitating stake in Company X ('Blocking Stake').

Company A and Company Y dealt with each other at arm's length for the sale of the Blocking Stake.

In June 20XX (i.e. the same day it announced the Blocking Stake sale), Company Y also announced an intention to make an offer to acquire all of the other shares in Company X in exchange for an issue of shares in Company Y under an offer-market takeover bid pursuant to Chapter 6 of the Corporations Act 2001.

The off-market takeover offer was contained in a Bidder's Statement dated July 20XX. The offer consideration was the same as the Blocking Stake sale. The offer was subject to some conditions. It included Company Y shareholder approval, minimum acceptance condition (at least 80% of the Company X shares) and other conditions.

The takeover offer was a takeover bid within the meaning of the Corporations Act 2001 and was not carried out in contravention of the provisions mentioned in paragraphs 612(a) to (g) of that Act.

Aside from the Blocking Stake, Company A also beneficially owned a further number of Company X shares. There was also a public announcement that Company A provided Company Y with a written notice of its intention to accept the off-market takeover offer in respect of those remaining Company X shares.

In August 20XX, Company Y shareholder approval was met. In August 20XX, Company Y announced that the 80% acquisition threshold had been met, and the takeover offer of Company X became unconditional.

When the takeover reaches 100 percent, Company A would own less than 25% of Company Y.

Other matters

In June 20XX, the Individual announced their retirement and their statement indicated that Company A's consequent sale of shares in Company X to Company Y were inextricably part of an inter-related and inter-connected step allowing Company Y to take over Company X.

In late June 20XX, Company Y appointed the Individual as a non-executive director.

Company Y's Notice of Meeting showed a linkage between the acquisition of the Blocking Stake and Company Y's takeover bid for Company X.

Company A was neither a significant stakeholder nor a common stakeholder for the arrangement for the purposes of section 124-783 of the ITAA 1997.

Company X and Company Y were not members of the same linked group just before the arrangement.

For the purpose of paragraph 124-795(2)(a) of the ITAA 1997, the capital gain from the sale of the Blocking Stake would not be disregarded.

For the purpose of section 124-795(3) of the ITAA 1997, rollover was not applicable under Division 122 or Division 615 for the Blocking Stake sale.

For the purpose of section 124-795(4) of the ITAA 1997, Company Y would not make such a choice.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection104-10(1)

Income Tax Assessment Act 1997 subsection 104-10(4)

Income Tax Assessment Act 1997 Subdivision 124-M

Income Tax Assessment Act 1997 section 124-780

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

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

Income Tax Assessment Act 1997 paragraph 124-780(2)(a)

Income Tax Assessment Act 1997 subsection 124-780(2A)

Income Tax Assessment Act 1997 paragraph 124-780(2A)(a)

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 paragraph 124-780(3)(f)

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 124-783

Income Tax Assessment Act 1997 paragraph 124-795(2)(a)

Income Tax Assessment Act 1997 section 124-795

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

Income Tax Assessment Act 1997 paragraph 124-795(2)(a)

Income Tax Assessment Act 1997 paragraph 124-795(2)(b)

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

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

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

Reasons for decision

Question 1

Summary - single arrangement

The exchange of Company A shares under the Blocking Stake sale agreement executed in May 20XX was in consequence of a 'single arrangement' under paragraph 124-780(1)(b) of the ITAA 1997 because the two transactions were linked, interrelated and intended to achieve a merger arrangement.

Detailed reasoning

Subdivision 124-M of the ITAA 1997 provides a rollover from capital gains tax where post-CGT shares are replaced with other shares (for instance, in a takeover or merger arrangement). The operative provision for scrip for scrip rollover is section 124-780 of the ITAA 1997.

One of the requirements is that if shares are exchanged for shares and, in accordance with paragraph 124-780(1)(b) of the ITAA 1997, the 'exchange is in consequence of a single *arrangement that satisfies the conditions in subsection 124-780(2) or (2A)'.

The exchange occurs in consequence of a single arrangement

Tax Ruling TR 2005/19 states that the phrase 'in consequence of' means that the exchange must occur 'as a result' of a single arrangement:

The acquiring entity must acquire the shares 'in consequence' of a single arrangement. An exchange of shares occurs in consequence of a single arrangement if it occurs 'as a result of' the single arrangement; Reseck v. Federal Commissioner of Taxation 75 ATC 4213; (1975) 5 ATR 538.

Thus, the exchange should follow on from (i.e. be as a result of) the single arrangement.

'Arrangement' is also defined in subsection 995-1(1) of the ITAA 1997 as 'any arrangement, agreement, understanding, promise or undertaking, whether express or implied, and whether or not enforceable (or intended to be enforceable) by legal proceedings'.

Furthermore, TR 2005/19 states that while the term 'arrangement' is defined very broadly, there is no definition of the term 'single arrangement'.

Paragraph 11.23 of the Explanatory Memorandum to the New Business Tax System (Miscellaneous) Bill (No. 2) 2000 details a number of factors which may assist in determining what constitutes a single arrangement:

What constitutes a single arrangement is a question of fact. Relevant factors in determining whether what takes place is part of a single arrangement would include, but not be limited to, whether there is more than one offer or transaction, whether aspects of an overall transaction occur contemporaneously, and the intention of the parties in all the circumstances as evidenced by objective facts.

Tax Laws Amendment (2010 Measures No. 4) Bill 2010 (which introduced subsection 124-780(2A)) also provides further guidance, which states the following:

5.13 In addition, the single arrangement must consist of, be part of, or include:

·         a takeover bid for the original interests by the acquiring entity that is not carried out in contravention of the provisions mentioned in section 612 of the Corporations Act (a non-contravening takeover bid); or

·         a compromise or arrangement entered into by the original entity under Part 5.1 of the Corporations Act, approved by a court under paragraph 411(4)(b) of the Corporations Act (an approved scheme of arrangement).

[Schedule 4, item 2, paragraph 124-780(2A)(b)]

5.14 It is a question of fact as to what forms a single arrangement. If there is a close nexus between particular elements of a broader transaction, then those elements would form part of the same arrangement. A scheme of arrangement may include a number of elements where only some of those elements form the single arrangement.

5.15 An arrangement that comprises a non-contravening takeover bid and/or a scheme of arrangement, and some interrelated and/or interdependent transactions not subject to the Corporations Act, will also meet the requirement set out in paragraph 5.13. An arrangement that is part of a broader non-contravening takeover bid or an approved scheme of arrangement will also meet this requirement. Notwithstanding that the transactions were not conditional on each other, and each one was a separate and legally distinct commercial transaction.

It was advised that the off-market takeover offer was a takeover bid within the meaning of the Corporations Act 2001 and was not carried out in contravention of the provisions mentioned in paragraphs 612(a) to (g) of that Act.

Whilst the sale of the Blocking Stake and the off-market takeover offer involved decisions by independent parties, from a commercial perspective, the two transactions were interrelated and intended to achieve a merger arrangement. Based on the objective facts of this case, the Commissioner accepts that the sale of Blocking Stake was part of a broader arrangement which included the takeover bid.

The following factors surrounding the chain of events supported this conclusion:

·         The consideration for both transactions was the same (i.e. the agreement for the Blocking Stake sale and the off-market takeover offer).

·         It is accepted that the parties intended to effect a commercial takeover and the initiate sale was to acquire a facilitation or blocking stake to achieve it. Both transactions were also publically announced on the same day.

·         The Bidder's Statement and Company Y's Notice of Meeting made a clear linkage between the two transactions. They attested that it happened successively as part of an overall arrangement to achieve a merger.

·         Company A provided written notice of its intention to accept the takeover offer for the remaining Company X shares it held. Then on June 20XX, Individual (being the beneficially owner of all the shares in Company A) also joined Company Y's Board.

These factors viewed together indicate that both transactions were entered into to facilitate a merger, or they were part of the same plan to takeover Company X that resulted in the 80% threshold being met. This view is also consistent with the broader reading of 'arrangement' in Federal Commissioner of Taxation v Fabig [2013] FCAFC 99.

Question 2

Summary - Subdivision 124-M

Company A can choose scrip for scrip roll-over relief under Subdivision 124-M of the ITAA 1997 in respect of the exchange of its Company X shares for Company Y shares pursuant to the agreement to sell its Blocking Stake.

Detailed reasoning

Subdivision 124-M of the ITAA 1997 provides a shareholder with scrip for scrip roll-over, which allows the shareholder to disregard a capital gain from the disposal of shares in one entity in exchange for shares in another entity.

Section 124-780 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 in this case are:

·         Shares are exchanged for shares in another company;

·         The exchange occurs as part of a single arrangement;

·         Conditions for arrangement are satisfied;

·         Conditions for roll-over are satisfied;

·         Further conditions are not applicable; and

·         Exceptions to obtaining scrip for scrip roll-over are not applicable.

In this case, Company X shares held by Company A were exchanged for Company Y shares. Question 1 above has ruled that the sale of the Blocking Stake was part of a broader arrangement which included the takeover bid. (See above for the reasoning.)

Furthermore, the disposal of Company X shares to Company Y for replacement shares in Company Y satisfied all the above mentioned conditions and exceptions under Subdivision 124-M of the ITAA 1997. Accordingly, Company A can choose roll-over relief in respect of the exchange of its Company X shares for Company Y shares under the Blocking Stake sale agreement.

However, scrip for scrip roll-over for shares exchanged under the agreement would only become available when Company Y became the owner of at least 80% of the voting shares in Company X as required by paragraph 124-780(2)(a) of the ITAA 1997.

ATOID 2002/274 provides further guidance on the appropriate tax treatment for the relevant income year where there were separate disposals under a single arrangement.