Edited version of private advice

Authorisation Number: 1051628335547

Date of advice: 17 January 2020

Ruling

Subject: Scrip-for-scrip roll-over

Question

Is there a roll-over under Subdivision 124-M of the Income Tax Assessment Act 1997 for the shares in XYZ that Entity A exchanged for shares in Company A?

Answer

Yes

This ruling applies for the following period:

1 July 2018 to 30 June 2019

The scheme commences on:

A day during the 2019 income year

Relevant facts and circumstances

Entity A is an Australian resident. Entity A acquired their shares in XYZ after 20 September 1985.

The scheme

During the 2019 income year, the directors of XYZ entered into a number of agreements (the 'Agreements') that resulted in a third party, Acquiring Co acquiring all of XYZ's shares on issue. Acquiring Co is wholly owned by Company A, which in turn is wholly owned by Company B.

Prior to Acquiring Co acquiring all of XYZ's shares on issue, XYZ had more than 300 members.

The Agreements, broadly, contained provisions that resulted in a contractual obligation for Company A to issue shares in itself to Entity A on the scheme implementation date. This contractual obligation only arose if a number of conditions were met. Those conditions were met approximately some weeks prior to the scheme implementation date.

Prior to the scheme implementation date, Company B disposed of its existing interest in XYZ to Company A for consideration of shares in Company A, and subsequent to this, Company A disposed of its interest in XYZ to Acquiring Co for consideration of shares in Acquiring Co.

The scheme was approved by the Federal Court of Australia.

Consequences of the scheme for Entity A

As a result of the scheme, Entity A disposed of shares in XYZ to Acquiring Co. As consideration for those shares, Entity A received shares in Company A.

At the time that Entity A disposed of its shares in XYZ to Acquiring Co in exchange for shares in Company A, the capital proceeds for those shares exceeded Entity A's cost base for those shares.

If the other requirements are satisfied, Entity A will choose to obtain a roll-over under Subdivision 124-M of the Income Tax Assessment Act 1997 in relation to shares in XYZ it disposed of to Acquiring Co for which it received consideration shares in Company A.

Company A did not, prior to Entity A exchanging its shares in XYZ for shares in Company A, make a choice and notify Entity A in writing of that choice, that Entity A could not obtain a roll-over under Subdivision 124-M of the Income Tax Assessment Act 1997.

Relevant legislative provisions

Division 122 of the Income Tax Assessment Act 1997

Subdivision 124-M of the Income Tax Assessment Act 1997

Subsection 170-260(2) of the Income Tax Assessment Act 1997

Division 615 of the Income Tax Assessment Act 1997

Section 975-150 of the Income Tax Assessment Act 1997

Section 975-500 of the Income Tax Assessment Act 1997

Reasons for decision

A taxpayer can choose to obtain a scrip-for-scrip roll-over under Subdivision 124-M of the Income Tax Assessment Act 1997 ('ITAA 1997') when interests held in one entity are exchanged by the taxpayer for replacement interests in another entity.

The conditions that must be satisfied for a taxpayer to be able to choose the scrip-for-scrip rollover differ depending on whether the original interests are shares or trust interests.

Exchange of shares, options, rights or similar interests

Section 124-780 of the ITAA 1997 sets out the conditions that must be satisfied if the original interest was a share, or interest in such a share. It provides that there is a roll-over if:[1]

(a)  an entity (the original interest holder) exchanges:

(i)    a share (the entity's original interest) in a company (the original entity) for a share (the holder's replacement interest) in another company; or

(ii)   ...

(b)  the exchange is in consequence of a single arrangement that satisfies subsection (2) or (2A); and

(c)  the conditions in subsection (3) are satisfied; and

(d)  if subsection (4) applies, the conditions in subsection (5) are satisfied.

Conditions for the arrangement

The arrangement must be a single arrangement that satisfies either subsection 124-780(2) of the ITAA 1997 or subsection 124-780(2A) of the ITAA 1997.

ATO Interpretative Decision ATO ID 2002/274 Income Tax: CGT: scrip for scrip roll-over - single arrangement provides that the term arrangement is defined very broadly in section 995-1 of the ITAA 1997:

arrangement means any arrangement, agreement, understanding, promise or undertaking, whether express or implied, and whether or not enforceable (or intended to be enforceable) by legal proceedings.

ATO ID 2002/274 notes that whilst there is a definition for arrangement, the term 'single arrangement' is not defined. ATO ID 2002/274 states the Explanatory Memorandum to the New Business Tax System (Miscellaneous) Bill (No.2) 2000 provides a number of factors that may assist in determining what constitutes a single arrangement, and quotes paragraph 11.23 of that Explanatory Memorandum:

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.

Subsection 124-780(2A) of the ITAA 1997 is about takeover bids, and is satisfied if:

(a)  the arrangement resulted in:

(i)    a company (the acquiring entity) that is not a member of a wholly-owned group becoming the owner of 80% or more of the voting shares in the original entity; or

(ii)   a company (the acquiring entity) that is a member of a wholly-owned group increasing the percentage of voting shares that it owns in the original entity, and that company or members of the group becoming the owner of 80% or more of those voting shares; and

(b)  the arrangement was, or was part of, one or more of the following:

(i)    a takeover bid (within the meaning of the Corporations Act 2001) for the original interests by the acquiring entity that is not carried out in contravention of the provisions mentioned in paragraphs 612(a) to (g) of that Act;

(ii)   a compromise or arrangement entered into by the original entity under Part 5.1 of the Corporations Act 2001, approved by order of a court made for the purposes of paragraph 411(4)(b) of that Act.

Conditions for roll-over

Subsection 124-780(3) of the ITAA 1997 provides the conditions for the roll-over to be:

(a)  the original interest is a post-CGT asset; and

(b)  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; and

(c)  its replacement interest is in a company that is:

(i)    the acquiring entity, when the arrangement involves an acquiring entity that is not a member of a wholly-owned group; or

(ii)   in any other case, the ultimate holding company of the wholly-owned group; and

(d)  the original interest holder chooses to obtain the roll-over, or if the original interest holder is a significant stakeholder or common stakeholder, both the original interest holder and the replacement entity jointly choose to obtain the roll-over; and

(e)  if a joint choice is required, the original interest holder informs the replacement entity in writing of the cost base of its original interest just before the relevant CGT event happened in relation to it;

(f)   if an acquiring entity is a member of a wholly-owned group, no member of the group issues equity (other than a replacement interest), or owes new debt, under the arrangement:

(i)    to an entity that is not a member of the group; and

(ii)   in relation to the issuing of the replacement interest.

Further roll-over conditions in certain cases

Additional conditions must be satisfied if the original interest holder and an acquiring entity did not deal with each other at arm's length and:[2]

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

(b)  the original interest holder, the original entity and an acquiring entity were all members of the same linked group just before that time.

Exceptions

A taxpayer cannot obtain the roll-over under Subdivision 124-M of the ITAA 1997 if:[3]

• just before the taxpayer stops owning their original interest, they are a foreign resident, unless just after the taxpayer acquires their replacement interest, that replacement interest is taxable Australian property; or
• any capital gain the taxpayer might make from their replacement interest would be disregarded, except because of a roll-over; or
• the taxpayer and the acquiring entity are members of the same wholly-owned group just before the taxpayer stops owning their original interest and the acquiring entity is a foreign resident; or
• the taxpayer can choose a roll-over Division 122 of the ITAA 1997 or Division 615 of the ITAA 1997 for the CGT event; or
• the replacement entity makes a choice that you cannot obtain the roll-over, and that entity or the original entity notifies you in writing of the choice before the exchange.

Wholly-owned group

Section 975-500 of the ITAA 1997 provides that two companies are the members of the same wholly owned-group if:

(a)  one of the companies is a 100% subsidiary of the other company; or

(b)  each of the companies is a 100% subsidiary of the same third company.

Section 975-505 of the ITAA 1997 provides that a company (the subsidiary company) is a 100% subsidiary of another company (the holding company) if all the shares in the subsidiary XYZ beneficially owned by:

(a)  the holding company; or

(b)  one or more 100% subsidiaries of the holding company; or

(c)  the holding XYZ one or more 100% subsidiaries of the holding company.

A company (other than the subsidiary company) is a 100% subsidiary of the holding company only if:

(a)  it is a 100% subsidiary of the holding company; or

(b)  it is a 100% subsidiary of a 100% subsidiary of the holding company.

The subsidiary company is not a 100% subsidiary of the holding company if a person is, or will be at some future time, in a position to affect rights, in relation to the subsidiary company, of:

(a)  the holding company; or

(b)  a 100% subsidiary of the holding company.

A person is taken to be in a position to affect rights if that person has a right, power or option to acquire those rights or to do an act that would prevent the holder of the rights from exercising them for its own benefit.[4]

A company is the ultimate holding company of a wholly-owned group if it is not a 100% subsidiary of another company in the group.[5]

Linked group

Companies that are linked to one another are in a linked group.[6] Linked group has the meaning given to it by subsection 170-260(2) of the ITAA 1997, which provides:

Two companies are linked to each other if:

(a)  one of them has a controlling stake in the other; or

(b)  the same entity has a controlling stake in each of them.

An entity has a controlling stake in a XYZ a particular time if the entity, or the entity and its associates[7] between them:

(a)  are able at that time to exercise, or control the exercise of, more than 50% of the voting power in the company (either directly, or indirectly through one or more interposed entities); or

(b)  have at that time the right to receive for their own benefit (either directly, or indirectly through one or more interposed entities) more than 50% of any dividends that the company may pay; or

(c)  have at that time the right to receive for their own benefit (either directly, or indirectly through one or more interposed entities) more than 50% of any distribution of capital of the company.

Significant and common stakeholder

An original interest holder is a significant stakeholder if before the arrangement started the original interest holder, either alone or together with its associates, had a significant stake in the original entity and, just after it was completed, a significant stake in the replacement entity. A significant stake means, in the case of a company, shares carrying 30% or more of the voting rights, rights to dividends, or rights to distributions of capital.[8]

An original interest holder is a common stakeholder if before the arrangement started, the original interest holder either alone or with its associates had a common stake in the original entity and, just after it was completed, a common stake in the replacement entity.[9]

Where both the original and replacement entities are companies, an entity, or 2 or more entities, have a common stake in the original entity if the entity or entities and their associates between them have:[10]

(a)  80% or more of the voting rights in the original entity just before the arrangement started and in the replacement entity just after the arrangement was completed; or

(b)  the right to receive 80% or more of dividends payable by the original entity just before the arrangement and by the replacement entity just after the arrangement was completed; or

(c)  the right to receive 80% or more of any distribution of capital by the original entity just before the arrangement started and by the replacement entity just after the arrangement was completed.

No original interest holder is a common stakeholder for an arrangement if the original entity had at least 300 members just before the arrangement started.[11]

No original interest holder has a significant stake in a company that has at least 300 members.[12]

Roll-over for the disposal of assets to, or the creation of assets in, a wholly-owned company

Division 122 of the ITAA 1997 allows an individual or trustee to obtain roll-over relief where an individual, trustee or the partners in a partnership transfer an asset or the net assets of a business to, or create certain rights in, a wholly-owned company. The roll-over can only be triggered when certain CGT events happen:[13]

• CGT event A1, a disposal of a CGT asset, or all of the assets of a business, to the company;
• CGT event D1, creating contractual or other rights in the company;
• CGT event D2, granting an option to the company;
• CGT event D3, granting the company a right to income from mining;
• CGT event F1, granting a lease to the company, or renewing or extending a lease.

Roll-overs for business restructures

Division 615 of the ITAA 1997 allows for a roll-over where a taxpayer owns shares in a company or units in a unit trust, which is restructured with the result that the taxpayer becomes the owner of new shares in another company and this other company owns all the shares or units in the original entity. The shareholders or unitholders must dispose of their shares or units solely for shares in the other company.

Broadly, roll-over relief is available under Division 615 of the ITAA 1997 for certain business reorganisations where no change occurs in the economic ownership of an underlying asset or where the underlying assets in which the taxpayer has an economic interest do not change.[14]

Is there a roll-over under Subdivision 124-M of the ITAA 1997?

Exchange of shares, options, rights or similar interests

The condition in paragraph 124-780(1)(a) of the ITAA 1997 is satisfied because on a day during the 2019 income year, Entity A exchanged shares it held in XYZ for shares in Company A.

Conditions for the arrangement

The exchange must be in consequence of a single arrangement

As referred to by ATO ID 2002/274, relevant factors in determining whether what takes place is part of a single arrangement include:

§  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.

During the 2019 income year, the directors of XYZ entered into a number of agreements that, broadly, resulted in Entity A disposing of shares in XYZ to Acquiring Co in exchange for shares in Company A.

After considering the circumstances, the Commissioner considers that the exchange of the shares Entity A held in XYZ for shares in Company A was in consequence of a single arrangement. That is because the exchange of shares was one aspect of many in an overall transaction that occurred contemporaneously, and the facts of the circumstances indicate that the intention of the parties was that the exchanging of shares in XYZ for shares in Company A was part of overall transaction in which Acquiring Co acquired all of XYZ's shares on issue.

The single arrangement satisfies subsection (2) or (2A)

For all arrangements, where the acquiring entity is a member of a wholly-owned group, the roll-over is only available if the arrangement results in the acquiring entity increasing the percentage of voting shares it holds in the original entity and the acquiring entity, or other members of the relevant group, become the owner of 80% or more of the voting interests in the original entity.

For takeover bids or arrangements, the arrangement does not need to satisfy all the conditions in subsection 124-780(2) of the ITAA 1997, but can instead satisfy the conditions in subsection 124-80(2A) of the ITAA 1997. This subsection (2A) requires the arrangement to be a takeover bid that is, is part of, or includes either, or both of:

§  a takeover bid that does not contravene certain provisions in Chapter 6 of the Corporations Act 2001;

§  a compromise or arrangement approved by a court under Part 5.1 of the Corporations Act 2001.

The arrangement satisfies subsection 124-780(2A) of the ITAA 1997. That is because:

§  the arrangement results in Acquiring Co, a member of a wholly-owned group, increasing the percentage of voting shares it holds in XYZ and becoming the owner of 100% of the voting interests in XYZ; and

§  the arrangement was an arrangement under Part 5.1 of the Corporations Act 2001, and was approved by the Federal Court for the purposes of paragraph 411(4)(b) of that Act.

Consequently, the exchange of shares in XYZ for shares in Company A by Entity A is in consequence of a single arrangement that satisfies subsection 124-780(2A) of the ITAA 1997, and the condition in paragraph 124-780(1)(b) is satisfied for the scheme.

Conditions for roll-over

Original interest is a post-CGT asset

The condition in paragraph 124-780(3)(a) of the ITAA 1997 is satisfied because Entity A acquired its shares in XYZ on or after 20 September 1985.

A capital gain would otherwise happen

The condition in paragraph 124-780(3)(b) is satisfied because Entity A would make a capital gain on the disposal of its shares XYZ if the roll-over did not apply.

Replacement interest

If the original interests are acquired by a company that is a member of a wholly-owned group, the original interest holder's replacement interest must be in the ultimate holding company of the wholly-owned group.

Two companies are the members of the same wholly-owned group if one of the companies is wholly owned by the other company, or both of the companies are wholly owned by the same third company.

Acquiring Co is wholly owned by Company A. Consequently, they are both members of the same wholly-owned group, and the replacement interests Entity A receives must be in the ultimate holding company of the group to satisfy the conditions for roll-over.

Company A will be the ultimate holding company of the wholly-owned group if it is not a 100% subsidiary of another company in the group. A 100% subsidiary is a company in which all the shares were beneficially owned by:

§  the ultimate holding company;

§  one or more 100% subsidiaries of the holding company; or

§  by the holding company together with one or more 100% subsidiaries of the holding company.

A company is not a 100% subsidiary if a person is, or will be at some future time, in a position to affect rights in relation to the subsidiary company, of the holding company or a 100% subsidiary of the holding company.

Prior to the scheme implementation date, Entity A was in a position to affect rights of Company B in relation to Company A.

Consequently, Company A was not a 100% subsidiary of Company B and was the ultimate holding company of the wholly-owned group of which Acquiring Co was a member.

The condition in paragraph 124-780(3)(c) of the ITAA 1997 is satisfied because Entity A's replacement interests are in Company A, the ultimate holding company of the relevant wholly-owned group as at the time Acquiring Co acquires the shares in XYZ.

Choose the roll-over

The original interest holder must choose to obtain the roll-over or, if section 124-782 of the ITAA 1997 applies, both the original interest holder and replacement entity must jointly choose to obtain the roll-over.

Section 124-782 of the ITAA 1997 has application if the original interest holder is a significant stakeholder or common stakeholder, as defined in section 124-783 of the ITAA 1997.

Entity A is not a significant stakeholder. That is because XYZ had at least 300 members just before the arrangement started, and therefore, Entity A cannot have a significant stake in XYZ.

Entity A is not a common stakeholder. That is because just before the arrangement started, XYZ had at least 300 members. Consequently, section 124-782 of the ITAA 1997 has no application.

The condition in paragraph 124-780(3)(d) of the ITAA 1997 is satisfied because Entity A will choose the roll-over in Subdivision 124-M of the ITAA 1997 in lodging its income tax return for the 2019 income year.

No new equity or debt

Where an acquiring entity is member of a wholly-owned group, it will not satisfy the condition in paragraph 124-780(3)(f) of the ITAA 1997 if it issues equity (other than a replacement interest) or owes new debt, under the arrangement, to an entity that is not a member of the group and in relation to the issuing of the replacement interest.

The only equity issued in the wholly-owned group as a result of the arrangement are the replacement interests issued by Company A.

The condition in paragraph 124-780(3)(f) of the ITAA 1997 is satisfied because no member of the wholly-owned group issued equity or owed new debt in relation to the issuing of the replacement interests by Company A.

Further roll-over conditions in certain cases

Further conditions if the parties did not deal with each other at arm's length

The conditions in subsections 124-780(4) and 124-780(5) of the ITAA 1997 do not apply because XYZ had at least 300 members before the arrangement started, and Entity A, XYZ and Acquiring Co were not members of the same linked group just before that time.

Consequently, the requirement in paragraph 124-780(1)(d) of the ITAA 1997, that the conditions in subsection (5) be met, does not need to be satisfied.

Exceptions

Foreign resident

The exception in subsection 124-795(1) of the ITAA 1997 does not apply. That is because Entity A is a resident of Australia for tax purposes.

Capital gain disregarded or acquiring entities part

The exception in paragraph 124-795(2)(a) of the ITAA 1997 does not apply. That is because Entity A will not be able to disregard any capital gain it makes on the disposal of its replacement interests in Company A.

Wholly-owned group and foreign resident acquiring entity

The exception in paragraph 124-795(2)(b) of the ITAA 1997 does not apply. That is because Entity A and Acquiring Co are not members of the same wholly-owned group.

Roll-over under Division 122 or 615 available

If Entity A can choose a roll-over under either Division 122 or Division 615 of the ITAA 1997 for the exchange of shares, they cannot choose a roll-over under subdivision 124-M of the ITAA 1997.

Entity A cannot choose a roll-over under Division 122 of the ITAA 1997 for the scheme because they do not wholly own Company A.

Entity A cannot choose a roll-over under Division 615 of the ITAA 1997 because they do not own shares in Acquiring Co, which owns all the shares in XYZ, the original entity. Acquiring Co was not interposed between Entity A and XYZ.

Consequently, because Entity A cannot choose a roll-over under either Division 122 or Division 615 of the ITAA 1997, the exception in subsection 124-795(3) of the ITAA 1997 does not apply.

No roll-over election

The exception in subsection 124-795(4) of the ITAA 1997 does not apply. That is because Company A did not make a choice that Entity A could not obtain the roll-over and notify Entity A of that choice prior to the exchange of shares.

Is there a roll-over?

Were the conditions satisfied?

There is a roll-over under Subdivision 124-M of the ITAA 1997 for Entity A with respect to the exchange of shares it held in XYZ for shares in Company A.

That is because, in relation to the arrangement, all of the conditions in subsection 124-780(1) of the ITAA 1997 have been satisfied and none of the exceptions in section 124-795 of the ITAA 1997 apply.