Edited version of private advice

Authorisation Number: 1051933339353

Date of advice: 13 December 2021

Ruling

Subject: CGT roll-over relief under Subdivision 124-M of the Income Tax Assessment Act 1997

Question

Is capital gains tax rollover relief available to Company A under Subdivision 124-M of the Income Tax Assessment Act 1997 in respect of its interest in Company B acquired by Company C?

Answer

Yes

This ruling applies for the following period:

Period ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Company A currently owns 50% of the ordinary shares of Company B.

These shares were acquired on or after 20 September 1985.

The other 50% shareholder in Company B is Company X. Both Company A and Company X are wholly owned by Company Y.

Company C has entered into share exchange agreements with Company A and Company X to acquire all of their shares in Company B. This will result in Company C owning 100% of the ordinary shares in Company B.

Under the agreement, Company A will receive shares in Company C equal to the market value of the shares disposed of in Company B.

Other matters and Assumptions

Company A and Company X are not associates of Company C.

Prior to entering the share sale agreement, Company A and its associates owned X% of the ordinary shares in Company C.

Just after completion of the share sale agreement, Company A and its associates will not have interests in Company C entitling them to:

•         30% or more of the voting rights in Company C, or

•         rights to receive 30% or more of any dividends or capital distributions that Company C may pay.

It is assumed that Company A will elect to obtain the rollover.

Apart from the rollover Company A would make a capital gain.

Under the arrangement by which Company C acquires 100% of the ordinary shares in Company B, it and its wholly owned subsidiaries will not issue any equity or debt interests other than those issued under the share exchange agreements to Company A and Company X in exchange for their shares in Company B.

Company C is the 100% owner of a number of subsidiary companies and no other entity owns 100% of the shares in it.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 124-M

Income Tax Assessment Act 1997 section 124-780

Income Tax Assessment Act 1997 section 124-782

Income Tax Assessment Act 1997 section 124-785

Reasons for decision

In this detailed reasoning, references to legislative provisions are to provisions in the Income Tax Assessment Act 1997 unless specified otherwise.

Subdivision 124-M allows capital gains tax (CGT) roll-over where shareholders in companies, unitholders in unit trusts or beneficiaries of fixed trusts, exchange these membership interests for comparable interests in an acquiring entity, usually as part of a takeover (see the Explanatory Memorandum to the New Business Tax System (Capital Gains Tax) Bill 1999). A taxpayer may obtain a roll-over under section 124-785 if the conditions in section 124-780 are satisfied. Relevantly for Company A, this requires that:

1.    shares in a company (the original shares) are exchanged for shares in another company (the replacement shares) (subparagraph 124-780(1)(a)(i)),

2.    the exchange happens as part of a single arrangement that satisfies subsection 124-780(2) (paragraph 124-780(1)(b)),

3.    the relevant conditions for rollover in subsection 124-780(3) are satisfied:

                      i.        that the original interest was acquired on or after 20 September 1985 (subparagraph 124-780(3)(a)),

                     ii.        that apart from the roll-over a capital gain would be made from a CGT event in relation to the original interest (paragraph 124-780(3)(b)),

                    iii.        the replacement shares are in a company that is the ultimate holding company of the wholly owned group (subparagraph 124-780(3)(c)(ii)),

                   iv.        the original interest holder chooses to obtain the rollover and section 124-782 does not apply (paragraph 124-780(3)(d)), and

                     v.        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 to an entity that is not a member of the group and in relation to the issuing of the replacement interest (paragraph 124-780(3)(f)).

4.    if the original interest holder and the acquiring entity did not deal with each other at arm's length, then the conditions in subsection 124-780(5) are satisfied (paragraph 124-780(1)(d)).

Condition 1: shares in a company (the original shares) are exchanged for shares in another company that is a member of a wholly owned group (the replacement shares) (subparagraph 124-780(1)(a)(i))

Yes, this condition is satisfied as Company A will receive shares in Company C, which is the ultimate holding company of a group of wholly owned companies being an entity in which no other entity owns 100% of the shares (see subsection 124-780(7)), in exchange for its shares in Company B.

Condition 2: the exchange happens as part of a single arrangement that satisfies subsection 124-780(2) of the ITAA 1997 (paragraph 124-780(1)(b))

This condition is satisfied as there is a single arrangement under which:

1.    Company C becomes the owner of 100% of the interests in Company B (124-780(2)(a)(ii)), and

2.    the owners of 100% of the shares in Company B (Company A and Company X) are able to participate and exchange their shares in Company B for shares in Company C on the same terms (paragraphs 124-780(2)(b) & (c).

Condition 3(i): that the original interest was acquired on or after 20 September 1985 (subparagraph 124-780(3)(a))

This condition is satisfied as Company A acquired the original interest in Company B on or after 20 September 1985.

Condition 3(ii): that apart from the roll-over a capital gain would be made from a CGT event in relation to the original interest (paragraph 124-780(3)(b))

Yes, this condition is satisfied, as apart from the rollover, Company A would make a capital gain on the disposal of its shares in Company B.

Condition 3(iii): the replacement shares are in a company that is the ultimate holding company of the wholly owned group subparagraph (124-780(3)(c)(ii))

This condition is satisfied as the replacement shares received by Company A are in Company C, the ultimate holding company of a group of wholly owned companies, being an entity in which no other entity owns 100% of the shares (see subsection 124-780(7)).

Condition 3(iv): the original interest holder chooses to obtain the rollover (subparagraph 124-780(3)(d))

As Company A will elect to obtain rollover, and section 124-782 does not apply, this condition is satisfied.

Non-application of 124-782

Section 124-782 will apply if an original interest holder (here Company A), is a significant stakeholder or a common stakeholder for the arrangement.

Company A will not be a significant stakeholder for the arrangements (per subsection 124-783(1)(b)), as just after the arrangement it and its associates will not have between them interests in Company C that will give them:

•         30% or more of the voting rights in Company C, or

•         rights to receive 30% or more of any dividends or capital distributions that Company C may pay (see subsection 124-783(6)).

Company A and Company X will not be common stakeholders per paragraph 124-783(9), as just after the arrangement Company A and Company X and their associates will not have between them:

•         80% or more of the voting rights in Company C, or

•         rights to receive 80% or more of any dividends or capital distributions that Company C may pay (see subsection 124-783(9)).

Condition 3(v): 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 to an entity that is not a member of the group and in relation to the issuing of the replacement interest (paragraph 124-780(3)(f))

This condition is satisfied as the only debt or equity interests issued under the arrangement are the new shares issued by Company C in exchange for the shares in Company B.

Condition 4: that if the original interest holder and the acquiring entity did not deal with each other at arm's length, then the conditions in subsection 124-780(5) of the ITAA 1997 are satisfied (paragraph 124-780(1)(d) of the ITAA 1997).

As the exchange is a scrip for scrip arrangement between non-associated entities where Company A is being issued shares in Company C with a market value equal to the shares it is disposing of to Company C, the parties are at arm's length and have acted in the manner in which parties at arm's length would be expected to behave in conducting their affairs and nothing in the stated facts indicate they have not acted severally and independently in forming their bargain. The Commissioner is of the view that it is an arms' length dealing (see paragraphs 61 and 62 of Taxation Ruling TR 2005/19 Income Tax: scrip for scrip roll-over arrangements - application of Subdivision 124-M of the Income Tax Assessment Act 1997 - Part IVA of the Income Tax Assessment Act 1936). Therefore, the conditions in subsection 124-780(5) do not need to be satisfied.

Requirements for obtaining rollover are satisfied

For the reasons set out above, the proposed arrangement satisfies all the requirements specified in section 124-780. Therefore, Company A may obtain rollover relief under subdivision 124-M as set out in section 124-785.