Edited version of your private ruling

Authorisation Number: 1051988960897

Date of advice: 30 May 2022

Ruling

Subject: Scrip for scrip rollover

Question 1

Can the Applicant access CGT roll-over relief pursuant to Subdivision 124-M of the ITAA 1997 on the exchange of their shares in Practice Company for shares in Holdings Pty Limited?

Answer

Yes.

Question 2

Will the anti-avoidance provisions contained in Part IVA of the Income Tax Assessment Act 1936 apply to the proposed exchange of shares?

Answer

No.

This ruling applies for the following periods:

Year ending 30 June 2022

Year ending 30 June 2023

The scheme commences on:

1 July 2021

Relevant facts and circumstances

1.    The Applicant is a minority shareholder in the Practice Company. The Applicant obtained their shares in the Practice on or after 20 September 1985.

2.    The Applicant has not made an election such that their ordinary shares are subject to the TOFA provisions in Division 230 of the Income Tax Assessment Act 1997 (ITAA 1997).

3.    The Applicant did not acquire any of their ordinary shares in Practice Company in circumstances that attract the operation of Division 83A of the ITAA 1997.

4.    The Applicant is a resident of Australia.

5.    Holdings Pty Limited (Holdings) is the majority shareholder in the Practice Company.

6.    Holdings is the ultimate holding company of a tax consolidated group (Holdings Group).

7.    Holdings will make an offer to each Applicant to acquire each share held by the Applicant in the Practice Company in exchange for newly issued shares in Holdings (the Offer). The shares in Holdings offered to each Applicant will be determined on the same basis and will be dependent on the proportion of the Applicant's shareholding in the Practice Company and the Practice Company's past EBITDA.

8.    The Applicant cannot be compelled by Holdings or any other member of the Holdings Group to accept the Offer.

9.    Neither Holdings or any other member of the Holdings Group will issue equity other than the Replacement Interests, or owe 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.

10.  After the exchange of shares, Holdings will be the owner of 80% or more of the ordinary shares in the Practice Company.

11.  After the exchange of shares, the Applicant and their associates will not have:

•                    shares carrying 30% or more of the voting rights in Holdings; or

•                    the right to receive 30% or more of any dividends that Holdings may pay; or

•                    the right to receive 30% or more of any distribution of capital of Holdings.

12.  Holdings currently has less than 300 shareholders.

13.  After the implementation of the scheme forming this private ruling, Holdings will have less than 300 shareholders.

Holdings Shares

14.  Ordinary shares in Holdings confer voting, dividend and rights to capital.

15.  Prior to the Offer, Holdings will amend its constitution to convert to a limited company.

16.  Holdings will create two new classes of share:

•                    Practice Tracking Shares (PTS);

•                    Convertible Tracking Shares (CTS).

17.  PTS and CTS will confer dividend and capital rights in Holdings but no voting rights.

18.  The dividend rights attaching to the PTS and CTS will provide for dividend amounts to be calculated with reference to the financial performance for the Practice Company in which that shareholder previously held ordinary shares.

19.  Despite dividends payable to holders of PTS and CTS being determined on financial performance of the relevant Practice Company, the ability of Holdings to pay these dividends are subject to the existence of available profits within Holdings, as well as any other requirement of the Corporations Act 2001, to pay the dividend.

20.  CTS will also confer a right to convert the CTS to ordinary shares. The process for converting the CTS will be determined at a later time.

21.  The shares offered to the Applicant are the Replacement Interests.

Assumptions

Applicant will accept the offer during the year ending 30 June 2022;

Applicant would make a capital gain by accepting the offer;

Applicant will hold their replacement Holdings shares on capital account;

Applicant will make the choice to obtain the roll-over;

Applicant will not be able to choose a roll-over under Division 122 or 615 for the exchange of shares.

Holdings will not make the choice under subsection 124-795(4) of the ITAA 1997 to prevent the Applicant from obtaining the roll-over.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 177A(1)

Income Tax Assessment Act 1936 Subsection 177C(2)

Income Tax Assessment Act 1936 Paragraph 177C(2)(a)

Income Tax Assessment Act 1936 Subparagraph 177C(2)(a)(i)

Income Tax Assessment Act 1936 Subsection 177D(1)

Income Tax Assessment Act 1997 Division 83A

Income Tax Assessment Act 1997 Division 122

Income Tax Assessment Act 1997 Subdivision 124-M

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

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 Paragraph 124-780(2)(b)

Income Tax Assessment Act 1997 Paragraph 124-780(2)(c)

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 Subsection 124-782(1)

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

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

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

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

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

Income Tax Assessment Act 1997 Subsection 124-795(2)

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

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

Income Tax Assessment Act 1997 Division 230

Income Tax Assessment Act 1997 Division 615

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

Reasons for decision

Question 1

Can the Applicant access CGT roll-over relief pursuant to Subdivision 124-M of the ITAA 1997 on the exchange of their shares in Practice Company for shares in Holdings Pty Limited?

Summary

The Applicant can access roll-over relief pursuant to Subdivision 124-M.

Detailed reasoning

Exchange of interests

22.  Subsection 124-780(1) of the Income Tax Assessment Act 1997 (ITAA 1997) sets out where there is a roll-over under subdivision 124-M of the ITAA 1997.

23.  Paragraph 124-780(1)(a) of the ITAA 1997 requires:

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) an option, right or similar interest (also the holder's original interest) issued by the original entity that gives the holder an entitlement to acquire a share in the original entity for a similar interest (also the holder's replacement interest) in another company; and

24.  Here, the Applicant will exchange shares in the Practice Company for shares in Holdings so Paragraph 124-780(1)(a) of the ITAA 1997 is met.

25.  Paragraph 124-780(1)(b) of the ITAA 1997 requires that:

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

26.  The Offer will be made to each Applicant simultaneously. As a result, the exchange of interests satisfying paragraph 124-780(1)(a) of the ITAA 1997 will be made as a consequence of a single arrangement.

80% or more requirement

27.  Paragraph 124-780(2)(a) of the ITAA 1997 requires that the arrangement must:

result 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 (also an acquiring entity) that is a member of such a 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 shares;

28.  Holdings will increase their existing shareholding of voting shares in the Practice Company to 100%.

29.  As Holdings is a member of the Holdings Group, subparagraph 124-780(2)(a)(ii) of the ITAA 1997 is met.

All owners can participate

30.  Paragraph 124-780(2)(b) of the ITAA 1997 requires that the arrangement must:

be one in which at least all owners of * voting shares in the original entity (except a company referred to in paragraph (a)) could participate

31.  Each shareholder in the Practice Company, other than Holdings, may participate in the arrangement.

32.  As a result paragraph 124-780(2)(b) of the ITAA 1997 is met.

Substantially the same terms

33.  Paragraph 124-780(2)(c) of the ITAA 1997 requires that the arrangement must:

be one in which participation was available on substantially the same terms for all of the owners of interests of a particular type in the original entity.

34.  The number of shares offered to each Applicant is made on the same basis.

35.  The types of shares offered to each Applicant is determined on the same basis.

36.  As a result, paragraph 124-780(2)(c) of the ITAA 1997 is met.

Acquisition date

37.  Paragraph 124-780(3)(a) of the ITAA 1997 provides:

the original interest holder * acquired its original interest on or after 20 September 1985

38.  Each Applicant acquired its on interest on or after 20 September 1985 so this requirement is met.

Capital Gain

39.  Paragraph 124-780(3)(b) of the ITAA 1997 provides:

apart from the roll-over, it would make a * capital gain from a * CGT event happening in relation to its original interest

40.  The Applicant would have made a capital gain as result of accepting the Offer if not for the roll-over.

41.  Therefore this requirement is met.

Replacement interests

42.  Paragraph 124-780(3)(c) of the ITAA 1997 provides:

its replacement interest is in a company (the replacement entity) that is:

(i) the company referred to in subparagraph (2)(a)(i); or

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

43.  The replacement interest received by the Applicant will be shares in the ultimate holding company of a wholly owned group so this requirement is met.

Roll-over choice

44.  Paragraph 124-780(3)(d) of the ITAA 1997 provides:

the original interest holder chooses to obtain the roll-over or, if section 124-782 applies to it for the * arrangement, it and the replacement entity jointly choose to obtain the roll-over

45.  The Applicant will make the choice to obtain the roll-over.

46.  Therefore this requirement is met.

Significant or common stakeholders

47.  Subsection 124-782(1) of the ITAA 1997 provides

(1) The * cost base of an original interest * acquired by an acquiring entity under the * arrangement from an original interest holder becomes the first element of the cost base and * reduced cost base of the acquiring entity for the interest if:

(a) the original interest holder obtains a roll-over; and

(b) the holder is a * significant stakeholder or a * common stakeholder for the arrangement.

...

48.  Subsection 124-783(1) of the ITAA 1997 provides:

An original interest holder is a significant stakeholder for an * arrangement if it had:

(a) a * significant stake in the original entity just before the arrangement started; and

(b) a significant stake in the replacement entity just after the arrangement was completed.

49.  Subsection 124-783(6) of the ITAA 1997 provides:

An entity has a significant stake in a company at a time if the entity, or the entity and the entity's * associates between them:

(a) have at that time * shares carrying 30% or more of the voting rights in the company; or

(b) have at that time the right to receive 30% or more of any * dividends that the company may pay; or

(c) have at that time the right to receive 30% or more of any distribution of capital of the company.

50.  After the Applicant accepts the Offer, they and their associates will not result in any of the criteria in subsection 124-783(6) of the ITAA 1997 being met.

51.  Therefore the Applicant is not a significant stakeholder.

52.  Subsection 124-783(3) of the ITAA 1997 provides:

An original interest holder is a common stakeholder for an • arrangement if it had:

(a) a * common stake in the original entity just before the arrangement started; and

(b) a common stake in the replacement entity just after the arrangement was completed.

53.  Subsection 124-783(9) of the ITAA 1997 provides:

If the original entity and the replacement entity are companies, an entity, or 2 or more entities, have a common stake in the original entity just before the * arrangement started and in the replacement entity just after the arrangement was completed if the entity or entities, and their * associates, between them:

(a) had 80% or more of:

(i) the voting rights in the original entity just before the arrangement started; and

(ii) the voting rights in the replacement entity just after the arrangement was completed; or

(b) had the right to receive 80% or more of:

(i) any * dividends that the original entity may pay just before the arrangement started; and

(ii) any dividends that the replacement entity may pay just after the arrangement was completed; or

(c) had the right to receive 80% or more of:

(i) any distribution of capital of the original entity just before the arrangement started; and

(ii) any distribution of capital of the replacement entity just after the arrangement was completed.

54.  After the Applicant accepts the Offer, they and their associates will not result in any of the criteria in subsection 124-783(9) of the ITAA 1997 being met.

55.  Therefore the Applicant is not a significant stakeholder.

56.  As a result, Section 124-782 of the ITAA 1997 will not apply.

Issue of equity

57.  Paragraph 124-780(3)(f) of the ITAA 1997 provides:

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.

58.  The Explanatory Memorandum to the Tax and Superannuation Laws Amendment (2015 Measures No. 4) Bill 2015 provides at paragraph 1.37 that:

The new roll-over condition does not apply to:

•         the issue of replacement interests themselves;

•         new debt owed or equity issued to an external financier or investor to fund the purchase of original interests under the arrangement; or

•         new debt owed or equity (including equity other than replacement interests) issued to the original interest holders as consideration for their original interests.

59.  Other than the replacement interests, Holdings will not issue debt or equity instruments under the arrangement.

60.  Therefore this requirement is met.

Arm's length dealing

61.  Subsection 124-780(4) of the ITAA 1997 provides:

The conditions specified in subsection (5) must be satisfied if the original interest holder and an acquiring entity did not deal with each other at * arm's length and:

(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.

62.  Subsection 124-780(5) of the ITAA 1997 provides:

The conditions are:

(a) the * market value of the original interest holder's * capital proceeds for the exchange is at least substantially the same as the market value of its original interest; and

(b) its replacement interest carries the same kind of rights and obligations as those attached to its original interest.

63.  Subsection 995-1(1) of the ITAA 1997 provides:

In this Act, except so far as the contrary intention appears:

...

"arm's length": in determining whether parties deal at arm's length, consider any connection between them and any other relevant circumstance.

64.  Nothing in the facts and relevant circumstances suggest that Holdings and the Applicant are dealing on a non-arm's length basis.

65.  As a result, a consideration of the conditions in subsection 124-780(5) of the ITAA 1997 is not necessary.

Exceptions

66.  Subsection 124-795(1) of the ITAA 1997 provides

You cannot obtain the roll-over if, just before you stop owning your original interest, you are a foreign resident unless, just after you * acquire your replacement interest, the replacement interest is * taxable Australian property.

67.  The Applicant is not a foreign resident. Therefore this exception does not apply.

68.  Subsection 124-795(2) of the ITAA 1997 provides:

(a) any * capital gain you might make from your replacement interest would be disregarded (except because of a roll-over); or

(b) you and the acquiring entity are members of the same * wholly-owned group just before you stop owning your original interest and the acquiring entity is a foreign resident.

69.  The Applicant would not be able to disregard a capital gain from the replacement interest but for the availability of a roll-over.

70.  The Applicant and Holdings were not members of the same wholly owned group prior to the exchange of shares.

71.  Therefore these exceptions do not apply.

72.  Subsection 124-795(3) of the ITAA 1997 provides:

You cannot obtain the roll-over for the * CGT event happening in relation to the exchange of your original interest if you can choose a roll-over under Division 122 or 615 for that event.

73.  The Applicant cannot choose a roll-over under Division 122 or 615 with respect to the exchange of shares. Therefore this exception does not apply.

74.  Subsection 124-795(4) of the ITAA 1997 provides:

You cannot obtain the roll-over for the * CGT event happening in relation to the exchange of your qualifying interest if:

(a) the replacement entity makes a choice to that effect under this subsection; and

(b) that entity or the original entity notifies you in writing of the choice before the exchange.

75.  Holdings will not make a choice under subsection 124-795(4) of the ITAA 1997. As a result this exception does not apply.

Conclusion

76.  The Applicant can access CGT roll-over relief under subdivision 124-M with respect to the exchange of shares detailed in the relevant facts and circumstances.

Question 2

Will the anti-avoidance provisions contained in Part IVA of the Income Tax Assessment Act 1936 apply to the proposed exchange of shares?

Summary

The anti-avoidance provisions contained in Part IVA will not apply to the exchange of shares.

Detailed reasoning

77.  Subsection 177D(1) provides:

This Part applies to a scheme if it would be concluded (having regard to the matters in subsection (2)) that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for the purpose of:

(a) enabling a taxpayer (a relevant taxpayer ) to obtain a tax benefit in connection with the scheme; or

(b) enabling the relevant taxpayer and another taxpayer (or other taxpayers) each to obtain a tax benefit in connection with the scheme;

78.  Subsection 177C(2) provides:

A reference in this Part to the obtaining by a taxpayer of a tax benefit in connection with a scheme shall be read as not including a reference to:

(a) the assessable income of the taxpayer of a year of income not including an amount that would have been included, or might reasonably be expected to have been included, in the assessable income of the taxpayer of that year of income if the scheme had not been entered into or carried out where:

(i) the non-inclusion of the amount in the assessable income of the taxpayer is attributable to the making of a declaration, agreement, election, selection or choice, the giving of a notice or the exercise of an option (expressly provided for by this Act or the Income Tax Assessment Act 1997 ) by any person, except one under Subdivision 126-B, 170-B or 960-D of the Income Tax Assessment Act 1997; and

(ii) the scheme was not entered into or carried out by any person for the purpose of creating any circumstance or state of affairs the existence of which is necessary to enable the declaration, agreement, election, selection, choice, notice or option to be made, given or exercised, as the case may be;

79.  Subsection 177A(1) provides:

In this Part, unless the contrary intention appears:

"scheme" means:

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

(b) any scheme, plan, proposal, action, course of action or course of conduct.

80.  The relevant facts and circumstances constitute a scheme as defined in subsection 177A(1).

81.  As a result of choosing to obtain a rollover under subdivision 124-M of the ITAA 1997 with respect to the exchange of shares detailed in the relevant facts and circumstances, the Applicant will obtain a tax benefit.

82.  That tax benefit is the non-inclusion of assessable income attributable to the making of a choice that is not excepted by subparagraph 177C(2)(a)(i).

83.  Nothing in the facts and relevant circumstances suggest that the scheme was entered into to create circumstances or a state of affairs to enable the making of that choice.

84.  Therefore paragraph 177C(2)(a) operates to require a reading of subsection 177D(1) as not including a reference to the non-inclusion of assessable income attributable to the Applicant making the choice to obtain a rollover under subdivision 124-M of the ITAA 1997.

85.  Nothing in the relevant facts and circumstances indicate that the scheme has been entered into for the purpose of obtaining a tax benefit in connection with the exchange of shares.

Conclusion

86.  Part IVA does not apply to the exchange of shares.