Edited version of private advice

Authorisation Number: 1052013359947

Date of advice: 4 October 2022

Ruling

Subject: CGT - scrip for scrip rollover

Question 1

Will the Shareholders be eligible to obtain roll-over relief under Division 615 of the Income Tax Assessment Act 1997 (ITAA 1997) in relation to the exchange of their shares in ABC Pty Ltd (ABC P/L) for shares in HoldingCo (under Step 2 of the Proposed Restructure)?

Answer

Yes

Question 2

Will the Shareholders be eligible to obtain roll-over relief under Subdivision 124-M of the ITAA 1997 in respect of the exchange of their shares in XYZ Pty Ltd (XYZ P/L) for shares in HoldingCo (under Step 3 of the Proposed Restructure)?

Answer

Yes

Question 3

Will the proposed scheme described in this ruling constitute a scheme to which section 177D of Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) applies?

Answer

No.

This ruling applies for the following period:

Income year ending 30 June 20XX

Relevant facts and circumstances

The Shareholders

A Family Pty Ltd as trustee for The A Investment Trust (A Trust) is an Australian resident discretionary trust established in 20XX. A Trust has a family trust election in place with effect from the 20XX income year.

A Trust holds a 50% direct interest in the shares of ABC P/L, and a 50% direct interest in the shares of XYZ P/L. Each of these shareholdings are post-CGT assets.

B Investments Pty Ltd as trustee for the B Family Trust (B Trust) is an Australian resident discretionary trust established in 20XX. B Trust has a family trust election in place with effect from the 20XX income year.

B Trust holds a 25% direct interest in the shares of ABC P/L, and a 25% direct interest in the shares of XYZ P/L. Each of these shareholdings are post-CGT assets.

C Investments Pty Ltd as trustee for the C Family Trust (C Trust) is an Australian resident discretionary trust established in 20XX. C Trust has a family trust election in place with effect from the 20XX income year.

C Trust holds a 25% direct interest in the shares of ABC P/L, and a 25% direct interest in the shares of XYZ P/L. Each of these shareholdings are post-CGT assets.

A Trust, B Trust and C Trust, together are referred to as the Shareholders. The Shareholders will remain Australian residents for tax purposes throughout the Proposed Restructure period.

ABC P/L Pty Ltd

ABC P/L is an Australian resident private company incorporated in 20XX.

ABC P/L has a single ordinary class of shares on issue, with 80 ordinary shares on issue in the proportions set out above. The Shareholders have held their shares in ABC P/L since 20XX.

The voting rights in ABC P/L, rights to any dividends paid by ABC P/L and rights to any distribution of capital of ABC P/L for each of the Shareholders are in the same proportion as the ordinary shares they hold in ABC P/L. The Shareholders collectively hold 100% of the voting rights in ABC P/L and 100% of the right to dividends or distributions of capital of ABC P/L.

The principal activity of ABC P/L is the provision of civil engineering services to deliver infrastructure projects. ABC P/L has successfully completed infrastructure projects in multiple sectors across Australia.

ABC P/L has three 100% subsidiary companies. ABD Pty Ltd (ABD P/L), being one of the subsidiary companies, was incorporated in 20XX.

At present ABD P/L is dormant, however it has been incorporated in line with the group's:

•         vertical integration strategy, whereby ABD P/L will undertake demolitions works on behalf of entities within the group as well as directly with external clients; and

•         asset protection strategy, whereby distinct service offerings are conducted by separate legal entities within the group to quarantine risks that may arise from providing the specific service.

The other two subsidiaries of ABC P/L were incorporated in 20XX. Each of these companies have not undertaken any operations to date, however they may be used in the future to hold corporate service employees and incur corporate overheads. The costs incurred by these companies would ultimately be re-charged to the relevant trading entities each month.

XYZ P/L Pty Ltd

XYZ P/L is an Australian resident private company incorporated in 20XX.

XYZ P/L has a single ordinary class of share on issue, with 80 ordinary shares on issue in the proportions set out above. There have been no changes in shareholdings since incorporation.

The voting rights in XYZ P/L, rights to any dividends paid by XYZ P/L and rights to any distribution of capital of XYZ P/L for each of the Shareholders are in the same proportion as the ordinary shares they hold in XYZ P/L. The Shareholders collectively hold 100% of the voting rights in XYZ P/L and 100% of the right to dividends or distributions of capital of XYZ P/L.

XYZ P/L is the head company of an income tax consolidated group (the XYZITCG) formed in 20XX. XYZ P/L does not actively trade and essentially acts as a holding company. There are a number of trading subsidiaries under XYZ P/L.

Relationship between ABC P/L and XYZ P/L entities

ABC P/L self performs large scale infrastructure projects. ABC P/L Pty Ltd leases plant and equipment owned by the subsidiaries of XYZ P/L.

Whilst the businesses of ABC P/L and the subsidiary members of the XYZITCG operate separately in many respects and across different market segments, the companies are subject to common governance and systems.

Functions such as human resources, information technology systems, marketing and branding are undertaken in a consistent and uniform manner across the various companies.

Proposed Restructure

The steps of the Proposed Restructure are as follows:

Step 1

A tax consolidated group will be formed with ABC P/L as head company and with ABD P/L, ABE P/L and ABF P/L as subsidiary members (the ABCITCG).

Step 2

A new head company (HoldingCo) will be incorporated and interposed as the sole shareholder of ABC P/L, with each of the Shareholders receiving shares in HoldingCo as consideration for 100% of their shares in ABC P/L.

The shares in HoldingCo at the time of its incorporation will be held by an external party, and will be cancelled or redeemed concurrently with the issue of shares in itself to the Shareholders under this Step. The Shareholders will then own all the shares in HoldingCo.

Replacement shares in HoldingCo issued to the Shareholders will be held in the same proportion and carry the same rights as the shares originally held by the Shareholders in ABC P/L. Each of the Shareholders will receive ordinary, non-redeemable shares in HoldingCo as follows:

Within 28 days of the 'completion time', HoldingCo will make a choice pursuant to subsection 615-30(2) of the ITAA 1997 that the ABCITCG continues in existence at and after the completion time with HoldingCo as the head company.

Step 3

HoldingCo will acquire 100% of the shares in XYZ P/L from the Shareholders. As consideration for the sale, the Shareholders will each receive shares in HoldingCo.

The newly issued HoldingCo shares issued to each of the Shareholders will be ordinary shares, will not be redeemable shares, and will all carry the same rights and obligations as the original XYZ P/L shares held by each of the Shareholders. The value of the shares issued to each of the Shareholders will be at least substantially the same as the market value of the shares each Shareholder held in XYZ P/L.

Each Shareholder will make a capital gain from the exchange of their shares in XYZ P/L. The capital gain made by each Shareholder will not be disregarded otherwise than because of a roll over.

Each Shareholder will jointly with HoldingCo choose for CGT roll over relief to apply under Subdivision 124-M of the ITAA 1997 to defer the capital gain on the sale of shares in XYZ P/L. HoldingCo will not make a choice to deny a roll-over to the Shareholders.

Each Shareholder will inform HoldingCo in writing of their cost base in their original shares in XYZ P/L worked out just before the CGT event happened in relation to them.

The transaction will be available to each of the Shareholders to participate and each Shareholder will choose to participate. Participation will be available on the same terms for each Shareholder.

Other than for the shares in itself, HoldingCo (and any other entity) will not issue equity, or owe new debt, under Step 3 of the Proposed Restructure.

Step 4

After the completion time of Step 3, ABC P/L will transfer all shares it holds in ABD P/L, ABE P/L and ABF P/L to HoldingCo.

Reasoning behind Proposed Restructure

ABC P/L and XYZ P/L have grown rapidly over recent income years, and have ambitions to continue this growth into the future. The group of companies want to expand by tendering for larger contracts and potentially via strategic acquisitions that support and strengthen the existing businesses.

The current structure has presented some historical challenges in respect of the growth objective and it will realistically continue to present ongoing challenges moving forward without the changes contemplated by this Proposed Restructure. The proposed structure will provide the group of companies with the flexibility it requires to continue to grow its presence in the market sectors it operates within.

Where HoldingCo acquires XYZ P/L, as proposed, and combines the respective business operations and structures under a singular holding entity, the group can present a stronger consolidated balance sheet which will facilitate opportunities to tender for larger contracts than has been possible to date. As the group continues its growth trajectory, a stronger financial position and more sophisticated structure will allow it to compete for tenders on larger public and private infrastructure projects.

Additionally, being able to present consolidated financial statements will assist the group with obtaining funding to pursue growth opportunities, whether in the form of debt financing with financial institutions, or equity investments from new investors.

The group has offered a number of further commercial reasons for the Proposed Restructure.

Note: This ruling does not consider the potential application of Part IVA of the ITAA 1936 to a scheme comprised of any steps, events or transactions which are not referred to in this ruling.

Assumptions

1)    Step 1 of the Proposed Restructure, or the cost resetting process pursuant to Subdivision 705-A of the ITAA 1997, as modified by Subdivision 705-B of the ITAA 1997 will not result in a step-up in the assets of ABD P/L, ABE P/L or ABF P/L.

2)    Step 3 of the Proposed Restructure, or the cost resetting process pursuant to Subdivision 705-A of the ITAA 1997, as modified by Subdivision 705-C of the ITAA 1997, will not result in a step-up in the XYZITCG's assets.

Relevant legislative provisions

Income Tax Assessment Act 1936 former section 16ZZPA

Income Tax Assessment Act 1936 former section 16ZZPB

Income Tax Assessment Act 1936 former section 16ZZPC

Income Tax Assessment Act 1936 former section 16ZZPD

Income Tax Assessment Act 1936 Part IVA

Income Tax Assessment Act 1936 section 177D

Income Tax Assessment Act 1936 subsection 177D(2)

Income Tax Assessment Act 1936 section 177F

Income Tax Assessment Act 1997 section 104-10

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

Income Tax Assessment Act 1997 Division 122

Income Tax Assessment Act 1997 Subdivision 124-M

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(1)(c)

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

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

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 subsection 124-780(2A)

Income Tax Assessment Act 1997 subsection 124-780(3)

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 subsection 124-783(3)

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

Income Tax Assessment Act 1997 section 124-795

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 125

Income Tax Assessment Act 1997 Division 615

Income Tax Assessment Act 1997 subsection 615-5(1)

Income Tax Assessment Act 1997 paragraph 615-5(1)(a)

Income Tax Assessment Act 1997 paragraph 615-5(1)(b)

Income Tax Assessment Act 1997 paragraph 615-5(1)(c)

Income Tax Assessment Act 1997 subsection 615-5(2)

Income Tax Assessment Act 1997 Subdivision 615-B

Income Tax Assessment Act 1997 section 615-15

Income Tax Assessment Act 1997 subsection 615-20(1)

Income Tax Assessment Act 1997 subsection 615-20(2)

Income Tax Assessment Act 1997 subsection 615-20(3)

Income Tax Assessment Act 1997 section 615-25

Income Tax Assessment Act 1997 section 615-30

Income Tax Assessment Act 1997 subsection 615-30(2)

Income Tax Assessment Act 1997 Subdivision 705-A

Income Tax Assessment Act 1997 Subdivision 705-B

Income Tax Assessment Act 1997 Subdivision 705-C

Income Tax Assessment Act 1997 section 960-130

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

Income Tax Assessment Act 1997 section 975-500

Reasons for decision

All subsequent legislative references are to the ITAA 1997, unless otherwise indicated.

Question 1

Summary

The Shareholders will be eligible to obtain roll-over relief under Division 615 of the ITAA 1997 in relation to the exchange of their shares in ABC P/L for shares in HoldingCo (under Step 2 of the Proposed Restructure).

Detailed reasoning

Broadly, Division 615 provides that you can choose for transactions under a scheme to restructure a company's business to be tax neutral if, under the scheme you cease to own shares in the company and, in exchange, you become the owner of new shares in another company.

Subsection 615-5(1) states that you can choose to obtain the roll-over if:

(a)  you are a member of a company or a unit trust (the original entity); and

(b)  you and at least one other entity (the exchanging members) own all the shares or units in it; and

(c)   under a scheme for reorganising its affairs, the exchanging members dispose of all their shares or units in it to a company (the interposed company) in exchange for shares in the interposed company (and nothing else); and

(d)  the requirements in Subdivision 615-B are satisfied.

The Shareholders are members of ABC P/L (the original entity) pursuant to section 960-130, and together (as the exchanging members) own all the shares in ABC P/L, thereby satisfying the requirements in paragraphs 615-5(1)(a) and (b).

Is there a 'scheme for reorganising its affairs' under which the Shareholders dispose of their shares in ABC P/L to an interposed company in exchange for shares in the interposed company, and nothing else?

'Scheme' is defined in subsection 995-1(1) as 'any arrangement' or 'any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise'.

The phrase 'scheme for reorganising its affairs' is not defined in the Income Tax Assessment Act. However, a similar phrase 'reorganisation of the affairs' [of a unit trust or a company] was used in former sections 160ZZPA, 160ZZPB, 160ZZPC and 160ZZPD of the ITAA 1936. The meaning of these provisions is discussed in Taxation Ruling TR 97/18 Income tax: capital gains: roll-over relief following reorganisation of the affairs of a unit trust or company - sections 160ZZPA, 160ZZPB, 160ZZPC and 160ZZPD (TR 97/18). Paragraph 26 of TR 97/18 says:

...the expression 'scheme for the reorganisation of the affairs of a unit trust' must be interpreted in the context in which that expression appears. What is meant is the interposition of a company between the unit trust and its unitholders.

Paragraph 32 of TR of TR 97/18 says:

It is not possible to consider parts of schemes in isolation. In considering a scheme, we must look at the entirety of the scheme and its effect in determining whether the scheme is one for the reorganisation of the affairs of a unit trust.

Applying the reasoning in TR 97/18 to the Division 615 roll-over, this suggests that while the 'reorganisation' involves interposing a company, a broader scheme or arrangement may not be eligible if it includes other steps which would fail the roll-over requirements. Therefore, the application of the nothing else condition under paragraph 615-5(1)(c) is not limited to looking at a single step or transaction in isolation from other transactions or steps which form part of a single plan.

Taxation Determination TD 2020/6 Income tax: what is a 'restructuring' for the purposes of subsection 125-70(1) of the Income Tax Assessment Act 1997? (TD 2020/6) discusses the meaning of the phrase 'restructuring of the demerger group,' used in Division 125, which provides roll-over relief for demergers. TD 2020/6 makes several points for identifying the restructuring, including that:

•         what steps form part of the restructuring is a question of fact;

•         the restructuring is not necessarily confined to the steps or transactions that deliver ownership interests, but may include previous or subsequent transactions in a sequence;

•         transactions may form part of the restructuring even where they are legally independent of each other, contingent on different events, or may not occur;

•         a transaction is not necessarily part of the restructuring merely because it is enabled or a consequence of the restructuring; and

•         whether transactions occur simultaneously or are separated by a significant period is relevant but not necessarily decisive.

While the phrase 'restructuring of the demerger group' is not used in Division 615, the general approach taken in TD 2020/6 is relevant to identifying the 'scheme for reorganising its affairs'. That is, what steps form part of the scheme is a question of fact, and several transactions occurring in a sequence might form part of a single scheme.

Taken together, both TR 97/18 and TD 2020/6 suggest that when evaluating an arrangement's eligibility for CGT roll-over relief, multiple transactions may form part of the relevant scheme. Therefore, we need to determine which steps in the proposed transactions form part of the 'scheme for reorganising'.

In this regard, the relevant determination for the Shareholders under paragraph 615-5(1)(c) is to identify the scope of the scheme by considering all likely and potential steps, and then determining which of those steps should be considered part of the 'scheme for reorganising its affairs'. Typically, a transaction forms part of a plan if it is an integral step to achieve a desired outcome. All steps which occur under a plan to produce an intended result will be relevant.

Of particular relevance to the Shareholders is whether the transaction under Step 3 of the Proposed Restructure is part of the scheme for reorganising. If, for example, the scheme for reorganising includes Step 3, then the Shareholders will receive additional shares in HoldingCo (in exchange for their shares in XYZ P/L), i.e. something other than shares in HoldingCo received in exchange for shares in ABC P/L, which may cause the condition under paragraph 615-5(1)(c) to be failed.

The interposition of HoldingCo will occur as part of a planned series of steps under the Proposed Restructure in which the Shareholders will dispose of their shares in ABC P/L (per Step 2) and shares in XYZ P/L (per Step 3) in exchange for shares in HoldingCo.

However, we are satisfied that the scheme for reorganising does not include Step 3, and is limited to Step 2, for reasons including:

• the shares in HoldingCo received under Step 3 will not be directly linked to the exchange of shares with HoldingCo in Step 2;
• the interposition of HoldingCo under Step 2 is not contingent on Step 3 going ahead; and
• Step 3 (or Step 3 in combination with Step 2) will not change the economic position of the Shareholders, i.e. they will not dispose any part of their interest in the assets of the group and the total value of assets held by them will not change.

The relevant requirements under Subdivision 615-B are spread across sections 615-15 to 615-30. Section 615-15 provides:

The interposed company must own all the shares or units in the original entity immediately after the time (the completion time) all the exchanging members have had their shares or units in the original entity disposed of, redeemed or cancelled under the scheme.

Under Step 2 of the Proposed Restructure, HoldingCo will own all the shares in ABC P/L immediately after the Shareholders dispose of their shares in ABC P/L (the completion time), thereby satisfying the requirement in section 615-15.

Subsection 615-20(1) provides:

Immediately after the completion time, each exchanging member must own:

(a) a whole number of shares in the interposed company; and

(b) a percentage of the shares in the interposed company that were issued to all the exchanging members that is equal to the percentage of the shares or units in the original entity that were:

(i) owned by the member; and

(ii) disposed of, redeemed or cancelled under the scheme.

Immediately after the completion time, each of the Shareholders will own a whole number of shares in HoldingCo and a percentage of the shares in HoldingCo that will be issued to them that will be equal to the percentage of the shares in ABC P/L that they originally owned and disposed of under the Proposed Restructure, thereby satisfying the requirements in subsection 615-20(1).

Subsection 615-20(2) provides:

The following ratios must be equal:

(a) the ratio of:

(i) the market value of each exchanging member ' s shares in the interposed company; to

(ii) the market value of the shares in the interposed company issued to all the exchanging members (worked out immediately after the completion time);

(b) the ratio of:

(i) the market value of that member ' s shares or units in the original entity that were disposed of, redeemed or cancelled under the scheme; to

(ii) the market value of all the shares or units in the original entity that were disposed of, redeemed or cancelled under the scheme (worked out immediately before the first disposal, redemption or cancellation).

Under Step 2 of the Proposed Restructure, the shares in HoldingCo issued to the Shareholders will be held in the same proportion and carry the same rights as the shares originally held in ABC P/L, and the total market value of HoldingCo will be the same as the market value of ABC P/L (as the only asset that HoldingCo will own will be the shares in ABC P/L).

Given this, immediately after the completion time the ratio of the market value of each Shareholders' shares in HoldingCo to the market value of the shares in HoldingCo issued to all the Shareholders will be equal to the ratio of the market value of each Shareholder's shares in ABC P/L disposed of under Step 2 of the Proposed Restructure to the market value of all the shares in ABC P/L disposed of under Step 2 of the Proposed Restructure, such that the requirement in subsection 615-20(2) will be met.

Subsection 615-20(3) provides:

Either:

(a) you are an Australian resident at the time your shares or units in the original entity are disposed of, redeemed or cancelled under the scheme; or

...

The Shareholders are Australian residents (and will be at the time their ABC P/L shares will be disposed of under Step 2 of the Proposed Restructure), therefore the requirement in paragraph 615-20(3)(a) will be satisfied.

Section 615-25 provides:

(1) The shares issued in the interposed company must not be redeemable shares.

(2) Each exchanging member who is issued shares in the interposed company must own the shares from the time they are issued until at least the completion time.

(3) Immediately after the completion time:

(a) the exchanging members must own all the shares in the interposed company; or

...

On the basis of the facts provided, section 615-25 will be satisfied as:

• the shares issued in HoldingCo will not be redeemable shares;
• each Shareholder will hold (own) the shares in HoldingCo issued to them from the time they are issued until at least after the completion of the Proposed Restructure; and
• immediately after the completion time, the Shareholders collectively will own all the shares in HoldingCo.

Section 615-30 provides:

(1) Unless subsection (2) applies, the interposed company must choose that section 615-65 applies.

(2) The interposed company must choose that a consolidated group continues in existence at and after the completion time with the interposed company as its head company, if:

(a) Immediately before the completion time, the consolidated group consisted of the original entity as head company and one or more other members (the other group members); and

(b) immediately after the completion time, the interposed company is the head company of a consolidatable group consisting only of itself and the other group members.

(3) A choice under subsection (1) or (2) must be made:

(a) within 2 months after the completion time, if the choice is under subsection (1); or

(b) within 28 days after the completion time, if the choice is under subsection (2); or

(c) within such further time as the Commissioner allows.

The choice cannot be revoked.

Immediately before the completion time, ABC P/L will be the head entity of the ABCITCG. Within 28 days of the completion time, HoldingCo will make the choice for the purposes of subsection 615-30(2) that the consolidated group continues in existence at and after the completion time with HoldingCo as its head company. As a result, the conditions in section 615-30 will be satisfied.

Conclusion

As each of the requirements in subsection 615-5(1) will be satisfied, the Shareholders will be eligible to obtain roll-over relief in relation to the disposal of their ABC P/L shares under Step 2 of the Proposed Restructure and, in accordance with subsection 615-5(2), the Shareholders will be taken to have chosen to obtain the roll-over.

Question 2

Summary

The Shareholders will be eligible to obtain roll-over relief under Subdivision 124-M in respect of the exchange of their in XYZ P/L for shares in HoldingCo (under Step 3 of the Proposed Restructure).

Detailed reasoning

Subdivision 124-M 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.

Subdivision 124-M contains a number of conditions for, and exceptions to, the eligibility of a shareholder to choose scrip for scrip roll-over.

Only partial roll-over will be available if, in addition to shares, the capital proceeds include something (ineligible proceeds) other than replacement shares.

Each of the conditions and exceptions relevant to the Shareholders are considered below.

Shares are exchanged for shares in another company

Subparagraph 124-780(1)(a)(i) requires an entity to exchange a share in a company for a share in another company.

The Shareholders (the original interest holders) will exchange their shares in XYZ P/L (the original entity) for shares (the replacement interests) in HoldingCo. Therefore, this requirement will be satisfied.

The exchange occurs as part of a single arrangement

Paragraph 124-780(1)(b) requires that the exchange of shares is in consequence of a single arrangement that satisfies subsection 124-780(2) or (2A).

The term 'arrangement' is broadly defined in subsection 995-1(1) to mean 'any arrangement, agreement, understanding, promise or undertaking, whether express or implied, and whether or not enforceable (or intended to be enforceable) by legal proceedings'.

The term 'single arrangement' is not defined and therefore takes its ordinary meaning. Paragraph 11.23 of the Explanatory Memorandum to the New Business Tax System (Miscellaneous) Bill (No. 2) 2000 details a number of factors that 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.

This requirement will be satisfied as the shares in XYZ P/L will be exchanged for shares in HoldingCo at one point in time pursuant to a single contractual agreement.

Whether the Shareholders will exchange their shares held in XYZ P/L for shares in HoldingCo under a single arrangement that satisfies subsection 124-780(2) is considered immediately below.

Conditions for arrangement are satisfied

80% or more ownership

Subparagraph 124-780(2)(a)(ii) requires that the arrangement results in 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 to 80% or more.

Section 975-500 provides that 2 companies are members of the same wholly-owned group if one of the companies is a 100% subsidiary of the other company. HoldingCo, owning 100% of shares in ABC P/L at the time of Step 3, will be a member of a wholly-owned group. HoldingCo will satisfy the requirement in subparagraph 124-780(2)(a)(ii) as it will obtain 100% of the voting shares in XYZ P/L.

All voting share owners participate

Paragraph 124-780(2)(b) requires that the arrangement must be one in which at least all the owners of voting shares in the original entity could participate.

As the transaction (under Step 3) involves the exchange of shares held by each of the shareholders of XYZ P/L, this condition will be satisfied.

Participation is on substantially the same terms

Paragraph 124-780(2)(c) requires that the arrangement must be one in which participation is available on substantially the same terms for all the owners of interests of a particular type in the original entity.

There is only one class of shares in XYZ P/L, being ordinary shares. The offer to acquire shares is made to each shareholder of XYZ P/L on the same terms. Accordingly, this condition will be satisfied.

Conditions for roll-over are satisfied

The arrangement must also satisfy the conditions for roll-over in subsection 124-780(3) (paragraph 124-780(1)(c)).

Original interest is acquired on or after 20 September 1985

Paragraph 124-780(3)(a) requires the original interest holder to have acquired its original interest on or after 20 September 1985.

XYZ P/L was incorporated in 20XX and all the shares in XYZ P/L were issued to the Shareholders at this time. Accordingly, this condition is satisfied.

Shareholder would otherwise make a capital gain

Paragraph 124-780(3)(b) requires that, 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.

Apart from the roll-over, CGT event A1 will happen to the Shareholders upon disposal of the XYZ P/L shares (section 104-10), and the Shareholders will make a capital gain under subsection 104-10(4). Therefore, this condition will be satisfied.

Replacement interests in the acquiring entity

Subparagraph 124-780(3)(c)(ii) requires that the replacement interest is in the company (the replacement entity) that is the ultimate holding company of the wholly-owned group.

The replacement interests are shares in HoldingCo and HoldingCo is the ultimate holding company of its wholly-owned group. Therefore, this condition will be satisfied.

Choice to obtain scrip for scrip roll-over

If section 124-782 applies, paragraph 124-780(3)(d) requires that the original interest holder and the replacement entity jointly choose to obtain the roll-over. Section 124-782 applies if an original interest holder obtains a roll-over under Subdivision 124-M and is a significant stakeholder or a common stakeholder (as defined in section 124-783 for the arrangement).

Pursuant to subsection 124-783(3), an original interest holder is a common stakeholder for an arrangement if it had a common stake in the original and replacement entity respectively just before the arrangement started and just after the arrangement was completed. In accordance with subsection 124-783(9), an entity, or two or more entities, will 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 hold shares carrying 80% or more of the voting, dividend and capital rights of the relevant companies both before and after the arrangement.

The Shareholders together will hold greater than 80% of the voting, dividend and capital rights of the original and replacement entity before and after step 2 of the Proposed Restructure.

Accordingly, the Shareholders are all common stakeholders under section 124-783 and for the purpose of section 124-782.

As all the Shareholders and HoldingCo will jointly choose to obtain the roll-over, this condition will be satisfied.

Significant or common stakeholders notify cost base

If section 124-782 applies, paragraph 124-780(3)(e) requires the original interest holder that is a significant stakeholder or common stakeholder for the arrangement to inform the replacement entity in writing of the cost base of its original interest worked out just before a CGT event happened in relation to it.

As the Shareholders will notify HoldingCo in writing of the cost base of their shares in XYZ P/L just before their disposal, this condition will be satisfied.

Issue of equity or new debt by member of a wholly owned group

Paragraph 124-780(3)(f) provides that if the acquiring entity is a member of a wholly-owned group, no member of the group issues equity (other than the replacement interests), 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.

Paragraph 1.37 in the Explanatory Memorandum to the Tax and Superannuation Laws Amendment (2015 Measures No. 4) Bill 2015 confirms that this 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.

As HoldingCo will only issue replacement interests, being the HoldingCo shares, to the Shareholders and will not issue any other debt or equity instruments to the Shareholders (or any other entity that is not a member of the wholly-owned group) under the Proposed Restructure, the condition in paragraph 124-780(3)(f) will be satisfied.

Further roll-over conditions are satisfied

A further condition in subsection 124-780(5) must be satisfied where the original interest holder and the acquiring entity did not deal with each other at arm's length and neither the original entity nor the replacement entity had at least 300 members just before the arrangement started, or the original interest holder, the original entity and the acquiring entity were all members of the same linked group just before that time (subsection 124-780(4)).

This condition must be satisfied in order to apply the roll-over as the Shareholders (the original interest holders) and HoldingCo (the acquiring entity) will not be dealing with each other at arm's length, and neither XYZ P/L (the original entity) nor HoldingCo will have at least 300 members just before the arrangements started.

The further condition under subsection 124-780(5) requires the market value of the original interest holder's capital proceeds for the exchange to be at least substantially the same as the market value of its original interest, and its replacement interest must carry the same kind of rights and obligations as those attached to its original interest.

The number of HoldingCo shares that each Shareholder will receive under the share exchange in return for the disposal of their XYZ P/L shares will directly reflect the market value of their XYZ P/L shares in accordance with the valuations that will be undertaken prior to the exchange. Therefore, the market value of the HoldingCo shares (constituting each Shareholder's capital proceeds for the exchange) will be at least substantially same as the market value of the XYZ P/L shares.

The shares that the Shareholders will receive in HoldingCo will be ordinary shares which carry the same rights and obligations as those attached to their shares in XYZ P/L.

Consequently, the requirements of subsection of 124-780(5) will be met.

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

Section 124-795 sets out the circumstances under which scrip for scrip roll-over under Subdivision 124-M is not available.

The exceptions set out under subsections 124-795(1), (2) and (4) are not relevant and are not considered further in this ruling.

Subsection 124-795(3) provides that roll-over is not available if roll-over relief can otherwise be obtained under Division 122 (asset transfers to a wholly-owned company) or Division 615 (business restructures) for the exchange of the original interest.

As the Division 122 and Division 615 roll-overs cannot be obtained for the transfer of the shares in XYZ P/L to HoldingCo, this exception does not apply.

Conclusion

Based on the information provided, the Shareholders will satisfy the requirements in Subdivision 124-M to be eligible to obtain scrip for scrip roll-over relief in respect of the exchange of their ordinary shares in XYZ P/L for shares in HoldingCo of an equivalent value.

Question 3

Summary

The Proposed Restructure described in this ruling will not constitute a scheme to which section 177D of Part IVA of the ITAA 1936 applies.

Detailed reasoning

Section 177D of the ITAA 1936 provides that Part IVA of the ITAA 1936 applies to a scheme, or any part of a scheme, entered into or carried out by a person for the dominant purpose of enabling a taxpayer to obtain a tax benefit in connection with the scheme. If Part IVA of the ITAA 1936 applies to a scheme, the Commissioner can make a determination under section 177F of the ITAA 1936 to cancel the tax benefit obtained under the scheme.

A conclusion about a relevant person's purpose is the conclusion of a reasonable person based on all the facts and evidence that are relevant to considering the matters outlined in subsection 177D(2) of the ITAA 1936.

On the facts of the proposed scheme described in this ruling, and having consideration of the matters outlined in subsection 177D(2) of the ITAA 1936, there is insufficient tax purpose to engage the application of the general anti-avoidance provisions in Pt IVA of the ITAA 1936.