Edited version of private advice

Authorisation Number: 1052057445866

Date of advice: 15 December 2022

Ruling

Subject: CGT - scrip for scrip roll-over

Question 1

Are the Australian Shareholders eligible to choose the scrip for scrip roll-over under Subdivision 124-M of the Income Tax Assessment Act 1997 (ITAA 1997) on the exchange of their shares in the Companies for shares in Holding Company?

Answer

Yes.

This ruling applies for the following period:

Income year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

COY AU

1.       COY AU is a proprietary limited company incorporated and registered in Australia and is an Australian tax resident.

2.       The company is not a tax resident of any other country.

3.       The central management and control of the company is in Australia.

4.       The directors of the company include:

•         Person A

•         Person B

•         Person C

•         Person D

5.    The company has X ordinary shares on issue at AUD1 each owned as follows:

6.       The shares in COY AU will be subdivided from X shares to X shares. The subdivision will not affect the rights of the shares nor the ownership thereof; it will simply split a smaller number of shares on issue into a larger number of shares.

7.       Person E intends to gift X shares in COY AU to a related individual, Person C.

8.       Person F intends to gift X shares in COY AU to a related individual, Person C.

9.       Person C has negotiated to dispose of X shares in COY AU to the Trustee for B Trust for market value consideration.

10.     Ownership of COY AU immediately prior to the restructure will be as follows:

11.     The company does not own any direct or indirect interests in real property (land) in Australia, nor does it hold any legal or equitable interests in land situated in Australia.

COY W

12.     COY W is a private limited company incorporated in Place A and B and is a tax resident of the Country W.

13.     The company is not a tax resident of any other country.

14.     The central management and control of the company is in the Country W.

15.     The directors of the company include:

•         Person A

•         Person B

•         Person C

16.     The company has X ordinary shares on issue at X each, owned as follows:

17.     The shares in COY W will be subdivided from X shares to X shares. The subdivision will not affect the rights of the shares nor the ownership thereof; it will simply split a smaller number of shares on issue into a larger number of shares.

18.     Person E intends to gift X shares (approximately X%) in COY W to a related individual, Person C.

19.     Person F intends to gift X shares (approximately X%) in COY W to a related individual, Person C.

20.     The directors of COY W intend to cause the company to buy-back X of its shares from COY B (being X% of the shares on issue to Calder Holdings) for market value consideration.

21.     COY B has agreed to this buy-back.

22.     Ownership of COY W immediately prior to the restructure will be as follows:

23.     The company does not own any direct or indirect interests in real property (land) in Australia, nor does it hold any legal or equitable interests in land situated in Australia.

COY Y

24.     COY Y is a private limited company incorporated in Country Y and is a tax resident of Country Y.

25.     The company is not a tax resident of any other country.

26.     The central management and control of the company is in Country Y.

27.     The directors of the company include:

•         Person A

•         Person B

28.     COY Y has X ordinary shares on issue at X each owned as follows:

29.     COY Y will issue X ordinary shares at X as a bonus share issue to each of the existing shareholders in proportion to their existing shareholding.

30.     These bonus shares are ordinary shares and carry the same rights and entitlements as the existing ordinary shares on issue and are non-redeemable.

31.     Immediately after the bonus share issue the ownership of COY Y will be as follows:

32.     Person E intends to gift X shares in COY Y to a related individual, Person C.

33.     Person F intends to gift X shares in COY Y to a related individual, Person C.

34.     The directors of COY Y intend to cause the company to buy-back X of its shares from COY B for market value consideration. COY B has agreed to this buy-back.

35.     Person C has negotiated to dispose of X shares in COY Y to the following investors for market value consideration:

36.     Ownership of COY Y prior to the restructure will be as follows:

37.     The company does not own any direct or indirect interests in real property (land) in Australia, nor does it hold any legal or equitable interests in land situated in Australia.

COY X

38.     COY X is a company incorporated in Country X and is a tax resident of Country X.

39.     The company is not a tax resident of any other country.

40.     The central management and control of the company is in Country X.

41.     The managers of the company are residents of Country X.

42.     COY X has capital contributions of X from members, giving rise to Membership Interests for income, capital and voting in the company as follows:

43.      

44.     The company does not own any direct or indirect interests in real property (land) in Australia, nor does it hold any legal or equitable interests in land situated in Australia.

45.     COY X does not typically issue share instruments to record the interests of members. A member's interest will provide the member with a right to a proportionate share of the profits and assets on distribution.

COY Z

46.     COY Z is a limited liability company incorporated in Country Z and is a tax resident of

47.     Country Z.

48.     COY Z is not a tax resident of any other country.

49.     The central management and control of COY Z is in Country Z.

50.     The directors of the COY Z include:

•         Person K

•         Person H

•         Person L

51.     COY Z has 100 ordinary shares on issue at X each, owned as follows:

52.     The shares in COY Z held by COY X and COY W will be sold to Holding Company for market value consideration.

53.     Ownership of COY Z immediately prior to the restructure will be as follows:

54.     COY Z does notown any direct or indirect interests in real property (land) in Australia, nor does it hold any legal or equitable interests in land situated in Australia.

Australian taxpayers

55.     Person H is an Australian tax resident and is not a tax resident of any other country.

56.     COY H is a proprietary limited company incorporated and registered in Australia and is an Australian tax resident. Person H is the Australian resident director and shareholder of

57.     COY H. COY H acts as the Trustee for B Trust.

58.     B Trust is a discretionary family investment trust. By virtue of its Australian resident trustee,

59.     B Trust is a resident trust for CGT purposes. Person H ultimately controls B Trust. The Trustee for B Trust owns X% of the share capital in COY A.

60.     COY A is a proprietary limited company incorporated and registered in Australia and is an Australian tax resident. Person H is the Australian resident director.

61.     COY I is a proprietary limited company incorporated and registered in Australia and is an Australian tax resident. COY I acts as the trustee for A Trust.

62.     A Trust is a discretionary family investment trust. By virtue of its Australian resident trustee, it is a resident trust for CGT purposes. Person D ultimately controls the A Trust and is an Australian tax resident.

63.     Collectively, the Trustee for A Trust, the Trustee for B Trust, COY A and Person H are referred to as the 'Australian Shareholders'.

Country W

64.     Person C is a Country W tax resident and is not a tax resident of any other country.

65.     Person E is a Country W resident and is not a tax resident of any other country.

66.     Person F is a Country W resident and is not a tax resident of any other country.

67.     Person I is a Country W resident and is not a tax resident of any other country.

68.     COY G is a Country W resident and is not a tax resident of any other country.

Country Y

69.     Person A is a tax resident of Country Y and is not a tax resident of any other country.

70.     Person B is a tax resident of Country Y and is not a tax resident of any other country.

71.     COY B is a tax resident of Country Y and is not a tax resident of any other country.

72.     Person G is a tax resident of Country Y and is not a tax resident of any other country.

73.     Person J is a tax resident of Country Y and is not a tax resident of any other country.

Country X

74.     COY E is a tax resident of Country X and is not a tax resident of any other country.

75.     COY Dis a tax resident of Country X and is not a tax resident of any other country.

76.     Person M is a tax resident of Country X and is not a tax resident of any other country.

77.     Person N is a tax resident of Country X and is not a tax resident of any other country.

78.     Person K is a tax resident of Country X and is not a tax resident of any other country.

Country Z

79.     Person K is a tax resident of Country Z and is not a tax resident of any other country.

80.     Person L is a tax resident of Country Z and is not a tax resident of any other country.

81.     COY C is a company incorporated in and resident of Country Z and is not a tax resident of any other country.

Collectively

82.     Collectively, COY W, COY Y, COY X and COY Z are referred to as the 'Foreign Companies'.

83.     Collectively, COY AU, COY W, COY Y, COY X and COY Z are referred to as 'the Companies' and the shareholders of the Companies are referred to as the 'Shareholders'.

Ownership

84.     Unless otherwise stated, each of the above listed Shareholders own ordinary shares in the relevant Companies for their own benefit and not as agent, custodian, or on trust for another party.

85.     The ordinary shares and membership interests in the Companies:

•         are held by the Shareholders on capital account (i.e. not as revenue assets, trading stock, or as part of a profit making undertaking or scheme);

•         are not eligible finance shares, nor widely distributed finance shares; and

•         carry the right to exercise any of the voting power in the relevant Companies, and there is no arrangement in force to affect that right.

86.     The Australian Shareholders acquired their interests in the Companies on or after

87.     20 September 1985.

88.     The Companies do not own any real property situated in Australia, and accordingly, their shares are not taxable Australian property.

89.     The Shareholders (or any other party) do not own or holds any rights or options over or in respect of the shares or membership interests in the Companies.

Associate-inclusive interests

90.     The following shareholders (Person H and Associates) are associates, as defined in section 318 of Income Tax Assessment Act 1936 (ITAA 1936):

•         Person H

•         COY A

•         Trustee for B Trust.

91.     Their associate-inclusive interests in the Companies:

92.     The following shareholders (Person C and Associates) are associates, as defined in section 318 of ITAA 1936:

•         Person C

•         Person E

•         Person F

•         COY G

•         COY B

•         Person A

•         Person B

93.     Their associate-inclusive interests in the Companies:

94.     The following shareholders are associates as defined in section 318 of ITAA 1936:

•         Person N [COY E]

•         Person K

95.     Their associate-inclusive interests in the Companies:

Proposed Arrangement

96.     As part of a single arrangement, a series of transactions are proposed to give effect to the restructure in the ownership of Companies, with the effect that a new holding company, Holding Company, will be interposed between the Shareholders and the Companies. As part of the interposition, the shares issued by Holding Company will be ordinary shares that are not redeemable shares.

97.     All the Shareholders in the Companies are able to, and will, participate in the transactions to give effect to the restructure arrangement on substantially the same terms, and further, the arrangement will be accepted and effected on substantially the same terms.

98.     As part of the arrangement, the replacement Holding Company shares the Shareholders will receive will have the same rights attached, and the same market value, as the shares in the Companies that Shareholders exchanged.

99.     To undertake the restructure, the following transaction is proposed to be undertaken (Restructure Transaction):

•         as part of a single scheme of arrangement, a new holding Company will be incorporated (Holding Company) (a Country W resident company),

•         Holding Company will then acquire the entire issued share capital and membership interests (ordinary shares) of the Companies from the Shareholders, and

•         as consideration, Holding Company will issue ordinary shares in itself to those same Shareholders in the same proportion and value as their shareholding in the original Companies, and nothing else.

100.  The shares in the Companies will all be exchanged as part of one arrangement for shares in Holding Company. The restructure will occur simultaneously as part of one arrangement.

101.  The estimated market value of each of the Companies immediately before the Restructure Transaction is:

102.  The estimated market value of Holding Company immediately after the Restructure Transaction will be $X.

103.  The shareholding in Holding Company immediately after the Restructure Transaction will be:

104.  COY C will not be an associate (as defined in section 318 of ITAA 1936) of

105.  Holding Company just after the Restructure Transaction is completed.

Other Facts

106.  The Australian Shareholders acquired their shares in the Companies on or after

107.  20 September 1985.

108.  The Australian Shareholders will realise a capital gain as a result of the exchange of their shares in the Companies.

109.  The Shareholders and Holding Company will choose for the Subdivision 124-M roll-over to apply.

110.  The Shareholders will notify Holding Company in writing of the cost base of their shares in any or all Companies if they are a significant stakeholder or common stakeholder just before the arrangement started.

111.  The Foreign Shareholders will not make a capital gain subject to Australian income tax on the transfer of their shares in the Australian Company, as the shares are not taxable Australian property, and the gain that would otherwise have been made is disregarded for Australian capital gains tax purposes pursuant to Division 855.

112.  The exchange of the Companies shares for shares in Holding Company are not part of a broader scheme or arrangement.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 318

Income Tax Assessment Act 1997 Subdivision 124-M

Income Tax Assessment Act 1997 section 124-780

Income Tax Assessment Act 1997subsection 124-780(1)

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 subsection 124-780(2)

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

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

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

Income Tax Assessment Act 1997 paragraph 124-780(3)(a)

Income Tax Assessment Act 1997 paragraph 124-780(3)(b)

Income Tax Assessment Act 1997 paragraph 124-780(3)(c)

Income Tax Assessment Act 1997 paragraph 124-780(3)(d)

Income Tax Assessment Act 1997 paragraph 124-780(3)(e)

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 paragraph 124-780(5)(a)

Income Tax Assessment Act 1997 paragraph 124-780(5)(b)

Income Tax Assessment Act 1997 section 124-782

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(2)

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

Income Tax Assessment Act 1997 subsection 124-783(4)

Income Tax Assessment Act 1997 subsection 124-783(5))

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

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

Income Tax Assessment Act 1997 section 124-784A

Income Tax Assessment Act 1997 subparagraph 124-784A(1)(a)(ii)

Income Tax Assessment Act 1997 section 124-784B

Income Tax Assessment Act 1997 subsection 124-785(1)

Income Tax Assessment Act 1997 subsection 124-785(3)

Income Tax Assessment Act 1997 section 124-795

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

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

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

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

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

Income Tax Assessment Act 1997 section 975-500

Income Tax Assessment Act 1997 section 975-505

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

Reasons for decision

Question 1

Are the Australian Shareholders eligible to choose the scrip for scrip roll-over under

Subdivision 124-M of the Income Tax Assessment Act 1997 (ITAA 1997) on the exchange of their shares in the Companies for shares in Holding Company?

Summary

Yes.

Detailed reasoning

All legislative references are to the Income Tax assessment Act 1997 unless otherwise specified.

113.  Subdivision 124-M allows a shareholder to choose roll-over where post-CGT shares are replaced with shares in another entity, subject to certain requirements.

114.  Section 124-780 contains a number of conditions for, and exceptions to, the eligibility of a shareholder to choose scrip for scrip roll-over.

115.  Subsection 124-780(1) provides (subject to certain exceptions in section 124-795) that there is a roll-over if:

•         an entity exchanges shares in a company for shares in another company

•         the exchange happens as part of a single arrangement

•         the conditions for the arrangement in subsection 124-780(2) are satisfied

•         the conditions for the roll-over in subsection 124-780(3) are satisfied

•         the further conditions for the roll-over in subsection 124-780(5) are satisfied if they did not deal with each other at arm's length.

Shares are exchanged for shares in another company

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

117.  A share in a company has the meaning given by subsection 995-1(1) and means a share in the capital of the company, and includes stock.

118.  This requirement is satisfied as the Australian shareholders will dispose of their shares in the Companies in exchange for shares in Holding Company.

The exchange is in consequence of a single arrangement

119.  Paragraph 124-780(1)(b) and subsection 124-780(2) require that the shares are exchanged 'in consequence of a single arrangement' that:

•         results in the acquiring entity becoming the owner of at least 80% of the voting shares in the original entity

•         is one in which all of the owners of voting shares are able to participate; and

•         is one in which participation is available on substantially the same terms for all interest holders of a particular type.

120.  The various components of the requirement in paragraph 124-780(1)(b) are discussed in the following paragraphs.

In consequence of a single arrangement

121.  There is no legislative guidance as to when an exchange would occur 'in consequence of' an arrangement for the purposes of the scrip for scrip roll-over provisions.

122.  The Explanatory Memorandum to New Business Tax System (Capital Gains Tax) Bill 1999, being the Bill that introduced Subdivision 124-M, states at paragraph 2.9 that scrip for scrip roll-over is available if 'the exchange is in consequence of an offer'. At paragraph 2.23 of that Explanatory Memorandum, it further states that:

...an acquisition occurs in consequence of an offer if the acquisition occurs as a result of, or effect of, the offer. This means that the offer needs to occur before the acquisition and have a causal connection or other connection with it. [emphasis added]

123.  The amendments to Subdivision 124-M in the New Business Tax System (Miscellaneous) Bill (No 2) 2000 had the effect that the acquiring entity no longer needed to make 'an offer'. Paragraph 1.19 of the Explanatory Memorandum to the New Business Tax System (Miscellaneous) Bill (No 2) 2000 states that:

An acquiring entity will no longer be required to make an offer. It will now be sufficient that the exchange be in consequence of an arrangement that results in an entity (an acquiring entity) becoming the owner of 80% or more of the specified interests in the original entity.

124.    The term 'arrangement' is defined very broadly in section 995-1 as follows:

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.

125.  The exchange of the Australian Shareholders' shares in the Companies for shares in Holding Company will be in consequence of an arrangement.

126.  There is no legislative guidance as to what would constitute a 'single arrangement' for the purposes of the scrip for scrip roll-over provisions.

127.  The Explanatory Memorandum to the New Business Tax System (Miscellaneous) Bill

128.  (No. 2) 2000, at paragraph 11.23, states:

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 the objective facts.

129.  The Explanatory Memorandum to Tax Laws Amendment (2010 Measures No. 4) Bill 2010, at paragraph 5.14, states:

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

130.    At paragraph 12 of TR 2005/19 a detailed scheme is set out by way of illustration of a scheme. Relevantly, the scheme involves the following elements (in the interests of brevity, the steps have been significantly simplified and summarised below):

•         Company A contemplating a disposal of 100% of its shares in Company B;

•         Company C incorporates two special purpose companies, Company D and

•         Company E; and

•         Company C making a bid for Company B which results in Company A disposing of its shares in Company B in exchange for shares in Company D, the company nominated by Company C to acquire the Company B shares.

131.  At paragraph 34 of TR 2005/19 it is noted that 'under the single arrangement', 100% of the shares held by Company A are, at a point in time and pursuant to a series of transaction documents, exchanged for a certain number of shares in Company D in satisfaction of the requirement in paragraph 124-780(1)(b).

132.  This indicates that notwithstanding that there may a series of related steps involved in a broader commercial restructure, in determining whether a single arrangement exists, it is necessary to focus on the particular step under which the subject shares are actually exchanged. That is, the existence of other related steps should not detract from the potential existence of a single arrangement that is the focus of roll-over relief under Subdivision 124-M.

133.  In the Full Federal Court decision in Commissioner of Taxation v Fabig [2013] FCAFC 99; 215 FCR 122; 95 ATR 660 (Fabig), amongst other things, the Court considered the identification of the relevant 'arrangement' for the purposes of Subdivision 124-M. Relevantly, in Fabig, the acquiring entity had made a number of pre-contractual offers and various iterations of the draft Share Purchase Agreement were negotiated between the parties. These were held to not form part of the relevant arrangement. Rather the arrangement relevant to Subdivision 124-M was held to be the contractual relationship entered into by the parties for the share exchange.

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

135.  The steps in the Restructure Transaction are considered to be a single arrangement and the shares in each of the Companies will be exchanged for shares in Holding Company as part of and in consequence of that single arrangement.

Conditions for arrangement are satisfied

136.  The single arrangement must satisfy the conditions in subsection 124-780(2) as detailed below.

80% or more ownership

137.  Paragraph 124-780(2)(a) requires that the arrangement must result in the acquiring entity, or members of a wholly-owned group, becoming the owner of 80% or more of the voting shares of the original entity.

138.  This condition is satisfied as Holding Company will own X% of the voting shares in the Companies after the Restructure Transaction.

All owners of voting shares participate

139.  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 (apart from the acquiring entity or members of the acquiring entity's wholly owned group) could participate.

140.  Holding Company before the Restructure Transaction will hold X% of the shares in

141.  COY Z. Holding Company is the acquiring entity and is excluded from the participation requirement in paragraph 124-780(2)(b)

142.  All other Shareholders in the Companies are able to, and will, participate in the transactions to give effect to the restructure arrangement.

Participation is on substantially the same terms

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

144.  Under the Proposed Arrangement:

•         All the Shareholders in the Companies are able to, and will, participate in the transactions to give effect to the restructure arrangement on substantially the same terms, and further, the arrangement will be accepted and effected on substantially the same terms.

•         As part of the arrangement, the Shareholders will receive the same rights and market value of shares in the Holding Company as they did in the Companies that they exchanged.

145.  Accordingly, this condition is satisfied as the offer to acquire shares was made by Holding Company to all the Companies shareholders in proportion to their shareholdings in each of the Companies and all shareholders of each of the respective Companies are able to participate on the same terms.

Conditions for roll-over are satisfied

146.  As specified in paragraph 124-780(1)(c), the arrangement must also satisfy the following conditions for roll-over in subsection 124-780(3).

Original interest is acquired on or after 20 September 1985

147.  Paragraph 124-780(3)(a) requires the original interests to have been acquired on or after 20 September 1985. As the Australian shareholders acquired their shares in the Companies after 20 September 1985, this condition is satisfied.

Shareholder would otherwise make a capital gain

148.  Paragraph 124-780(3)(b) requires a capital gain to be made from a CGT event happening in relation to the original interest if the roll-over did not apply.

149.  This condition is satisfied as the Australian Shareholders will realise a capital gain as a result of the exchange of their shares in the Companies.

Replacement interests in the acquiring entity

150.  Paragraph 124-780(3)(c) requires that the replacement interest is in the acquiring entity

151.  (or the ultimate holding company of the wholly-owned group which includes the acquiring entity).

152.  Wholly-owned group has the meaning given by section 975-500. Two companies are members of the same wholly-owned group if one of the companies is a 100% subsidiary of the other company; or each of the companies is a 100% subsidiary of the same third company.

153.  A 100% subsidiary is defined in section 975-505 as a company where all its shares are beneficially owned by:

•         a holding company;

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

•         or the holding company and one or more 100% subsidiaries of the holding company.

154.  As the shareholders of Holding Company (the acquiring company) include individuals, it cannot be a wholly-owned group and the replacement interest is required to be in the acquiring entity.

155.  The Australian shareholders will receive replacement shares in Holding Company (the acquiring entity) and accordingly the condition in paragraph 124-780(3)(c) is satisfied.

Choice to obtain scrip for scrip roll-over

156.  Paragraph 124-780(3)(d) requires that the original interest holder chooses to obtain the roll-over, or, if section 124-782 applies, the original interest holder and the replacement entity jointly choose to obtain the roll-over. Section 124-782 applies if an original interest holder is a significant stakeholder or a common stakeholder for the arrangement.

157.  The Shareholders and Holding Company will choose for the roll-over in Subdivision 124-M to apply satisfying the requirement in paragraph 124-780(3)(d).

Significant or common stakeholders notify cost base

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

159.  Subsection 124-783(1) provides that an original interest holder will be a significant stakeholder for an arrangement if it had a significant stake in the original entity just before the arrangement started and a significant stake in the replacement entity just after the arrangement was completed.

160.  An entity has a significant stake in a company under subsection 124-783(6) if the entity, or the entity and the entity's associates between them have shares carrying 30% or more of the voting, dividend and capital rights of the company.

161.  Similarly, in accordance with subsections 124-783(3) and (9), an entity will be a common stakeholder for an arrangement if together with their associates they hold shares carrying 80% or more of the voting, dividend and capital rights of the relevant companies both before and after the arrangement.

162.  No entities have an associate inclusive control that carries an 80% or more right to voting, dividend and capital rights of Holding Company and accordingly there will be no common stakeholders under subsections 124-783(3) and (9).

163.  Person H and Associates and the Person C and Associates both have associate-inclusive shareholding that carries 30% or more of the voting; dividend and capital rights of Holding Company.

164.  Person H and Associates and the Person C and Associates both have an associate-inclusive shareholding that carries 30% or more of the voting, dividend and capital rights of COY W. Consequently, they will all be significant stakeholders in respect of the Restructure Transaction for COY W under subsection 124-783(6).

165.  Person H and Associates have an associate inclusive shareholding that carries 30% or more of the voting; dividend and capital rights of COY Y, COY AU and

166.  COY X and accordingly they will be significant stakeholders in respect of the Restructure transaction for these respective companies under subsection 124-783(6).

167.  There are additional rules where the acquiring entity is an original interest holder which will apply for COY Z, as Holding Company will be an original interest holder in that company just before the Restructure Transaction.

168.  The other shareholders of COY Z are:

•         Person H, who holds X% of the shares, and

•         COY C, who holds X% of the shares

169.  Under subsection 124-783(2), if an original interest holder is an acquiring entity, any other original interest holder is a significant stakeholder if it:

•         had a significant stake in the original entity just before the arrangement started, and

•         is an associate of the replacement entity just after the arrangement is completed.

170.  COY C will have a significant stake in the original entity holding X% of the shares just before the arrangement commences. However, it will not be an associate, as defined section 318 of the ITAA 1936, of Holding Company just after the arrangement is completed. Accordingly, COY C will not be a significant stakeholder under subsection 124-783(2)

171.  Under subsection 124-783(4), if an acquiring entity for an arrangement is an original interest holder, each other original interest holder that has a replacement interest is a common stakeholder for the arrangement.

172.  However, no entity is a common stakeholder for an arrangement if either the original entity or the replacement entity had at least 300) just before the arrangement commenced (subsection 124-783(5)).

173.  COY Z and Holding Company will have less than 300 members just before the Restructure Transaction and accordingly subsection 124-783(5) will have no application.

174.  Holding Company, the acquiring entity in the arrangement, will hold X% of the shares in COY Z just before the Restructure Transaction. The other two shareholders, Person H and COY C, will acquire replacement interests in Holding Company under the Restructure Transaction. Accordingly, Person H and COY C will be common stakeholders under subsection 124-783(4) in respect of the Restructure Arrangement for COY Z.

175.  The Shareholders will notify Holding Company in writing of the cost base of their Companies shares if they are a significant stakeholder just before the arrangement started.

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

176.  Paragraph 124-780(3)(f) of the ITAA 1997 provides that if the acquiring entity is a member of a wholly-owned group, no member of the group issues equity, 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.

177.  As mentioned above Holding Company (the acquiring entity) is not a member of a

178.  wholly-owned group and accordingly this requirement is not applicable.

Further roll-over conditions

If the entities are not dealing at arm's length

179.  Subsection 124-780(4) provides that the additional requirements in subsection 124-780(5) must be satisfied if the original interest holder and the acquiring entity did not deal with each other at arm's length and neither entity had at least 300 members or they were all members of the same linked group just before the arrangement started.

180.  As the Companies and Holding Company will have fewer than 300 members before the share exchange, subsection 124-780(4) will apply if the Shareholders did not deal at arm's length in relation to the exchange.

181.  The question of whether the parties are dealing with each other at arm's length is not decided by asking whether the parties were at arm's length to each other.

182.  Subsection 995-1(1) provides that in determining whether parties deal at arm's length, consider any connection between them and any other relevant circumstance.

183.  ATO Interpretative Decision ATO ID 2004/498 (ATO ID 2004/498) considers the situation where a restructure is implemented, whereby a new acquiring entity is incorporated for the purpose of acquiring all the shares in the original entity in exchange for the issue of ordinary shares and redeemable preference shares. The original shareholders will own all the shares in the acquiring entity in the same proportion as they did in the original entity.

184.  In ATO ID 2004/498 the Commissioner determined that the parties were not acting at arm's length as the newly-incorporated acquiring company did not bargain as a party dealing at arm's length with these shareholders. In considering this situation, ATO ID 2004/498 states:

The structure of subsections 124-780(4) and 124-780 (5) of the ITAA 1997 indicate the phrase 'dealing at arm's length' is not to be construed as meaning the parties exchange their shares for a fair price or market value. A condition to be met in subsection 124-780(5), that the market value of the capital proceeds received by the shareholders is substantially the same as the market value of their original interest, must be met only if the original interest holder and acquiring entity 'did not deal with each other at arm's length' and fall within paragraphs 124-780(4)(a) or (b).

'Arm's length' is defined at subsection 995-1(1) of the ITAA 1997 as:

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

The Commissioner is therefore required to consider not only the relationship or connection between the shareholder and the acquiring entity but also the nature and circumstances of the dealing.

When determining whether the shareholder dealt with the acquiring entity at arm's length it is the collective bargaining power of the group of shareholders against the acquiring entity which must be considered (Elmslie and Others v. Commissioner of Taxation (1993) 46 FCR 576; 26 ATR 611; (1993); 93 ATC 4964).

As the restructure occurred in accordance with terms and conditions agreed between the shareholders it is considered that the newly incorporated acquiring company did not bargain as a party dealing at arm's length with these shareholders.

185.  It is considered that the principles in ATO ID 2004/498 equally apply in this situation, as the proposed share exchange also features a company that is being incorporated for the purposes of becoming the acquiring company under a scrip for scrip arrangement. Accordingly, it is considered that the parties did not act at arm's length in respect of the share exchange as Holding Company, being a newly created entity for the purposes of the share exchange, did not have the opportunity to bargain as a party dealing at arm's length with the Shareholders.

Further conditions must be satisfied

186.  Consequently, as the requirements in subsection 124-780(4) of the ITAA 1997 are satisfied, the requirements in subsection 124-780(5) must also be satisfied.

187.  Paragraph 124-780(5)(a) 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.

188.  The market value of the Holding Company shares the Shareholders will receive in exchange for each of their shares in the Companies will be at least substantially the same as the market value of their Companies shares. Consequently this requirement is satisfied.

189.  Paragraph 124-780(5)(b) requires the replacement interest to carry the same kind of rights and obligations as those attached to its original interest.

190.  The shares in the Companies that will be exchanged under the arrangement will be ordinary shares with voting, dividend and capital rights. The shares that the Shareholders will receive in Holding Company will also be ordinary shares with the same kind of voting, dividend and capital rights as all of the original shares. Consequently, the requirements of subsection of 124-780(5) have been met.

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

191.  Section 124-795 sets out the circumstances where roll-over under Subdivision 124-M is not available.

192.  Subsection 124-795(1) provides that the original interest holder cannot obtain the roll-over if it is a foreign resident just before it stops owning the original interest, unless the replacement interest is taxable Australian property.

193.  This exception does not apply as the Australian Shareholders are not foreign residents just before the share exchange.

194.  Paragraph 124-795(2)(a) provides that the roll-over is not available if a capital gain the original interest holder might make from the replacement interest would be disregarded, except because of a roll-over. For example, if a capital gain is disregarded because the asset is trading stock.

195.  This exception does not apply as the Australian Shareholders will hold the shares on capital account and therefore any capital gain they might make from the Companies shares will not be disregarded, except because of a roll-over.

196.  Paragraph 124-795(2)(b) provides that the roll-over is not available if the original entity and the acquiring entity are members of the same wholly-owned group just before the share exchange and the acquiring entity is a foreign resident.

197.  This exception does not apply as the Australian Shareholders and the Companies are not members of the same wholly-owned group just before the share exchange.

198.  Subsection 124-795(3) provides that the roll-over is not available if the original entity can choose a roll-over under Division 122 or 615.

199.  The exception under subsection 124-795(3) does not apply as the Australian Shareholders cannot choose a roll-over under Division 122 or Division 615 as they will not be the sole shareholders of the Holding Company after the arrangement and therefore, they will not hold the required number of shares in the Holding Company after the share exchange under those Divisions.

200.  The exception under subsection 124-795(4) does not apply, as Holding Company will choose for the roll-over under Subdivision 124-M to apply.

Consequences of the roll-over

201.  The Australian Shareholders are eligible to choose to obtain a CGT roll-over relief under Subdivision 124-M with respect to the exchange of their shares in the Companies under the Restructure Transaction.

202.  Where the roll-over is chosen, any capital gain on the Companies shares exchanged under the Restructure Transaction is disregarded pursuant to subsection 124-785(1).

Cost base where roll-over is chosen

Cost base of the Holding Company shares

203.  Subsection 124-785(2) provides that the first element of the Shareholders' cost base for the Holding Company shares is worked out by reasonably attributing the cost base of their shares in each of the respective Companies to the Holding Company shares they received in exchange for those Companies shares.

204.  The adjustment to the cost base as outlined in subsection 124-785(3) will not apply in this situation, as the Shareholders will only be receiving the replacement interests, being the Holding Company shares, under the Restructure Transaction.

Cost base of the Companies shares received by Holding Company

205.  Subsection 124-782(1) provides that the cost base of the Companies Shares held by an original interest holder that is a significant or common stakeholder for the arrangement will become Holding Company's first element of the cost base or reduced cost base for each of the respective Companies shares it receives from that holder under the Restructure Transaction.

206.  Note 1 to subsection 124-782(1) confirms that the cost base of the shares in the Companies received by Holding Company under the Restructure Transaction that are not from significant or common stakeholders for the arrangement, will be worked out under the ordinary cost base rules in Divisions 110 and 112. This will generally be the market value of the shares at the time of the share exchange.

207.  The modifications to the cost base or reduced cost base for restructures in section 124-784B will not apply in this situation, as one of the requirements for a single arrangement to be taken to be a restructure under subparagraph 124-784A(1)(a)(ii) is for there to be a common stakeholder for the arrangement disregarding subsections 124-783(4) and (5).

208.  The only common stakeholders to the Restructure Transaction are the COY Z shareholders, pursuant to subsection 124-783(4), and accordingly they are disregarded as common stakeholders for the purposes of sections 124-784A and 124-784B.