Edited version of private advice

Authorisation Number: 1052093716524

Date of advice: 8 March 2023

Ruling

Subject: CGT - rollovers - scrip for scrip rollover and disposal of assets by a trust to a company

Question 1

Will the transfer of all assets in Trust B to Company E meet the requirements for CGT rollover relief under Subdivision 124-N of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Will CGT event J4 under section 104-195 of the ITAA 1997 happen if the Trust B is wound up within 6 months of the transfer and novation of all the assets and liabilities of the Trust B to Company E?

Answer

No

Question 3

Will the acquisition of Company A ordinary shares by Company E from Trust E and Trust F meet the requirements for CGT rollover relief under Subdivision 124-M of the ITAA 1997?

Answer

Yes

Question 4

Will section 124-782 of the ITAA 1997 apply to determine the first element of Company E's cost base of Company A ordinary shares acquired from Trust E and Trust F?

Answer

Yes

Question 5

Will the acquisition of Company E ordinary shares by Company F from Company E Shareholders meet the requirements for CGT rollover relief under Subdivision 124-M of the ITAA 1997?

Answer

Yes

This ruling applies for the following periods:

Income year ending 30 June 20XX

Income year ending 30 June 20XX

Relevant facts and circumstances

Company A

Background

Company A as head company, and its wholly owned subsidiaries comprise an income tax consolidated group (Group A).

Company A and its subsidiaries are Australian incorporated and tax resident companies that are not exempt entities for Australian income tax purposes.

The Group A operates three key businesses in its sector.

Company A also holds XX% of the shares in Company B. The remaining XX% of shares in Company B are owned by Trust A.

Directors/controlling minds

Person A and Person B are the directors of Company A. Person A is the director of Company A's wholly owned subsidiaries.

The key decision-maker of the Group A is Person A.

Shareholdings

Table 1: Group A shareholdings

All shares were acquired on or after 20 September 1985 and are post-CGT assets. (All shares held in Company A are held on capital account, and not as revenue assets, trading stock or Division 230 of the ITAA 1997 financial arrangements.)

Rights attached to the shares

There are XX classes of shares in Company A. These categories carry different rights.

Trust B

Trustee

The trustee for Trust B is the Company E, being Australian incorporated and tax resident company that is not an exempt entity for Australian income tax purposes.

Person A is the director of Company E.

Shareholdings

Table 2: Trust B shareholdings

Company E does not own any assets. It was established to be the trustee of Trust B.

Beneficiaries

The unitholders are:

Table 3: Trust B unitholders

All units held in Trust B are held on capital account, and not as revenue assets, trading stock or Division 230 of the ITAA 1997 financial arrangements.

The only assets held and owned by Trust B are its ordinary shares in Company A. For completeness, there is a facility agreement in place between Company E as trustee for Trust B and Company A. This will be extinguished prior to any steps being completed.

Trust C

Person A is the appointor for the Trust C.

Person A is the director of Company C (the corporate trustee of Trust C).

Trust D

Person C is the appointor of the Trust D, which is a discretionary trust.

Person C is the director of Company D (the corporate trustee of the Trust D).

All entities (trustees and beneficiaries) are Australian tax residents and not exempt entities for Australian income tax purposes.

Trust E and Trust F

Person D and Person E are key management personnel of one of Group A's business offerings and have played (and continue to play) a significant role in its growth and success.

In order to reward Person D and Person E for their efforts and to continue to incentivise the growth and expansion of this business, they will be issued with shares in Company A.

Company F

Background

Company F, as head company, and its wholly owned subsidiaries comprise an income tax consolidated group (Group B). Company F and its subsidiaries are Australian incorporated and tax resident companies that are not exempt entities for Australian income tax purposes.

Control

Person C is chairman of the Board of Company F, with several other key executives in charge of operations and management of Company F's activities.

Shareholdings

Company G as trustee for Trust G owns XX of the shares on issue in Company F. Trust G is a discretionary trust for the benefit of Person C' relatives. Person C is the appointor for Trust G and the director of Company G which is the corporate trustee of the trust.

All entities (trustees and beneficiaries) are Australian tax residents and not exempt entities for Australian income tax purposes.

Company H owns the balance of Company F shares. Company H is a global company and its headquarter is in a foreign country.

The shares were acquired on or after 20 September 1985 and are post-CGT assets.

Proposed restructure

Company A is considering restructuring Company A's capital structure in order to facilitate a takeover by Company F. Following this restructure, it is expected that Company F will seek to acquire 100% of the shares in Company A.

This takeover is expected to facilitate the diversification of the earnings base and provide increased in market partnership opportunities.

The process of due diligence and negotiations are still in progress between the parties. No takeover agreement is in place yet and the timeline of the restructure and the subsequent takeover are still evolving.

Preliminary steps

The following "preliminary steps'' form part of the Group A's capital reorganisation but are not the subject of the ruling application.

Pre-step 1 Put and call option granted to Company A (or nominee) over shares in Company B.

A put and call option will be granted to Company A (or a nominee) to purchase XX% of the ordinary shares in Company B held by the Trust A for market value consideration.

Trust A will not be able to transfer its shares in Company B whilst the option is on issue.

This option is unlikely to be exercised prior to the contemplated Company F takeover.

The option granted to Company A will allow it (or a nominee) to wholly acquire Company B and bring it within the Group A (or Group B, if the takeover occurs).

Pre-step 2 Removal of bare trust arrangement between Company C and Trust D.

On XX XX 20XX, Company C (Trustee) and Company D as trustee for Trust D (Beneficial Owner) entered into a deed of acknowledgement of bare trust, which established a bare trust arrangement between the Trustee and the Beneficial Owner.

Pursuant to the deed of acknowledgement of bare trust, the Beneficial Owner may at any time request that the Trustee transfer the legal title to the above interests to the Beneficial Owner and the Trustee must, on receiving the request, transfer the legal title to the interests to the Beneficial Owner.

As a result of the bare trust arrangement, Company C relevantly holds interests as bare trustee for Company D as trustee for Trust D in Company E, Trust B and Company A.

The bare trust arrangement will be removed as a result of Company D as trustee for Trust D (the Beneficial Owner) requesting that Company C (the Trustee) transfer the legal title to the interests to Company D as trustee for Trust D (the Beneficial Owner).

Pre-step 3 - Dealing with other interests on issue in Company A with nominal value.

The following interests in Company A (which have nominal market value) will be cancelled for market value consideration of $XX:

•                     Shares held by Trust C;

•                     Shares held by Trust D;

•                     Shares held by Trust E; and

•                     Shares held by Trust A.

The cancellation of these interests which have nominal market value will help simplify the Group A's corporate structure by ensuring that the only interests on issue are those with value.

The following table summarises Company A's interest holding after the completion of the proposed preliminary capital reorganisation steps:

Table 4: Company A's holding after the completion of proposal

The following steps form part of the Group A's capital reorganisation and are the steps which are the subject of this ruling application (Proposed Transaction).

Step 1 - Removal of Trust B

In order to further simplify the capital structure of the Group A, Company A and its shareholders intend to remove the current trust structure whereby shares in Company A are owned indirectly via Trust B.

To facilitate this, Trust B will transfer all of its assets (being the shares held in Company A) to Company E. Trust C and Trust D's units in Trust B will end and each unitholder will receive additional shares in Company E equal to their respective units owned in Trust B.

Trust B will vest and cease to exist within 6 months of this occurring.

Each party involved will choose to obtain a Subdivision 124-N of the ITAA 1997 roll-over.

Step 2 - Dealing with class XX and class YY shares

Following completion of step 1, all investors in the Company A Group will hold their investments/interests through Company E, but for the following interests held by certain interest holders in Company A:

• Class XX shares held by Trust E; and
• Class YY shares held by Trust F.

To further simplify the Group A corporate structure, it is necessary for all investors in the Group A to hold their interests at the same corporate level (that is, in Company E). This will streamline repatriation outcomes and also increase future investment and takeover prospects for the Group A.

To facilitate this, the following steps will be undertaken:

Step 2(a)

The following interests on issue in Company A will be varied to allow for conversion to shares in Company A (equivalent to the market value of the interests):

•         Class XX shares held by Trust E; and

• Class YY shares held by Trust F.

This will be facilitated by a special resolution that will be approved by all of the shareholders of Company A as well as the shareholders holding the shares of the class that will be varied (that is, Trust E and Trust F). No amount will be paid or payable by the parties to effect this change of rights.

Step 2(b)

Trust E and Trust F will each convert their respective interests referred to at step 2(a) into shares in Company A equal to the market value of their respective interests.

Step 2(c)

Company E will acquire the shares in Company A from Trust E and Trust F under a share purchase agreement.

As consideration, Trust E and Trust F will receive shares in Company E equal to the respective market value of their shares in Company A.

Company E, Trust E and Trust F will choose to obtain a Subdivision 124-M of the ITAA 1997 roll-over.

The Company A Group will deconsolidate as a result of this step.

Trust E and Trust F will participate in the transaction on the same terms as each other.

Capital gains event (CGT) event A1 will happen when Trust E and Trust F dispose of their shares in Company A under the proposed share exchange. Trust E and Trust F will make a capital gain under subsection 104-10(4) of the ITAA 1997 apart from the roll-over on the basis that the market value of ordinary shares they will respectively receive in Company E exceeds the cost base of their respective ordinary shares in Company A.

Trust E and Trust F along with Company E will choose to obtain the roll-over.

Trust E and Trust F will notify Company E in writing of their respective cost base of Company A ordinary shares worked out just before the contract for sale to facilitate Company E's acquisition of their Company A ordinary shares is entered into.

The Company E ordinary shares will carry the same kind of rights and obligations as those attached to the Company A ordinary shares.

Step 2(d)

Company E will immediately make an election to form a new income tax consolidated group together with Company A and each of its wholly-owned Australian tax resident subsidiaries (Group C).

The above steps have been discussed with and agreed to by Trust E and Trust F.

The following table summarises Company E's shareholding prior to Company F's takeover:

Company F's takeover

Following Company A's capital reorganisation, it is expected that Company F will seek to acquire 100% of the shares in Company E (the proposed new parent entity of the Group A).

CGT event A1 will happen when Company E's vendor shareholders dispose of their shares in Company E under the proposed share exchange. Company E's vendor shareholders will make a capital gain under subsection 104-10(4) apart from the roll-over, meaning this condition is satisfied. The capital gain would equal the difference between the cost base of their respective Company E ordinary shares and the sum of the cash and the market value of the ordinary shares in Company F received in exchange.

It is not yet possible to determine the number and percentage of shareholdings in Company F following the contemplated Company F takeover on the basis that the transaction is still subject to due diligence and contractual negotiations which includes confirmation of purchase price.

It is also not yet known what each vendor shareholder will choose to receive as consideration (that is, Company F ordinary shares and/or cash).

The takeover is expected to be implemented under a share purchase agreement and involve:

•                     Company F acquiring 100% of the shares in Company E; and

•                     As consideration, Company E shareholders may choose a combination of shares in Company F and/or cash consideration equal to the respective market value of their ordinary shares in Company E. Each of the Company E vendor shareholders will receive the same offer and participate in the takeover on the same terms as each other.

The following table summarises Company F's shareholding following the completion of the preliminary capital reorganisation steps, restructure steps and Company F's takeover:

Company E's vendor shareholders along with Company F will choose to obtain the roll-over under Subdivision 124-M.

Company E's vendor shareholders will notify Company F in writing of their respective cost base of Company E shares worked out just before the contract for sale to facilitate Company F's acquisition of their Company E shares is entered into.

There is no step up to cost bases under this step.

The Company F ordinary shares will carry the same kind of rights and obligations as those attached to the Company E ordinary shares.

Company F and other members of its wholly-owned group will not issue any debt or other equity instruments under the arrangement to an entity that is not a member of the group in relation to the issuing of Company F ordinary shares to Company E's vendor shareholders.

It is intended that Company E will pay a franked dividend prior to the takeover completing.

Other relevant matters

Apart from Person C, Trust G and Trust D, there are no associations between any of the other entities for the purposes of section 318 of the Income Tax Assessment Act 1936.

There is no other identified or known association between any of the Company E shareholders that will participate in the contemplated Company F takeover or the Company F shareholders.

There is no cross-over/commonality between the named/known beneficiaries or trustees of the trusts that will own shares in Company E and then Company F.

All transactions will be on an arm's length basis - for market value.

Based on current valuations, the market value of ordinary shares issued by Company E to Trust E and Trust F in exchange for their disposal of Company A ordinary shares will not represent more than 80% of the market value of all ordinary shares issued by Company E.

All interest holders in Company A are Australian tax residents.

All beneficiaries of the Australian trusts depicted as interest holders in Company A are Australian tax residents.

All trustees of the Australian trusts depicted in the ownership structure of Company A are Australian tax resident companies.

Relevant legislative provisions

As referenced throughout the document.

Reasons for decision

All legislative references are to the Income Tax Assessment Act 1997 (ITAA 1997) unless stated otherwise.

Question 1

Summary

The proposed arrangement will satisfy the requirements of Subdivision 124-N.

Detailed reasoning

As set out in section 124-855 entities may be able to choose to obtain rollover under Subdivision 124-N where a unit trust disposes of all its assets to a company and the units in the trust are replaced by shares in the company.

Paragraph 124-855(1)(a)

Paragraph 124-855(1)(a)provides:

124-855(1)(a)(1) A roll-over may be available for a restructuring (a trust restructure) if:

(a)         a trust, or 2 or more trusts, (the transferor) dispose of all of their CGT assets to a company limited by shares (the transferee);

...

Section 995-1 defines 'dispose of a CGT asset' to mean where the disposal of the CGT assets gives rise to CGT event A1 under section 104-10.

Section 104-10 provides:

104-10(1) CGT event A1 happens if you dispose of a CGT asset.

104-10 (2) You dispose of a CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law. However, a change of ownership does not occur if you stop being the legal owner of the asset but continue to be its beneficial owner.

...

Under the Proposed Transaction, the Trust B will transfer all its assets, that is, shares in Company A, to Company E. As legal and beneficial ownership of all the assets of the Trust B will be acquired by Company E, the Proposed Transaction will trigger CGT event A1 for all CGT assets. As such, the requirement in paragraph 124-855(1)(a) will be satisfied.

Paragraph 124-855(1)(b)

Paragraph 124-855(1)(b) provides:

124-855(1)(b) CGT event E4 is capable of applying to all of the units and interests in the transferor;

...

Under section 104-70, CGT Event E4 happens if the trustee of a trust makes a distribution to a beneficiary of the trust in respect of the beneficiary's ongoing unit or interest in the trust and some or all of the payment is not assessable. The amount that is not included in the taxpayer's assessable income is referred to as the 'non-assessable part'.

The note to subsection 124-855(1) states that rollover over is not available for a restructure undertaken by a discretionary trust. For CGT event E4 to be capable of applying all the beneficiaries' interest must have a fixed capital component.

Under the terms of the trust deed for the Trust B the unitholders have a fixed entitlement to the capital of the trust. Whilst the trustee has absolute discretion to pay sums out of the capital of the trust fund, to the extent the trustee exercises this discretion, all such capital payments must be made to all unitholders in proportion to their holdings.

In effect, the trustee cannot make non-assessable distributions to different unitholders, such that any capital distribution made will be considered to be a fixed capital component. Therefore, CGT event E4 is capable of applying to all of the units and the requirement in paragraph 124-855(1)(b) will be satisfied.

Paragraph 124-855(1)(c)/subsection 124-860(1)

Paragraph 124-855(1)(c) provides:

(c) the requirements in section 124-860 are met.

...

Subsection 124-860(1) provides:

(1) All of the CGT assets owned by the transferor must be disposed of to the transferee during the trust restructuring period. However, ignore any CGT assets retained by the transferor to pay existing or expected debts of the transferor.

...

The 'trust restructuring period' is defined in subsection 124-860(2) as:

(2) The trust restructuring period for a trust restructure:

(a) starts just before the first CGT asset is disposed of to the transferee under the trust restructure, which must happen on or after 11 November 1999; and

(b) ends when the last CGT asset of the transferor is disposed of to the transferee.

...

Under the Proposed Transaction the Trust B will dispose of all of its CGT assets to Company E during the 'trust restructuring period'. The trust restructuring period will commence just before the first CGT asset of the transferor (that is, Trust B) is disposed of to the transferee (that is, Company E) and ends when the last CGT asset of the transferor is disposed of to the transferee.

Accordingly, the trust restructuring period will commence at the time the Trust B transfers all of its Company A shares to Company E and will end when the Trust B transfers all of its Company A shares to Company E. Therefore, subsection 124-860(1) will be satisfied.

Subsection 124-860(3)

Paragraph 124-860(3) provides:

(3) The transferee must not be an exempt entity.

An 'exempt entity' is defined in subsection 995-1(1) as:

(a) an entity all of whose ordinary income and statutory income is exempt from income tax because of this Act or because of another Commonwealth law, no matter what kind of ordinary income or statutory income the entity might have; or

(b) an untaxable Commonwealth entity.

Subdivision 50-A provides a list of the type of entities that may be considered exempt entities for income tax purposes.

As Company E is an incorporated company and not characterised as any type of exempt entity listed in Subdivision 50-A, the requirement in subsection 124-860(3) will be satisfied.

Subsection 124-860(4)

Paragraph 124-869(4) provides:

The transferee must be a company that:

(a) has never carried on commercial activities; and

(b) has no CGT assets, other than any or all of the following:

(i) small amounts of cash or debt;

(ii) its rights under an arrangement, if (collectively) those rights only facilitate the transfer of assets to the transferee from the transferor; and

(c) has no losses of any kind.

Example: It could be a shelf company.

At no time has Company E carried on any commercial activities. The only assets held and owned by Trust B are its shares in Company A. There is a facility agreement in place between Company E as trustee for Trust B and Company A. This will be extinguished prior to any steps being completed.

However, subsection 124-860(5) provides that subsection 124-860(4) does not apply to a transferee that is the trustee of the transferor. This requirement is not applicable. As Company E (the transferee) is the trustee of Trust B (the transferor), the requirements in subsection 124-860(4) do not apply.

Therefore, the requirement in subsection 124-860(4) will be satisfied.

Subsection 124-860(5)

Subsection 124-860(5) provides that subsection 124-860(4) does not apply to a transferee that is the trustee of the transferor.

This requirement is not applicable.

Subsection 124-860(6)

Subsection 124-860(6) states:

Just after the end of the trust restructuring period:

(a) each entity that owned interests in a transferor just before the start of the trust restructuring period must own replacement interests in the transferee in the same proportion as it owned those interests in that transferor; and

(b) the market value of the replacement interests each of those entities owns in the transferee must be at least substantially the same as the market value of the interests it owned in the transferor or transferors just before the start of the trust restructuring period. ...

Satisfying the conditions in subsection 124-860(6) requires determining what is meant by the term 'replacement interests'.

The term 'replacement interests' is defined in paragraph 124-870(1)(b) as the shares in a transferee company where ownership of units in a transferee trust end under a trust restructure in exchange for those shares.

The replacement interests are the shares held by the unitholders in Company E that are intended to replace the units held by the unitholders in Trust B following the restructure (Proposed Transaction).

Trust C and Trust D held all of the units in Trust B in the ratio of 50:50. In exchange for the transfer of shares, Company E will issue shares in the same 50:50 proportion.

The 'proportionate interest' test in paragraph 124-860(6)(a) compares the proportionate ownership of interests held by the unitholders in Trust B (the transferor) just before the trust disposes of its first CGT asset to Company E (the transferee) under the trust restructure, with the proportionate ownership of shares in Trust B that each unitholder will have just after the trust restructuring period.

Unitholders will have the same proportionate holding in Company E that they had in Trust B. Therefore, the requirement in paragraph 124-860(6)(a) will be satisfied.

The 'market value test' in paragraph 124-860(6)(b) requires that the market value of the replacement shares in Company E just after the trust restructuring period be at least substantially the same as the market value of the interests in Trust B just before the start of the trust restructuring period.

All unitholders will have the same rights under the ordinary shares in Company E that unit holders had under the units in Trust B and all assets and liabilities (noting there are no liabilities) of the Trust B will be transferred to Company E. Accordingly, the market value of the ordinary shares in Company E will be substantially the same as the market value of the units in Trust B. Therefore, the requirement in paragraph 124-860(6)(b) will be satisfied.

Accordingly, the requirements in subsection 124-860(6) will be satisfied.

Conclusion

Since all the requirements of subsection 124-855(1) will be satisfied, rollover is available for the transferor (that is, Trust B) and transferee (that is, Company E) if both the entities choose to obtain it in accordance with section 124-865 Both Trust B and Company E will choose to obtain the rollover.

Under section 124-875, the effect of the rollover relief under Subdivision 124-N is that:

•         any capital gain or capital loss from CGT event A1 happening to the transferor (that is, Trust B) under the trust restructure is disregarded; and

• the first element of the cost base and reduced cost base of each CGT asset that the transferee (that is, Company E) acquires under the trust restructure is the same as the cost base and reduced cost base of that asset for the transferor (that is, Trust B) just before the acquisition.

Further, since all the requirements of subsection 124-855(1) will be satisfied, rollover is also available for unitholders if they choose to obtain it in accordance with section 124-870 because:

•         the unitholders own units in Trust B; and

• the Unit Holders' ownership of all of their units in Trust B end under a trust restructure in exchange for shares in Company E.

Under section 124-10, the consequences of the rollover relief under Subdivision 124-N are that:

•         a capital gain or a capital loss that a unitholder makes on the redemption of the ordinary units in Trust B is disregarded; and

• the first element of the cost base and reduced cost base of the shares in Company E is equal to cost base and reduced cost base of the ordinary units in Trust B just before they were redeemed.

Accordingly, the transfer of all the assets and liabilities of the Trust B to Company E and the issue of shares in Company E to the unitholders of the Trust B meet the requirements for CGT rollover relief in Subdivision 124-N.

Question 2

Summary

CGT event J4 under section 104-195 will not happen as the Trust B will be wound up within 6 months from just before the transfer of the first CGT asset from the Trust B to Company E.

Detailed reasoning

Section 104-195 states:

104-195 (1) CGT event J4 happens if:

(a) there is a roll-over under Subdivision 124-N for a trust disposing of a CGT asset to a company under a trust restructure; and

(b) the trust fails to cease to exist:

(i) within 6 months after the start of the trust restructuring period; or

(ii) if that is not possible because of circumstances outside the control of the trustee--as soon as practicable after the end of that 6 month period; and

(c) the company owns the asset when the failure happens.

...

104-195(2) CGT event J4 also happens if:

(a) there is a roll-over under Subdivision 124-N for an entity (the shareholding entity) receiving a share in a company in exchange for a unit or interest in a trust under a trust restructure; and

(b) the trust fails to cease to exist:

(i) within 6 months after the start of the trust restructuring period; or

(ii) if that is not possible because of circumstances outside the control of the trustee--as soon as practicable after the end of that 6 month period; and

(c) the shareholding entity owns the share when the failure happens.

104-195(3)

The time of the event is when the failure to cease to exist happens.

The 'trust restructuring period' is set out in subsection 124-860(2) as:

124-860(2)

The trust restructuring period for a trust restructure:

(a) starts just before the first CGT asset is disposed of to the transferee under the trust restructure, which must happen on or after 11 November 1999; and

(b) ends when the last CGT asset of the transferor is disposed of to the transferee.

CGT event J4 will not be triggered as Trust B will be dissolved within six months of the start of the trust restructuring period, being the date the Company A ordinary shares are transferred from Trust B to Company E and additional ordinary shares are issued by Company E.

Questions 3 and 4

Summary

Trust E and Trust F can choose roll-over relief under Subdivision 124-M for exchanging its ordinary shares in Company A for ordinary shares in Company E.

The first element of the cost base of the shares in Company E acquired by the Trust E and Trust F will be determined by 'reasonably attributing to it' the cost base of the shares in Company A exchanged under the arrangement.

The cost base of the Company A shares held by Trust E and Trust Fwill become Company E's first element of the cost base or reduced cost base for each of the Company A shares it receives from Trust E and Trust F under the Proposed Transaction.

Detailed reasoning

CGT event triggered on exchange of shares

Section 104-10 provides that CGT event A1 happens if a taxpayer disposes of a CGT asset.

This will occur for Trust E and Trust F when they dispose of their shares in Company A to Company E in exchange for ordinary shares in Company E as there will be a change of both legal and beneficial ownership in the shares.

Subdivision 124-M - Scrip for scrip roll-over

Subdivision 124-M provides that a taxpayer may choose to roll-over a capital gain where post-CGT shares the taxpayer owns are replaced with other shares, subject to certain requirements.

Section 124-780 relevantly provides (and subject to some exceptions):

There is a roll-over if:

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

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

...

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

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

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

The original interest holder can obtain only a partial roll-over if the capital proceeds for its original interest include something other than its replacement interest: see section 124-790.

Shares are exchanged for shares in another company

Paragraph 124-780(1)(a) will be satisfied in so far as Trust E and Trust F (the original interest holders) exchange their ordinary shares in Company A (the original interest) for shares in Company E (the replacement interest) pursuant to the share purchase agreement.

The exchange is in consequence of a single arrangement

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

Subsection 124-780(2) relevantly states:

The arrangement must:

(a) 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

...; and

(b) 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; and

(c) 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.

The exchange occurs as part of a single arrangement

The exchange of the ordinary shares in Company A for the shares in Company E will be in consequence of an arrangement. The term 'arrangement' is defined very broadly in section 995-1.

The question of what constitute a single arrangement requires consideration of certain factors, including 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 (see The Explanatory Memorandum to the New Business Tax System (Miscellaneous) Bill (No. 2) 2000, at paragraph 11.23 and paragraph 32 TR 2005/19 Income tax: scrip for scrip roll-over arrangements - application of Subdivision 124-M of the Income Tax Assessment Act 1997 - Part IVA of the Income Tax Assessment Act 1936).

The single arrangement requirement will be satisfied, as the sale of the Company A shares will be implemented through the share purchase agreement, a single contract, between the parties. Whilst there are other steps in the lead up to the exchange, and that will occur contemporaneously with and are conditional upon the exchange, the disposal of the shares under the Proposed Transaction will itself constitute a single arrangement. As a direct consequence of this single arrangement, the shares in Company A will be exchanged for ordinary shares in Company E.

The 80% rule

Prior to the arrangement under which the shares in Company A are transferred, Company E holds shares in Company A (as a result of Trust B transferring its Company A shares to Company E).

As a result of this transfer of Company A shares by Trust E and Trust F, Company E (the acquiring entity) will own 80% or more of the voting shares in Company A (the original entity).

Accordingly, the requirements in paragraph 124-780(2)(a) would be satisfied.

All owners of voting shares participate

The share exchange will be offered to all original interest holders in Company A at the time except for Company E (the acquiring entity), being Trust E and Trust F.

Trust E and Trust F are able to, and will, participate in the Proposed Transaction to give effect to the restructure arrangement.

Accordingly, the requirements in paragraph 124-780(2)(b) will be satisfied.

All owners could participate and on substantially the same

The share purchase agreement will apply to Trust E and Trust F and on substantially same terms: Trust E and Trust F will participate in the transaction on the same terms as each other.

Neither of them has any special conditions etc. attached to one offer but not the other. There is no other participant in the scheme with the same or any other interests. As part of the arrangement, the Trust E and Trust F will receive the same rights and market value of shares in the Company E as they had in Company A.

Accordingly, the requirements in paragraph 124-780(2)(c) will be satisfied.

The conditions for rollover in subsection 124-780(3)

The relevant conditions for the roll-over under subsection 124-780(3) are as follows:

(a) the original interest holder acquired its original interest on or after 20 September 1985; and

(b) apart from the roll-over, it would make a capital gain from a CGT event happening in relation to its original interest; and

(c) its replacement interest is in a company (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; and

(d) 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; and

(e) if that section applies, the original interest holder informs 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; and

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

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

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

Original interest is acquired on or after 20 September 1985

Trust E and Trust F acquired their shares in Company A after 20 September 1985 so the condition in paragraph 124-780(3)(a) is satisfied.

Shareholder would otherwise make a capital gain

Apart from the roll-over, the Trust E and Trust F would make a capital gain from the disposal of their shares in Company A, so the condition in paragraph 124-780(3)(b) is satisfied.

Replacement interests in the acquiring entity

The replacement interest is shares in Company E which is the company that will become the 100% owner of Company A under the arrangement (that is the acquiring company referred to in subparagraph 124-780(2)(a)(i)). Therefore, paragraph 124-780(3)(c) is satisfied.

Choice to obtain scrip for scrip roll-over

If section 124-782 applies to the arrangement, the original interest holder and the replacement entity will need to jointly choose to obtain the roll-over.

Section 124-782 provides that if the original interest holder is a significant stakeholder or a common stakeholder for the arrangement, 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.

Significant stakeholder and common stakeholder are defined in section 124-783.

Relevantly, subsection 124-783(4) provides that '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'.

Company E, the acquiring entity, is also an original interest holder of Company A. This means that Trust E and ES Family Trust will be common stakeholders as they are original interest holders in Company A and will receive replacement interests in Company E.

Company E, Trust E and Trust F will choose to obtain the roll-over, so paragraph 124-780(3)(d) will be satisfied.

Significant or common stakeholders notify cost base

As Trust E and Trust F will notify Company E in writing of their respective cost base of Company A ordinary shares worked out just before the contract for sale to facilitate Company E's acquisition of their Company A ordinary shares is entered into paragraph 124-780(3)(e) will be satisfied.

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

As Company E will only issue replacement interests, being the Company E shares, to Trust E and Trust F and it will not issue debt or other equity instruments under the arrangement, the condition in paragraph 124-780(3)(f) is satisfied.

Further rollover conditions if subsection 124-780(4) applies

Subsection 124-780(4) provides for further roll-over conditions in certain circumstances, as follows:

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.

Subsection 124-780(5) provides that 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.

We accept that the Trust E and Trust F and Company E are dealing at arm's length with respect to the Proposed Transaction (share purchase agreement).

Therefore, as we accept that Trust E and Trust F and Company E are dealing with each other at arm's length, the conditions in subsection 124-780(5) do not need to be satisfied.

Exceptions

In some circumstances rollover relief under Subdivision 124-M is not available. The exceptions are outlined in section 124-795:

(1)  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.

(2)  You cannot obtain the roll-over if:

(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.

(3)  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.

(4)  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.

None of the exceptions are applicable.

Conclusion

Trust E and Trust F may obtain scrip for scrip rollover of the capital gain they would make in disposing of their shares in Company A for replacement shares in Company E under Subdivision 124-M.

Consequences of rollover relief under Subdivision 124-M being available

Disregarding capital gains

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

Cost base where roll-over is chosen

Cost base of Company E shares for Trust E and Trust F

Subsection 124-785(2) provides that the first element of Trust E's and Trust F's cost base for Company E shares is worked out by reasonably attributing the cost base of their shares in Company A to the Company E shares they received in exchange for Company A shares.

The adjustment to the cost base as outlined in subsection 124-785(3) will not apply in this situation, as the Trust E and Trust F will only be receiving the replacement interests, being the Company E shares, under the Proposed Transaction.

Cost base of the Company A shares received by Company E

Subsection 124-782(1) provides that the cost base of the Company A shares held by Trust E and Trust F, being common stakeholders for the arrangement, will become Company E's first element of the cost base or reduced cost base for each of the Company A shares it receives from Trust E and Trust F under the Proposed Transaction.

Note 1 to subsection 124-782(1) confirms that the cost base of the shares in Company A received by Company E under the Proposed 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.

The modifications to the cost base or reduced cost base for restructures in section 124-784B will not apply in this situation.

The arrangement in question is the acquisition of Company A ordinary shares by Company E from Trust E and Trust F, which will qualify for roll-over relief under section 124-780.

Subsection 124-784A(2) is satisfied if just after the completion time, the market value of the replacement interests issued by the replacement entity (being Company E) under the arrangement, or under an earlier arrangement for which section 124-784A applied in exchange for ordinary shares in the original entity (being Company A), is more than 80% of the market value of all the interests issued by the replacement entity (being Company E).

Regardless of whether or not the requirements in paragraph 124-784A(1)(a) are satisfied, section 124-784A will not apply to the acquisition of Company A ordinary shares from Trust E and Trust F as paragraph 124-784A(1)(b) will not be satisfied.

This is because subsection 124-784A(2) will not be satisfied as, based on current valuations, the market value of ordinary shares issued by Company E to Trust E and Trust F in exchange for their disposal of Company A ordinary shares will not represent more than 80% of the market value of all ordinary shares issued by Company E.

As the requirements of subsection 124-784A(2) will not be satisfied, section 124-784B will not be relevant in determining the cost base of any Company A ordinary shares acquired by Company E.

Question 5

Summary

Company E Shareholders can choose roll-over relief under Subdivision 124-M for exchanging their ordinary shares in Company E for ordinary shares in Company F.

The capital gain Company E Shareholders would otherwise make from CGT event A1 in respect of the exchange of its shares in Company E for shares in Company F will be fully disregarded for the shares only option or partially disregarded for the shares and cash option.

Company E Shareholders will make a capital gain in relation to the ineligible part of its original interest for which it received ineligible proceeds under subsection 124-790(1).

The first element of the cost base of the shares in Company F acquired by the Company E Shareholders will be determined by 'reasonably attributing to it' the cost base of the shares in Company E exchanged under the arrangement.

In determining the cost base of the shares in Company F, Company E Shareholders who receive shares and cash will reduce the cost base of their original interest (just before they stop owning it) by so much of the cost base as is attributable to the ineligible part as relevant.

Detailed reasoning

CGT event triggered on exchange of shares

Section 104-10 provides that CGT event A1 happens if a taxpayer disposes of a CGT asset.

This will occur for Trust C, Trust D, Trust E and Trust F (Company E Shareholders) when they dispose of their shares in Company E to Company F in exchange for ordinary shares in Company F as there will be a change of both legal and beneficial ownership in the shares.

Subdivision 124-M - Scrip for scrip roll-over

The exchange is in consequence of a single arrangement

Shares are exchanged for shares in another company

Paragraph 124-780(1)(a) will be satisfied in so far as the Company E Shareholders (the original interest holders) will exchange their ordinary shares in Company A (the original interest) for shares in Company F (the replacement interest) pursuant to the share purchase agreement.

Shares are exchanged for shares in another company

The exchange occurs as part of a single arrangement

The single arrangement requirement will be satisfied, as the sale of the Company E shares will be implemented through the share purchase agreement, a single contract, between the parties. Whilst there are other steps in the lead up to the exchange, and that will occur contemporaneously with and are conditional upon the exchange, the disposal of the shares under the Proposed Transaction will itself constitute a single arrangement. As a direct consequence of this single arrangement, the shares in Company E will be exchanged for ordinary shares in Company F.

The 80% rule

Prior to the arrangement under which the shares in Company E are transferred, Company F does not hold any shares in Company E.

As a result of this transfer of Company E shares by the Company E Shareholders, Company F (the acquiring entity) will own 100% of the voting shares in Company A (the original entity).

Accordingly, the requirements in paragraph 124-780(2)(a) would be satisfied.

All owners of voting shares participate

The share exchange will be offered to all Company E's Shareholders (being the original interest holders).

Company E shareholders are able to, and will, participate in the Proposed Transaction to give effect to the restructure/takeover arrangement.

Accordingly, the requirements in paragraph 124-780(2)(b) will be satisfied.

All owners could participate and on substantially the same terms

The share purchase agreement will apply to Trust E and Trust F and on substantially same terms: Trust E and Trust F will participate in the transaction on the same terms as each other.

Company E's Shareholders will participate in the transaction on the same terms as each other (for example, they will each receive the same offer as to their choice of the portion of cash and Company F ordinary shares that they receive as consideration).

Accordingly, the requirements in paragraph 124-780(2)(c) will be satisfied.

The conditions for rollover in subsection 124-780(3)

Original interest is acquired on or after 20 September 1985

The Company E Shareholders acquired their shares in Company E after 20 September 1985 so the condition in paragraph 124-780(3)(a) is satisfied.

Shareholder would otherwise make a capital gain

Apart from the roll-over, the Company E would make a capital gain from the disposal of the shares in Company E, so the condition in paragraph 124-780(3)(b) is satisfied.

Replacement interests in the acquiring entity

The replacement interest is shares in Company F, which is the company that will become the 100% owner of Company E under the arrangement (that is, the acquiring company referred to in subparagraph 124-780(2)(a)(i)). Therefore, paragraph 124-780(3)(c) is satisfied.

Choice to obtain scrip for scrip roll-over

Based on current valuations, Trust D will own 30% or more of the shares in Company E following completion of Company E's acquisition of Company A ordinary shares from Trust E and Trust F.

Trust D is a discretionary trust for the benefit of Person C relatives. Person C is the appointor for the trust and the director of Company D which is the trustee company XX of the shares on issue in Company F. The Trust G is a discretionary trust for the benefit of Person C's relatives. Person C is the appointor for the trust and the director of Company G which is the trustee company of the trust.

The Trust G will be an associate of Trust D as:

• in accordance with paragraph 318(3)(b) of the ITAA 1936, as natural persons benefit from Trust D (being Person C and his relatives), any entity that would be an associate of that natural person is an associate of Trust D; and
• in accordance with paragraph 318(1)(d) of the ITAA 1936, the Trust G will be an associate of Person C and his relatives as they benefit from the Trust G.

This means that Trust D will be a significant stakeholder in accordance with subsections 124-783(1) and 124-783(6) as based on current valuations:

• just before the Company F takeover, Trust D will hold 30% or more of the ordinary shares in Company E (providing it with 30% or more of all voting, dividend and capital rights of Company E); and
• just after the Company F takeover, Trust D together with its associate, Trust G, will hold 30% or more of the ordinary shares in Company F (carrying 30% or more of all voting, dividend and capital rights of Company F).

Based on current valuations, no other original interest holder besides Trust D will be a significant stakeholder or common stakeholder for the arrangement.

Company F and the Company E Shareholders will choose to obtain the roll-over, paragraph 124-780(3)(d) will be satisfied.

Significant or common stakeholders notify cost base

As the Company E Shareholders will notify Company F in writing of their respective cost base of Company E ordinary shares worked out just before the contract for sale to facilitate Company F's acquisition of their Company E ordinary shares is entered into paragraph 124-780(3)(e) will be satisfied.

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

As Company F will only issue replacement interests, being the Company F shares, to Company E Shareholders and it will not issue debt or other equity instruments under the arrangement, the condition in paragraph 124-780(3)(f) is satisfied.

Further rollover conditions if subsection 124-780(4) applies

We accept that the Company E Shareholders and Company F will be dealing at arm's length with respect to the Proposed Transaction (share purchase agreement).

Therefore, as we accept that Company E Shareholders and Company F will be dealing with each other at arm's length, the conditions in subsection 124-780(5) do not need to be satisfied.

Only partial rollover available in certain circumstances - subsection 124-790(1)

Subsection 124-790(1) provides:

The original interest holder can obtain only a partial roll-over if its capital proceeds for its original interest include something (the ineligible proceeds) other than its replacement interest. There is no roll-over for that part (the ineligible part) of its original interest for which it received ineligible proceeds.

The cost base of the ineligible part is that part of the cost base of the original interest (the shares in Company E) as it is reasonably attributable to it: subsection 124-790(2).

Shares and cash

The consideration received by the Company E Shareholders in consequence of the exchange may consist of shares in Company F and cash. In that case, the Company E Shareholders can only obtain a partial roll-over under section 124-790. There is no roll-over for that part of the original interest for which the cash is received.

Exceptions

None of the exceptions in section 124-795 are applicable.

Conclusion

Shares

The Company E Shareholders may obtain scrip rollover of the capital gain they would make in disposing of their shares in Company E for replacement shares in Company F under Subdivision 124-M.

Shares and cash

The Company E Shareholders may obtain partial scrip for scrip rollover of the capital gain they would make in disposing of their shares in Company E for replacement shares in Company F under Subdivision 124-M.

Consequences of rollover relief under Subdivision 124-M being available

Disregarding capital gains

Shares

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

Shares and case

Any capital gain will be disregarded to the extent it is attributable to the replacement shares in Company F.

The cash consideration received is ineligible proceeds. Consequently, the capital gain attributable to the ineligible part will not be disregarded

Cost base where roll-over is chosen

Cost base of Company F shares for Company E Shareholders will depend on the consideration

Shares

Subsection 124-785(2) provides that the first element of the relevant Company E Shareholders' cost base for Company E shares is worked out by reasonably attributing the cost base of their shares in Company E to the Company F shares the receive in exchange for Company E shares.

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

Shares and cash

The first element of the relevant Company E Shareholders' cost base for Company E shares that is worked out by reasonably attributing the cost base of their shares in Company E to the Company F shares they receive in exchange for Company E shares is subject to adjustment.

The adjustment to the cost base as outlined in subsection 124-785(3) will apply in this situation as the Company E Shareholder will not only be receiving replacement interests, being the Company F shares, under the Proposed Transaction In determining the cost base of the shares in Company F, these Company E Shareholders will reduce the cost base of their original interest (just before they stop owning it) by so much of the cost base as is attributable to the ineligible part as relevant.

[1] For convenience, the trust rather than the trustee is listed as the shareholder.

[2] For convenience, the trust rather than the trustee is listed as the shareholder.

[3] For convenience, the trust rather than the trustee is listed as the shareholder.