Edited version of private advice

Authorisation Number: 1052205142025

Date of advice: 19 December 2023

Ruling

Subject: Scrip for scrip - eligible shareholders

Question

Are the Shareholders eligible to choose the scrip for scrip roll-over under Subdivision 124-M of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of the exchange of their shares in the Company for shares in HoldCo under the Proposed Restructure?

Answer

Yes.

Question 2

Will the first element of the Shareholders' cost base of their replacement interests be worked out under subsection 124-785(2) of the ITAA 1997 by reasonably attributing the cost base of their Company shares to the HoldCo shares they acquire under the Proposed Transaction?

Answer

Yes.

This ruling applies for the following periods:

Year ending XX XX XXXX

Year ending XX XX XXXX

The scheme commenced on:

XX XX XXXX

Relevant facts and circumstances

1.            The Shareholders hold the following shares in the Company:

Table 1 Shares in Company

2.            There is no difference in rights associated with the X class shares and X class shares.

3.            It is expected that, by the time the proposed Restructure is implemented, the assets on the balance sheet (other than the shares in HoldCo) will be minimal.

HoldCo

4.            The current ownership of HoldCo is as follows:

Table 2 Current ownership

5.            HoldCo has XX% of the issued shares in TradeCo.

6.            The assets of the Company are its shares in TradeCo, managed investments of approximately $X, shares in unlisted companies of approximately $X, cash balance of approximately $X, plant and equipment and trade receivables.

Background

7.            The Family was one of the founding families of TradeCo's business. The Family owns a X% interest in TradeCo through HoldCo. The Family's intention is for this major asset to remain in the Family and is passed on to future generations. They also wish to maintain their interest in TradeCo as one shareholding in HoldCo to ensure that the Family continues to retain certain rights in relation to TradeCo such as a right to board representation.

8.            The ultimate ownership of the Family interest in TradeCo is split X:X between the Family respectively, including the shares held by their respective family trusts. The Family wish to continue to be able to deal separately with their respective family interests in HoldCo.

9.            The TradeCo shareholding has already been passed on through generations of the Family since it was founded. As such, the current ownership structure has evolved and become unnecessarily complex as it has passed through those generations. Specifically, the Company, which has a significant shareholding in HoldCo, is a legacy entity which creates confusion for the current Family members as to its purpose in the structure. Whilst the Family have a level of understanding that the Company is a legacy of the assets owned by their late parent, they are concerned that the continued existence of this entity in their ownership structure will only serve to create greater confusion as their shares in HoldCo are passed through family generations over time. They do not consider that the Company serves any purpose in the current ownership structure and results in an unnecessary layer of administration and complexity.

10.          As such, the objective of the Family is to:

(a)          remove the Company from the ownership structure, and

(b)          preserve the current ultimate economic ownership of the shares held by the respective Family entities in HoldCo (and therefore in TradeCo), which is split equally between the respective families.

11.          To achieve the Family's objectives, the following steps are contemplated in order to remove the Company and simplify the structure.

Proposed restructure (Proposed Restructure)

12.          Step 1 - HoldCo acquires all the Company shares from the Shareholders and in exchange newly issued shares in HoldCo will be issued to the Shareholders:

(a)          the Company X Class Shareholders will receive X Class ordinary shares in HoldCo

(b)          the Company X Class Shareholders will receive X Class ordinary shares in HoldCo

(c)           the X Class and X Class shares will carry equal rights

(d)          the Shareholders will receive HoldCo shares in exchange for their Company shares that are substantially the same as the market value of their original Company shares and nothing else.

13.          Step 2 - HoldCo elects to form a tax consolidated group with the Company as the only subsidiary member.

14.          Step 3 - HoldCo repurchases the shares the Company holds in HoldCo, likely by way of a capital reduction and cancellation, of these shares within X months.

15.          The X Class and X Class shares in the Company carry equal voting, dividend and capital rights.

16.          The replacement X Class and X Class shares in HoldCo will carry the same kind of rights and obligations as those attached to the Company X Class and X Class shares.

17.          As part of the Proposed Restructure, the Shareholders and HoldCo will jointly choose to obtain the roll-over in Subdivision 124-M of the ITAA 1997 pursuant to the requirements of paragraph 124-780(3)(d) of the ITAA 1997.

18.          The Shareholders will inform HoldCo in writing of the cost base of their original interests in the Company worked out immediately prior to the Proposed Restructure.

19.          The current and proposed direct shareholding of HoldCo.

Table 3 Current and Proposed Shareholding

20.          The ultimate ownership before and after the Proposed Restructure:

Table 4 Proposed restructure

Other relevant facts

21.          The Shareholders:

(a)          will be residents of Australia within the meaning of the subsection 995-1(1) of the ITAA 1997 and subsection 6(1) of the ITAA 1936 for the period of the ruling, and

(b)          hold their interests in the Company on capital account.

22.          Apart from the roll-over in Subdivision 124-M of the ITAA 1997, the Shareholders will make a capital gain from a CGT event happening in relation to the exchange of their interests in the Company for shares in HoldCo under the Proposed Restructure.

23.          The Shareholders, the Company and HoldCo will be 'associates' as defined in

24.          section 318 of the ITAA 1936 just before and just after Step 1 of the Proposed Restructure.

25.          HoldCo is not a member of a wholly owned group prior to the Proposed Restructure, as defined in section 975-500 of the ITAA 1997.

26.          HoldCo will make a choice to form a consolidated group in writing and a notice documenting this choice will be given to the Commissioner in an approved form by the time HoldCo lodges the group's first consolidated income tax return or the due date pursuant to the requirements in section 703-50 of the ITAA 1997.

27.          HoldCo and the Company:

(a)          are an Australian resident, but not a prescribed dual resident, within the meanings set out in subsection 6(1) of the ITAA 1936

(b)          have their taxable income taxed at a rate equal to the general company tax rate

(c)           are not any of the entities referred to in section 703-20 of the ITAA 1997.

28.          The Proposed Restructure is not part of a broader scheme or arrangement.

29.          The pre-CGT shares in HoldCo have not stopped being a pre-CGT asset because of Division 149 of the ITAA 1997.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 6(1)

Income Tax Assessment Act 1936section 318

Income Tax Assessment Act 1997 Division 122

Income Tax Assessment Act 1997 Subdivision 124-M

Income Tax Assessment Act 1997 section 124-780

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

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

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

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

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

Income Tax Assessment Act 1997 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 paragraph 124-780(4)(a)

Income Tax Assessment Act 1997 paragraph 124-780(4)(b)

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(6)

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

Income Tax Assessment Act 1997 subsection 124-784(2)

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

Income Tax Assessment Act 1997 subsection 124-785(2)

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 Division 149

Income Tax Assessment Act 1997 Division 615

Income Tax Assessment Act 1997 section 703-20

Income Tax Assessment Act 1997 section 975-500

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

Does Part IVA apply to this private ruling?

Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or diverted profits tax benefit in connection with an arrangement.

If Part IVA applies, the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies, we will need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

Reasons for decision

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

Question 1

Are the Shareholders eligible to choose the scrip for scrip roll-over under Subdivision 124-M in respect of the exchange of their shares in the Company for shares in HoldCo under the Proposed Restructure?

Summary

The Shareholders are eligible to choose roll-over under Subdivision 124-M.

Detailed reasoning

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

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

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

(a)          an entity exchanges shares in a company for shares in another company

(b)          the exchange happens as part of a single arrangement

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

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

(e)          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

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

5.            This requirement is satisfied as the Shareholders will dispose of their shares in the Company in exchange for shares in HoldCo.

The exchange is in consequence of a single arrangement

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

(a)          results in the acquiring entity becoming the owner of at least 80% of the voting shares in the original entity

(b)          is one in which all of the owners of voting shares are able to participate, and

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

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

In consequence of a single arrangement

8.            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.

9.            The Explanatory Memorandum (EM) 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 EM, it further states:

...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]

10.          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 EM to the New Business Tax System (Miscellaneous) Bill (No 2) 2000 states:

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.

11.          The term 'arrangement' is defined very broadly in subsection 995-1(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.

12.          The exchange of the Shareholders' shares in the Company for shares in HoldCo will be in consequence of an arrangement.

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

14.          The EM to the New Business Tax System (Miscellaneous) Bill (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.

15.          The EM 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.

16.          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):

(a)          Company A contemplating a disposal of 100% of its shares in Company B

(b)          Company C incorporates two special purpose companies, Company D and

(c)           Company E, and

(d)          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.

17.          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).

18.          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.

19.          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.

20.          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.

21.          While the Proposed Transaction contains other steps, it is necessary to focus on the particular step under which the subject shares are actually exchanged, which is Step 1.

22.          The exchange of the shares in Step 1 of the Proposed Restructure is considered to be a single arrangement and the shares in the Company will be exchanged for shares in HoldCo as part of and in consequence of that single arrangement.

Conditions for arrangement are satisfied

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

80% or more ownership

24.          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.

25.          This condition is satisfied as HoldCo will own X% of the voting shares in the Company after the Proposed Restructure.

All owners of voting shares participate

26.          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.

27.          This condition is satisfied, as all the Shareholders will participate as they will all dispose of their shares to give effect to the Proposed Restructure.

Participation is on substantially the same terms

28.          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.

29.          Under the Proposed Restructure HoldCo acquires all the shares from the Shareholders and in exchange:

(a)          the Company X Class Shareholders will receive class X ordinary shares in HoldCo

(b)          the Company X Class Shareholders will receive class X ordinary shares in HoldCo

(c)           the X Class and X Class shares will carry equal rights, and

(d)          the Shareholders will receive HoldCo shares in exchange for their Company shares that are substantially the same as the market value of their original Company shares and nothing else.

30.          Accordingly, this condition is satisfied as the offer to acquire shares was made by HoldCo to all the Shareholders in proportion to their shareholdings of each class of the Company shares and all the Company Shareholders of each class are able to participate on the same terms.

Conditions for roll-over are satisfied

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

Original interest is acquired on or after 20 September 1985

32.          Paragraph 124-780(3)(a) requires the original interests to have been acquired on or after 20 September 1985.

33.          As all the shares in the Company are post CGT shares, this condition is satisfied.

Shareholder would otherwise make a capital gain

34.          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.

35.          This condition is satisfied as apart from the roll-over in Subdivision 124-M, the Shareholders will realise a capital gain as a result of the exchange of their shares in the Companies.

Replacement interests in the acquiring entity

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

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

38.          The Shareholders will receive replacement shares in HoldCo (the acquiring entity) and accordingly the condition is satisfied.

Choice to obtain scrip for scrip roll-over

39.          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.

40.          As the Shareholders and HoldCo will choose for the roll-over in Subdivision 124-M to apply, this condition is satisfied.

Significant or common stakeholders notify cost base

41.          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.

42.          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.

43.          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.

44.          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.

45.          The Shareholders, the Company and HoldCo will be associates as defined in section 318 of the ITAA 1936 just before and just after Step 1 of the Proposed Restructure.

46.          The Shareholders own X% of the shares in the Company just before Step 1 of the Proposed Restructure.

47.          Accordingly, theShareholders will have an associate inclusive control of X% in the Company (the original entity) just before Step 1 of the Proposed Restructure and will be significant and common stakeholders in the Company just before the arrangement commences.

48.          Just after the arrangement is completed the replacement entity (HoldCo) shares will be owned by the Company, and the Shareholders and will have an associate inclusive control of X% in HoldCo (the replacement entity) just after Step 1 of the Proposed Restructure.

49.          Accordingly, there will be significant and common stakeholders in HoldCo just after the arrangement is completed and there will be a significant and common stakeholder for the arrangement.

50.          The Shareholders will inform HoldCo in writing of the cost base of their original interests in the Company worked out immediately prior to the Proposed Restructure and accordingly the condition in paragraph 124-780(3)(e) is satisfied.

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

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

52.          HoldCo (the acquiring entity) is not a member of a wholly owned group, so this condition is satisfied.

Further roll-over conditions

If the entities are not dealing at arm's length

53.          Subsection 124-780(4) provides that the additional requirements in subsection

54.          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.

55.          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.

56.          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. Subsection

57.          995-1(1) provides that in determining whether parties deal at arm's length, consider any connection between them and any other relevant circumstance.

58.          ATO Interpretative Decision 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.

59.          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.

60.          While this proposed restructure does not involve a newly incorporated company, It is considered that the principles in ATO ID 2004/498 still equally apply in this situation.

61.          The original entity (the Company) and HoldCo (the replacement entity) are directly and indirectly owned X% by the Shareholders immediately before the Proposed Restructure, accordingly it is considered that the parties did not act at arm's length in respect of the share exchange as HoldCo.

Further conditions must be satisfied

62.          Consequently, as all the conditions in subsection 124-780(4) are satisfied, the conditions in subsection 124-780(5) must also be satisfied.

63.          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.

64.          The Shareholders will receive HoldCo shares in exchange for their Company shares that are substantially the same as the market value of their original Company shares and nothing else. Consequently, this condition is satisfied.

65.          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.

66.          The replacement X Class and X Class shares in HoldCo will carry the same kind of rights and obligations as those attached to the Company X Class and X Class shares.

67.          Consequently, the conditions in subsection 124-780(5) have been met.

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

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

69.          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 a taxable Australian asset.

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

71.          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.

72.          This exception does not apply as the 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.

73.          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.

74.          This exception does not apply as the Company and HoldCo are not members of the same wholly owned group just before the share exchange.

75.          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.

76.          The exception under subsection 124-795(3) does not apply as the Exchanging Members 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 immediately after the share exchange under those Divisions (subsections .

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

Conclusion

78.          The Shareholders are eligible to choose to obtain CGT roll-over relief under Subdivision 124-M with respect to the exchange of their shares in the Company under the Proposed Restructure.

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

Question 2

Will the first element of the Shareholders' cost base of their replacement interests be worked out under subsection 124-785(2) by reasonably attributing the cost base of their Company shares to the HoldCo shares they acquire under the Proposed Transaction?

Summary

The Shareholders cost base of their replacement interests will be worked out under subsection 124-785(2). The adjustment to the cost base in subsection 124-785(3) will not apply, as the Shareholders will only be receiving the replacement interests, being the HoldCo shares, under the Proposed Restructure.

Detailed reasoning

80.          Subsection 124-785(2) provides that the first element of the Shareholders' cost base for the HoldCo shares is worked out by reasonably attributing the cost base (or part of it) of their Company shares to the HoldCo shares they received in exchange for those shares.

81.          Subsection 124-785(3) provides that the cost base is reduced by so much that is attributable to any part other than the replacement interest (HoldCo shares).

82.          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 Proposed Restructure.