House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Deputy Prime Minister and Treasurer, the Hon Wayne Swan MP)

Chapter 5 - Scrip for scrip alignment

Outline of chapter

5.1 Schedule 4 to this Bill amends the Income Tax Assessment Act 1997 (ITAA 1997) to make it easier for takeovers and mergers regulated by the Corporations Act 2001 (Corporations Act) to qualify for the capital gains tax (CGT) scrip for scrip roll-over.

5.2 All references to legislative provisions in this chapter are references to the ITAA 1997 unless otherwise stated.

Context of amendments

5.3 The exchange of shares in one company for shares in another company as part of a merger or takeover typically triggers a CGT taxing point and the realisation of a capital gain or capital loss. The capital gain or capital loss is generally calculated by reference to the market value of the proceeds - the replacement shares.

5.4 The scrip for scrip roll-over, contained in Subdivision 124-M, ensures that CGT is not an impediment to mergers and takeovers. It allows taxpayers exchanging shares in one company for shares in another to defer the realisation of any capital gains from this transaction. Relief is also available for the exchange of trust interests. A taxpayer that receives cash in addition to replacement interests may qualify for a partial roll-over.

5.5 A merger or takeover arrangement must meet a number of requirements to qualify for the roll-over. These include:

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that all holders of voting interests in the target entity be able to participate in the arrangement; and

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that this participation must be on substantially the same terms.

5.6 These participation requirements differ to some extent and duplicate to some extent the requirements in the Corporations Act, the principal legislation for regulating member participation. As a result, a merger or takeover arrangement that meets the requirements of the Corporations Act may not qualify for the scrip for scrip roll-over.

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The Corporations Act requires that, subject to some limited exceptions, all offers under an off-market takeover bid be the same. This ensures equal participation by members.

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Schemes of arrangement provide more flexibility than takeovers and may be used for mergers. A scheme of arrangement is an agreement between a company and its members and/or creditors that may be used as an alternative to a takeover. The Corporations Act ensures the arrangement becomes legally binding on the company's members and creditors if a court approves it. The scheme of arrangement process, including the role of the court and the Australian Securities and Investments Commission (ASIC), is aimed at protecting members against the scheme operating unfairly. ASIC has a published policy on its role in relation to schemes of arrangement.

5.7 These amendments ensure that the scrip for scrip roll-over operates more effectively.

Summary of new law

5.8 These amendments carve-out arrangements from having to meet the roll-over requirements, in paragraphs 124-780(2)(b) and (c), that the arrangement be one in which the target company's shareholders can participate on substantially the same terms, if the arrangement includes:

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a takeover bid that does not contravene key provisions in Chapter 6 of the Corporations Act; and/or

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a compromise or arrangement approved by a court under Part 5.1 of the Corporations Act (scheme of arrangement).

5.9 These amendments provide a similar carve-out for arrangements involving trusts. Paragraphs 124-781(2)(b) and (c) set out the requirement that the arrangement be one in which the target trust's interest or unit holders can participate on substantially the same terms. However, as trusts cannot undertake schemes of arrangements, this carve-out only applies in relation to takeover bids that do not contravene key provisions in Chapter 6 of the Corporations Act.

5.10 The amendments do not repeal the requirements contained in paragraphs 124-780(2)(b) and (c) and 124-781(2)(b) and (c), which remain as an alternative test.

Comparison of key features of new law and current law

Detailed explanation of new law

Replacement of shares

5.11 A taxpayer that exchanges shares (original interests) in one company (the original entity) for shares in another may qualify for the scrip for scrip roll-over if that exchange is in consequence of a single arrangement that meets a number of requirements. Options and rights to acquire shares in the original entity may also be original interests. Subsection 124-780(1) sets out these rules. [Schedule 4, item 1, paragraph 124-780(1)(b)]

5.12 Broadly, the single arrangement must result in another company (the acquiring entity):

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if it is not a member of a wholly owned group - becoming the owner of at least 80 per cent of the original interests in the original entity; or

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if it is a member of a wholly owned group - increasing the percentage of original interests that it owns in the original entity to at least 80 per cent.

Paragraph 124-780(2)(a) sets out these rules. [Schedule 4, item 2, paragraph 124-780(2A)(a)]

Example 5.1

Silver Ltd (Silver) makes a takeover bid that complies with Chapter 6 of the Corporations Act for the voting shares in Gold Ltd (Gold) and subsequently acquires a total of 30 per cent of Gold's voting shares before the takeover bid lapses.

This single arrangement does not qualify for the scrip for scrip roll-over as Silver does not become the owner of at least 80 per cent of Gold's voting shares.

5.13 In addition, the single arrangement must consist of, be part of, or include:

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a takeover bid for the original interests by the acquiring entity that is not carried out in contravention of the provisions mentioned in section 612 of the Corporations Act (a non-contravening takeover bid); or

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a compromise or arrangement entered into by the original entity under Part 5.1 of the Corporations Act, approved by a court under paragraph 411(4)(b) of the Corporations Act (an approved scheme of arrangement).

[Schedule 4, item 2, paragraph 124-780(2A)(b)]

5.14 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.

5.15 An arrangement that comprises a non-contravening takeover bid and/or a scheme of arrangement, and some interrelated and/or interdependent transactions not subject to the Corporations Act, will also meet the requirement set out in paragraph 5.13. An arrangement that is part of a broader non-contravening takeover bid or an approved scheme of arrangement will also meet this requirement.

Example 5.2

Green Ltd (Green) and Yellow Ltd (Yellow) jointly announce a proposal to merge where Yellow's voting shares are transferred to Green.

Yellow's shareholders will participate in the merger on the following basis:

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Green acquires shares owned by a cornerstone shareholder (Blue Ltd) for cash by way of a sale agreement.

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Owners of the remaining voting shares in Yellow receive one share in Green for each share they hold in Yellow. This acquisition is by way of a scheme of arrangement under Part 5.1 of the Corporations Act.

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The merger is conditional upon Green successfully completing both acquisitions.

Obtaining court approval under paragraph 411(4)(b) of the Corporations Act will satisfy the requirements of paragraph 124-780(2A)(b).

5.16 If some of the provisions mentioned in section 612 of the Corporations Act do not apply to a takeover bid and the bid does not contravene the remaining provisions (applicable provisions), then that bid will be a non-contravening takeover bid for the purposes of these amendments. For example, paragraph 612(g) of the Corporations Act requires compliance with a number of procedural steps for market bids and therefore would not be applicable for off-market bids.

5.17 Similarly, if a takeover bid does not contravene the applicable provisions mentioned in section 612 of the Corporations Act because of the modification of some or all of those provisions, then that bid will be a non-contravening takeover bid for the purposes of these amendments.

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For example, ASIC has the power under Part 6.10 of the Corporations Act to modify or exempt compliance with provisions of Chapter 6 (including the provisions mentioned in section 612).

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The Takeovers Panel also has the power to review ASIC orders and make interim and final orders which may affect the manner in which Chapter 6 applies to a takeover bid (see, for example, sections 656A and B of the Corporations Act).

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In addition, a court has the power under section 1325D of the Corporations Act to make an order than an act, document or matter is not invalid or has effect as if it was not in contravention of Chapter 6.

5.18 There is no specific form of evidence to show that an arrangement includes a non-contravening takeover bid or an approved scheme of arrangement. The available evidence will depend on the types of transactions.

Replacement of trust interests

5.19 A taxpayer that exchanges trust interests (original interests) in one trust (the original entity) for interests in another may qualify for the scrip for scrip roll-over if that exchange is in consequence of a single arrangement that meets a number of requirements. Options and rights to acquire interests in the original entity may also be original interests. Subsection 124-781(1) sets out these rules. [Schedule 4, item 3, paragraph 124-781(1)(c)]

5.20 Broadly, the arrangement must result in another trust (the acquiring entity) becoming the owner of at least 80 per cent of the trust voting interests or units. Paragraph 124-781(2)(a) sets out this rule. [Schedule 4, item 4, paragraph 124-781(2A)(a)]

5.21 In addition, the arrangement must consist of, be part of, or include, a non-contravening takeover bid for the original interests by the acquiring entity. [Schedule 4, item 4, paragraph 124-781(2A)(b)]

5.22 Section 411 of the Corporations Act does not apply to trusts.

Application and transitional provisions

5.23 These amendments apply to CGT events that happen on or after 6 January 2010.