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Ruling

Subject: Scrip for scrip roll-over relief

Question

Will the Commissioner confirm that Company B, and Company C will be eligible to jointly choose CGT rollover relief:

under paragraph 124-780(3)(d) of the Income Tax Assessment Act 1997 (ITAA 1997) in relation to the transfer of all the shares Company B holds in Company D to Company C in consideration for shares in Company C; and

confirm that the requirements of paragraph 124-780(5)(a) of the ITAA 1997 have been met?

Answer

Yes

This ruling applies for the following period

1 July 2011 to 30 June 2012

Relevant facts

The Group is a privately owned Australian business in the manufacturing industry.

The Group has several distinct operating and legal structures.

The current interest holders have entered into a Restructure Deed with the objective of consolidating their respective shareholding interests.

It is intended that all transactions under the Restructure take place at market value to ensure no dilution of relative shareholder value, and will ensure the group structure is simplified for the future to ultimately achieve greater operational, financial reporting and tax compliance efficiency.

Company D is an Australian resident company.

It is intended that the number of ordinary shares to be allotted will be calculated such that the market value of the shares in Company C issued on the Restructure date will be at least substantially the same as the market value of the shares in Company D acquired on the same date.

For the purpose of this ruling:

· the original interest holder is Company B;

· the original interest is shares in Company D;

· the original entity is Company D;

· the replacement interest is shares in Company C;

· the replacement entity is Company C; and

· the acquiring entity is Company C

Assumptions

Company B and Company C will jointly choose roll-over pursuant to Subdivision 124-M ITAA 1997.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 6(1)

Income Tax Assessment Act 1997 Division 122

Income Tax Assessment Act 1997 Subdivision 124-G

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 paragraph 124-780(1)(a)

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 paragraph 124-780(2)(a)

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

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

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

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

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

Income Tax Assessment Act 1997 subsection 124-782(3)

Income Tax Assessment Act 1997 section 124-783

Income Tax Assessment Act 1997 subsection 124-783(1)

Income Tax Assessment Act 1997 paragraph 124-783(1)(a)

Income Tax Assessment Act 1997 paragraph 124-783(1)(b)

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

Income Tax Assessment Act 1997 paragraph 124-783(3)(a)

Income Tax Assessment Act 1997 paragraph 124-783(3)(b)

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

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

Income Tax Assessment Act 1997 paragraph 124-783(6)(a)

Income Tax Assessment Act 1997 paragraph 124-783(6)(b)

Income Tax Assessment Act 1997 paragraph 124-783(6)(c)

Income Tax Assessment Act 1997 subsection 124-783(8)

Income Tax Assessment Act 1997 section 124-795

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

Income Tax Assessment Act 1997 subsection 124-795(2)

Income Tax Assessment Act 1997 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 paragraph 124-795(4)(a)

Income Tax Assessment Act 1997 paragraph 124-795(4)(b)

Income Tax Assessment Act 1997 section 170-260

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

Reasons for decision

All legislative references are to the ITAA 1997 unless otherwise noted.

Summary

Company B and Company C meet the eligibility criteria required in order to elect scrip for scrip roll-over relief under paragraph 124-780(3)(d).

Detailed reasoning

Subdivision 124-M allows a taxpayer to choose roll-over where the taxpayer's post-CGT shares or trust interests are replaced with other shares or trust interest. A taxpayer can choose to obtain roll-over when interests held in one entity (the original interests in the original entity) are exchanged by the taxpayer for replacement interests in another entity (the acquiring entity). This roll-over defers recognition of any capital gain (but not a capital loss) until a CGT event happens to the replacement interests.

Scrip for scrip roll-over is available if the taxpayer owns a post-CGT share (or interest in a share). The taxpayer must generally be an Australian resident and roll-over is only available if, apart from the roll-over, the taxpayer would make a capital gain (not a capital loss).

The primary conditions which must be satisfied to qualify for roll-over where post CGT shares are replaced with other shares are outlined in section 124-780 and require:

· shares in a company are exchanged for shares in another company;

· the exchange is a consequence of a single arrangement;

· conditions for roll-over are satisfied;

· further conditions are not applicable; and

· exceptions to obtaining scrip for scrip roll-over are not applicable.

The conditions have been applied to the rulees circumstances as follows:

Does the proposal result in an exchange of a share in a company (the original company), or rights over a share in a company, for a share or right in another company (the replacement interest)?

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

Subsection 995-1(1) defines a 'share' in a company to mean a share in the capital of the company, and includes stock.

The proposed exchange involves Company B transferring the fully paid ordinary shares it holds in Company D to Company C. In return, Company B will receive fully paid ordinary shares in Company C. The original interest and the replacement interest are both shares for the purpose of section 995-1(1), as they represent issued share capital in the respective companies.

Accordingly the requirement of subparagraph 124-780(1)(a)(i) is satisfied.

Is the arrangement a single arrangement?

Paragraphs 124-780(1)(b) and 124-780(2)(a) require that shares in an entity be exchanged in consequence of a single arrangement that results in another entity becoming the owner of 80% or more of the voting shares in the original entity.

Single arrangement

'Arrangement' is defined broadly in subsection 995-1(1) as any arrangement, agreement, understanding, promise or undertaking whether express or implied, and whether or not enforceable (or intended to be enforceable) by legal proceedings. Paragraph 11.23 of the Explanatory Memorandum to New Business Tax System (Miscellaneous) Bill (No.2) 2000 provides that the existence of a 'single arrangement' is a question of fact determined according to whether there is more than one offer or transaction, whether aspects of an overall transaction occur contemporaneously and intention of the parties as evidenced by the objective facts.

Based on the facts provided, it is considered that the arrangement falls within the definition of a single arrangement. The proposed exchange of a share in Company D by Company B in return for shares in Company C will occur concurrently in a single transaction.

As such the requirement of paragraph 124-780(1)(b) is satisfied.

80% ownership

Subparagraph 124-780(2)(a)(i) requires that the arrangement must result in a company (the acquiring company) 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.

Alternatively, under subparagraph 124-780(2)(a)(ii) where the acquiring company is a member of such a group, the arrangement must result in the acquiring company increasing the percentage of voting shares that it owns in the original entity and that company or members of the group becoming the owner of 80% or more of those shares.

For the purposes of subparagraph 124-780(2)(a)(i), the test time for whether a company is part of a wholly owned group is the settlement date of the first issue of replacement shares under the arrangement.

Company B currently holds fully paid ordinary shares in Company D which represents 100% of the issued capital in the company and 100% of the voting rights. The proposed exchange requires Company B to transfer the shares it holds in Company D to Company C. Subsequent to the execution of the proposed exchange, Company C will become the owner of 100% of the voting shares in Company D. Company C is the head company of a tax consolidated group and is therefore a member of a wholly-owned group.

Accordingly the requirement of subparagraph 124-780(2)(a)(ii) is satisfied.

Is the arrangement one in which at least all owners of voting shares in the original company could participate on substantially the same terms?

Paragraphs 124-780(1)(b) and 124-780(2)(b) require that the exchange of shares is in consequence of a single arrangement in which at least all owners of voting shares in the original entity could participate.

Paragraphs 124-780(1)(b) and 124-780(2)(c) require that the exchange of shares is in consequence of a single arrangement in which participation was available on substantially the same terms for all owners of interests of a particular type in the original entity.

Company D has only one class of share on issue being Ordinary shares of $1 each, owned 100% by Company B. The proposed exchange ensures participation is available to all shareholders, being Company B as the only original interest holder.

Accordingly the requirements of paragraphs 124-780(2)(b) and 124-780(2)(c) are satisfied.

Was the original interest acquired on or after 20 September 1985?

Paragraphs 124-780(1)(c) and 124-780(3)(a) require that the original interest holder acquired its interest on or after 20 September 1985.

Company B acquired its original interest in Company D after 20 September 1985. Accordingly the requirements of paragraphs 124-780(1)(c) and 124-780(3)(a) are satisfied.

In the absence of roll-over would the original interest holder make a capital gain from a CGT event happening to the original interest?

Paragraphs 124-780(1)(c) and 124-780(3)(b) require that apart from the roll-over, the original interest holder would make a capital gain from a CGT event happening in relation to its original interest.

In light of the valuation of 100% of the shares in Company D, the market value of the shares in Company D exceeds the cost base for capital gains tax purposes, such that Company B would (apart from the roll-over) make a capital gain on disposal of its original interest. That is, CGT event A1 will occur as a result of the transfer of the shares and a capital gain would be made by Company B in relation to the disposal of shares in Company D.

Accordingly the requirement of paragraph 124-780(3)(b) is satisfied.

Is the replacement interest an interest in the acquiring company, or the ultimate holding company of the acquiring company where the acquirer is part of a wholly owned group?

Paragraphs 124-780(1)(c) and 124-780(3)(c) require that the original interest holder's replacement interest is in a company that is the acquiring entity referred to in subparagraph 124-780(2)(a)(i).

Company B intends to replace its shares (the original interest) in Company D with shares in Company C (the replacement entity). Company C is in this case the ultimate holding company of a wholly owned group, as per subsection 124-780(7).

Accordingly the requirement of paragraph 124-780(3)(c) is satisfied.

Will the original interest holder and the replacement entity jointly choose to obtain roll-over?

Paragraphs 124-780(1)(c) and 124-780(3)(d) require that the original interest holder choose to obtain roll-over, or if section 124-782 applies to the arrangement, it and the replacement entity jointly choose to obtain roll-over.

Subsection 124-782(1) deals with the allocation or transfer of the cost base of the original interest holder to the acquiring entities. Subsection 124-782(1) applies if the (a) original interest holder obtains a roll-over and (b) the holder is a significant stakeholder or a common stakeholder for the arrangement.

Section 124-783 defines an original interest holder as a significant stakeholder if it holds a significant stake in the original entity just before the arrangement started and a significant stake in the replacement entity just after the arrangement is completed.

Under subsection 124-783(6) an entity has a significant stake if it (and its associates) have at that time, (a) shares carrying 30% or more of the voting rights or (b) the right to receive for their own benefit 30% or more of any distributions that the company may pay, or (c) the right to receive for their own benefit 30% or more of any distribution of capital in the company.

Given the facts provided, it is reasonable to conclude that the original interest holder (Company B) will be a significant stakeholder in relation to Company C. Therefore, section 124-782 will apply to the arrangement meaning that both Company B and Company C (replacement entity) must jointly choose to obtain roll-over. The applicant has confirmed that both Company B and Company C intends to choose the rollover relief available to them under Subdivision 124-M in relation to the disposal of shares in Company D.

Accordingly the requirements of paragraph 124-780(3)(d) will be satisfied.

Original interest holder to inform the replacement entity of the cost base of original interest

Paragraph 124-780(3)(e) requires that 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.

Company B will notify Company C of the cost base of its original interest (being the shares in Company D) in writing, worked out just before the CGT event happened.

Accordingly the requirement of paragraph 124-780(3)(e) will be satisfied.

Do the additional conditions contained outlined in subsection 124-780(5) apply?

Subsection 124-780(4) contains additional requirements to be satisfied if the original interest holder and the acquiring entity did not deal with each other at arm's length and:

(a) neither the original entity nor the replacement entity (in this case the acquiring 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.

'Arm's length' is defined at subsection 995-1(1) 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.

Company B, Company D and Company C are all related entities, being companies within the Group. Given that the transaction will take place as part of a restructure arrangement, as directed by the Restructure Deed, the entities may not be considered to be dealing at arm's length, despite the intention that all transactions under the Restructure are to be undertaken for consideration which is equal to market value.

Further, neither the original entity (Company B) nor the replacement entity (Company C) will have at least 300 members just before the arrangement starts. Company B, Company D and Company C also meet the requirements of a linked group under section 170-260.

Accordingly subsection 124-780(4) applies and as such the conditions in subsection 124-780(5) must also be met for roll-over to be available. These 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.

The taxpayer has advised the number of ordinary shares to be issued to Company B by Company C in consideration for the acquisition of shares in Company D.

The taxpayer has provided a market valuation of Company C and Company D. The ATO is satisfied that the market value of Company B's capital proceeds for the exchange will be at least substantially the same as the market value of its interest in Company D.

Accordingly, the requirements of paragraph 124-780(5)(a) will be satisfied.

Company B is the holder of ordinary shares in Company D. Company C will issue ordinary shares to Company B with equivalent rights as currently exist in relation to the share held by Company B in Company D.

Accordingly, the requirements of paragraph 124-780(5)(b) will be satisfied.

Do any of the exceptions contained in section 124-795 apply?

Section 124-795 sets out the exceptions in which scrip for scrip roll-over is not available under Subdivision 124-M:

Under subsection 124-795(1) roll-over is not available if, just before the original interest holder stops owning the original interest, the original interest holder is a foreign resident unless, just after the acquisition of the replacement interest by the original interest holder, the replacement interest is taxable Australian property.

Paragraph 124-795(2)(a) provides that the roll-over is not available if any capital gain the original interest holder might make from their replacement interest would be disregarded (except because of the roll-over).

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

Subsection 124-795(3) provides that the roll-over is not available if a roll-over can be chosen under Division 122 or Subdivision 124-G for that event.

Original interest holder is a resident of Australia

Company B is an Australian resident company for taxation purposes. Accordingly subsection 124-795(1) will not apply to preclude the roll-over from being obtained.

A capital gain cannot (apart from the roll-over) be otherwise disregarded

Company B is disposing of shares in Company D, a non Australian resident company. The eligibility of Company B for roll-over relief under subdivision 124-M of the ITAA 1997 in respect of the disposal of the share in Company D under the Scheme is on the basis that the capital gain Company B might make from their replacement interests (Company C shares) would not be disregarded (other than under the roll-over).

Whether the capital gain arising from the disposal of Company D shares is disregarded because of the operation of another provision of the ITAA 1997 is a question of fact for Company B.

Based on the facts provided by the taxpayer, paragraph 124-795(2)(a) will not apply.

Acquiring entity is not a foreign resident

Sections 995-1 and 975-500 state that two companies are members of the same 'wholly owned group' if (a) one of the companies is a 100% subsidiary of the other company; or (b) each of the companies is a 100% subsidiary of the same third company. Company B and Company C (acquiring entity) are not members of the same wholly-owned group. Both are Australian resident companies for taxation purposes.

Accordingly paragraph 124-795(2)(b) will not apply.

No rollover is available under Division 122 or Subdivision 124-G

Division 122 provides optional roll-over relief where an individual, trustee or the partners in a partnership transfer an asset or the net assets of a business to, or create certain rights in, a wholly-owned company. Company B and Company C are not members of the same wholly-owned group therefore Division 122 cannot apply to the arrangement.

Subdivision 124-G extends roll-over relief to arrangements for the reorganisation of resident companies. Given the facts provided, subdivision 124-G will not apply to the arrangement.

Accordingly subsection 124-795(3) will not apply.

In conclusion

As none of the exceptions contained in section 124-795 apply and the requirements in paragraph 124-780(5)(a) have been satisfied Company B and Company C will be eligible to jointly choose scrip for scrip rollover.