Scrip for Scrip Rollover

Contents

• Eligibility
• Significant stakeholders
• Common stakeholders
• Impact of rollover on shareholders (original interest holders).
• Impact of rollover on acquirer

The scrip for scrip rollover is designed to enable the exchange of shares in a company or units in a trust for other shares or units without capital gains tax being triggered.

The exchange of units and shares between entities is a regular occurrence when a business is restructuring or during the course of a takeover or merger.

As a basic illustration, take ABC Pty Ltd which acquires the shares of DEF Pty Ltd from DEF Pty Ltd shareholders. As consideration for the acquired shares, ABC Pty Ltd provides the DEF Pty Ltd shareholders with shares (instead of a cash payment) in ABC Pty Ltd. The cost base of the issued shares is the cost base of the shares exchanged and any capital gain at this point in time is disregarded.

The rules concerning the scrip for scrip rollover are contained in Subdivision 124-M of the Income Tax Assessment Act 1997. The rollover provides tax relief to resident shareholders who may otherwise end up with a capital gains tax liability without having received a cash payment to cover the tax liability. Note that a non resident shareholder is generally only subject to capital gains tax on taxable Australian property. The share of a foreign shareholder will only be taxable Australian property where the company holds a majority of its asset value in Australian real property.

Note this article does not address how the restructure applies to wholly owned groups.

Eligibility

To be eligible for the scrip for scrip rollover, all of the following requirements set out in section 124-780 of the Act must be satisfied in respect of the shares (there are similar requirements for the exchange of units set out in section 124-781 of the Act):

1. The shares in the original entity must generally be exchanged for replacement shares in the acquiring entity.
2. The exchange must occur as part of a single arrangement. This could include:
   • having shares exchanged
   • a scheme of arrangement involving cancellation of shares
   • a scheme of arrangement involving the redemption of shares
   • a hybrid of the above.
3. The acquiring entity becomes the owner of at least 80% of the voting shares in the original entity.
4. The shareholders with voting shares in the original entity must all be invited to participate in the arrangement.
5. Participation must be offered on substantially the same terms to all voting shareholders of a similar class in the original entity. This does not mean that each shareholder in the original entity must participate on the same terms – only that each of these shareholders is given a genuine opportunity to participate in the arrangement on the same terms. Note that requirement 5 and 4 (above) does not apply if the arrangement is a takeover bid or a scheme of arrangement carried out in compliance with the Corporations Act.
6. The shareholders holdings in the original entity must be post CGT assets. That is, the shareholders must not have acquired their shares in the original entity prior to 20 September 1985. However, note there are special rules that that deal with pre CGT holdings and enable the rollover to continue to be available (in certain circumstances).
7. The shareholders would have made a capital gain on the realisation of shares in the original entity if this rollover was not utilised.
8. The type / kind of replacement interest must match the type / kind of the original interest. For example, a share can only be exchanged for a share, or a unit with a unit, an option with an option etc.
9. Where the arrangement does not occur under arm’s length conditions (and we are not referring to widely held entities), the replacement interest will need to confer the same rights and obligations as available to shareholders under their original interests. The market value of the issued replacement interests must also substantially match the market value of the original interests acquired by the takeover entity.
10. The original entity shareholders must elect that the rollover applies. Note that a joint election from original interest holders and the shareholders of the acquiring entity may be required where there are common or significant stakeholders involved.
11. The rollover is not available where the restructure rollover in Division 122 or Division 615 of the Act are available to be applied in respect of the transaction.

Note that the replacement interest issued to a shareholder will restart the clock for the purposes of satisfying the 12 month rule relevant to the 50% CGT discount. Therefore, if a replacement interest is disposed within 12 months the discount will not be available.

Common stakeholders

A common stakeholder is defined as an original interest holder that had:

• A common stake in the original entity just prior to the arrangement.
• A common stake in the replacement entity just following the completion of the arrangement.

A common stake is essentially where a shareholder (inclusive of associates) has at least 80% of the rights to either: voting entitlements, dividends entitlements, or entitlements to capital distributions. The rules around common stakeholders will not apply where the relevant entity has more than 300 members provided there is no concentrated ownership.