Subdivision 124-M Scrip For Scrip Rollover Relief

ATP Taxpoint
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Document 1 of 9 Source: Tax Analytical Services/Commentary ITAA 1997/Subdivision 124-M Scrip for scrip rollover relief
Subdivision 124-M Scrip for scrip rollover relief

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Document 2 of 9 Source: Tax Analytical Services/Commentary ITAA 1997/Subdivision 124-M Scrip for scrip rollover relief/CONTENTS
CONTENTS
GENERAL COMMENTARY SPECIAL TOPICS ACCREDITATION
GENERAL COMMENTARY OVERVIEW Rollover for scrip-for-scrip transactions Application of Subdiv 124-M [124-M.1000]
[124-M.1000]
[124-M.3000] [124-M.9000]
[124-M.1020] [124-M.1040]
Subdivision 124-M section finding list
CONDITIONS FOR SCRIP FOR SCRIP ROLLOVER Correspondence between original and replacement interests Exchange must result from a single arrangement [124-M.1100]
[124-M.1120] [124-M.1140] [124-M.1160]
Requirement for 80% holding of interests in original entity Participation rules for holders of interests in original entity Replacement interest rules [124-M.1180]
Additional conditions for non-arm's length dealings Foreign resident original interest holders
[124-M.1200]
[124-M.1220] [124-M.1240]
Limitation on foreign resident to foreign resident exchanges Taxpayer must choose rollover [124-M.1260]
Subdivision 124-M not applicable if rollover available under other subdivisions GENERAL CONSEQUENCES OF SCRIP FOR SCRIP ROLLOVER Cost base of replacement interests for original interest holder Cost base of original interests for acquiring entity Partial rollover under Subdiv 124-M [124-M.1440] [124-M.1400]
[124-M.1280]
[124-M.1420]
Rollover relief for pre-CGT original interests where CGT event K6 applies
[124-M.1460]
ROLLOVER CONSEQUENCES FOR SIGNIFICANT OR COMMON STAKEHOLDERS Transfer of cost base in significant or common stakeholder cases Where original interest holder is a significant stakeholder Where original interest holder is a common stakeholder [124-M.1500]
[124-M.1520] [124-M.1540] [124-M.1560]
Cost base of ultimate holding company in connection with a downstream acquisition SPECIAL TOPICS SPECIAL TOPICS Subdivision 124-M rollover and the CGT discount [124-M.3000] [124-M.3020]
CGT discount does not pre-empt choosing Subdiv 124-M rollover Subdivision 124-M rollover and employee share schemes ACCREDITATION Author list [124-M.9000]
[124-M.3040]
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Document 3 of 9 Source: Tax Analytical Services/Commentary ITAA 1997/Subdivision 124-M Scrip for scrip rollover relief/CURRENCY OF SERVICE - SUBDIVISION 124-M
CURRENCY OF SERVICE - SUBDIVISION 124-M

Latest addition: Current to: 30 November 2005
Commentary reflects the legislation as at 30 November 2005
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Document 4 of 9 Source: Tax Analytical Services/Commentary ITAA 1997/Subdivision 124-M Scrip for scrip rollover relief/GENERAL COMMENTARY/Overview
Overview
Rollover for scrip-for-scrip transactions Application of Subdiv 124-M [124-M.1000] [124-M.1020] [124-M.1040]
[124-M.1000]
Rollover for scrip-for-scrip transactions
Link to Weekly Tax Bulletin for news affecting this commentary Subdivision 124-M provides optional CGT rollover relief when post-CGT interests in companies and trusts are exchanged for similar interests in another entity typically under the terms of a scrip-for-scrip takeover or merger offer. It also provides a very limited form of rollover is available for certain pre-CGT original interests: see [124-M.1460]. Rollover relief can only be chosen where a capital gain would have resulted from the exchange of the share or trust interest.
Conditions for rollover relief

The primary conditions which must be satisfied to qualify for Subdiv 124-M rollover are summarised below. 1. A taxpayer's original interests must be exchanged for replacement interests of the same or similar kind, eg where the original interest is a share, the replacement interest must be a share in another company. The same rule applies where the original interest is a unit or other interest in a trust but, in addition, the holders of the interests in the original trust and the holders of the interests in the acquiring trust must have "fixed entitlements"to all of the income and capital of the respective trusts both before and after the exchange (see [124-M.1100]).If the original interest holder receives any thing other than a similar replacement interest, only a partial rollover will be available (see below). 2. The exchange of an entity's original share interestsfor replacement interestsmust happen under a single arrangement which might embrace an offer for exchange of interests, a scheme of arrangement by way of cancellation, a scheme of arrangement by way of redemption (or a combination of these) (see [124-M.1120]). 3. In relation to original shares or interests in shares, the arrangement must result in the acquiring entity- or in the case of "downstream acquisition "- the acquiring company or other members of a wholly-owned group becoming the owner of 80% or more of the voting interests in the original entity. In relation to original units or other interestsin a fixed trust, there is also an 80% rule which requires the arrangement to result in the acquiring entity owning 80% or more of the trust voting interests in the original trust or, if there are no trust voting interests, 80% or more of the units or other interestsin the original trust (see [124-M.1140]). 4. The arrangement for the exchange must allow for the participation of at least all owners of voting interests in the original entity (excluding the acquiring entity and, where the acquiring entity is a company, other members of a whollyowned group of which the acquiring entity is a member). In addition that participation must be available on substantially the same terms for all owners of interests of a particular type in the original entity (see [124-M.1160]). 5. The replacement shares or interests in shares provided in exchange for the original shares or interests in the target company must be shares or interests in shares in the acquiring entity.However, where the acquiring company is a 100% subsidiary, the replacement shares or interests can be in acquiring company's holding company (see [124M.1180]). 6. In a case where the exchanging entities do not deal with each other at arm's length and neither is widely held, or where the original interest holder, original entity and replacement entity were all members of the same "linked group" just before the arrangement, the replacement interest must confer the same rights and obligations as the original interest. Furthermore, the market value of the capital proceeds for the exchange must be at least substantially the same as the market value of the original interest (see [124-M.1200]). 7. A foreign resident original interest holder can obtain Subdiv 124-M rollover relief only if, just after the replacement interest is acquired, the entity in which the interest is acquired is an Australian resident or a resident trust for CGT purposes (see [124-M.1220]).
Partial rollover
The original interest holder can obtain only a partial rollover if the capital proceeds for its original interest include "ineligible proceeds", ie something other than the replacement interest (eg cash). There is no rollover for that part of its original interest for which it receives ineligible proceeds: see [124-M.1440].
Cost base of replacement interests

The first element of the cost base of each replacement interest in the hands of an original interest holder is determined by reasonably attributing to it the cost base of each original interest exchanged and for which Subdiv 124-M rollover has been chosen. Where the original interest exchanged was a pre-CGT asset, the first element of the cost base of the replacement interest is the market value of the replacement interest just after it is acquired: see [124-M.1400].
Cost base of original interests

Generally, the first element of the cost base of original interests in the hands of the acquiring entity will be determined under the ordinary cost base rules, ie the market value of the replacement interest at the time of the exchange: see [124-M.1420]. However, the cost base of the original interest will become the first element of the cost base of the replacement interest where the original interest holder, together with associates, has either: (a) a 30% or more stake in the original entity and in the entity in which the replacement interest is issued; or
(b) an 80% or more holding common to both entities (but only if both entities are not widely held) (see [124-M.1500] and following).
[124-M.1020]
Application of Subdiv 124-M
Subdivision 124-M was enacted by the New Business Tax System (Capital Gains Tax) Act 1999 (Act 165 of 1999) and applies from 10 December 1999, the date of assent to that enacting legislation. Unless indicated otherwise, references in the commentary on Subdiv 124-M to the "relevant Explanatory Memorandum" are references to the Explanatory Memorandum to the enacting Act mentioned above.
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Amendments by the New Business Tax System (Miscellaneous) Bill (No 2) 2000 (Act 89 of 2000) to the rules in Subdiv 124-M concerning the cost base of interests acquired by the acquiring entity also commenced from 10 December 1999. Other changes made by the Act to availability of the rollover where foreign resident companies were involved applied from to CGT events occurring after 13 April 2000.
[124-M.1040]
This section finding list shows where the substantive provisions of Subdiv 124-M are primarily are dealt with in the commentary on Subdiv 124-M.
Subdivision 124-M section number 124-780(1)(a) Commentary reference
[124-M.1100] [124-M.1120] [124-M.1140] [124-M.1160] [124-M.1180] [124-M.1260], [124-M.1500] [124-M.1200] [124-M.1100] [124-M.1120] [124-M.1140] [124-M.1160] [124-M.1260], [124-M.1500] [124-M.1500] [124-M.1520], [124-M.1540] [124-M.1560] [124-M.1400] [124-M.1440] [124-M.1220], [124-M.1240], [124-M.1280] [124-M.1460] [124-M.1200]
124-780(1)(b) 124-780(2)(a) 124-780(2)(b) and(c) 124-780(3)(c) 124-780(3)(d) and (e) 124-780(4) and (5) 124-781(1)(a) and (b) 124-781(1)(c) 124-781(2)(a) 124-781(2)(b) and (c) 124-781(3)(d) and (e) 124-782 124-783 124-784 124-785 124-790 124-795 124-800 124-810
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Document 5 of 9 Source: Tax Analytical Services/Commentary ITAA 1997/Subdivision 124-M Scrip for scrip rollover relief/GENERAL COMMENTARY/Conditions for scrip for scrip rollover
Conditions for scrip for scrip rollover

Correspondence between original and replacement interests Exchange must result from a single arrangement [124-M.1100] [124-M.1120] [124-M.1140] [124-M.1160]
Requirement for 80% holding of interests in original entity Participation rules for holders of interests in original entity Replacement interest rules [124-M.1180]
Additional conditions for non-arm's length dealings Foreign resident original interest holders
[124-M.1200]
[124-M.1220] [124-M.1240]
Limitation on foreign resident to foreign resident exchanges Taxpayer must choose rollover [124-M.1260]
Subdivision 124-M not applicable if rollover available under other subdivisions
[124-M.1280]
[124-M.1100]
Correspondence between original and replacement interests
Link to Weekly Tax Bulletin for news affecting this commentary Rollover relief under Subdiv 124-M is limited to an exchange of original interests for replacement interests of the same or similar kind.
Original share interests

Where the original interest is a share, the replacement interest must be a share in another company. Where the original interest is an option, right or similar interest which entitles the holder to acquire a share in the original entity, the replacement interest must provide a similar entitlement in relation to the other company: s 124-780(1)(a). The relevant Explanatory Memorandum (see [124-M.1020]) stated (at para 2.25) that corresponding interest rule in s 124-780(1)(a) would be satisfied where the rights attaching to a replacement share were different to the original share. For example, in ATO ID 2003/893 the Tax Office indicated that the rule would be satisfied where redeemable preference shares were exchanged for ordinary shares under a scheme of arrangement. The fact that the redeemable preference shares were treated as "debt interests" under the debt and equity rules in Div 974 was no impediment to Subdiv 124-M rollover applying to the exchange. Although Subdiv 124-M rollover is available only where 80% or more of votinginterests are acquired by the acquiring entity or wholly-owned group (see [124-M.1140]), taxpayers exchanging non-voting interests (or receiving non-voting interests) are permitted to obtain the rollover in relation to those non-voting interests.
Original unit interests

Where the original interest is a unit or other interest in a trust, the replacement interest must also be a unit or other interest in the acquiring trust. Where the original interest is an option, right or similar interest which entitles a taxpayer to acquire a unit or other interest in the original trust, the replacement interest must provide a similar entitlement in relation to the acquiring trust: s 124-781(1)(a).
Fixed entitlements rule

Section 124-781(1)(b) imposes an additional requirement: the holders of the interests in the original trust and the holders of the interests in the acquiring trust must have "fixed entitlements " to all of the income and capital of the respective trusts both before and after the exchange. According to TD 2002/22, the references in s 124-781(1)(a)(i) to "a unit or other interest" in relation to both the original and replacement interests encompasses an exchange of any of the following: (a) (b) (c) (d) a unit in a unit trust for a unit in another unit trust; a unit in a unit trust for an interest (not being a unit) in a trust; an interest (not being a unit) in a trust for a unit in a unit trust; and an interest (not being a unit) in a trust for an interest (not being a unit) in another trust.
Thus, for example, the fixed entitlements requirement will be satisfied where the beneficiaries of a trust (which is not a unit trust) who are presently entitled to the income and capital of the trust in proportion to the capital subscribed by each beneficiary (or predecessor in title) exchange their interests in the trust for units in a unit trust. The Tax Office also considers that an exchange of units in a public trading trust for shares in a company will not satisfy the corresponding interests rule: ATO ID 2003/197. Its reasoning is that the treatment under s 102T of ITAA 1936 of units in a public trading trust as shares for the purpose of taxing such a trust as a company does not apply for Subdiv 124-M purposes. However, as the ID points out, s 102T does make reference to Subdiv 713-C which facilitates a public trading trust becoming the head company of a consolidated group. Section 713-135states that where such a choice is made, the trust is treated like a company (and presumably its units like shares) for the purposes of the "applied law" which includes ITAA 1997 and rollover under Subdiv 124-M.
Chess Unit of Foreign Security (CUFS)

For Subdiv 124-M purposes, the holder of a Chess Unit of Foreign Security (CUFS) - a unit of beneficial ownership in a foreign security developed by the ASX to facilitate the transferring and holding of a foreign security - is treated as holding the underlying interest (share or unit) to which the CUFS relates: ss 124-780(6) and 124-781(5).
[124-M.1120]
Exchange must result from a single arrangement
It is a condition for Subdiv 124-M rollover relief that the "exchange" of an entity's original share interests for replacement interests must happen under a "single arrangement": s 124-780(1)(b). Although the legislation refers to an "exchange" of interests, it is clear that the relevant arrangement can involve an offer for exchange of interests, a scheme of arrangement by way of cancellation, a scheme of arrangement by way of redemption (or a combination of these).
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The existence of a "single arrangement" will be a question of fact determined according to whether there is more than one offer or transaction, whether aspects of an overall transaction occur contemporaneously andthe intention of the parties as evidenced by the objective facts. In Example 11.1from the Explanatory Memorandum to the New Business Tax System (Miscellaneous Bill (No 2) 2000 (reproduced below), two scrip-for-scrip offers on similar terms made with a 6-month period are taken together to constitute a single arrangement.
Example
Green Bottles Ltd proposes a scrip-for-scrip takeover for Tincans Ltd. Tincans has 2 classes of voting shares and options on issue. In respect of each type of interest Green Bottles makes an identical takeover offer to each holder. Green Bottles acquires 62% of the shares in Tincans through acceptances of the offer. Rollover is not available to the shareholders in Tincans as Green Bottles did not acquire 80% of the [voting] shares under this arrangement. Six months later Green Bottles makes a second scrip-for-scrip offer to Tincans shareholders (a new arrangement) and as a consequence increases its shareholding to 85%. Coincidentally the terms of the offer are substantially the same as the original arrangement. The shareholders in Tincans who accepted the offer under the second arrangement are eligible for scrip-for-scrip rollover. Rollover is still not available for the shareholders that participated in the first arrangement as the 80% threshold was not reached as a result of that arrangement even though both arrangements were on substantially the same terms.
Section 124-781(1)(c)which relates to trusts, does not use the adjective "single". However, it does require the exchange to be "in consequence of an arrangement" (emphasis added). Notwithstanding the absence of "single", this clearly indicates that there must be one "arrangement".
[124-M.1140]
Requirement for 80% holding of interests in original entity
Subdivision 124-M rollover is dependant on the arrangement for the exchange of interests resulting in holdings of interests in the original entity satisfying an 80% threshold in the circumstances explained below.
Shares and share interests

In relation to original shares or interests in shares, the arrangement must result in the acquiring entity becoming the owner of 80% or more of the voting interests in the original entity: s 124-780(2)(a)(i). Where the acquiring entity is a member of a wholly-owned group, the rollover is available under s 124-780(2)(a)(ii) only if: (a) the arrangement results in the acquiring company increasing the percentage of voting shares it holds in the in the original entity; and (b) the acquiring company or other members of the group becoming the owner of 80% or more of the voting interests in the original entity. Both ss 124-780(2)(a)(i) and (ii) refer to the acquiring company (or wholly-owned group) "becoming" the owner of 80% or more of the voting shares in the original entity. This creates some ambiguity, as it is not immediately clear whether, for example, a company increasing it's ownership from 75% of voting shares to 81% has "become" the owner of 80% of voting shares as a result of the arrangement. This issue has been clarified by TD 2000/50 which states that a company may "become" the owner of 80% or more of voting shares as a result of an arrangement even though it may not have acquired 80% or more of voting shares specifically as a result of the arrangement. That is, the 80% threshold will be satisfied as long as the acquiring company holds 80% or more of voting shares by the end of the arrangement, regardless of whether some of those shares were held before the arrangement. This will be the case even where the acquiring company holds 80% or more of shares before the arrangement. Section 124-780(2)(a)(ii) refers to the acquiring company "increasing the percentage of voting shares that it owns in the original entity". This provision also gives rise to ambiguity, as "increasing" may be interpreted to mean that the company must have some initial shareholding which may then be "increased" by way of the arrangement. In TD 2000/51, the Tax Office accepts that a company can "increase" its percentage of voting shares in the target company even if it owned no shares in the company before the arrangement. Where a subsidiary member of a consolidated group acquires shares in a non-group company under a scrip-for-scrip arrangement, the single entity rule which applies under the consolidation regime is not relevant in determining the eligibility for Subdiv 124-M rollover of shareholders in the original company. Section 124-780(2)(a)(ii) is tested as though the acquiring company and the head company are separate entities: TD 2004/50. There is a fundamental issue whether the 80% threshold should be imposed at all, at least in an "on market" situation, as no genuine reasons have been advanced to support the adoption of the figure of 80% as the test. The threshold introduces a significant element of uncertainty for taxpayers holding interests in an original entity which militates against encouraging shareholders to accept early or at all (other than in very closely held situations). Where an acquiring entity makes its offer conditional upon achieving the 80% threshold (as a non-waivable condition), taxpayers may, in some situations, be able to make an objective determination as to whether the threshold is satisfied and thus whether the rollover is available. This is more likely to achieve freeing up among the shareholders of the target entity, but it also makes the likelihood of the takeover being less successful as there is then no ability to waive the 80% level of acceptance and keep the acceptances received. At 79% is there any less justification? By way of comparison, s 135 of the Taxation of Chargeable Gains Act 1992 (UK) contains one of the company scripfor-scrip rollovers provided in the United Kingdom. Under s 135(1)(a) of the Taxation of Chargeable Gains Act 1992(UK) the acquiring company is only required to acquire 25% of the ordinary share capital of the original company. Alternatively, the rollover is available where, inter alia, there is an offer made "on a condition such that if it were satisfied [the acquiring company] would have control of [the original company]".
Units and unit interests

In relation to original units or other interests in a fixed trust, the 80% rule, which is contained in s 124-781(2)(a) applies as follows: the arrangement must result in the acquiring entity owning 80% or more of the trust voting interests in the original trust or, if there are no trust voting interests, 80% or more of the units or other interests in the original trust.
[124-M.1160]
Participation rules for holders of interests in original entity
Link to Weekly Tax Bulletin for news affecting this commentary For Subdiv 124-M rollover to be available in relation to an exchange of share interests, the relevant arrangement must: (a) allow for the participation of at least all owners of voting interests in the original entity (excluding the acquiring entity and, where the acquiring entity is a company, other members of a wholly-owned group of which the acquiring entity is a member) (s 124-780(2)(b)); and (b) be one in which participation is available on substantially the same terms for all owners of interests of a particular type in the original entity (s 124-780(2)(c)). For example, if the target company has two classes of shares which bestow different rights to participate in the profits of the company, a takeover offer could be structured differently for each class of shareholder: see ATO ID 2003/177. The question of whether a target company had different types of interests also arose in ATO ID 2004/800. The target company and its shareholders entered into a shareholders' agreement under which a particular shareholder acquired ordinary shares in the company plus additional rights giving the shareholder certain vetos and priorities in relation to voting issues, share disposals by other shareholders and winding up of the company. In a subsequent takeover, the
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special position of this shareholder was recognised by offering the shareholder preference shares in the acquiring company (as opposed to ordinary shares offered to other shareholders). The Tax Office ruled that the offer did not satisfy the "substantially the same terms" test:
the share capital of [the target company] consists of only one class of shares. There is no evidence that as part of the arrangement any change was made to the company's constitution to vary the rights attaching to a particular shareholder's share. Further, no special resolutions of the company were made to change the rights of any ordinary shareholders. The additional rights were granted ... under a separate agreement and do not form part of the rights attaching to the share. As a result, it is considered that all the ordinary shareholders in [the target company] own interests of the same type.
In the Explanatory Memorandum to the New Business Tax System (Miscellaneous) Bill (No 2) 2000, it was stated that the use of a nominee sale arrangement for odd-lot shareholders does not prevent an arrangement from being considered to be "on substantially the same terms". Example 11.2 from the relevant Explanatory Memorandum is reproduced below.
Example
Jumbo Ltd makes a takeover offer for shares in Hippo Ltd (both are resident companies listed on the Australian Stock Exchange). Jumbo offers 2 of its shares for every 10 Class A Hippo shares and 1 share for every 20 Class B Hippo shares. As the offer in respect of both classes of shares are made concurrently they are considered to form part of one arrangement for the purposes of the rollover. Jumbo obtains ASIC approval to establish a nominee sale arrangement for odd-lot shareholders. Shares in Jumbo that would otherwise be allocated to former Hippo shareholders are allocated to a nominee for sale if the shares do not constitute a marketable parcel. This does not prevent the arrangement being on substantially the same terms for all shareholders of a particular type.
The participation rules for trusts are cast in substantially similar terms: s 124-781(2)(b) and (c).
[124-M.1180]
Replacement interest rules
As originally enacted, the requirement for Subdiv 124-M rollover relief in s 124-780 in relation to replacement shares or interests in shares provided in exchange for shares or interests in the target company was that they had to be in the "acquiring entity". This general rule, which is now contained in s 124-780(3)(c)(i), still applies. This was consistent with the original conception of the rollover applying where the acquiring entity was the same company that issued interests in itself to the target company shareholders. However, it was soon appreciated that this failed to address scrip-for-scrip arrangements under which a subsidiary in a wholly-owned group acquired the target company shares, but the shares provided in exchange were shares in the holding company of the group ("downstream acquisitions"). The issuing of shares in the holding company is commonly used where a subsidiary is used to acquire certain new businesses. If shares in the subsidiary were issued, the ownership of the holding company would be diluted (possibly defeating the purpose of the acquisition) and target company shareholders could get shares for which there was no market. To address this defect, s 124-780(3)(c)(ii) extends Subdiv 124-M rollover to situations where: (a) the acquiring company is a 100% subsidiary of another member of its wholly-owned company group which is its ultimate holding company; and (b) the replacement share or other relevant interest is in the ultimate holding company.
In this scenario: 1. SubCo 1 (a wholly-owned subsidiary of ParentCo) already holds 40% of the voting interests in TargetCo.
2. By way of a single arrangement, SubCo 2 acquires 50% of the remaining voting interests in TargetCo, with the exchanging holders receiving shares in ParentCo. 3. As SubCo 1 and SubCo 2 are members of a wholly-owned group, the 80% threshold is satisfied and those interest holders in TargetCo exchanging their interests in consequence of the arrangement may obtain rollover relief. In this example, rollover relief would not have been available if the replacement interests were shares in SubCo 2 rather than shares in ParentCo. There is no logical reason for in effect prohibiting SubCo 2 from issuing the replacement interests. Section 124-780(3)(c)(ii) was intended to be permissive - ie to "extend" the circumstances to downstream acquisitions. There could be genuine commercial reasons for the parties preferring to effectively pool a wholly-owned subsidiary and the target company in circumstances where the shareholders in the target company only received shares in the subsidiary and not in its ultimate parent company.
[124-M.1200]
Additional conditions for non-arm's length dealings
Link to Weekly Tax Bulletin for news affecting this commentary Section 124-780(4) contains additional conditions that must be satisfied where, in relation to an arrangement involving shares or share acquisition entitlements, the original interest holder and the acquiring entity do not deal with each other at arm's length. These additional conditions apply where: (a) neither the original company nor the replacement company had 300 members just before the arrangement commenced; or (b) the original interest holder, the original company and the acquiring company were all members of the same "linked group" just before the arrangement commenced. Two companies are linked to each other if one of them has a controlling stake in the other or the same entity has a
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controlling stake in each of them. That is, a holding company and subsidiary are linked as are 2 or more sister subsidiaries: see s 170-260. Section 124-781(4) imposes the same additional requirements for non-arm's length dealings where neither the original trust nor the acquiring trust had at least 300 beneficiaries before the arrangement commenced. The additional requirements - set out in s 124-780(5)for shares and s 124-781(4) for units - are as follows: 1. 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. This requirement will give rise to valuation issues for both the interest holder andthe acquiring entity. 2. The replacement interest carries the same kind of rights and obligations as those attached to the original interest. This requirement will require the acquiring entity or other replacement entity to be careful to ensure that the terms on which the replacement interests are issued mirror those of the original interests exchanged. In ATO ID 2004/498, independent valuations established that the consideration paid by the acquiring company was reasonably equivalent to the market value of the shares in the original company, but the second requirement was not satisfied because the original shares were exchanged for ordinary and redeemable preference shares in the acquiring company.
Denial of 300 member/beneficiary threshold where 20/75 test applies

In considering whether a company has at least 300 members or a trust has at least 300 beneficiaries, care must be taken to determine whether s 124-810 applies. Section 124-810 will deem a company or trust not to have at least 300 members or beneficiaries on the basis of a 20/75 ownership and control test. Generally, a company will be deemed not to have more than 300 members either of the following conditions in ss 124810(3) and (5) apply: (a) up to 20 individuals have ownership of 75% of the shares of the company, determining ownership on the basis of entitlement to the company's income and capital and voting rights; or (b) on an objective basis, such a concentration of ownership is capable of arising as a result of a variety of possibilities, including alteration of share rights, conversion, cancellation, redemption or acquisition of shares, or the exercise by a person of any power or authority in relation to rights attaching to shares. For these purposes, an individual, associates and nominees of the individual will be counted as one individual: s 124810(6). The deeming provisions relating to trusts are similar to those for companies: ss 124-810(4) and (5).
[124-M.1220]
Foreign resident original interest holders
A foreign resident original interest holder can obtain Subdiv 124-M rollover relief only if, just after the replacement interest is acquired, the entity in which the interest is acquired is an Australian resident or a resident trust for CGT purposes: s 124-795(1). Under Category 9 in s 136-25 a replacement interest acquired by a foreign resident has the "necessary connection with Australia"for CGT purposes where the foreign resident has elected to obtain Subdiv 124-M rollover relief in relation to the original interest. This provision ensures that a foreign resident cannot utilise the rollover to rollover into interests which do not have the necessary connection with Australia.
[124-M.1240]
Limitation on foreign resident to foreign resident exchanges
Link to Weekly Tax Bulletin for news affecting this commentary As originally enacted, Subdiv 124-M rollover could be used in situations involving a foreign resident original entity and a foreign resident acquiring entity. This created the potential for the tax-free repatriation of low taxed profits under the s 23AJ exemption for foreign dividends in the ITAA 1936. Such repatriation of profits could occur where, for example, an Australian resident interest holder exchanged its shares in a foreign entity in return for newly issued shares in a foreign resident acquiring entity. Accordingly, the rules in ss 124-795(4) and (5)were enacted by Act No 89 of 2000 in relation to CGT events on or after 13 April 2000 to deny Subdiv 124-M rollover relief in such situations unless one of the following conditions is satisfied: (a) (b) (i) the original entity had at least 300 members just before the arrangement started; or the acquiring entity: had at least 300 members just before the arrangement started; or
(ii) was a wholly-owned subsidiary of a foreign resident ultimate holding company just after the arrangement was completed that had at least 300 members just before the arrangement started. However, s 124-810 may deem a company not to have at least 300 members in certain circumstances: see [124M.1200]. On its wording, s 124-795(4) only applies where there is an acquisition of an interest by the acquiring company as a result of the arrangement. Accordingly, rollover relief will not be denied where there is a cancellation of interests in the original company without new interests being issued to an acquiring company.
[124-M.1260]
Taxpayer must choose rollover
Link to Weekly Tax Bulletin for news affecting this commentary Each taxpayer who would otherwise make a capital gain under an exchange arrangement to which Subdiv 124-M otherwise applies must make an election to obtain the rollover relief: s 124-780(3)(d), 124-781(3)(c). In certain circumstances involving common stakeholders or significant stakeholders, a joint election by the acquiring entity and the original interest holder is required: see [124-M.1500]. The election does nothave to be lodged with the Tax Office; the manner in which a taxpayer's return is prepared is sufficient evidence of the making of the choice: s 103-25(2). However, as a matter of prudent record keeping, a taxpayer should ensure that the election is in writing and contains the relevant cost base details. There is no requirement that an election be for all of the original interests exchanged. For example, in ATO ID 2003/362, the taxpayer had accumulated net capital losses which made it desirable to realise a capital gain in respect of some, but not all, of the exchanged original interests. Taking advantage of the CGT discount in relation to disposal of interests under a scrip-for-scrip arrangement does not involve making a choice that pre-empts the subsequent making of a choice to obtain Subdiv 124-M (see ATO ID 2000/891 discussed at [124-M.3020]).
[124-M.1280] Subdivision 124-M not applicable if rollover available under other subdivisions
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other subdivisions
Section 124-795(3) provides that a taxpayer cannot elect to obtain rollover relief under Subdiv 124-M if a rollover is available under: (a) (b) Div 122 (rollover for the disposal of assets to, or the creation of assets in, a wholly-owned company); or Subdiv 124-G (insertion of a holding company).
The Explanatory Memorandum to the legislation that enacted s 124-795(3)in its current form (Act 89 of 2000) stated (at para 11.64) that:
Where the circumstances are such that rollover would ordinarily be sought under those provisions, those provisions and notSubdivision 124-Mshould apply. Attempts to "disqualify" arrangements from relief under those provisions (to secure a better, or different, relief under Subdivision 124-M) may attract the general anti-avoidance provisions in Part IVA of the ITAA 1936.
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Document 6 of 9 Source: Tax Analytical Services/Commentary ITAA 1997/Subdivision 124-M Scrip for scrip rollover relief/GENERAL COMMENTARY/General consequences of scrip for scrip rollover
General consequences of scrip for scrip rollover

Cost base of replacement interests for original interest holder Cost base of original interests for acquiring entity Partial rollover under Subdiv 124-M [124-M.1440] [124-M.1460] [124-M.1400] [124-M.1420]
Rollover relief for pre-CGT original interests where CGT event K6 applies
[124-M.1400]
Cost base of replacement interests for original interest holder
Where Subdiv 124-M rollover relief applies to an exchange of interests, any capital gain made by the holder of the original interest is disregarded: s 124-785(1). This means that the CGT liability that would otherwise arise is deferred until the taxpayer disposes of the replacement interest (subject to any rollover relief available at that time). The first element of the cost base of each replacement interest is determined by reasonably attributing to it the cost base of each original interest exchanged and for which Subdiv 124-M rollover has been chosen: s 124-785(2).
Example
Janice owns 5,000 shares in Targetco. As at 1 April 2005 these shares has a cost base of $2. On the same day, Offerco makes a takeover offer which results in Janice receiving 20,000 shares in Offerco. The cost base of each Offerco share will be $0.50, the attributable amount of the cost base of each Targetco share calculated as follows: $5,000 $2 20,000. Variation: assume instead that Janice receives 5,000 ordinary Offerco shares (market value $5 per share) and 5,000 Offerco preference shares (market value $3 per share). The cost base of the shares attributable to their acquisition cost is calculated as follows:
(a) (b)
ordinary shares: $2 ($5 $8) = $1.25 preference shares: $2 ($3 $8) = $0.75
Pre-CGT original interests

Where the original interest exchanged is a pre-CGT asset, the first element of the cost base of the replacement interest is the market value of the replacement interest just after it is acquired: s 124-800(1)- see also [124-M.3000].
[124-M.1420]
Cost base of original interests for acquiring entity
Subdiv 124-M does not prescribe a particular basis on which an entity determines the cost base of the original interests it acquires. Accordingly, the cost base of the original interests will be determined under the normal cost base rules. On this basis, the first element of the cost base of the original interest in the hands of the acquiring entity will normally be the market value of the replacement interest at the time of the exchange: s 110-25(2)(b). Where the original interest was exchanged for a replacement interest and something else (eg cash), the first element of the cost base of the original interest will be the total market value of the consideration provided for the exchange, ie the sum of the value of the replacement shares and the non-share consideration. These cost base outcomes are modified where s 124-782applies - see [124-M.1500]and following.
[124-M.1440]
Partial rollover under Subdiv 124-M
An original interest holder will receive only a partial rollover when it receives something other than a replacement interest (such as cash and/or property), referred to in s 124-790(1) as "ineligible proceeds". In ATO ID 2002/100 original shares were exchanged for shares in the acquiring entity and a right to receive a number of shares in the acquiring entity calculated on the yet to be determined profit performance of the original entity for the year. The Tax Office ruled that the "rights" component of the exchange was ineligible proceeds. There is no Subdiv 124-M rollover for the "ineligible part", ie that part of the original interest for which ineligible proceeds are received. This means that there will be a capital gain equal to the ineligible proceeds less the cost base of the ineligible part. Section 124-790(2) provides that the cost base of the ineligible part is that part of the cost base of the original interest "reasonably attributable to it". This will essentially require the original interest holder to attribute the value of the original interest to the separate components of the consideration received (ie the replacement interests and the cash and/or other property).
Example
Todd owns 1,000 shares in Targetco (cost base $6 per share). He exchanges those shares for 1,000 Offerco shares (market value $10) plus $5 cash ("ineligible proceeds") for each Targetco share. The cost base of each of Todd's Targetco shares which is attributable to the cash component of the consideration is calculated as follows: $6 ($5,000 $15,000) = $2. This means that the capital gain made by Todd on this Targetco shares is: $5,000 (ineligible proceeds) - $2,000 (cost base of shares attributable to ineligible proceeds) = $3,000. The cost base of each of Todd's Offerco shares is: $6 ($10,000 $15,000) = $4.
[124-M.1460] K6 applies
Rollover relief for pre-CGT original interests where CGT event
As originally enacted Subdiv 124-M did not provide rollover relief on the disposal of an original interest which was a pre-CGT asset, on the basis that generally no CGT liability would arise at the time of the exchange of interests. However, a limited form of rollover relief was introduced by amendments in 2000to ss 104-230(10) and 124-800(2) (effective from the original commencement date of Subdiv 124-M) in recognition of the fact that under CGT event K6 a CGT liability can arise on the disposal of a certain pre-CGT interests where at least 75% of the net value of a company or trust is represented by post-CGT acquired property. The effect of this limited form of rollover relief is that:
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(a) a capital gain arising under CGT event K6 is disregarded to the extent that rollover relief would have been available had the interest been a post-CGT interest (s 104-230(10)); and (b) the cost base of the replacement interests is reduced by the amount of the K6 capital gain that was disregarded (s 124-800(2)). 2006 ATP a part of Thomson Legal & Regulatory Limited ABN 64 058 914 668
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Document 7 of 9 Source: Tax Analytical Services/Commentary ITAA 1997/Subdivision 124-M Scrip for scrip rollover relief/GENERAL COMMENTARY/Rollover consequences for significant or common stakeholders
Rollover consequences for significant or common stakeholders

Transfer of cost base in significant or common stakeholder cases Where original interest holder is a significant stakeholder Where original interest holder is a common stakeholder [124-M.1500] [124-M.1520] [124-M.1540] [124-M.1560]
Cost base of ultimate holding company in connection with a downstream acquisition
[124-M.1500] cases
Transfer of cost base in significant or common stakeholder
Subdivision 124-M contains special rules in s 124-782 for determining the cost base of original interests in the hands of an acquiring entity where the original interest holder was a "significant stakeholder" or "common stakeholder" in relation to the exchange arrangement. Section 124-782 (and the related definitional provisions in s 124-783) were enacted to deal with situations in which the original interest holders are likely to have some influence over the acquiring entity. The circumstances in which an original interest holder will be treated as being a significant stakeholder or a common stakeholder are explained at [124-M.1520] and [124-M.1540] respectively. Under s 124-782(1) the cost base of the original interests is effectively transferred to the acquiring entity, ie the cost base of the original interest in the hands of the original interest holders becomes the first element of the cost base of the interests in the hands of the acquiring entity. If the arrangement involved the cancellation of original interests and the issuing of new interests to the acquiring entity, s 124-782(2)allocates the cost base of the original interests to the new interests in accordance with the criteria specified in the provision. This cost base transfer will invariably ultimately result in double taxation. That is, both the original interest holders and the acquiring entity will be assessed on the disposal of their replacement interests and acquired interests respectively when those interests are disposed of, with the first element of the cost base being the cost base of the original interest before the arrangement for both interests. The only difference will be when the tax liabilities arise. In many cases, it will not be possible to predict with certainty when this will occur. But, because of the inevitable double tax (and, as discussed below, the possible triple tax), an election for rollover is unlikely where there would be a cost base transfer. In most situations the only circumstance would be where the acquiring entity is reasonably confident that it will not be disposing of the acquired interests for a very long time, if ever. The transfer of cost base will also make it practically impossible for an acquiring entity to determine its potential CGT liability on the ultimate disposal of the interests acquired. This arises as the transferred cost base of each original interest will not normally be ascertainable until the joint election (see below) is made and the original interest holders to which s 124-782 applies notify the acquiring entity of the cost base of their original interests pursuant to ss 124780(3)(e) and 124-781(3)(d). The difficulties associated with the transfer of cost base will make it very difficult for an acquiring entity to calculate an appropriate bid price for a potential takeover.
Joint election required

An original interest holder with either a significant or common stake may only obtain the rollover where a joint election is made with the replacement entity in respect of the interest. Where there is a downstream acquisition, that replacement entitywill be the ultimate holding company and not the acquiring entity. However, as indicated above, given the potential double (and possible triple) tax and the general difficulties in ascertaining the potential CGT liability of the acquiring entityon the disposal of the interests acquired, an election in these circumstances will be rare. That is, a replacement entity facing a transfer of cost base would normally refuse to make the joint election, preferring to obtain a market value cost base for the original interest. This will leave original interest holders to which s 124-782 applies with the prospect of realising a capital gain on the exchange, generally equal to the market value of the replacement interests less the cost base of the original interests. If the joint rollover election is made: (a) (b) the cost base of the interests will be transferred from the original interest holder to the acquiring entity; and s 124-784may apply (see [124-M.1560]).
Under s 124-780(3)(e) each original interest holder to which s 124-782 applies is required to inform the replacement entity in writing of the cost base of its original interest worked out just before the exchange of the original interest. Where the original entity has many interest holders, this will create a substantial administrative burden on the replacement entity where the joint election is to be made. A further administrative burden is imposed by the need for a joint election made by each original interest holder to which s 124-782 applies and the replacement entity. This will necessitate correspondence between the replacement entity and each relevant original interest holder. If the joint election is not made: (a) scrip-for-scrip rollover relief will not be available to original interest holders to which s 124-782 applies in relation to the disposal of the interest; (b) and those original interest holders will potentially face a capital gain on the disposal for which no rollover is available;
(c) the acquiring entity will determine the first element of the cost base of the acquired interest under the normal cost base rules. Notwithstanding the refusal of the replacement entity to make a joint election, rollover relief will still be available to other original interest holders. Indeed, it appears that a replacement entity may choose to make a joint election with some original interest holders to which s 124-782 applies and not others.
[124-M.1520]
Where original interest holder is a significant stakeholder
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Section 124-783 set out two situations in which an original interest holder will be treated as a "significant stakeholder " in relation to an exchange of interests with the result that a cost base transfer or allocation will be triggered under s 124-782 (see [124-M.1500]). Section 124-783(1) contains the primary test. It provides that an original interest holder is a "significant stakeholder" in relation to an exchange of interests where, on an associate-inclusive basis, it had a significant stake in: (a) (b) the original entity just before the arrangement; and the replacement entity just afterthe arrangement.
Section 124-783(2) contains an additional (ie secondary) significant stake test. It provides that if an original interest holder is an acquiring entity any other original interest holder is a significant stakeholder where it: (a) (b) had a significant stake in the original entity just before the arrangement started; and is an associate of the replacement entity just after the arrangement was completed.
This additional test operates on an equivalent basis to the primary test taking into account associate interests that may not be appropriately counted where the acquiring entity is an original interest holder. The test is illustrated in Example 11.5 taken from the Explanatory Memorandum to the legislation that enacted s 124-783 (Act 89 of 2000).
Example
Shares in Adventure Co are held as follows:
. . .
Atlantis Co 45%; Euphoria Co 25%; and widely-held by 500 unrelated entities 30%.
Ivory Tower Co owns 90% of the shares in Atlantis Co and 75% of the shares in Euphoria Co. Atlantis Co makes an offer to acquire shares it does not hold in Adventure Co in exchange for shares in Atlantis Co. Atlantis Co is an associate of Euphoria Co just before the arrangement (see s 318 of ITAA 1936). On an associate-inclusive basis Euphoria Co had a 70% stake (45% + 25%) in Adventure Co prior to the arrangement. This is a significant stake. If Euphoria Co and Atlantis Co jointly elect for roll-over on Euphoria's shares in Adventure Co, their cost base will be transferred to Atlantis Co regardless of whether or not it has a significant stake in Atlantis Co immediately after the arrangement. This is because Euphoria Co and Atlantis Co are associates just after the arrangement. As Adventure Co is widely-held just before the arrangement the common stake test will not apply.
70%, on an associate-inclusive basis, is a "significant stake".
** The % size of this holding by Euphoria in Atlantis after the completion of the takeover bid does not matter, because Euphoria and Atlantis are associates after such completion.
Significant stake in a company

Under s 124-783(6), an entity has a "significant stake" in a companywhere it and its associates between them have: (a) (b) (c) shares carrying 30% or more of the voting rights in the company; or the right to receive for their own benefit 30% or more of any dividends that the company may pay; or the right to receive for their own benefit 30% or more of any distribution of capital of the company.
The following example (Example 11.3) from the Explanatory Memorandum to the legislation that enacted s 124-783 (Act 89 of 2000) illustrates how the significant stake rules for companies operate.
Example
Yellow Co has 3 million ordinary shares on issue of which Brown Co holds 1 million. Mr Brown owns all the shares in Brown Co. A 1:3 takeover offer is made by Green Co for all the ordinary shares in Yellow Co. Before the takeover, Green Co has 1 million ordinary shares on issue. Mr Brown owns 600,000 ordinary shares in Green Co. Brown Co receives 333,333 shares in Green Co as part of the takeover arrangement.
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Immediately before the takeover arrangement, Brown Co owned 33% of the original entity Yellow Co. This is a significant stake. Immediately after the takeover arrangement, Brown Co and Mr Brown (an associate of Brown Co) together own 933,333 shares out of the 2 million shares on issue in Green Co. Again this is a significant stake. In order for roll-over to be obtained on the transfer of the shares by Brown Co to Green Co, there must be a joint roll-over choice by these companies. If this occurs, the cost base of the shares for Brown Co will become the first element of their cost base for Green Co.
Widely-held entity exception

Section 124-783(8) contains an exception to the primary significant stakeholder test for widely-held entities. It provides that no original interest holder has a significant stake in a company with at least 300 members or a trust which at least 300 beneficiaries providedit is reasonable for the company or the trustee to conclude that this is the case on the information available to it. It would not be reasonable to make this conclusion where evidence is available from which a reasonable person would conclude that there may be an interest holder with a significant stake - see for example ATO ID 2005/198. Section 124-810, which deems certain companies and trusts not to have 300 or more members or beneficiaries, applies to 124-783(8): see [124-M.1140]. The effect of s 124-810 is to rebut the presumption that a group of original interest holders with a significant stake in a widely held entity are not likely to be in a position to influence that entity.
Significant stake in a trust

Under s 124-783(7)an entity has a "significant stake " in a trust where it andits associates between them have the right to receive for their own benefit 30% or more of any distribution to beneficiaries of the trust of income or capital of the trust.
[124-M.1540]
Where original interest holder is a common stakeholder
Section 124-783defines when an original interest holder will be treated as a "common stakeholder" in relation to an exchange of interests with the result that a cost base transfer or allocation will be triggered under s 124-782 (see [124M.1500]). Under the primary test in s 124-783(3) an original interest holder is treated as a common stakeholder in relation to an exchange of interests where it had a "common stake"in: (a) (b) the original entity just before the arrangement; and the replacement entity just after the arrangement.
There is an additional or secondary test in s 124-783(4) which provides that if an acquiring entity is an original interest holder, each other original interest holder that has a replacement interest is a common stakeholder.
Common stake in a company

Where the original entity and the acquiring entity are companies, s 124-783(9) provides that an entity or 2 or more
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entities have a common stake in the original entity where the entity or entities between them, on an associate-inclusive basis, have: (a) 80% or more of the voting rights in the original entity just before the arrangement started and in the replacement entity just after the arrangement was completed; or (b) the right to receive 80% or more of dividends payable by the original entity just before the arrangement and by the replacement entity just after the arrangement was completed; or (c) the right to receive 80% or more of any distribution of capital by the original entity just before the arrangement started and by the replacement entity just after the arrangement was completed.
Common stake in a trust

For trusts, a common stake exists where an entity or entities between them, on an associate-inclusive basis, have the right to receive 80% or more of any distribution of income or capital by the original entity just before the arrangement started and by the replacement entity just after the arrangement was completed: s 124-793(10). The common stake provisions apply as this group is likely to have some influence over the replacement entity rather than being subsumed into the pre-existing interest holders in the replacement entity. The following example (Example 11.6) from the Explanatory Memorandum to the legislation that enacted s 124-783 (Act 89 of 2000) illustrates how the common stake rules for trusts apply.
Example
Charles, Ian, Peter and David, who are unrelated businessmen, each holds 25% of the 100 units in a small unit trust (Print Trust) which runs a printing business. Each unit has a market value of $250. They wish to reorganise the business by setting up a holding trust (Hold Trust) that they, and their spouses, will control and in which they will all have an investment. Hold Trust is capitalised with $10 million and 50 units are issued to each of the 4 businessmen and their spouses. The trustee of Hold Trust makes an offer to each of Charles, Ian, Peter and David to acquire their units in Print Trust in exchange for units in Hold Trust. The market value of the replacement units is substantially the same as the original units. None of the stakes held by Charles, Ian, Peter and David qualifies as a significant stake. However, they each have a common stake in Print Trust and Hold Trust, because together they, with their associated spouses, have 100% of the rights to income and capital of both trusts. Provided Charles, Ian, Peter and David elect with Hold Trust for roll-over, the first element of cost base of their replacement interests in Hold Trust will be the cost base of their original interests in Print Trust. The first element of Hold Trusts interests in Print Trust will be the cost base of those same original interests in Print Trust.
Widely held entity exception

Section 124-783(5) contains an exception to the primary common stakeholder test for widely held entities. It provides that no original interest holder can be a common stakeholder if either the original or the replacement entity is widely held (ie 300 or more members/beneficiaries) just before the arrangement started. Unlike the similar provision for the significant stakeholder test (see [124-M.1520]), this is not subject to it being reasonable to conclude that no common stake exists. Note that s 124-810, which deems certain companies and trusts not to have 300 or more members or beneficiaries (see [124-M.1200]) applies to s 124-783(5).
[124-M.1560] Cost base of ultimate holding company in connection with a downstream acquisition
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It is common for a subsidiary in a group to acquire the shares in the original entity, with shares in the ultimate holding company being issued as consideration.In such downstream acquisition cases there is clearly: (a) a transaction between the subsidiary and the shareholder(s) in the original entity, who sell their shares in the original entity to the subsidiary; and (b) a transfer between the ultimate parent company and the outgoing shareholders in the original entity, who receive new replacement shares issued by the ultimate holding company. However, it is necessary to recognise that there has been a transaction between the parent and the subsidiary, whereby the parent has in effect provided the consideration for the acquisition of property by the subsidiary. Normally, in the first instance, the transaction would be treated as involving a loan by the parent to the subsidiary of the amount treated by the parent as having been received by it upon the issue of its new shares to the former shareholders in the original entity. That loan could later be (wholly or partly) capitalised by the issue of additional shares by the subsidiary to the parent. Care needs to be taken to avoid any tainting of the share capital of the subsidiary. Alternatively, as part of the takeover, the subsidiary could just issue additional shares to the parent, without first recognising any loan by the parent to the subsidiary. Section 124-784 can potentially apply to this situation in any downstream acquisition where there is a cost base transfer under s 124-782 due to the existence of a significant stake or a common stake. In other words, under s 124784(1), the section applies where: (a) an acquiring company either issues equity or owes new debt to its ultimate holding company under an arrangement; and (b) the cost base of an original interest was transferred or allocated under s 124-782.
If s 124-784 applies, it allocates a specific cost base to the equity issued or new debt owed to the ultimate holding company, irrespective of either the cost or paid up value attributed to the new shares by the parent and the subsidiary or the amount of the new debt recorded or recognised by them, in their respective accounts. The cost base will be based on the cost base of the shares in the original company transferred to the subsidiary under s 124-782. This is illustrated in Example 11.8 in the Explanatory Memorandum to the legislation that enacted s 124-784 (Act 89 of 2000).
Example
Target Co has 3 associated shareholders Able Co, Better Co and Competent Co that each holds 300 shares. Each share has a cost base of $200 and a market value of $333. Sub Co (a 100% subsidiary of Parent Co which holds 200 shares) makes a 1:3 offer to acquire all the shares in Target Co in exchange for shares in Parent Co. Before the takeover, Parent Co is worth $300,000 and is owned by 2 shareholders, Dependable Co and Efficient Co, each with 150 shares. Sub Co is worth $300,000. As part of the arrangement, Sub Co issues 200 shares to Parent Co making the total number of shares on issue to Parent Co 400. Able Co, Better Co and Capable Co each has (on an associate inclusive basis) a significant stake in Target Co before the arrangement and in Parent Co after the arrangement. They choose, with Parent Co, for roll-over. Each of the 900 shares acquired by Sub Co obtains a first element of cost base of $200. The total of these cost bases ($180,000) is reasonably apportioned to the 200 shares issued by Sub Co to Parent Co as follows: $180,000/200 = $900 per share.
* **
This is 100% on an associate-inclusive basis, which is a significant stake in Target. This is 50% on an associate-inclusive basis, which is a significant stake in Parent.
The following additional observations in relation to the example should be noted.

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1. The market value of TargetCo is $299,700 (ie 300 shares 3 shareholders $333). Assume that it is $300,000 (which, by coincidence, happens to be the same as the stated value of each of ParentCo and SubCo).Before the takeover offer, each share in ParentCo is worth $1,000 ($300,000 divided by 300 (ie 2 150) issued shares).Therefore, one share in ParentCo ($1000) is worth three times one share in TargetCo ($333). That is why the offer by SubCo is on a 1:3 basis (using shares in ParentCo and not in itself).Therefore, ParentCo issues 300 extra shares (900 divided by 3), in addition to the 300 shares already on issue. 2. Each of the 200 shares which ParentCo initially holds in SubCo is worth $1,500 ($300,000 divided by 200).Normally, SubCo should have either: (a) recognised new debt of $300,000 owed to ParentCo (being the market value of the shares in TargetCo acquired by SubCo); or (b) issued new shares worth $300,000 to ParentCo. In this case, given that each existing share in SubCo was worth $1,500 (see above), 200 extra shares in SubCo (ie $300,000 divided by $1,500) should be issued to ParentCo. 3. The latter is exactly what happened. Therefore, the extra shares were neither issued at a discount (which might have attracted the share value shifting rules) nor at a premium. 4. However, as a result of the application of s 124-784(2), the cost base to ParentCo of each of its 200 new shares in SubCo is reduced to $900, instead of $1500. The percentage reduction (to 0.6 of actual cost or market value) is the same as the proportion which the cost base of the shares in TargetCo ($200), which is transferred to SubCo under s 124-782, bears to their market value ($333). 5. This gives rise to triple tax:
(a) if Able Co, Better Co and Competent Co sell their aggregate 300 new shares in ParentCo for their market value of $300,000, they will realise a taxable gain of $120,000 (because their rolled over cost base was only $180,000); (b) if SubCo sells its 900 newly acquired shares in TargetCo for their market value of $300,000, it too will realise a taxable gain of $120,000, even though it has made no actual gain. That is because of the cost base transfer under s 124-782, because the significant stakeholder threshold was met; or (c) if ParentCo sold its 200 newly acquired shares in SubCo for their market value, it too would realise a taxable gain of $120,000, even though it has made no actual gain. That is because s 124-784 reduces its cost base in those shares from $1500 per share to $900 per share (or from $300,000 in aggregate to $180,000). 6. Thus, the rollover inevitably results in total taxable gains of $360,000, whereas the real gain on which tax was deferred was only $120,000. 7. Where, instead of new shares being issued, a debt is simply recorded, s 124-784(2) also reduces the cost base of the debt.However, s 124-784(3) effectively creates an exception if the new debt is "merely repaid". But that exception will not apply if, for example, the debt is assigned or, according to the note to s 124-784(3), "exchanged". The use of the word "exchanged" in the statutory note raises an issue as to the consequence if the debt initially recorded is satisfied by the subsequent issue of additional shares in SubCo, eg 200 in the kind of the example. This suggests that this is not intended to be caught. This is because the last sentence in para 11.48of the Explanatory Memorandum focuses on the feature that "within the group, there has been no realisation of any value of the original entity", which would clearly be the case also if the debt was capitalised.However, we are not absolutely confident that that would constitute "repayment" within the meaning of the exception in s 124-784(3). Therefore, there should perhaps be an exchange of cheques, or at least the hand over of a cheque and its endorsement back to the debtor subsidiary. 8. In any event, the existence of this exception highlights how ludicrous s 124-784 is in the first place. This is because it may be so easily avoided. If a debt is initially recorded and then there is a repayment and immediate payment back by way of subscription for shares, then the newly issued shares probably are not caught by the section.We say "probably not", as it appears that, notwithstanding the "purpose" stated in s 124-784(1) (which applies the section to any equity issued as part of the arrangement), s 124-784(3) in effect overrides it so long as there is an actual "repayment" of the debt before any new shares are issued. In other words, where that occurs, s 124-784(2), having already operated on the new debt, is exhausted. 9. Finally, unless the s 124-784(3) exception applies, s 124-784 again inevitably gives rise to triple tax if a new debt from SubCo to ParentCo arises as part of the arrangement. For all the above reasons, the rollover election should never be made in a downstream acquisition where either the significant stakeholder or the common stakeholder threshold is met.
Non-operation of s 124-784 in a consolidated group

As a result of the single entity rule, s 124-784 does not apply to a consolidated group in relation to shares issued by a subsidiary member to the head company under a scrip-for-scrip arrangement: TD 2004/51. 2006 ATP a part of Thomson Legal & Regulatory Limited ABN 64 058 914 668
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Document 8 of 9 Source: Tax Analytical Services/Commentary TOPICS/Special Topics
ITAA
1997/Subdivision
124-M
Scrip
for
scrip
rollover relief/SPECIAL
Special Topics
Subdivision 124-M rollover and the CGT discount [124-M.3000] [124-M.3020] CGT discount does not pre-empt choosing Subdiv 124-M rollover Subdivision 124-M rollover and employee share schemes
[124-M.3040]
[124-M.3000]
Subdivision 124-M rollover and the CGT discount
Where Subdiv 124-M rollover relief is obtained, a replacement interest acquired in a scrip-for-scrip takeover or merger is, for the purposes of the CGT discount under Div 115, deemed to have been acquired at the time that the original interest was acquired: item 2 of s 115-30. As such, a taxpayer disposing of replacement interests will generally be able to obtain the relevant Div 115 CGT discount, provided the taxpayer is otherwise eligible for the discount. Where a share or interest in a share is a pre-CGT asset, the rollover is unavailable as the original interest holder does not face a capital gain. The replacement interest will not be deemed to have been acquired at the time of the original, pre-CGT, interest, as there is no rollover. As such, the replacement interest will be taken to have been acquired at the time of the exchange. This will mean that original interest holder who might otherwise obtain the CGT discount will be unable to obtain the discount if the replacement interest is disposed within the 12 months after the scrip-for-scrip exchange. On the other hand, the original interest holder benefits from a stepped-up cost base, as under s 124-800(1), the first element of the replacement interest will be its market value just after the transferring interest holder acquired it. This will leave original interest holders exchanging pre-CGT interests in a situation that has potential benefit or detriment in that: (a) if the market value of the replacement interest falls, the original interest holder may dispose of the replacement interest and realise a capital loss which would otherwise be unavailable (ie if the pre-CGT status of the original interest had been attributed to the replacement interest); or (b) if the market value of the replacement interest rises, the original interest holder will face a capital gain on the disposal of the replacement interest which would not otherwise have arisen (ie if the pre-CGT status of the original interest had been attributed to the replacement interest). The response to concerns expressed by professional bodies about the CGT discount not being available for the disposal within 12 months of replacement assets exchanged for pre-CGT assets (see minutes of the 28 November 2001 meeting of the National Tax Liaison Group CGT Sub-committee) the Tax Office stated that:
the treatment of pre-CGT shares in a scrip for scrip exchange reflects a deliberate policy position. The Government (consistent with a Ralph Report recommendation) decided that the scrip for scrip rollover should not preserve pre-CGT status. The rationale for the rollover arose from the cash-flow difficulties of meeting a tax liability at the time of a takeover and this is not an issue in relation to pre-CGT assets. The Government also decided that the post-CGT replacement shares for pre-CGT original shares should have a market value cost base.
In that same meeting the professional bodies asked whether the market value cost base given to the post-CGT shares that replaced the pre-CGT original shares was central to the resetting of the CGT discount clock: Was this in acknowledgment of the fact that it is important not to confer a "double taxation benefit" of having a market value cost base but having the CGT discount clock begin from acquisition of the pre-CGT original shares? The ATO confirmed that this was important to the policy thinking. The professional bodies suggested that one way of dealing with concerns about this "double benefit" could be to allow the original interest holder to choose to apply either market value cost base or the cost base of the pre-CGT original shares. Only if they chose the former should they not be entitled to take into account the pre-CGT period of ownership for qualifying for the CGT discount. The suggestion was noted, but no action has eventuated.
[124-M.3020] rollover
CGT discount does not pre-empt choosing Subdiv 124-M
In ATO ID 2002/891 a taxpayer exchanged shares in company A for shares in company B in circumstances that would have made the taxpayer able to choose Subdiv 124-M rollover. However, both the original and replacement shares were held in a personal portfolio service which received all of the documentation relating to the exchange. The portfolio service did not advise the taxpayer about the availability of Subdiv 124-M rollover (details about which were presumably contained in the relevant documentation). The taxpayer made a CGT discount reduced capital gain in relation to the exchange but, on subsequently becoming aware of the availability of the rollover, sought to choose the rollover and request an amended assessment. In the ID the Tax Office observed that the general rule is that a choice available under the CGT provisions once made cannot be changed. However, a taxpayer does not have to choose the CGT discount, ie if the conditions for the discount are satisfied it applies automatically. Therefore, where the CGT discount has applied to a capital gain without consideration of Subdiv 124-M, no irrevocable choice has been made and the rollover can be chosen, subject to the Tax Office granting further time to so.
[ 124-M.3040]
Subdivision 124-M rollover and employee share schemes
Where a company has in place an employee share scheme or option scheme governed by Div 13A of ITAA 1936 under which there are qualifying shares and/or rights with deferred discount income, the acquisition of those shares and rights under a scrip-for-scrip acquisition may trigger the recognition of the discount income notwithstanding the existence of the rollover. This is because the operation of Div 13A is outside the CGT regime. In some situations, such as where executives of a target company have large amounts of deferred discount income on qualifying rights which are interests in shares for the purpose of Subdiv 124-M, the tax effects of the crystallisation of discount income may be an additional barrier to the efficient acquisition of that target company. 2006 ATP a part of Thomson Legal & Regulatory Limited ABN 64 058 914 668
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Document 9 of 9 Source: Tax Analytical Services/Commentary ITAA 1997/Subdivision 124-M Scrip for scrip rollover relief/ACCREDITATION
ACCREDITATION
[124-M.9000] Author list
Original contributors
The original commentary on Subdiv 124-M was written by: Hugh Driver Solicitor, Malleson Stephen Jaques, Sydney and David J P Williams Partner, Malleson Stephen Jaques, Sydney The commentary on Subdiv 124-M was revised and updated by: Jerry Reilly BA LLB Thomson ATP Senior Tax Writer
Technical editor
Ian Murray-Jones BA BEc CA FTAA Thomson ATP Senior Tax Writer
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Subdivision 124-M Scrip For Scrip Rollover Relief

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Subdivision 124-M Scrip for scrip rollover relief

Subdivision 124-M section finding list

[124-M.1120] [124-M.1140] [124-M.1160]

[124-M.1520] [124-M.1540] [124-M.1560]

CURRENCY OF SERVICE - SUBDIVISION 124-M

Commentary reflects the legislation as at 30 November 2005

Subdivision 124-M section finding list

Rollover for scrip-for-scrip transactions

Conditions for rollover relief

Cost base of replacement interests

Cost base of original interests

Application of Subdiv 124-M

Subdivision 124-M section finding list

Conditions for scrip for scrip rollover

Subdivision 124-M not applicable if rollover available under other subdivisions

Correspondence between original and replacement interests

Original share interests

Original unit interests

Fixed entitlements rule

Chess Unit of Foreign Security (CUFS)

Exchange must result from a single arrangement

Requirement for 80% holding of interests in original entity

Shares and share interests

Units and unit interests

Participation rules for holders of interests in original entity

Replacement interest rules

Additional conditions for non-arm's length dealings

Denial of 300 member/beneficiary threshold where 20/75 test applies

Foreign resident original interest holders

Limitation on foreign resident to foreign resident exchanges

Taxpayer must choose rollover

General consequences of scrip for scrip rollover

Cost base of replacement interests for original interest holder

Pre-CGT original interests

Cost base of original interests for acquiring entity

Partial rollover under Subdiv 124-M

Rollover relief for pre-CGT original interests where CGT event

Rollover consequences for significant or common stakeholders

Cost base of ultimate holding company in connection with a downstream acquisition

Transfer of cost base in significant or common stakeholder

Joint election required

Where original interest holder is a significant stakeholder

Link to Weekly Tax Bulletin for news affecting this commentary

70%, on an associate-inclusive basis, is a "significant stake".

Significant stake in a company

Widely-held entity exception

Significant stake in a trust

Where original interest holder is a common stakeholder

Common stake in a company

Common stake in a trust

Widely held entity exception

The following additional observations in relation to the example should be noted.

Non-operation of s 124-784 in a consolidated group

Document 8 of 9 Source: Tax Analytical Services/Commentary TOPICS/Special Topics

Subdivision 124-M rollover and the CGT discount

CGT discount does not pre-empt choosing Subdiv 124-M

Subdivision 124-M rollover and employee share schemes

Ian Murray-Jones BA BEc CA FTAA Thomson ATP Senior Tax Writer

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