Scrip please or scrip tease? The AAT rules in favour for roll-over relief
Tax Telegraph, March 2013
The recent AAT decisions in Dickinson and Fabig have found that scrip for scrip roll-over relief may be available even where there is a significant discrepancy between the manner in which the consideration offered by the acquiring company is allocated amongst the shareholders.
Scrip for scrip roll-over relief
Scrip for scrip roll-over relief may be available under subdivision 124-M of the Income Tax Assessment Act 1997 (ITAA 1997) when shares held in one company are exchanged for replacement shares in another company (for example where there is a company takeover).
If scrip for scrip roll-over relief is available, the capital gain arising from the exchange of shares in the target company is disregarded until a future disposal of the replacement shares. Further, the cost base of the replacement shares is determined by reference to the cost base of the original shares.
Broadly, to obtain scrip for scrip roll-over relief the exchange of shares must be the consequence of a single arrangement that:
- Results in the acquiring company holding at least 80% of the shares in the target company
- Is one in which all owners of voting shares in the target company can participate; and
- Is one in which participation is available on substantially the same terms for all owners of interests of a particular type in the target company.
Dickinson and Fabig
Dickinson and Fabig (the Taxpayers) were shareholders in a company known as iMega Pty Limited (iMega). They held 5,000 (50%) and 3,230 (32.3%) of the shares in iMega respectively. On 22 May 2006, the shareholders of iMega and the Board of Directors of iMega entered into a Shareholders Agreement (the Shareholders Agreement). A clause in the Shareholders Agreement provided that any consideration received for the sale of the shares by the shareholders would be distributed in the following manner:
- Dickinson (80%)
- Fabig (15.5%)
- Robekesh and Kezweasel (2.25%)
- Global Interactive (2.25%).
On 3 July 2006, a Share Purchase Agreement (Share Purchase Agreement) was entered into with a company known as Photon Group Limited (Photon) where Photon acquired 90% of the shares in iMega from the shareholders. The acquisition was in proportion to each shareholder’s holding so that each shareholder agreed to sell 90% of their shareholding in iMega to Photon under the Share Purchase Agreement. Additionally, the shareholders granted to Photon the option to buy the remaining shares in iMega. The shareholders were also to be paid an earn-out price based on future earnings in proportion to the shares they respectively held.
On 2 November 2006, a variation agreement (Deed of Variation) was subsequently entered into which substituted the earn-out payment with cash. The option was cancelled and the remaining shares in iMega were sold to Photon for a combination of cash and shares in Photon. The cash consideration and the issuing of shares in Photon were both allocated in a manner which was consistent by Shareholders Agreement.
In addition, the only shares on issue in iMega were ordinary shares and the Taxpayers and Photon dealt with each other at arm’s length.
Consequently, the Taxpayers both elected for scrip for scrip roll-over relief under Division 124-M of the ITAA 1997 in relation to the exchange of shares pursuant to the Share Purchase Agreement and the Deed of Variation.
Before the Taxpayers could utilise scrip for scrip roll-over relief, the AAT had to determine whether each exchange was made in consequence of a single arrangement where that arrangement was one in which participation was available on substantially the same terms for all of the shareholders.
The meaning of arrangement
The AAT first identified the arrangement that led to the relevant exchange i.e. Photon becoming the owner of 80 per cent or more of the voting shares in iMega. The AAT broadly defined the meaning of arrangement and found the definition was wide enough to include things such as unenforceable promises and understandings.
As such, the two share exchanges that led to the finalisation of the relevant exchange were treated as part of the arrangement. Photon’s indifference as to the break-up of the consideration between the shareholders was treated as a relevant circumstance which formed part of the ultimate arrangement.
Was the arrangement one in which participation was available on the same terms for all the shareholders?
Photon made an offer to all the shareholders for all the shares in iMega. The offer was available to all the shareholders on the same terms. However, Photon was indifferent as to how the shareholders determined the allocation of the consideration between them so long as the total amount did not exceed the total consideration that Photon was willing to pay.
The AAT adopted a broad interpretation of the requirement that ‘the arrangement must be one in which participation was available on substantially the same terms for all of the owners of interests of a particular type in the target entity’. The AAT found that the key requirement was whether participation was available on substantially the same terms rather than the shareholders agreeing to exchange their shares substantially on the same terms.
The fact that the shareholders decided to take the offer on the basis that more consideration would to paid to some shareholders and less to others did not detract from the fact that participation was available on substantially the same terms to all shareholders. The shareholders ultimately decided with reference to the Shareholders Agreement how the consideration would be allocated between them.
As a result, scrip for scrip roll-over relief was available to the Taxpayers.
The recent AAT cases of Dickinson and Fabig highlight that scrip for scrip roll-over relief may be available where participation is substantially available on the same terms even if the consideration offered by the acquiring company is allocated by the shareholders of the target company in a manner which different to their shareholdings.
This broadens the scope of the roll-over relief and is welcome news for taxpayers.
Please contact your local Deloitte Private advisor if you would like to discuss whether scrip for scrip roll-over relief may be available for you.
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