7 February 2008
Manager - Company Tax Unit
Business Tax Divison
Department of Treasury
CANBERRA ACT 2600
By email: email@example.com
Dear Mr Regan,
Consolidation and capital gains tax (CGT) rollovers
The Institute of Chartered Accountants in Australia welcomes the opportunity to make a
submission regarding the former Government's announcements of 12 October 2007 and
16 October 2007, and the Government’s announcement of 11 January 2008.
The Institute is Australia’s premier accounting body, which represents over 46,000
members who are fully qualified Chartered Accountants working either in the accounting
profession providing auditing, accountancy, taxation and business consultancy services
or in diverse roles in business, commerce, academia or government. 33 Erskine Street
In October 2007 the former Government made two announcements regarding a proposal Sydney NSW 2000
to modify the tax consolidation regime to ensure that the tax cost setting laws did not GPO Box 3921
Sydney NSW 2001
apply to cause an “inappropriate uplift” in the tax costs of a joining entity’s assets service> 1300 137 322
following certain rollovers. phone> 61 2 9290 1344
fax> 61 2 9262 1512
On 11 January 2008 the Assistant Treasurer and Minister for Competition Policy and
27–29 Napier Close
Consumer Affairs, the Hon Chris Bowen MP, made the welcomed announcement that the
Deakin ACT 2600
Government would be moving to allay concerns in industry regarding the former phone> 61 2 6282 9600
Government’s announcements, given the disruption they caused for Australian capital fax> 61 2 6282 9800
markets, and in particular scrip for scrip transactions. He proposed that the new
measures would not apply to “non-contrived commercial takeovers involving an exchange L32, 345 Queen Street
Brisbane Qld 4000
of scrip”. phone> 61 7 3233 6500
fax> 61 7 3233 6555
Further to our meeting with you, and your colleagues at both Treasury and the ATO, on
23 January 2008, as well as the resulting Discussion Paper, that you issued on 1 L11, 1 King William Street
Adelaide SA 5000
February 2008, the focus of the attached submission is the implementation of the latter
phone> 61 8 8113 5500
announcement. The submission makes the following key recommendations (highlighted fax> 61 8 8231 1982
in grey shading in the attached):
TCCI, 30 Burnett Street
1. We endorse the Assistant Treasurer’s comment in his media release that the North Hobart Tas 7000
phone> 1800 014 555
“previous Government’s announcement has caused significant disruption to the fax> 61 3 9670 3143
operation of Australia’s capital markets and has effectively prevented any new scrip
for scrip transactions” and that “It is necessary to ensure that the changes protect L3, 600 Bourke Street
public revenue while not having the unintended consequence of hindering the Melbourne Vic 3000
operation of scrip for scrip transactions.” We therefore believe that the focus phone> 61 3 9641 7400
fax> 61 3 9670 3143
should be on restoring legitimate scrip takeovers by widely held entities as a
mechanism for growth of Australian companies. Any other peripheral proposals to Grd, 28 The Esplanade
adjust tax consolidation or other rules and policies should be deferred and Perth WA 6000
considered in a proper consultative manner so as not to delay and confuse scrip phone> 61 8 9420 0400
fax> 61 8 9321 5141
2 We submit that the ATO could use existing legislative integrity measures in relation to contrived
rollovers, and the ATO should be urged to apply Part IVA to rollovers under Subdivision 124-M
that cause inappropriate uplifts.
3 Alternatively and in the interest of providing more certainty to Australian capital markets by mid
February as desired by the Assistant Treasurer, we recommend that new integrity rules be
inserted in Part 3-90 to deal with tax cost setting outcomes in respect of certain Subdivision
124-M scrip rollovers
4. Rollovers of pre-CGT interests under Subdivisions 122-A, 122-B, 124-G and 124-H should be
dealt with by way of separate integrity rules such as in a modified s.705-57, in a process
separate to that for Subdivision 124-M scrip rollovers.
5. Any reforms to the application of s.45B should be undertaken as a separate tax reform process,
and should not delay the prompt resolution of the proposed scrip rollover measures. Any
reference to the application s.45B in the present context should be avoided until such a process
is complete. To do otherwise would defeat the purposes of providing certainty in an area that
has already suffered considerable setback since the initial announcement made by the former
Government on 12 October 2007.
6 There was insufficient information in the original announcements to justify making the proposal
being retrospective to 12 (or even 16) October 2007. The proposed measures should instead
be effective from the date of the more detailed announcement that is expected to follow this
Legislative references above and in the attached submission are to the Income Tax Assessment Act
1997 (ITAA 1997) unless otherwise stated.
We look forward to a speedy resolution of the issues raised in this submission. In the meantime,
should you require any clarification or assistance, please do not hesitate to contact me on (02) 9290
Institute of Chartered Accountants in Australia
cc. The Hon Chris Bowen MP
Institute of Chartered Accountants’ Submission - Consolidation and CGT
Background: How Subdivision 124-M scrip roll-overs may allow asset cost base uplifts
Very broadly, Subdivision 124-M allows exchanging shareholders or unitholders to choose a rollover
where there would otherwise be a capital gain and where an entity (say B) acquires 80% or more of
the interests in another entity (say A) and issues shares or units in itself to the shareholders or
unitholders in A, and those shareholders or unitholders are given substantially similar participation
Where there is no common stakeholder or no significant stakeholder, the normal cost base rules will
apply. This means that the first element of B’s cost base of the interests it acquires in A will equal the
market value of the shares or units it issues in itself to the former shareholders or unitholders of A:
Where the market value of A’s assets exceeds the cost base of those assets, the effect is that if B
forms a consolidated group, with A as a subsidiary member, the tax cost setting amount of A’s assets
will be uplifted, assuming B has given fair value to A’s former shareholders, when it issues shares to
Subdivision 124-M will not apply if Subdivision 124-G applies: s124-795. Subdivision 124-G, rather
than Subdivision 124-M, will apply if the underlying ownership of the target and the acquiring entity
remain identical (and certain other requirements are satisfied).
In addition an uplift will not be available (or will be limited) under Subdivision 124-M if there is
“significant stakeholder” or a “common stakeholder”. The effect of s124-782 is that cost base of the
original holder of the interest in A will become the first element of the cost base or reduced cost base
of the interests acquired by B in A that are transferred from, or are issued in respect of a cancelled
interest of a “significant stakeholder” or “common stakeholder” that has obtained a rollover. This
inheriting of the original cost base of significant stakeholder or common stakeholder shares limits the
ability to obtain an uplift, if B then forms a consolidated group with B as a subsidiary member.
Section 124-783 defines “significant stakeholder” and “common stakeholder”. An entity is a
“significant stakeholder” broadly if it (including associates) has an interest of 30% or more in the
original entity and the replacement entity. An entity is a common stakeholder if together with other
entities it holds at least 80% of the interests in the original entity and the replacement entity.
However no original interest holder is a common stakeholder if ether the original entity or replacement
entity had at least 300 members (if it is a company) or beneficiaries (if it is a trust) just before the
arrangement started: s124-783(5). In addition no original interest holder has a significant stake in a
company or trust with at least 300 shareholders or beneficiaries, and if it reasonable to conclude on
the information available that there is no significant stakeholder: s124-783(8).
Recommendation 1: The focus should be on restoring legitimate scrip takeovers by widely
held entities as a mechanism for growth of Australian companies. Any other peripheral
proposals to adjust tax consolidation or other rules and policies should be deferred and
considered in a proper consultative manner so as not to delay and confuse scrip takeover
We agree with the Assistant Treasurer’s media release that the “previous Government’s
announcement has caused significant disruption to the operation of Australia’s capital markets and
has effectively prevented any new scrip for scrip transactions … It is necessary to ensure that the
changes protect public revenue while not having the unintended consequence of hindering the
operation of scrip for scrip transactions.”
We therefore believe that the focus should be on restoring legitimate scrip takeovers by widely held
entities as a mechanism for growth of Australian companies.
Any other peripheral proposals to adjust tax consolidation or other rules and policies should be
deferred and considered in a proper consultative manner so as not to delay and confuse scrip
Recommendation 2: No change for Subdivision 124-M rollovers and the ATO apply Part IVA to
rollovers under Subdivision 124-M that cause inappropriate uplifts
The announcement of 16 October 2007 also proposed to change the tax consolidation rules in regard
to CGT rollovers under Subdivision 124-M without specifying a particular issue of concern with this
Subdivision. However the announcement of 12 October 2007 had identified scrip-for scrip rollovers,
followed by the formation of a consolidated group and the immediate disposal of underlying assets
taking advantage of inappropriately uplifted tax values, as an issue of concern.
The claimed risk to revenue is not demonstrated
We are of the strong view that the proposed measures are unjustified in respect of scrip rollovers
involving widely held entities, especially listed public company takeovers. Treasury claims of a
“significant revenue risk” have not been supported by evidence in respect of the quantum of deferral
capital gains (that are subject to scrip rollover) and whether there is a significant period of deferral
after the arrangement.
We understand that, in respect of Australian listed company takeovers:
• there can be a significant level of turnover of listed target company shares during the bid
period. This suggests that the cost base of shareholders participating in the scrip for scrip
arrangement may be close to the bid price of the target, with the result that deferred gains
may not be significant;
• there can also be significant turnover of listed bidder company shares, after the takeover.
Such turnover may result in any deferred gains being realised in a relatively short time period
after a takeover.
We have seen no material supplied which suggests a systemic risk to the revenue. We submit that
additional research should be undertaken by Treasury to verify that there is a significant amount of
deferred gains arising in respect of scrip for scrip takeovers, and the deferral period is also significant,
such as to justify the proposed measures.
Existing integrity measures are sufficient
We are of the view that the specific anti-avoidance rule in Subdivision 124-M, which requires the
preservation of the existing cost base for shares acquired in the target to the extent that they relate to
a significant stakeholder or common stakeholders, is adequate to counter inappropriate uplifts. In
instances where a scheme does not trigger the significant and common stakeholder rules but it has
been undertaken for the purpose of obtaining an inappropriate uplift, it is submitted that the ATO
should be able to apply the general anti-avoidance rules, Part IVA of the Income Tax Assessment Act
1936 (ITAA 1936), to the arrangement.
If the ATO’s view is that Part IVA cannot be applied to various legitimate transactions, this suggests
that the policy should be adjusted cautiously. Tax consolidation has always involved winners and
losers, and we are concerned not to see major shifts in policy occurring because there are
occasionally ‘winners’ while the revenue benefits from the outcomes of tax consolidation in respect of
The announcement of 11 January 2008 states the Government does not wish to hinder the operation
of scrip for scrip transactions in the case of “non-contrived commercial takeovers”.
A typical “non-contrived commercial takeover” will involve a significant change in the underlying
ownership of the target entity. For example if B, which is a listed company, takes over A, another
listed company, and a proportion of A’s members take up a scrip for scrip offer, typically there will be
an influx of new shareholders onto B’s register. However there will usually be a significant change in
the underlying ownership of A – usually the underlying ownership of A will change by 50% or more,
because B’s existing members will be included in the underlying ownership of A. A significant change
in underlying ownership such as this should cause this type of takeover to be categorised as a “non-
contrived commercial takeover”.
Two less typical, but not unusual, arrangements are:
• when two companies (Y and Z) agree to merge with each being acquired by a newly
incorporated company (Newco) under a scrip for scrip; and
• a reverse takeover.
Merger under Newco
If X and Y, two listed companies, are acquired by Newco in a scrip rollover under Subdivision 124-M,
and the common stakeholder and significant stakeholder rules do not apply, the tax cost of the assets
of both X and Y will be reset based on the market value of the shares issued by Newco. This
contrasts with the situation that would arise if X acquired Y or vice versa, where only the tax cost of
the assets of the target entity would be reset – not the tax cost of the assets of both entities.
However there may be good commercial reasons for having X and Y as sister companies – typically
to achieve a flat reporting structure. It is difficult to categorise such a structure as “contrived”. As a
plain vanilla takeover would allow the tax cost of the assets of one of the entities to be reset, one may
ask what is the problem with the tax cost of both entities’ assets being reset?
Where X is substantially larger than Y and it might be reasonable to expect X to take over Y, there
would be strong grounds for the Commissioner seeking to apply the general anti-avoidance provision
Nonetheless, if it is thought necessary to apply the new measures to a “merger under Newco”
arrangement then they should apply to the two legs of the arrangement sequentially:
1. The first leg would usually involve a corporate restructure to interpose Newco between
Company X and its existing shareholders. This scrip-for-scrip exchange would not normally
satisfy the 20% test and therefore the new measures would be likely to apply.
2. The second leg would involve the takeover of Company Y by Newco. This scrip-for-scrip
exchange may or may not satisfy the 20% test, depending on the relative values of Company
X, Company Y and Newco. The new measures may or may not apply.
It is possible to implement both legs of a “merger under Newco” arrangement at the same time, in
which case the new measures might apply to either or both legs. The measures should therefore
allow Newco to elect, in relation to a simultaneous arrangement, that one leg should be treated as
having occurred first.
Similar principles would apply to a “merger under Newco” involving more than two targets. If the
acquisitions occur in sequence then the new measures should apply to them in sequence. If two or
more acquisitions occur simultaneously then NewCo should be entitled to specify the order in which
they are taken to have occurred.
A reverse takeover
A “reverse takeover” typically occurs where a larger unlisted company allows its shares to be acquired
by a smaller listed company, which issues shares to the shareholders of the acquired company under
a scrip for scrip arrangement. This is sometimes called a “backdoor listing”.
Typically in this case there may not be a significant change in underlying ownership. In this case
where the common stakeholder rule did not apply because there are more than 300 members in the
company which was subject to the reverse takeover, and where the tax benefit was significantly larger
than the cost savings from a “backdoor listing”, there would be strong grounds for the Commissioner
seeking to apply the general anti-avoidance provision Part IVA.
The adequacy of the significant and common stakeholder rules and running the Part IVA gauntlet
The significant and common stakeholder rules were introduced as an amendment to the existing
Subdivision 124-M rules and were consequently the result of some practical experience of the
previous rules and were apparently the result of careful consideration. The commentary in the
Explanatory Memorandum (EM) for New Business Tax System (Miscellaneous) Bill (No 2) 2000
dealing with the common stakeholder and significant stakeholder rules is set out as Appendix 1. This
commentary demonstrates the careful consideration given to these rules when they were introduced.
This submission argues that these rules, together with Part IVA, should be sufficient to prevent
inappropriate uplifts. The significant and common stakeholder rules will not of course apply where the
300 or more person exceptions in subsection 124-783(5) and (8) will apply.
It is assumed here that the general design of the significant and common stakeholder rules is not at
issue and the only issue is whether the 300 or more person exceptions is appropriate. As explained
earlier, a reason for the 300 person exception to the common stakeholder rule was the difficulty in
ascertaining the preserved cost bases inherited by the acquiring entity under this rule when this
information had to be ascertained from 300 or more shareholders or beneficiaries.
These exceptions are already set at high level, above which it is less likely that contrived and non-
commercial arrangements will be entered into to obtain inappropriate uplifts. In practice where 300 or
more persons are involved, complex and widely publicised arrangements will normally be required
and it would be usual for a ruling to be obtained from the ATO (for example the Class Ruling in the
Publishing and Broadcasting acquisition and demerger (Class Ruling CR 2007/111)) or a tax opinion
would be obtained from a reputable advisor. If the proposed arrangement is seen as inappropriate by
theATO, or viewed by the tax adviser as subject to a not insignificant tax risk, the tax risk and
attendant publicity should usually be sufficient to dissuade the parties from proceeding further.
As pointed out previously, the exception in subsection 124-783(8) for the significant stakeholder rule
applies only where there are 300 or more shareholders or beneficiaries and “if it is reasonable…to
conclude that this is the case [there is no significant shareholder] on the information available…”. It is
apparent from Class Ruling CR 2007/111 at paragraphs 46 to 49 that when Publishing and
Broadcasting Limited demerged although there were more than 300 shareholders, the exception in
subsection 124-783(8) did not apply and the significant shareholder rule applied to limit a potential
There is a further problem with repealing the exceptions in subsections 124-783(5) and (8). This
repeal would apply in cases where the target does not become a subsidiary member of the acquirer’s
consolidated group and no uplift is obtained. Usually the target will join the acquirer’s group. However
in those cases where it does not, an additional compliance burden will have been imposed on the
acquirer because of an “inappropriate uplift” which is not relevant for its circumstances.
The implication of the announcement of 12 October 2007 is that the “immediate” disposal of assets for
no capital gain after a takeover is tax avoidance. However, where there has been a takeover, there
will usually be surplus assets that are not of use to the acquirer. It would be encouraging inefficiency
and causing dead weight costs to set a time limit after a takeover during which the disposal of assets
whose cost has been reset will attract a tax penalty. Where the “immediate” disposal of significant
assets results in a tax saving is significant relative to other aspects of the takeover, there would be
strong grounds for Part IVA to apply and it would be difficult to escape the conclusion that the
arrangement was “contrived”.
The consolidation tax cost setting rules, while providing benefits for taxpayers in many instances, are
more importantly an integrity measure. A strong policy justification is therefore required for not
applying them. The policy justification for the announcements of 12 and 16 October 2007 would seem
to be that because the shareholders in the target entity have obtained a rollover – which is normally
just a deferral of tax – the acquirer should suffer some tax penalty. However, what is the revenue cost
of this deferral bearing in mind that
• many shareholders do not choose a Subdivision 124-M rollover (non-residents, hedge funds
and other short term holders); and
• those who do are likely to realise their gain in say a two to five year time frame – whatever is
the normal holding period for the type of shareholder who chooses a rollover?
For these reasons, it is submitted that the existing significant and common stakeholder rules, with the
back-up of Part IVA, are adequate and no changes are required regarding Subdivision 124-M or the
application of the consolidation cost setting rules following a Subdivision 124-M rollover.
Recommendation 3: As an alternative to recommendation 2, insert new integrity rules in Part
3-90 to deal with tax cost setting outcomes in respect of certain Subdivision 124-M scrip
rollovers and give acquiring entities a choice to opt out of scrip rollover relief
This recommendation is made, if contrary to Recommendation 2, the Government decides to insert
new integrity rules to deal with tax cost setting outcomes in respect of certain Subdivision 124-M scrip
At the outset we submit that any such proposed integrity rules should be targeted to only address tax
consolidation tax cost setting outcomes, and should not take the form of amendments to Subdivision
124-M (which could apply beyond tax consolidation outcomes).
Exclusion for listed public company takeover of another listed public company
It is likely that in a takeover involving both a listed public company acquirer and listed public company
target, the proposed measures, taking into account the recommendations included in this submission,
would not apply.
However, such arrangements would still require testing to ensure that the capture test was not
breached. Such testing could not be undertaken until after the arrangement was completed. This
would result in much uncertainty for the takeover process, bid pricing and other matters.
Furthermore, such testing would necessarily be a lengthy and costly exercise, considering the large
size of some listed public company share registers.
Recommendation 3.1: a takeover of a listed public company by another listed public company
should be completely excluded from the proposed measures. This exclusion would not apply
to arrangements described in paragraph 4 of the Discussion paper (if, under the arrangement,
a shelf entity (including a shelf consolidated group or MEC group) acquires the membership
interests of two or more target entities simultaneously).
Proposed capture test – substantial continuity of ownership test (SCOT)
The Discussion Paper indicates that the proposed measure will adjust the operation of the
consolidation tax cost setting rules in circumstances where a CGT roll-over applies and there is
insufficient change in economic ownership of the target entity (where other key requirements are also
satisfied). The proposed threshold was whether there has not been a change of at least 20% in the
ultimate beneficial ownership of the target entity or it is not reasonable to assume there has been
such a change.
Our comments and recommendations are:
• The proposed measures are not intended to apply to “non-contrived arrangements”. Whilst we
appreciate that you may have chosen a SCOT threshold of 20% for new shareholders to be in
keeping with the common stakeholder rules, it may be more appropriate to consider a lower
threshold of say 10% particularly for public companies given that the aim is to exclude
contrived arrangements. This would further reduce the unnecessary costly compliance costs
and issues of dealing with the SCOT for takeovers where the proposals clearly should not
• The proposed amendments could adopt the common stakeholder capture tests that are
contained in s.124-783, which could be modified to apply to entities with 300 or more
members. Again, the proposed measures should be contained in Part 3-90 and should not
impact scrip rollover arrangements generally.
• The Treasury Discussion paper refers to “beneficial ownership”. We submit that the proposed
SCOT should operate by reference to direct ownership, and should not require listed public
companies to undertake burdensome tracing of ownership to ultimate shareholders. Special
concessions will be required to allow limited tracing through nominees.
Further key requirements for the proposed measures to apply
The proposed measures should be restricted by additional requirements to ensure that they apply
appropriately. The following factors should be expressly incorporated into Part 3-90 capture test for
the purpose of the proposed measures targeted against scrip for scrip arrangements:
Key threshold requirements would be:
• Scrip rollover is likely to be elected by some shareholders
• The interposed company has not made an election to prevent scrip rollover. We submit that
this option should be available for potentially affected takeover arrangements, and would be
equivalent to the existing joint election mechanism that currently applies where there is a
significant stakeholder and/or common stakeholder under s.124-780(3)(d).
• Target entity joins a consolidated group
• Tax cost of revenue assets exceeds their terminating value
• A non-incidental purpose of arrangement to obtain an uplift in the tax cost of assets (this is
necessary to ensure that the measure is limited to “contrived” arrangements).
A number of exclusions would ensure that the proposed measures do not inadvertently apply to
genuine takeover arrangements (as distinct from group restructures). So:
• If the ‘more than 20% fresh equity” test was breached, there should be an exclusion to allow
scrip rollovers to take place where there was at least 20% of new underlying assets, looking
to the underlying assets of the target and the acquirer. This test should look to the underlying
assets of the companies (and groups) rather than just their equity. This is a necessary
exclusion provision to deal with cases where the SCOT may be breached due to the acquirer
being asset rich but debt funded (with a relatively low equity base relative to the target entity).
In our view, no integrity measures would be needed to deal with concerns about acquirers
engaging in ‘asset stuffing’ of the acquirer, because Part IVA would deal with such
• The proposed measures should provide the company with an opportunity to satisfy the SCOT
test, based on reasonable estimates. This may be subject to a requirement of notifying the
Commissioner of Taxation. Alternatively, the proposed rules should allow the company to
request the Commissioner to exercise a discretion not to apply the rules, where:
• a low proportion of shareholders were likely to be eligible for rollover (say, less than
10% eligibility for rollover); or
• in relation to a listed public company, there were practical difficulties in testing for
Application of the proposed measures – existing tax value option
The Treasury discussion paper proposes that where the proposed measures apply, the head
company of a consolidated group will be given a choice to disregard the tax cost setting rules in
Division 705 when the target entity becomes a member of the acquiring entity’s consolidated group or
MEC group, or the acquiring entity subsequently becomes a member of a consolidated group or MEC
group – that is, the original tax costs of the target entity’s assets (or the original cost base if the target
entity is not consolidated) will be retained.
We support this proposal, as it would allow affected groups to limit the compliance burden of
determining appropriate adjustments to the allocable cost amount (ACA) for the target entity.
However, this existing tax value proposal must have optional application only, as this rule could
produce inequitable outcomes in various circumstances.
We recommend that the following issues also be considered by Treasury in respect of this option:
• Where the target entity is a consolidated group or consolidatable group, the existing tax value
option should also be available for all the 100% subsidiaries of the target entity (where the tax
cost setting rules apply to those entities).
• Furthermore, where the target entity is a head company of a consolidated group, Division 711
and CGT event L5 should not apply to the subsidiary members in respect of the
deconsolidation of the target consolidated group.
Application of the proposed measures – Adjusted ACA
We support the consideration to allow the head company to apply the cost setting rules in Division
705 in respect of the target entity, subject to a reduction to step 1 of the target entity’s ACA when it
joins the consolidated group or MEC group by an amount that appropriately reflects the extent to
which CGT roll-over relief is available for significant or common stakeholders.
We support the option for groups to apply the tax cost setting rules subject to appropriate adjustments
to ACA Step 1 (as an ALTERNATIVE to existing tax values applying for all assets). However,
compliance concessions, safeguards and compensating adjustments are required in order for this
option to be capable of practical application and to mitigate potentially very significant compliance
- 10 -
Our comments and recommendations on this proposed option are as follows:
Compliance shortcuts – determination of shares where scrip rollover elected
• Treasury should consider whether formal notice requirements should be incorporated into the
proposed measures to obtain written notification from exchanging shareholders, in respect of
whether scrip rollover has been chosen, in the following circumstances:
- Exchanging shareholders that held a significant stake in the target; or
- Exchanging shareholders that end up with a “substantial holding” in the acquiring
entity (as defined in s.9 of the Corporations Act 2001 – essentially in terms of a 5% or
greater associate-inclusive voting interest).
• In relation to other exchanging shareholders allow groups to make a bona fide reasonable
estimate, based on the best information reasonably available, of the shares that were eligible
for scrip rollover. These will be, in essence:
- Australian individual shareholders and superannuation funds
- Australian managed funds investing for capital growth but not
- foreign investors
- investors on revenue account such as hedge funds and share traders.
• In circumstances where affected groups are unable to make a reasonable estimate of what
proportion of shareholders in classes eligible for scrip takeover would actually elect to take
the scrip takeover, Treasury may consider whether a default assumed scrip rollover rate of
say 50% could be applied. So, for example, if the share fund investors cannot easily be
subdivided into those investing on capital or revenue account, then 50% of the category of
share funds investors would be assumed to be eligible for the scrip rollover.
Compliance shortcuts – calculation of deferred gains on shares where scrip rollover elected
• Treasury should consider whether formal notice requirements should be incorporated into the
proposed measures to obtain written notification from exchanging shareholders, in respect of
rollover cost base, in the following circumstances:
- Exchanging shareholders that held a significant stake in the target; or
- Exchanging shareholders that end up with a “substantial holding” in the acquiring
entity (as defined in s.9 of the Corporations Act 2001 – essentially in terms of a 5% or
greater associate-inclusive voting interest).
• In relation to other exchanging shareholders, the acquiring entity should be entitled to
reasonably estimate the aggregate cost base of those shareholders who require roll-over
relief (e.g. on the basis of the target’s share register records).
• Alternatively, groups can determine the cost base of rollover shares (only) based on the tax
cost of the target entity’s underlying assets less liabilities – (based on the cost base rollover
utilised in Subdivision 124-G).
Safeguards – no step down below terminating value
• The revised tax cost setting amount for an asset should not be reduced below the terminating
value of the asset. This outcome is consistent with the approach adopted for the treatment of
formerly pre-CGT shares in s.705-57(7).
- 11 -
Compensating adjustments when scrip takeover deferral ends
• Reversal of the reduction to the ACA of the target entity (and other entities impacted by its
ACA) is required, in recognition of the fact that the relevant deferred gains are likely to be
ultimately realised by the relevant shareholders, when they subsequently sell their shares.
• Possible approaches include:
• Capital loss over 5 years (which should apply to both options, i.e. where existing tax
values were chosen or the ACA of the target entity was adjusted). This option
provides some simplicity, however, there is an issue whether a capital loss is
sufficient compensation for reduced tax costs for revenue assets.
• Recalculate ACA if reasonable to assume that shareholders’ deferred capital gains
have been recouped, or after a set period of time (say 5 years).
• Adjust exit ACA calculation when target entity leaves a consolidated group.
Recommendation 3.2: Giving acquiring entities a choice to “opt out” of scrip rollover relief
If the proposed rules were to apply in relation to widely-held targets, it is likely to be impractical to
require the exchanging shareholder and the acquiring entity to jointly elect for scrip-for-scrip roll-over
relief. It would also be impractical to require the exchanging shareholder to notify the acquiring entity,
in writing, of the cost base of the shares in the target.
We therefore recommend that the acquiring entity be able to “opt out” of roll-over relief, in which case
no exchanging shareholder would be eligible.
Recommendation 4: Amendments to rollovers of pre-CGT interests under Subdivisions 122-A,
122-B, 124-G and 124-H
The announcement of 16 October 2007 proposed to change the tax consolidation rules in regard to
CGT rollovers under:
• Subdivisions 124-G and 124-H where pre-CGT shares or interests were rolled over; and
• Subdivisions 122-A and 122-B without specifying what the concern was, but apparently the
concern was the rollover of pre-CGT assets.
We recommend a legislative amendment so that where there has been a rollover of pre-CGT assets
under Subdivisions 122-A, 122-B, 124-G or 124-H and this would otherwise result in an uplift of the
tax cost of revenue-type assets on the formation of a consolidated group following the rollover, that
either the following occurs (at the option of the taxpayer):
• taxpayers choose to retain the market value uplift in shares, but forgo the pre-CGT status of
their shares (both the original and replacement interests). This essentially will treat pre-CGT
interests in the same manner as Subdivision 124-M treats such pre-CGT interests
• taxpayers choose to retain the cost base of the underlying assets (utilising a stick approach),
but retain the pre-CGT interests in both the original and replacement interests.
We acknowledge that section 705-57 in its current form could also be used to achieve broadly the
same outcome as that provided above. However, our main concern with that provision is that it
required two allocable cost amount (ACA) calculations to be prepared by the relevant consolidated
group. We believe that this approach results in high compliance costs, and therefore is not the
preferred option for dealing with the issue identified by Treasury.
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Section 705-57, which deals with, what is considered by Treasury, as inappropriate uplifts for revenue
type assets resulting from pre-CGT interests having become post-CGT interests and being deemed to
be acquired for market value. The effect of section 705-57 is to ensure there is no uplift for trading
stock, depreciating assets and assets held on revenue account. The “wasted” ACA may be claimed
as a capital loss over 5 years as a CGT event L1: section 104-500.
Section 705-57 resulted from concerns expressed by practitioners regarding uplifts that might
otherwise have resulted from pre-CGT interests having been deemed to be acquired for market value
by Division 149 and former section 160ZZS of the ITAA 1936. However, while section 705-57 can
effectively deal with the concern around pre-CGT interests, the provision results in significant high
compliance costs for SMEs. That is, the provision requires two ACA calculations to be performed,
and also requires the taxpayer to correctly identify revenue assets, and calculate a carry forward CGT
event L1 capital loss over five years. We do not believe that the mechanism chosen by Treasury and
the Government to address any concerns around pre-CGT interests should create such a significant
compliance burden for SMEs. Accordingly, we do not believe that section 705-57 is an appropriate
provision to deal with this perceived mischief.
We are broadly happy with the proposal provided by Treasury in its latest Discussion paper, which
would allow a group to utilise a “stick” type option. However, we request that taxpayers be given the
alternative choice of retaining the market value of shares, and forgoing the pre-CGT interest in
original and replacement interests. We believe that this is appropriate as (a) this option is provided
under a Subdivision 124-M rollover, and (b) there is significant uncertainty surrounding pre-CGT
interests given the announced (but unenacted) pre-CGT factor rules of 1 December 2005. Given that
pre-CGT interests can be lost inside a tax consolidated group, the claw back of a market value uplift
and the loss of pre-CGT interests would constitute an unacceptable outcome for SMEs.
Finally, we note that the roll-overs that are subject of this part of the submission (i.e. 122-A, 122-B,
and 124-G) usually involve a new entity being interposed on top of a tax consolidated group (due to
the nature of those roll-over provisions). We would recommend that section 703-70 be extended so
that it encompasses these additional roll-over provisions.
We believe that this option would also eliminate the need for new interposed entities choosing to form
a new tax consolidated group (thereby eliminating the push down issue). Furthermore, the extension
of section 703-70 also ensures that limited Step 1 and Step 3 amounts that are provided on a roll-
over, do not adversely impact the group on a push down calculation (in cases where the group has
predominantly remained the same both before and after the rollover).
Recommendation 5: Any reforms to the application of s.45B should be undertaken as a
separate tax reform process, and should not delay the prompt resolution of the proposed scrip
Paragraph 5 of the Treasury Discussion Paper raises the issue as to whether section 45B of the
Income Tax Assessment Act 1936 applies appropriately to these arrangements to prevent
distributions of profits being treated as distributions of capital.
It is unclear whether consideration of section 45B is for the purpose of:
(i) an alternative solution to the proposed measures, or
(ii) whether any amendment to section 45B would be additional to the proposed measures.
The Discussion paper does not elaborate on the circumstances where s.45B is being
considered to apply. We submit that unless Treasury is considering section 45B as an alternative
solution to the perceived integrity issues, then any potential reforms to the application of s.45B should
be undertaken as a separate tax reform process, and should not delay the prompt resolution of the
proposed scrip rollover measures.
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We reiterate our Recommendation 1 that the focus of this consultation and reform process should
seek to achieve closure, and to restore legitimate non-contrived scrip takeovers. This process should
not be used to set in place some broader reform, without any justification or explanation of the basis
or underlying rationale of the issues. Such an approach would continue the situation that, to quote the
Assistant Treasurer’s words with which we strongly agree:
“The previous Government’s announcement has caused significant disruption to the operation
of Australia’s capital markets and has effectively prevented any new scrip for scrip
transactions” … This situation is quite urgent, it is necessary that this consultation be
conducted expeditiously, and be completed by mid-February.
It is necessary to ensure that the changes protect public revenue while not having the
unintended consequence of hindering the operation of scrip for scrip transactions.
“Accordingly, I have asked that the consultation focus on ensuring non-contrived commercial
takeovers involving an exchange of scrip are not affected by the changes.”
The commercial and business uncertainty arising from some as-yet unknown, unexplained, and
uncosted review of section 45B does not justify the government being placed in a position of
introducing unknown tax uncertainty over the implementation of legitimate non-contrived transactions.
Given that the Assistant Treasurer requires action by mid February, we recommend that the section
45B issues be left to a separate consultative process independent of the scrip takeovers rectification
and that no reference be made to them in the current context.
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Appendix 1 – the EM for the significant and common stakeholder rules in
The Explanatory Memorandum (EM) for New Business Tax System (Miscellaneous) Bill (No 2) 2000
which introduced the common stakeholder and significant stakeholder rules states:
Why are cost base rules required?
11.32 At present Subdivision 124-M does not specify the first element of the cost base (i.e.
acquisition cost) of an original interest in the hands of the acquiring entity. The effect of the
general CGT cost base rules is that usually these interests will have an acquisition cost equal to
their market value.
11.33 A ‘step-up’ to market value for an acquisition cost where no capital gain has been
recognised creates a structural CGT issue involving potential tax deferral. For example, there is
a deferral opportunity because the acquiring entity (in which original interest holders have an
interest) can choose to sell the interests in the original trust or company (that have a market
value cost base) rather than their underlying assets (on which a greater gain may be realised).
This would allow the original interest holders to benefit from the reinvested untaxed gains
attributable to gains on the assets of the original entity. Other jurisdictions (USA and Canada) do
not allow a market value cost base.
11.34 The Treasurer’s Press Release No. 87 of 10 December 1999 recognises that a market
value cost base for the acquiring entity is generally not appropriate where a capital gain is not
recognised for the transfer. However, it also recognises that requiring a cost base transfer from
original interest holders may impose significant compliance costs, especially where the original
entity is widely held.
11.35 The proposed amendments will require a cost base transfer only from original interest
holders that are likely to have some influence over the acquiring entity.
The following more detailed comments in the EM demonstrate how the integrity rules in Subdivision
124-M apply and show the detailed consideration that was given to the framing of these rules.
How will the cost base rules operate?
11.36 Generally, the first element of the cost base of interests acquired by an acquiring entity will
be determined under the general rules about cost base in Divisions 110 and 112 of the ITAA
1997. However, a cost base transfer will apply to interests in respect of which a roll-over was
obtained in 2 cases only.
11.37 The first case is where, on an associate-inclusive basis, an entity has a 30% or more stake
(significant stake) in the original entity before the arrangement and in the entity in which its
replacement interests are held just after the arrangement. [Schedule 5, item 4, subsection
124-782(1) and subsections 124-783(1), (6) and (7)]
11.38 For a widely-held entity (generally one with 300 or more shareholder/beneficiaries), it will
be assumed that no interest holder has a ‘significant stake’ in it if that assumption is reasonable.
It would not be reasonable to make that assumption if, for example, evidence is available from
which a reasonable person would conclude that there may be an interest holder with a
‘significant stake’. [Schedule 5, item 4, subsection 124-783(8)]
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.
If Mr Brown had only 10,000 shares in Green Co just before the takeover arrangement,
then the significant stake test would not be satisfied. Although Brown Co owned a 33%
stake in Yellow Co before the arrangement, Brown Co and Mr Brown would own only
343,333 shares out of the 2 million shares in the acquiring company (Green Co)
immediately thereafter. This is less than 30%. There would be no cost base transfer in this
11.39 An additional significant stake test applies if an acquiring entity for an arrangement is an
original interest holder. In this case any other original interest holder may also be a significant
it had a significant stake in the original entity before the arrangement; and
just after the arrangement it is an associate of the entity in which it holds
[Schedule 5, item 4, subsection 124-783(2)]
11.40 This 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
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 section 318 of
the 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 (see
paragraph 11.41) will not apply.
11.41 The second case where a cost base transfer may be required is where an interest is part
of an 80% or more common holding (a common stake) of interests (determined on an associate-
inclusive basis) in a non-widely-held original entity just before the arrangement and in a non-
widely-held replacement entity just after the arrangement. [Schedule 5, item 4, subsection
124-782(1) and subsections 124-783(3), (5), (9) and (10)]
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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
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
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 Trust’s interests in Print Trust will
be the cost base of those same original interests in Print Trust.
11.42 An additional test applies if an acquiring entity for an arrangement is an original interest
holder. Reflecting the fact that in this case direct and indirect interests in the original entity are
maintained, another original interest holder (i.e. apart from the acquiring entity) may also have a
common stake if the:
original entity is not widely-held just before the arrangement; and
replacement entity is not widely-held just after the arrangement.
[Schedule 5, item 4, subsection 124-783 (4) and (5)]
Adventure Co has 3 non-associated shareholders:
Atlantis Co with 70% of its ordinary shares;
Euphoria Co with 15% of its ordinary shares; and
Capable Co with 15% of its ordinary shares.
All the shares in Atlantis Co are held by Ivory Tower A Co and B Co.
Atlantis Co makes an offer to Euphoria Co and Capable Co to buy out their minority
interests in Adventure Co in exchange for shares in Atlantis Co. Atlantis Co obtains a 15%
holding from Euphoria Co and 5% from Capable Co, taking it to an 90% interest in
Neither Euphoria Co nor Capable Co had a significant stake in Adventure Co prior to the
arrangement so the significant stakeholder test will not apply.
However, Adventure Co was not widely-held before the arrangement and Atlantis Co was
not widely-held after the arrangement. Because Atlantis Co was an original interest holder,
there will be a cost base transfer in respect of the shares acquired from Euphoria Co and
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11.43 In determining whether the above percentage tests for cost base transfer are met, all pre
and post-CGT interests will be taken into account. However, as noted at paragraph 11.36 there
is a cost base transfer only for those interests for which roll-over is obtained.
11.44 An original interest holder with a ‘significant stake’ or ‘common stake’, can obtain the scrip
for scrip roll-over only where a joint election is made with the replacement entity in respect of the
interest. While cost base transfer is not an issue that will directly affect the replacement entity in
a downstream arrangement, it is considered appropriate to require it (as the ultimate holding
company of the wholly-owned group) to make the election. The ultimate holding company will be
part of the overall arrangement and would be expected to consult closely with the acquiring
entity, or entities if more than one. In some cases involving cancellation of interests there may be
more than one acquiring entity and the original interest holder would be unable to determine with
which entity it was required to make a joint election. [Schedule 5, item 4, paragraphs 124-
780(3)(d) and 124-781(3)(c)]
11.45 If a joint roll-over election is made, there will be a transfer of cost base from the original
interest holder to the acquiring entity. The joint election will not need to be lodged with the
Commissioner but must be in writing and include the interest holder’s cost base details so that
the acquiring entity can properly determine its acquisition cost. [Schedule 5, item 4,
paragraphs 124-780(3)(e) and 124-781(3)(d)]
11.46 If a joint election is not made in respect of an interest forming part of a significant or
common stake, scrip for scrip roll-over will not apply to it and the acquiring entity will determine
its first element of cost base for it under the normal cost base rules. The acquiring entity may
indicate to interest holders that have a significant stake or common stake its unwillingness to
make a joint election at the start of the scrip for scrip arrangement. This may occur, for example,
because the acquiring entity does not want to take on a potential tax liability that belonged to the
holder of a significant stake or common stake.
11.47 For a downstream acquisition where the acquiring subsidiary issues debt or equity to the
ultimate holding company, the acquisition cost to the ultimate holding company for that debt or
equity will be based on the acquisition cost (as set out in paragraphs 11.36 to 11.46) for the
shares in the original company that the subsidiary acquires. [Schedule 5, item 4, section 124-
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.
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11.48 In a downstream arrangement, a loan may be recorded by the ultimate holding company to
the acquiring entity representing the value of the replacement interests issued by it. Under
the cost base transfer rules, the cost base allocated to the debt (an asset of the ultimate
holding company) may be less than its market value. If that debt is assigned to an
independent third party for cash, so that the group indirectly realises the value of the
original entity, it is not inappropriate that a capital gain arises on that transaction. However,
if the loan is merely repaid by the acquiring entity, any capital gain made on the debt from
that repayment is disregarded. This is appropriate because, within the group, there has
been no realisation of any value of the original entity. [Schedule 5, item 4, subsection
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Appendix 2 - The rollovers to which the announcements were proposed to
The announcement of 16 October 2007 advised that the proposal announced on 12 October 2007
would apply where a “takeover bid or scheme of arrangement is announced by either party to an
approved stock exchange after 12 October 2007” and arrangements concerning unlisted companies
where the offer was made to shareholders after 12 October 2007.
We submit that there was insufficient information in the original announcements to justify making the
proposal retrospective to 12 (or even 16) October 2007. The proposal should instead be effective
from the date of the more detailed announcement that is expected to follow this consultation process.
In addition the announcement of 16 October 2007 listed the rollovers which would be subject to the
“The changes will ensure that the tax cost setting rules [of the consolidation regime] do not apply
to uplift the tax costs of the assets of an entity that joins a consolidated group or multiple entry
consolidated group (MEC group) following a CGT rollover affecting the membership interests of
the joining entity. The CGT rollovers to which the measure applies are:
• a scrip for scrip rollover (Subdivision 124-M of the Income Tax Assessment Act 1997);
• a CGT rollover that applies when an individual, trustee or partnership transfers assets to a
wholly-owned company (Subdivisions 122-A and 122-B);
• a CGT rollover that applies when pre-CGT shares are exchanged for shares in another
company (Subdivision 124-G); and
• a CGT rollover that applies when pre-CGT interests in a trust are exchanged for shares in a
company (Subdivision 124-H).
“The measure will not affect a demerger transaction, unless that demerger happens as part of the
arrangement that involves an entity joining a consolidated group or MEC group following a
relevant CGT rollover.”
The last three of these groups rollovers (Subdivisions 122-A and 122-B, Subdivision 124-G and
Subdivision 124-H) will be dealt with first as they relate to Recommendation 3.
A rollover by an individual, trust or partnership under Subdivisions 122-A or 122-B
A CGT rollover is available under Subdivision 122-A when an individual or trustee transfers assets to
a company (Company X) wholly owned by the individual or trust. A CGT rollover is available under
Subdivision 122-B when a partnership transfers assets to a company (Company X) wholly-owned by
The transferor’s cost base in the rollover assets, if they were acquired by the transferor on or after 20
September 1985, is inherited by Company X except for “a precluded asset” – see subsections 122-
70(2) and 122-200(2). A “precluded asset” is a depreciating asset, trading stock or an interest in a film
referred to in section 118-30. No rollover is available under Subdivisions 122-A and 122-B for
precluded assets: item 1 of the tables in subsections 122-25(2) and 122-135(3).
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Pre-CGT assets of the transferors are treated as pre-CGT assets of Company X (ie acquired before
20 September 1985): subsections 122-70(3) and 122-200(3). There is no specific provision
establishing a cost base for these deemed pre-CGT assets. As a result they will be treated as
acquired by Company X for the market value of the shares issued by Company X to the transferors
that are referable to the pre-CGT assets: subsection 110-25(2)
Subject to an exception for pre-CGT assets, the cost base of the transferor in the shares in the
Company X will equal the cost base of the transferor in the rollover assets – see sections 122-40 and
An “inappropriate uplift” might be seen to result from Subdivisions 122-A and 122-B if the rollover
assets are pre-CGT membership interests in a company or interests in a trust and that company or
trust becomes a subsidiary member of a consolidated group formed by Company X, as head
company. There may be an uplift if the market value of the pre-CGT membership interests at the time
of the rollover is in excess of their cost base. When the allocable cost amount (ACA) of the subsidiary
member is calculated, the step 1 amount will be based on the market value of the membership
interests at the time of the rollover which, when it is spread to the assets of the subsidiary member, is
likely to result in a cost base uplift.
Based on the fact that for some other rollovers mentioned in the announcement of 16 October 2007,
pre-CGT interests are the cause of the concern, the reference in the announcement to rollovers under
Subdivisions 122-A and 122-B is likely to be directed at the rollover of pre-CGT interests in a
company or trust, although the announcement is silent on this point.
Subdivision 124-G restructures, and the potential uplift from pre-CGT shares
Subdivision 124-G allows a rollover where shareholders in a company (A) exchange their shares in A
for shares in another company (B), which becomes the sole shareholder of A, provided their
percentage shareholdings in B, and the ratio of the market values of the shares they hold in B held in
relation to each other are equal to the percentages and ratio of market values they previously held in
A: section 124-365. The application of Subdivision 124-G is limited to “restructures” which preserve
the existing percentages of ownership through an interposed company and it does not apply where
there is a commercial takeover and those percentages and values will not match up.
Shares in A will be treated as having been acquired by B before 20 September 1985 if any of A’s
assets are taken to have been acquired before that date: subsection 124-385(1). The number of
shares in A (expressed as a percentage of all the shares in A) that are taken to be pre-CGT is based
on the market value of A’s pre-CGT assets less liabilities in respect of those assets expressed as a
percentage of the market value of all A’s assets less its liabilities: subsection 124-385(2). There is no
specific provision establishing a cost base for these deemed pre-CGT shares. As a result they will be
treated as acquired by B for the market value of the shares issued by B to the former shareholders in
A that are referable to the pre-CGT shares in A: subsection 110-25(2)
B’s cost base in A’s shares that are not deemed to be pre-CGT is equal to the cost base of A’s assets
(that are not pre-CGT) less the liabilities of A in respect of those non-pre-CGT assets. See subsection
Where Subdivision 124-G applies and B forms a consolidated group with A as a subsidiary member,
the effect of section 124-385 is that there cannot be an uplift of the cost bases of the assets of A when
the group forms except to the extent that the shares B holds in A are deemed to be pre-CGT shares.
However as the pre-CGT shares in A will be treated as acquired by B at the time of the rollover for
their market value, where this exceeds their historical cost, there is a potential uplift in the tax cost
setting amount of A’s assets.
It is this aspect of Subdivision 124-G, namely the pre-CGT shares that are identified as an issue of
concern in the announcement of 16 October 2007.
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Subdivision 124-H and the uplift on exchanging pre-CGT interests in a unit trust for shares in a
A rollover is available under Subdivision 124-H when interests in a unit trust are exchanged for shares
in a company. Subdivision 124-H is similar in its operation to Subdivision 124-G. There is a
requirement that percentages and the ratio of market values of shareholdings in the interposed
company must replicate those in the original unit trust: sections 124-450 and 124-460.
The company will be treated as holding pre-CGT units in the unit trust based on the market value of
the unit trust’s pre-CGT assets less liabilities in respect of those assets expressed as a percentage of
the market value of all the unit trust’s assets less its liabilities: subsection 124-470(2).
The company’s cost base in the post-CGT units in the unit trust will equal the cost base of the post-
CGT assets of the unit trust less liabilities in respect of those assets. See subsection 124-470(3).
Where Subdivision 124-H applies and the interposed company forms a consolidated group with the
unit trust as a subsidiary member, the effect of subsection 124-470(3) is that there cannot be an uplift
of the cost bases of the assets of the unit trust when the group forms, except to the extent that the
units the company holds in the unit trust are deemed to be pre-CGT. However as the pre-CGT units in
the unit trust will be treated as acquired by the company at the time of the rollover for their market
value (see explanation above in regard to Subdivision 124-G), there is a potential uplift in the tax cost
setting amount of the unit trust’s assets where the market value of the units exceeds their historical
It is this aspect of Subdivision 124-H, namely the pre-CGT units that are identified as an issue of
concern in the announcement of 16 October 2007.