Income Tax: Capital Gains tax: Partial scrip for scrip roll-over: ineligible proceeds

Is the taxpayer, a shareholder who exchanges shares in one company for shares and a right to an undetermined number of shares in another company entitled to a full scrip for scrip roll-over under Subdivision 124-M of the Income Tax Assessment Act 1997 (ITAA 1997)?

No. The taxpayer is only entitled to a partial scrip for scrip roll-over under section 124-790 of the ITAA 1997.

Under a share sales agreement, the shareholders have sold shares in a company (the original entity) in exchange for: • shares in another company (the acquiring entity) and • a right to receive a number of shares in the acquiring entity equal to one times the combined earnings before interest and tax of the original entity for year ended 30 June 2001, upon completion of the audited financial accounts of the original entity for that year;

The requirements for roll-over are otherwise satisfied.

The taxpayer is entitled to choose scrip for scrip roll-over to the extent that the taxpayer's shares are exchanged for shares in the acquiring company. Subsection 124-780(1) of the ITAA 1997 requires that a replacement interest must be of the same kind as the original interest, e.g., a share for a share.

Subsection 124-790(1) of the ITAA 1997 provides that there is no roll-over to the extent that the capital proceeds from shares includes something other than a 'replacement interest' which is referred to in this subsection as 'ineligible proceeds.'

Ineligible proceeds are not limited to cash, e.g., a right to be issued shares that cannot be ascertained until a future date, is not a replacement asset for a share for the purposes of subsection 124-780(1) of the ITAA 1997.

In these circumstances only partial roll-over is available as the taxpayer has accepted a right to shares which cannot be ascertained until a future date.

Under subsection 124-790(2) of the ITAA 1997 a reasonable part of the cost base of the taxpayer's shares in the original entity can be taken into account in working out the capital gain from the receipt of the ineligible proceeds. The Commissioner considers it is reasonable to allocate a portion of the cost base of the original shares having regard to the proportion that the ineligible proceeds bears to the total proceeds.