Capital gains tax: scrip for scrip roll over: member of wholly owned group of companies

Is Acquiring Co a member of a wholly-owned group of companies for the purposes of paragraph 124-780(2)(a) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. For the purposes of subparagraph 124-780(2)(a)(ii) of the ITAA 1997 Acquiring Co is a member of a wholly-owned group of companies just before it first increases the percentage of voting shares that it owns in Target Co under the scrip for scrip arrangement. This is different from the time when Acquiring Co acquires the Target Co shares for the purposes of the CGT provisions.

Parent Co owned 85% of the shares in Acquiring Co. On 31 July 2001, Parent Co acquired the remaining shares in Acquiring Co.

On 1 July 2001, Acquiring Co made an offer to the shareholders of Target Co to exchange their Target Co shares for shares in Parent Co. The offer was accepted by 100% of Target Co shareholders during July 2000 but settlement did not occur until 1 August 2001.

In applying section 124-780 of the ITAA 1997 it is important to ascertain whether a company (an acquiring entity) is a member of a wholly owned group of companies because that determines which company must issue replacement shares under a scrip for scrip arrangement.

If the acquiring entity is not a member of a wholly owned group, it must issue the replacement shares (subparagraphs 124-780(3)(c)(i) and 124-780(2)(a)(i) of the ITAA 1997). However where the acquiring entity is a member of a wholly owned group of companies, the replacement shares must be issued by the ultimate holding company of the group (subparagraph 124-780(3)(c)(ii) and 124-780(2)(a)(ii) of the ITAA 1997).

In this case, Acquiring Co was a member of the wholly owned group (of which Parent Co was the ultimate holding company) just before 1 August 2001, the date of settlement, when Acquiring Co first increased the percentage of shares that it owned in Target Co. Accordingly for the target shareholders to qualify for scrip for scrip roll-over their replacement shares must be in Parent Co.

The fact that Acquiring Co was not a member of the wholly owned group of companies when the offer was made to the Target Co shareholders (1 July 2001) or when they accepted the offer is not relevant for the purposes of the roll-over.

Providing all the other conditions in Subdivision 124-M of the ITAA 1997 are satisfied, scrip for scrip roll-over will be available for the original shareholders of Target Co because they acquired shares in the ultimate holding company of the wholly owned group as required by subparagraph 124-780(3)(c)(ii) of the ITAA 1997.