Capital Gains Tax: scrip for scrip roll-over - significant stake

Does a taxpayer have, for the purposes of section 124-783 of the Income Tax Assessment Act 1997 (ITAA 1997), a significant stake in a company that has more than 300 members, if the taxpayer owns shares that carry more than 30% of the voting rights in that company?

Yes. Because the taxpayer's shares carry more than 30% of the voting rights in the company the taxpayer has a significant stake in the company in accordance with paragraph 124-783(6)(a) of the ITAA 1997. It would not be reasonable for the company to conclude that the taxpayer did not have a significant stake.

The taxpayer acquired shares in an Australian resident company (the original company) after 19 September 1985.

Under an arrangement that satisfied the requirements for scrip for scrip roll-over in Subdivision 124-M of the ITAA 1997, the taxpayer's shares in the original company were exchanged for shares in another company (the replacement company).

Just before the arrangement started the taxpayer owned shares carrying more than 30% of the voting rights in the original company. Just after the arrangement was completed the taxpayer owned shares carrying more than 30% of the voting rights in the replacement company. The replacement company is an Australian resident company that has more than 300 members.

Roll-over for a scrip for scrip arrangement is not available under Subdivision 124-M of the ITAA 1997 for a shareholder who is a significant stakeholder for the arrangement unless the shareholder and the replacement company jointly choose for roll-over to apply (paragraph 124-780(3)(d) of the ITAA 1997).

A shareholder is a significant stakeholder for a scrip for scrip arrangement if it had a significant stake in the original company just before the arrangement started and a significant stake in the replacement company just after the arrangement was completed (subsection 124-783(1) of the ITAA 1997).

Subsection 124-783(6) of the ITAA 1997 provides that an entity has a significant stake in a company at a time if the entity, or the entity and their associates between them, have at that time: • shares carrying 30% or more of the voting rights in the company • the right to receive for their own benefit 30% or more of any dividends the company may pay, or • the right to receive for their own benefit 30% or more of any distribution of capital of the company.

However, an entity does not have a significant stake in a company that has at least 300 members if it is reasonable for the company to conclude that this is the case on the information available to it (subsection 124-783(8) of the ITAA 1997).

The Explanatory Memorandum to the New Business Tax System (Miscellaneous) Bill (No. 2) 2000 which introduced section 124-783 says at paragraph 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'.

In this case, the available evidence demonstrates that just after the arrangement the taxpayer held shares in the replacement company that carried more than 30% of the voting rights in that company. This is a significant stake within the meaning of the term in paragraph 124-783(6)(a) of the ITAA 1997. Therefore the taxpayer has a significant stake in the replacement company under this arrangement.