Upon a company being taken over or merging with another company, a client may become liable to pay capital gains tax (CGT) when disposing of their existing shares.

In certain circumstances, your client may be able to defer paying any CGT until a later CGT event. This is where a scrip-for-scrip rollover becomes a possibility.

Requirements for scrip-for-scrip rollovers

A relevant possible rollover could be available to your client where:

  • Your client exchanges a current interest with a replaceable interest in the following way:

(a)  old shares in a company are exchanged for new shares in the takeover company; or

(b)  a unit or other interest in a fixed trust is exchanged for a similar unit or interest in another fixed trust.

  • Your client has made a capital gain from such an exchange on or after 10 December 1999.
  • The exchange is a consequence of an arrangement (as defined in the Income Tax Assessment Act 1997 (Cth) (ITAA 97)) that results in the acquiring entity becoming the owner of 80% or more of the original company or trust.

There are further requirements that need to be satisfied depending on whether the arrangement involves a company or a trust.

A “partial” rollover is available if the exchange of a current interest with replaceable interest is accompanied by something else, usually cash.

Recent example of what can go wrong: Fabig & Dickinson

In the case of Commissioner of Taxation v Fabig & Dickinson [2013] FCAFC 99 (Fabig & Dickinson), the Full Federal Court upheld the Commissioner’s appeals from the decisions of the Administrative Appeals Tribunal in Dickson v FCT [2013] AATA 25 and Fabig v FCT [2013] AATA 26.

In Fabig & Dickinson, Ms Fabig and Mr Dickinson held the majority of the shares in iMega Pty Ltd (iMega). All the shareholders in iMega entered into a Share Purchase Agreement to dispose of 90% of the shares they held for cash as well as shares in Photon Group Ltd (Photon). This gave rise to possible partial scrip-for-scrip rollover for the non-cash component. However, Photon paid the shareholders different consideration for their shares, consistent with the Shareholders’ Agreement that was entered into prior to the exchange. For example, an individual with a 50% shareholding was entitled to 80% of the consideration, while an individual with 32.5% shareholding was entitled to only 15.5% of the consideration.

A key requirement for the relevant rollover to have existed was that the exchange (of shares for consideration) was the consequence of a single “arrangement” in which participation was available to Ms Fabig and Mr Dickinson on “substantially the same terms”.

The question before the court in this case was whether the CGT rollover requirements contained in section 124-780(2)(c) of the ITAA 97 were satisfied. Namely:

  • whether the Tribunal erred in the identification of the “arrangement”; and
  • whether the “arrangement” was one in which participation was available on “substantially the same terms” for all the shareholders.

Here, the Share Purchase Agreement constituted the terms of the “arrangement”, while the allocation of the purchase price as amongst shareholders within the Shareholders’ Agreement did not. The Tribunal did not err in its identification of what the “arrangement” was.

Essentially, the existing Shareholders’ Agreement stipulated that each shareholder had already agreed to portion the share contribution on an agreed allocation. Because of this, the Australian Tax Office (ATO) argued that participation in the share sales could not have been made available on “substantially the same terms” to each of the shareholders. As a result of this, the CGT rollover requirements were not satisfied. The Full Federal Court held that the taxpayers were not entitled to a partial scrip-for-scrip rollover for the exchange of shares in iMega.

What can we take away from Fabig & Dickinson? 

The ATO has insisted there will be no resulting changes in the Commissioner’s practices for scrip-for-scrip rollovers. The only principle the ATO sought to emphasise in this case was that the evaluation of “substantially the same terms” is to be made by reference to the “arrangement” in question as well as other matters beyond the “arrangement” itself. This includes, where appropriate, any Shareholders’ Agreement.

As a starting point, you should ensure that all contractual relationships (such as the special share sale consideration sharing arrangements in Fabig & Dickinson) your client engages in do not impede on the conditions of satisfying the scrip-for-scrip rollover.

Aside from this issue, where issues can be overlooked, there are several statutory conditions that should be satisfied in order that a scrip-for-scrip rollover is available. You should provide your client with an assurance that their circumstances fit the criteria for the CGT rollover. 

The author wishes to acknowledge Law Clerk Georgia Edwards for her contribution to this article.