A Scrip for Scrip Rollover is a transaction which allows the shareholders in a company targeted by another company to exchange their shares for shares in the acquiring company and as a result does not trigger immediate capital gains tax (CGT).
‘Scrip’ means a document or certificate of ownership indicating a right to shares.
There are two instances in which this occurs the first is scrip for scrip rollover for a company and the second a scrip for scrip rollover for a trust.
For a Company
For a company to qualify for a scrip rollover it must qualify pursuant to Subdivision 124-M of the Income Tax Assessment Act 1997.
Specifically:
- Capital Gain – If the rollover was not used the shareholders would have made a capital gain
- Exchange – Like for Like – Must be shares for shares or units for units
- Participation – All shareholders who can vote in the target entity must be able to participate on substantially the same terms
- Post CGT Assets – The assets must have been acquired after 20 September 1985
- Significant/Common Stakeholders – Rules apply if there are significant (30% or more) or common (80% or more) stakeholders involved
- Single Arrangement – It must be a single arrangement where at least 80% of the voting shares must be acquired in the target company
A Significant stakeholder is a shareholder that has at least 30% of rights to voting entitlements, dividend entitlement or entitlements to capital distributions.
A Common stakeholder is a shareholder at least 80% of rights to voting entitlements, dividend entitlement or entitlements to capital distributions unless the company has more than 300 members.
There are specific rules around wholly owned groups and linked groups to qualify for the relief. Specific legal and accounting advice should be obtained in relation to these scenarios.
For a Trust
For a Trust it occurs in much the same way, and it must comply with the Corporations Act 2001.
The key difference between the two is how the structures operate, and the level of power and involvement that the trust owners have in the company.
Deferral of CGT
The benefit of a scrip rollover is that CGT is deferred, allowing you to plan and manage any CGT that would become payable at a later date when you subsequently sell the shares.
When you then sell the shares and based on timeframe you can then apply the 50% CGT discount.
There are a number of strong benefits of scrip for scrip rollover, and they all involve CGT concession.
Can you have a partial scrip rollover and partial cash payment?
The simple answer is yes.
Often the offer to purchase the shares will be made up of a partial scrip offer and a cash component.
It is important to obtain advice when considering a partial rollover as any component paid in cash will trigger a CGT event and the cost base must be apportioned correctly.
How can FC Lawyers help?
A scrip for scrip rollover is an incredibly useful when looking to sell your business, merge or restructure.
It will allow you to defer CGT liabilities, but it is imperative that you obtain expert advice to ensure compliance and calculation of the cost bases and the taxation implications
Contact our business and corporate team to discuss your legal needs.
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