This mechanism is valuable for shareholders when their existing shares are exchanged for new shares rather than receiving a cash payout. In this article, we’ll explore the essentials of scrip for scrip rollovers, their benefits, and criteria for eligibility.
Founders & investors often find themselves managing complex tax situations when they exchange shares, particularly during mergers and acquisitions (M&A) or flip up scenarios. A rollover designed to alleviate some of the tax burdens in such scenarios is the “scrip for scrip rollover” – a relief provided by the Australian Tax Office (ATO) under certain conditions.
What is a Scrip for Scrip Rollover?
In M&A transactions, companies may offer shareholders the opportunity to swap their shares in the original entity for shares in the acquiring or newly merged entity. This process, known as a “scrip for scrip” exchange, allows shareholders to defer paying capital gains tax that would otherwise apply if they sold their shares for cash. The ATO introduced the scrip for scrip rollover as part of Division 124-M of the Income Tax Assessment Act 1997 to encourage shareholder participation in such transactions without an immediate tax burden.
Why Use a Scrip for Scrip Rollover?
- Tax Deferral: The primary benefit of a scrip for scrip rollover is that it allows investors to defer CGT on the transaction. This tax deferral can be a significant advantage for shareholders, especially if the gains on the shares are substantial.
- Flexibility: This option provides shareholders flexibility to participate in the transaction without being forced to sell their shares, potentially benefiting from the future growth of the newly acquired or merged company.
- Compliance and Cashflow Planning: Scrip for scrip rollover relief supports long-term investment strategies, enabling founders and investors to avoid an immediate tax hit while still being compliant with ATO regulations.
Conditions for Eligibility
While a scrip for scrip rollover can be useful, not all transactions are eligible. The ATO specifies certain conditions, including:
- Genuine Acquisition: The exchange must be part of a legitimate takeover or merger where one company genuinely acquires another.
- Shareholding Test: The acquiring entity must acquire at least 80% of the shares in the target company for the transaction to be eligible (if using the subdivision 124-M rollover, other rollover provisions specify greater requirements).
- Resident Company Requirement: Both companies involved must meet certain residency requirements, typically requiring both entities to be based in Australia.
Professional tailored tax advice is highly recommended to assess your particular situation for eligibility and any additional steps you should take.
Important Considerations
While a scrip for scrip rollover offers many benefits, it is essential for investors to consider that this is only a tax deferral mechanism. Once the newly acquired shares are eventually sold, CGT will apply based on the original acquisition date, which affects the CGT discount availability.
For Australian investors, particularly those involved in large-scale mergers and acquisitions, understanding the scrip for scrip rollover can support better tax planning and maximise value retention. By deferring CGT obligations, shareholders can focus on longer-term investment growth, making the scrip for scrip rollover an essential mechanism for financial strategy in corporate transactions.
Ready to optimise your tax planning for an upcoming restructure? Let’s discuss how the scrip for scrip rollover can support your business goals. Contact our tax accountants today.
