Submission to the Ralph Review

Scrip For Scrip Roll Over Relief

You have raised the possibility of scrip for scrip roll over relief in your discussion paper at 11.46 11.50. AVCAL agrees with the argument that the lack of scrip for scrip roll over relief is severely hampering the merger of economically compatible entities.

One example, of the problems caused by the lack of a scrip for scrip roll over is the recent sale of the previously venture capital backed Ozemail to America Online in exchange for cash. It had been the preference for the owners of Ozemail to merge with the Australian listed company AAPT by way of scrip for scrip exchange. This would have left the company resident in Australia and greatly strengthened AAPT in the process. However, the Ozemail vendors could not accept the straight scrip for scrip transaction as proposed by AAPT, as they required funds with which to pay the CGT liability that would have arisen upon the scrip for scrip transfer. The vendors accepted the all cash alternative and Ozemail is now 100% foreign owned.

AVCAL is strongly of the opinion that scrip for scrip roll over should be made available in respect of scrip for scrip issues of both private and public companies. Scrip for scrip mergers occur frequently between compatible venture capital backed private companies in order to create an entity with sufficient economies of scale and of sufficient size to be listed. Despite the fact that the merged businesses are owned by their previous shareholders there is a capital gains event for half of these shareholders. The incidence of the capital gains tax on an unrealised gain and its application to only some of the shareholders are two wrongs which scrip for scrip roll over relief would remedy.

In Canada, roll over relief is available, where a Canadian corporation purchases shares of another corporation from an arms length vendor and in exchange, issues shares of its own to the vendor and no other consideration is received.

In the UK, where a shareholder receives new shares in exchange for existing shares as a result of a "scheme of reconstruction or amalgamation", the shareholders are not treated as disposing of their shares for capital gains tax purposes, and the new shares are treated as the same assets as the original shares. This includes the issuing of shares by company A to the shareholders of company B in exchange for their shares in company B, provided company A acquires at least 25% of company B as a result. If shares are exchanged partially for other shares and partially for cash, a proportionate CGT disposal occurs to the extent of the cash element.

An anti-avoidance provision requires that such a scheme must be effected for bona fide commercial reasons and must not form part of a scheme for the avoidance of capital gains tax or corporation tax.

US law allows for certain transactions defined as "tax free reorganisations" to be effected without gain or loss. In general, a stock for stock exchange or a "B reorganisation" is the acquisition by one corporation of stock of another corporation, in exchange solely for its own or its parents voting stock. No gain or loss will result from a B reorganisation if immediately after the acquisition, the acquiring corporation has control of the other (whether or not it had control before the acquisition).

These measures avoid the "lock-in effect" where capital fails to be re-allocated efficiently because vendors prefer not to be exposed to CGT, on unrealised gains. This lock-in effect is probably significant in the Australian context. AVCAL believes that roll over relief should be provided not just in respect of public scrip but also private scrip transactions.