Scrip-for-scrip rollovers allow your SMSF to disregard capital gains made from the shares, units or other interest the fund may own in a company that has been taken over.
For CGT purposes, any shares received that qualify for the rollover concession adopt the cost base of the original shares or units. This defers any capital gains and may allow the fund to access to the CGT discount.
Any capital gain or loss made when your SMSF disposes of the replacement shares is calculated as the difference between the market value of the replacement shares and the cost base of the original shares that were taken over.
How does it apply?
The CGT rules allow concessions for shares in a company that has been taken over or merged and your SMSF receives new shares in the takeover company. It also applies if you have exchanged a unit or another interest in a fixed trust for a share in the takeover company. The scrip-for-scrip rollover relief applies only to capital gains the SMSF makes on the take over and not to any capital losses at that time.
To qualify for the scrip-for-scrip rollover concession:
- the acquiring company or companies within a group become the owner of 80% or more of the original company or trust
- holders of voting interests in the company being taken over can participate in the merger or takeover on substantially the same terms
- there is no breach of the Corporations Act, or
- a scheme of arrangement has been approved by a court.
If the takeover target is a trust, scrip-for-scrip rollover is available to all owners with voting interests in the takeover trust or, if there are no voting interests, all owners of units or other fixed interests, or providing the takeover bid does not contravene the Corporations Act.
Case study one
The Ellie SMSF owns ordinary shares in South Head Ltd and has accepted a takeover offer from Cliff Investments Ltd for which she receives 1 ordinary share. The market value of Cliff Investments Ltd shares is $20. The takeover qualifies for a scrip-for-scrip rollover concession.
The cost base of the South Head Ltd shares was $14 which means that if the rollover concession did not apply the Ellie SMSF would have made a capital gain of $6 per share.
Because of the scrip-for-scrip rollover the cost base for the Cliff Investments Ltd shares will be the original cost base of the South Head Ltd shares which is $14.
Partial rollover relief
Partial scrip-for-scrip rollover applies if your SMSF exchanges shares, units or interests for similar interests in takeover company plus something else such as cash. This is because the rollover concession applies only to shares etc. received in exchange and not to the cash. In these situations the cost base of the shares taken over will be apportioned between the replacement shares and the cash including any other proceeds received which are not eligible for the rollover.
Case study two
The Gavin SMSF owns 1000 shares in Grass Park Ltd which have a cost base of $80 each. The SMSF accepts a takeover offer from Lawn Mower Ltd which consists of one Lawn Mower Ltd share plus $10 cash. Just after the takeover each Lawn Mower Ltd share is worth $90.
The SMSF receives the $10 cash for each share and has $10,000 to which the scrip-for-scrip rollover does not apply. Because of the partial scrip-for-scrip rollover it is necessary to apportion a proportion of the cost base of the Grass Park Ltd shares on the bases of the proportion that the cash the SMSF has received bears to the total proceeds:
Shares, units or other interests that were acquired before 20 September 1985 (pre-CGT), are not eligible for a scrip for scrip rollover. But, the cost base of the replacement shares at the time of the exchange are used for CGT purposes as they are no longer treated as a pre-CGT asset.
Qualifying for the CGT discount
Any CGT discount is calculated from the time the original shares were acquired by your SMSF plus the ownership period of the replacement shares up to the time they are disposed of. If the combined ownership period of the new and old shares is greater than 12 months any capital gain will qualify for the CGT discount. The same applies to units in a trust.
Case study three
The Corinne SMSF purchased shares in Hi-lands Ltd on 1 September 2019 and it was taken over by Frost Ltd on 30 June 2019. The takeover qualified for the scrip-for-scrip rollover concession. As the Corinne SMSF continues to hold the shares in Frost Ltd the CGT discount will apply as the combined time the shares in Hi-lands Ltd and Frost Ltd will be greater than 12 months.
Don’t forget that before the CGT discount applies, any capital losses including any carry forward net capital losses from earlier years, that qualify are deducted from the fund’s capital gains before applying any CGT discount.
Scrip-for-scrip rollovers and CGT cost base resets
When the superannuation changes commenced on 1 July 2017, it was possible to have access to a cost base reset of investments which qualified and were owned by the fund as at 30 June 2017. The reset applied to funds where investments were allocated to pension phase or if the fund was required to use the proportioning rule to work out its exempt pension income.
The effect of the CGT cost base reset was to treat the relevant investments as being disposed of notionally on 30 June 2017 and re-acquired immediately at their market value. Any capital gain or loss on the reset cost base could be disregarded on pension assets if the allocated method was used or where the proportional method was used it was possible to bring forward the relevant taxable capital gain until the investment was disposed of.
If the fund used the CGT cost base reset and the shares became eligible for the scrip-for-scrip rollover concession the cost base of the shares etc. in the takeover target would be their market value on 30 June 2017. The reason is that on that day, because of the fund accessing the CGT cost base reset, the relevant shares and other investments were deemed to have been disposed of and re-acquired. For purposes of the CGT legislation the cost base reset is regarded as a CGT Event A1 under section 104-10 of the ITAA 1997 (refer to para 3.324 of the Explanatory Memorandum to the legislation).
Case study four
The Yvonne SMSF purchased 2000 shares in Clisby Holdings Ltd for $20 on 1 July 2016. On 30 June 2017 the shares were valued at $50 and it was decided to elect to take up the CGT cost base reset at that time. As the fund used the proportional method to determine its exempt current pension income it was decided to defer payment of tax on the taxable capital gain until the shares were disposed of. The deferred taxable capital gain was $20 in view of the proportion of the fund that was in retirement phase and accumulation phase for the 2016/17 financial year.
On 31 December 2019, Footy Feeva Ltd makes a successful takeover bid for Clisby Holdings Ltd of one Footy Feeva Ltd share for each two Clisby Holdings Ltd shares. At that date the Footy Feeva Ltd shares are valued at $150 each. The takeover qualifies for a scrip-for-scrip rollover concession.
As the Yvonne SMSF decided to reset the CGT cost base for the Clisby Holdings Ltd shares on 30 June 2017 they will have a cost base of $50 for purposes of the takeover as the shares are deemed to have been acquired at that time. Therefore the capital gain at the time of the takeover would be $100 ($150 - $50). However, as the scrip-for-scrip rollover concession applies, the Footy Feeva Ltd shares will assume a cost base of $50.
The deferred taxable capital gain of $20 resulting from the CGT cost base reset will be included in the Yvonne SMSF income for the 2019/20 financial year.
Benefit of scrip-for-scrip rollovers
Scrip-for-scrip rollovers can be very useful in deferring a taxable capital gain where a takeover occurs. However, if the shares were owned by a superannuation fund and the fund took advantage of the CGT cost base reset on 30 June 2017 any deferred taxable capital gain may end up being brought to account in the fund’s return at the time of the takeover.
Subscribe to SMSF News to receive my latest articlesGraeme Colley, Executive Manager, SMSF Technical and Private Wealth, SuperConcepts
While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.
This article is not intended for distribution or use in any jurisdiction where it would be contrary to applicable laws, regulations or directives and does not constitute a recommendation, offer, solicitation or invitation to invest.