How a takeover can swap your shares for new ones without triggering an immediate capital gains tax bill.
If you own shares in a listed company and another company launches a takeover, you can wake up one morning to find your holding has been swapped for shares in the bidder. That swap is a CGT event, and without any relief it would trigger capital gains tax on a profit you never actually cashed out. The scrip-for-scrip rollover exists to stop that from happening. It lets you defer the gain so you are not taxed simply because a corporate deal reshuffled your shares. This guide explains how the rollover works, the conditions you have to meet, what happens when cash is part of the deal, and the records you need to keep.
Scrip is just an old word for a share certificate, or more loosely, equity itself. When one company buys another, it often pays the target company's shareholders in its own shares rather than cash. You hand over your scrip in the target and receive scrip in the bidder. The rollover rules are set out in Subdivision 124-M of the Income Tax Assessment Act 1997, and the ATO summarises them on its scrip-for-scrip rollover guidance.
The core idea is simple. Normally, exchanging one asset for another is a disposal, and a disposal of an asset worth more than you paid produces a capital gain. The rollover treats the exchange as if no gain happened at that moment. You are taken to have acquired the replacement shares for the same cost base as the original shares, so the unrealised gain rides along inside the new holding until you choose to sell.
This is the point most people miss: the scrip-for-scrip rollover does not wipe out the tax. It postpones it. Suppose you bought shares for $20,000 and a takeover swaps them for bidder shares worth $35,000. You have an unrealised gain of $15,000. With the rollover, you report no gain in the year of the takeover, and your new shares carry a cost base of $20,000, the same as the originals. When you later sell those bidder shares for, say, $40,000, your gain is calculated from the $20,000 cost base, so the full $20,000 of growth (the original $15,000 plus the new $5,000) is taxed at that point. The tax bill was deferred, not removed.
That deferral is still valuable. You keep your money working in the market rather than handing a slice to the ATO for a deal you had no say in, and you control the timing of the eventual sale, which lets you plan around your marginal rate and any capital losses.
The rollover is not automatic and it is not available on every deal. Several conditions in Subdivision 124-M must be satisfied. The key ones for an ordinary shareholder are set out below.
| Condition | What it means for you |
|---|---|
| You would make a capital gain | The rollover only helps where the exchange would otherwise produce a gain. It cannot be used to defer or create a capital loss. |
| Similar interest exchanged | You must receive a like interest: shares for shares, or units for units. Swapping shares for something unlike equity does not qualify. |
| The 80% test | The acquiring entity must end up holding at least 80% of the voting shares in the target company. This is why rollover relief usually only appears once a takeover has reached majority control. |
| Offered to all holders | The arrangement must be available to all owners of that class of interest on substantially the same terms, not cherry-picked for some shareholders. |
| Australian residency | You generally cannot choose the rollover if you were a foreign resident just before the exchange, unless the replacement interest keeps a connection to Australian tax. |
| Post-CGT asset | Shares acquired before 20 September 1985 (pre-CGT) are not eligible. The replacement is instead taken to be acquired at the exchange, with a cost base equal to its market value. |
You do not have to work all of this out from scratch. When a takeover proceeds, the bidder almost always applies to the ATO for a class ruling that confirms whether scrip-for-scrip rollover is available and how to calculate the new cost base. That ruling is published and is the document you should rely on for a specific deal.
Many takeovers are not pure share swaps. The bidder offers, say, one of its shares plus 50 cents in cash for each of your shares. In that situation you can only roll over the part of your gain that relates to the replacement shares. The cash portion is treated as ineligible proceeds and triggers a partial capital gain in the year of the takeover.
Working it out means apportioning your original cost base between the scrip you received and the cash you received, based on their relative market values. You then calculate a capital gain on just the cash slice. If your shares qualified for the 50% CGT discount, that discount still applies to the cash-portion gain. The class ruling for the deal will usually spell out the exact apportionment method so you do not have to guess.
A common worry is that a takeover resets the clock for the 50% CGT discount, meaning you would have to hold the new shares for another 12 months to qualify. It does not. For discount purposes, the replacement shares are treated as having been acquired on the date you bought the original shares. So if you had held the target shares for five years, the bidder shares inherit that five-year history and remain eligible for the discount immediately.
Because the rollover is optional, there are situations where triggering the gain now is the smarter move. If you have carried-forward capital losses sitting on your tax return with nothing to offset them against, a takeover can be a chance to realise a gain and soak up those losses, sometimes wiping out the tax entirely. Similarly, if your income is unusually low this year and you expect to be on a higher marginal rate when you eventually sell, crystallising the gain now at a lower rate can beat deferring it. The right choice depends on your own numbers, which is where a tax adviser earns their fee.
Because the rollover quietly transfers your old cost base onto the new shares, your record keeping has to survive the takeover. Keep the original purchase contracts and brokerage statements, the takeover or scheme documents, the bidder's class ruling, and any statement showing the split between scrip and cash. When you finally sell the replacement shares, possibly years later, those original records are what let you prove the correct cost base. The ATO's CGT record keeping tool can help you carry the figures forward across the rollover.
Disclaimer: This guide offers general information about the scrip-for-scrip CGT rollover in Australia and is not financial or tax advice. The rules in Subdivision 124-M are detailed and the outcome depends on the specific takeover and your circumstances. Always refer to the official ATO scrip-for-scrip guidance and the relevant class ruling for your deal, and consult a qualified tax professional.