When a larger company buys your startup and pays in its own shares rather than cash, nothing lands in your bank account — but the ATO still sees a disposal. Exchanging your shares is CGT event A1, and on a successful startup the gain can be enormous. Without relief, founders would owe real tax on paper consideration they can’t spend and often can’t sell for years. The relief is the scrip-for-scrip rollover in Subdivision 124-M of the Income Tax Assessment Act 1997, and while it was designed with listed takeovers in mind, it does a lot of quiet work in private startup M&A — provided the deal is built to qualify.
What the Rollover Actually Does
If you’re eligible and you choose the rollover, the capital gain on your original shares is disregarded — not forgiven, deferred. Your replacement shares inherit the cost base of the old ones (s 124-785), so the untaxed gain travels with you and crystallises when you eventually sell the acquirer’s shares.
Two features matter more than founders expect. First, the rollover is optional and chosen shareholder by shareholder: there’s no form, you simply prepare your tax return on the basis that it applies (though in stakeholder cases, more on that below, the choice must be made jointly with the company whose shares you receive). Second, the holding-period clock doesn’t restart. Under item 2 of the table in s 115-30(1), your replacement shares are treated as acquired when you acquired the originals — a point the ATO confirms in class ruling after class ruling, and one that secondary commentary sometimes gets wrong. Chains of successive rollovers need care after Paule v FCT [2019] FCA 394 (affirmed on appeal as Hart v FCT [2019] FCAFC 179), but a single scrip-for-scrip exchange preserves your acquisition date. Be clear-eyed about what that date now buys, though: with the 50% CGT discount legislated to end for CGT events from 1 July 2027, the preserved date secures the full discount only for disposals before that day; afterwards, transitional rules split the gain and only the pre-1 July 2027 slice keeps discount treatment.
The Conditions in Section 124-780
The core requirements are that:
- you exchange shares for shares (or options for options) in another company, as a consequence of a single arrangement;
- the arrangement results in the acquiring company — alone or with its wholly-owned group — holding at least 80% of the voting shares in your company;
- the arrangement is open to all owners of voting shares, on substantially the same terms for holders of interests of the same kind (conditions treated as satisfied for a formal takeover bid or court-approved scheme of arrangement);
- your original shares are post-CGT assets (acquired on or after 20 September 1985) and, apart from the rollover, you would make a capital gain — there is no rollover for shares standing at a loss, so a loss simply crystallises; and
- your replacement shares are in the acquiring company itself or in the ultimate holding company of its wholly-owned group — which is how deals run through acquisition subsidiaries can still qualify, subject to a funding condition: no group member may issue other equity, or take on new debt owed outside the group, under the arrangement in relation to issuing your replacement shares (s 124-780(3)(f)).
Private deals have an extra hurdle. Where you and the acquirer aren’t dealing at arm’s length and neither company has at least 300 members — a test most startups fail even with a long register, because s 124-810 deems a company not to have 300 members where 20 or fewer individuals hold at least 75% of the votes, income or capital — s 124-780(5) adds conditions: the market value of what you receive must be substantially the same as the market value of what you gave up, and the replacement shares must carry the same kind of rights and obligations as the originals. A founder rolled into a different class of share, or in at an off-market exchange ratio, can fail the rollover on this alone.
Mixed Cash and Scrip: The Partial Rollover
Most startup acquisitions aren’t all-scrip. Where consideration is part cash, part shares, s 124-790 allows a partial rollover: the scrip component rolls over, while the cash is ineligible proceeds and the gain attributable to it is taxed now. The cost base of your original shares is apportioned on a reasonable basis — in practice, proportionately to value. Sell for $1 million cash plus $3 million of acquirer stock with a $400,000 cost base, and roughly $100,000 of cost base attaches to the cash (producing a $900,000 taxable gain today) while $300,000 carries into the replacement shares. Cash earn-outs layered on top bring their own look-through rules, which we’ve covered in our guide to earn-outs in startup acquisitions.
The Founder Trap: Significant and Common Stakeholders
Here’s the part that surprises founders at term sheet stage. If you’re a significant stakeholder — broadly, you and your associates have 30% or more of the votes, dividends or capital of the target just before the deal and a significant stake in the acquirer just after — or a common stakeholder across both companies (ss 124-782 and 124-783), two things change. The rollover must be chosen jointly with the replacement entity — the company whose shares you receive, which in an acquisition-subsidiary structure is the ultimate holding company — you must inform that company in writing of the cost base of your shares worked out just before the CGT event (s 124-780(3)(e)), and the acquirer’s cost base in your target shares becomes your old cost base, not market value.
That cost base transfer is why buyers push back. An acquirer that pays $10 million in scrip for shares with a $100,000 founder cost base inherits that $100,000 cost base — embedding your deferred gain in its own balance sheet and creating a second layer of tax if it ever sells the target entity. Sophisticated buyers price this, negotiate it, or refuse the joint choice altogether — and s 124-795(4) even lets the replacement entity switch the rollover off unilaterally for all holders, provided it or the target notifies them in writing before the exchange. A founder who assumes rollover relief without securing it in the share purchase agreement can discover at completion that the buyer won’t sign the election. If rollover matters to you, it belongs in the term sheet, alongside the rest of the structuring points in our founder’s guide to startup acquisitions.
Foreign Buyers
A foreign acquirer does not, by itself, disqualify the rollover — Australian shareholders regularly roll into overseas listed stock. The main carve-out is narrow: no rollover where you and the acquirer are members of the same wholly-owned group and the acquirer is a foreign resident (s 124-795(2)(b)). The exceptions that matter more are elsewhere in s 124-795. A foreign-resident shareholder can only choose rollover if the replacement shares are taxable Australian property afterwards, which they rarely are (s 124-795(1)). And Subdivision 124-M is switched off entirely where you could instead choose a rollover under Division 122 or Division 615 (s 124-795(3)) — which is why a standard proportionate Delaware flip runs under Division 615, and scrip-for-scrip matters mainly for exchanges that aren’t exactly pro rata. And once you hold foreign scrip, your deferred Australian gain sits in an asset whose own tax story has just begun — worth modelling before you agree to be paid in it.
When Not to Roll Over
Because the choice is yours, run the counterfactual. If you have capital losses to absorb the gain, taxing it now may be cheaper than deferring. The end of the 50% CGT discount from 1 July 2027 adds a timing wrinkle — though not the one founders usually fear. Rolling over now doesn’t forfeit the discount on gains already accrued: scrip held through 30 June 2027 is deemed sold and reacquired at its market value that day (ss 112-155 and 112-165), and the deferred pre-July-2027 slice keeps discount treatment when you eventually sell. But growth after that day runs under CPI indexation and a 30% minimum rate instead, the split leans on a defensible 30 June 2027 valuation of unlisted scrip, and how the transitional rules treat an exchange happening after 1 July 2027 needs specific advice before you assume the same split applies. Crystallising at a known number today can beat defending a valuation years later. Separately, founders who qualify for the small business CGT concessions may be able to reduce or eliminate the gain permanently rather than merely postpone it — a rollover that defers a gain you could have extinguished is an expensive default. The right answer depends on your cost base, your other tax attributes and what you’ll do with the acquirer’s shares, and it should be settled while the deal documents are still drafts. Our mergers and acquisitions team structures share-based exits with the tax election mechanics written into the transaction documents, and as startup lawyers in Sydney we’d rather negotiate the rollover before signing than argue about it after completion.
This article is general information only, not legal or tax advice — rollover eligibility turns on the precise structure of the deal, your shareholding and your personal tax position. Viridian Lawyers advises Australian founders, startups and investors on acquisitions, exits and the structures behind them. If there’s a scrip offer on the table, get in touch before you sign.
