ATO ID 2004/633: Capital Gains Tax: demerger - CGT event K6 exception - demerged company listed on stock exchange
Date of decision: 12 July 2004
Year of income: Year ended 30 June 2004
Business line: Public Groups and International

Issue
Must a demerged company be a listed company for the exception from CGT event K6 under paragraph 104-230(9)(a) of the Income Tax Assessment Act 1997 (ITAA 1997) to apply to shares in the company?

Decision
Yes. A demerged company must be a listed company for the exception from CGT event K6 under paragraph 104-230(9)(a) of the ITAA 1997 to apply to shares in the company.

Facts
The taxpayer owns shares in a company which has been listed on the Australian Stock Exchange (ASX) for four years. The company is the head entity of a demerger group. As part of a demerger under Division 125 of the ITAA 1997, the taxpayer received new shares in the demerged entity. The demerged entity listed on the ASX just after the demerger. Three years after the demerger, the taxpayer sells their shares in the demerged entity and seeks to apply the CGT event K6 exception under paragraph 104-230(9)(a) of the ITAA 1997.

Reasons for decision
Summary: Subsection 104-230(9) of the ITAA 1997 provides the general exceptions from CGT event K6 happening. Under paragraph 104-230(9)(a) of the ITAA 1997 CGT event K6 does not happen when some of the shares in the company referred to in subsection 104-230(2) of the ITAA 1997 were listed on a stock exchange (either in Australia or a foreign country) for at least five years at the time the CGT event referred to in paragraph 104-230(1)(b) of the ITAA 1997 (the other CGT event) happens. Subsection 104-230(9A) of the ITAA 1997 further provides that the exception under paragraph 104-230(9)(a) applies where:- If the above conditions are satisfied, the demerged entity is treated as being listed on the stock exchange at all times when some of the shares of the head entity of the demerger group were so listed (subsection 104-230(9A) of the ITAA 1997). As the head entity in this case had been listed on the stock exchange for four years at the time of the demerger, the demerged entity is treated as having been listed for those four years. The demerged entity had been listed for a further three years. Therefore, the combined period of the head entity and the demerged entity being listed on the stock exchange is at least five years as required by paragraph 104-230(9)(a) of the ITAA 1997. The exception from CGT event K6 applied when the taxpayer sold their shares in the demerged entity as provided for by paragraph 104-230(9)(a) of the ITAA 1997 and section 104-230(9A) of the ITAA 1997.

Legislative references: Income Tax Assessment Act 1997 paragraph 104-230(1)(b) subsection 104-230(2) subsection 104-230(9) paragraph 104-230(9)(a) subsection 104-230(9A) paragraph 104-230(9A)(a) paragraph 104-230(9A)(b) paragraph 104-230(9A)(c) Division 125
Subject references: Capital gains tax CGT events CGT events K1-K6 - other events Demerged entity Demerger Demerger group