ATO ID 2003/874: Capital gains tax: Demerger - definition of demerger
Date of decision: 22 September 2003
Year of income: Year ended 30 June 2004
Business line: Public Groups and International

Issue
In relation to a demerger, is the requirement in subparagraph 125-70(1)(e)(i) of the Income Tax Assessment Act 1997 (ITAA 1997) satisfied if the original interests in the head entity, a company, consist of both shares and options, when the new interests in the demerged entity, also a company, consist only of shares?

Decision
Yes. In relation to a demerger, the requirement in subparagraph 125-70(1)(e)(i) of the ITAA 1997 is satisfied if the original interests in the head entity, a company, consist of both shares and options when the new interests in the demerged entity, also a company, consist only of shares.

Facts
Company X, the head entity of a demerger group, undertook a demerger of its wholly owned subsidiary, Company Y. The method of demerger that Company X chose was to dispose of all of its interests in Company Y to its own shareholders. The original interests of shareholder W in Company X consisted of shares and options. However, W received only shares in Company Y, the demerged entity.

Reasons for decision
Summary: The definition of a demerger is contained in subsection 125-70(1) of the ITAA 1997. Paragraph 125-70(1)(e) of the ITAA 1997 requires that new interests must be of a similar kind to the original interests. Subparagraph 125-70(1)(e)(i) of the ITAA 1997 specifically requires that all the new interests must be ownership interests in a company, if the head entity of a demerger group is a company. An 'ownership interest in a company' is defined in paragraph 125-60(1)(a) of the ITAA 1997 as a share in the company or an option, right or similar interest issued by the company that gives the owner an entitlement to acquire a share in the company. Therefore, if all the new interests qualify as ownership interests in a company as defined under paragraph 125-60(1)(a), the requirement under subparagraph 125-70(1)(e)(i) is met. There is no requirement for some of the new interests to be options if some of the original interests are options. If the original interests consist of shares and options, the new interests may be only shares.

Legislative references: Income Tax Assessment Act 1997 paragraph 125-60(1)(a) subsection 125-70(1) paragraph 125-70(1)(e) subparagraph 125-70(1)(e)(i)
Subject references: Capital gains tax Change in ownership interests Demerger Demerger group Demerger subsidiary Head entity