ATO ID 2004/455: Capital gains tax: Demerger - consideration given by head entity shareholders for new interests in demerged entity
Date of decision: 6 May 2004
Year of income: Year ended 30 June 2004
Business line: Public Groups and International

Issue
Can the condition in paragraph 125-70(1)(d) of the Income Tax Assessment Act 1997 (ITAA 1997) be satisfied if the head entity shareholders give consideration for the shares they receive in the demerged entity?

Decision
Yes. The condition in paragraph 125-70(1)(d) of the ITAA 1997 can be satisfied if the head entity shareholders give consideration for the shares they receive in the demerged entity.

Facts
A company is a head entity of a demerger group in terms of section 125-65 of the ITAA 1997. The company demerged a subsidiary in a manner that satisfied all the conditions of the definition of demerger in section 125-70 of the ITAA 1997 (assuming the giving of consideration by the head entity shareholders does not result in those conditions not all being satisfied). The shareholders in the head entity gave consideration to the demerged entity for the shares they received in the demerged entity under the demerger.

Reasons for decision
Summary: Paragraph 125-70(1)(d) of the ITAA 1997 provides that one of the conditions which a restructure must satisfy in order to be a 'demerger' as defined by section 125-70 of the ITAA 1997 is that 'the acquisition by entities of new interests [in the demerged entity] happens only because those entities own or owned original interests [in the head entity]'. It has been suggested that paragraph 125-70(1)(d) of the ITAA 1997 could be interpreted as requiring that there be no condition for the acquisition of new interests other than the ownership of original interests, with the consequence that a requirement that any consideration be given for the new interests would result in paragraph 125-70(1)(d) being failed. The relevant Explanatory Memorandum to the New Business Tax System (Consolidation, Value Shifting, Demergers and Other Measures) Bill 2002 is silent on the meaning of paragraph 125-70(1)(d) of the ITAA 1997. The purpose of paragraph 125-70(1)(d) of the ITAA 1997 is to exclude from the definition of a demerger a restructure in which persons other than owners of original interests in the head entity acquire new interests in the demerged entity. Neither Division 125 of the ITAA 1997 nor the Explanatory Memorandum implies any other purpose. Consequently, paragraph 125-70(1)(d) of the ITAA 1997 does not exclude a restructure from being a demerger under section 125-70, where the head entity shareholders give consideration for their new interests in the demerged entity. As only the head entity shareholders were entitled to acquire interests in the demerged entity, the condition in paragraph 125-70(1)(d) can be satisfied.

Legislative references: Income Tax Assessment Act 1997 Division 125 section 125-65 section 125-70 paragraph 125-70(1)(d)
Other references: Explanatory Memorandum to the New Business Tax System (Consolidation, Value Shifting, Demergers and Other Measures) Bill 2002
Subject references: Capital gains tax Demerged entity Demerger Demerger roll-over