Private ruling: Demerger
Date of advice: 9 February 2021
Published: March 2021
Ruling period: Income year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will any capital gain or capital loss arising from the disposal by Company A of the shares it holds in its wholly owned subsidiary Company B in the proposed demerger arrangement be disregarded under section 125-155 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes. | Q2: Will the Commissioner confirm that all or any part of the distribution of Company B shares to Company A shareholders that is a dividend will constitute a demerger dividend, and therefore be neither assessable income nor exempt income pursuant to subsections 44(3) and 44(4) of the Income Tax Assessment Act 1936 (ITAA 1936)? | A2: Yes. | Q3: Will the Commissioner make a determination under subsection 45B(3) of the ITAA 1936 that section 45BA or section 45C of the ITAA 1936 will apply to the whole, or any part, of any benefit provided to the shareholders of Company A under the proposed arrangement? | A3: No.

Relevant facts and circumstances: Company A is an Australian proprietary company. All the shareholders of Company A acquired their shares after 19 September 1985. Company A owns all of the shares on issue in its subsidiary Company B. Company A will demerge all its interests in Company B to Company A shareholders in proportion to their current shareholding. There are no preliminary steps or proposed transactions that will form part of the restructuring. A number of commercial reasons were provided as the reason for undertaking a demerger. Company A will not make an election under subsection 44(2) of the ITAA 1936. There is no intention or proposal for the sale or later disposal of the shares in Company B or Company A by the Company A shareholders following the demerger.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 6 | Income Tax Assessment Act 1936 section 44 | Income Tax Assessment Act 1936 section 45B | Income Tax Assessment Act 1936 section 45BA | Income Tax Assessment Act 1936 section 45C | Income Tax Assessment Act 1936 Part IVA | Income Tax Assessment Act 1936 section 177A | Income Tax Assessment Act 1936 section 177D | Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 Division 125 | Income Tax Assessment Act 1997 section 125-65 | Income Tax Assessment Act 1997 section 125-70 | Income Tax Assessment Act 1997 section 125-155

Reasons for decision: Summary: Any capital gain or capital loss arising from the disposal by Company A of the shares it holds in its wholly owned subsidiary Company B in the proposed demerger arrangement will be disregarded under section 125-155 of the ITAA 1997. All or any part of the distribution of Company B shares to Company A shareholders that is a dividend will constitute a demerger dividend, and therefore be neither assessable income nor exempt income pursuant to subsections 44(3) and 44(4) of the ITAA 1936. The Commissioner will not make a determination under subsection 45B(3) of the ITAA 1936 that section 45BA or section 45C of the ITAA 1936 will apply to the whole, or any part, of any benefit provided to the shareholders of Company A under the proposed arrangement.