Private ruling: Demerger Rollover relief pursuant to section 125-55 of the ITAA 1997
Date of advice: 30 September 2016
Published: March 2017
Ruling period: 1 July 20XX to 30 June 20YY
Date scheme commenced: The year ended 30 June 20YY

Ruling: Q1: Will the Taxpayer be entitled to choose demerger rollover relief pursuant to section 125-55 of the ITAA 1997 as a result of the demerger? | A1: Yes | Q2: Pursuant to subsection 125-80(2) of the ITAA 1997, will the Taxpayer's CGT cost base for their shares in Company X acquired under the demerger be apportioned between their original Company A shares and their new Company X shares? | A2: Yes | Q3: For the purposes of Division 115 of the ITAA 1997, will the Taxpayer, as a shareholder of Company A be taken to have acquired the Company X shares under the demerger on the same date as they acquired their corresponding shares in Company A? | A3: Yes | Q4: Will the Commissioner make a determination under subsection 45B(3) in respect of any demerger benefit or capital benefit arising from the demerger? | A4: No | Q5: Does Division 7A of the ITAA 1936 apply to any of the distributions to be made under the demerger? | A5: No.

Relevant facts and circumstances: The group structure General structure The AAA group is a group of entities consisting of two separate businesses: ● the Australian business ( AAA Australia ), being: ● Company A; and ● a subsidiary of Company A; and ● the Foreign business (AAA Foreign), being: ● Company X, a subsidiary of Company A; and ● Several other subsidiaries of Company A held through Company X; None of the entities is a corporation sole nor a complying superannuation entity. The businesses - AAA Foreign and AAA Australia AAA Australia and AAA Foreign both carry on the same business type. However, they operate in different markets. The opportunity and risk profiles of the two businesses differ. AAA Foreign is seen as a growth business with significant long term growth potential. Company A Company A was created to hold the entities in both AAA Foreign and AAA Australia. Over X% of the total Company A shares on issue are held by Australian resident shareholders, with the remaining less than Y% being held by non-residents. The Applicant ( the Taxpayer ) is a shareholder of Company A and is an Australian resident. Company A has never paid a dividend. Company A also operates an employee share and option plan. Some or all of the options currently on issue will be cancelled prior to the proposed demerger such that those options represent less than X% of the total ownership interests in Company A. Possible mergers The AAA group has been approached by a competitor with a non-binding conditional offer to merge the operations of AAA Australia and the competitor by way of share acquisition. No binding agreement or term sheet has been entered into, other than an Exclusivity Deed Poll. There are currently no proposals, offers or plans being discussed or considered in connection with the interests in AAA Foreign once it has been separated from Company A by way of the demerger as outlined below. There is also currently no intention on the part of Company A, Company X or Company A Shareholders to in any way deal with their interests in AAA Foreign following the demerger should it proceed. The demerger Under the demerger: ● Company A will make an in specie distribution of Z% of its shares in Company X to the Company A Shareholders. ● The number and class of shares which will be transferred to each Company A Shareholder under the demerger will correspond to the proportion and class of share each Company A shareholder currently holds in Company A. ● In accounting for the demerger, Company A will register the distribution in its books of account by: 1. Debiting the share capital account; 2. Debiting the balance of the demerger allocation to a Demerger Reserve; and 3.Crediting the investment in Company X (representing the entirety of the book value of Company X). The Company A shareholders' agreement and constitution There are significant issues with and restrictions in, the Shareholders' Agreement that make growing the AAA business difficult. The constitution of Company A ( Constitution ) provides that its directors may declare that a dividend is payable and that they may fix the amount, the time for payment, and the method of payment (which may include the transfer of assets) of the dividend. The in specie dividend will be declared by the board of Company A pursuant to the Constitution prior to the distribution of the dividend. Reasons provided for demerger The reasons provided for the demerger are articulated in the Private Ruling application for the Taxpayer ( Application ) and are as follows: (a) there are differences between AAA Foreign and AAA Australia in terms of market positioning and growth potential; (b) capital raising will be significantly easier through a demerged Company X; (c) business efficiencies, including: (i) management efficiencies and synergies; (ii) improved governance efficiencies; (iii) employee incentives and access to talent; (iv) reporting; (v) independence and growth opportunities; and (vi) cost inflation; (d) flexibility for future transactions, including merger opportunities; (c) the proposal for demerging at this point in time is to allow for further Foreign expansion; (d) there are current issues regarding the Shareholders' Agreement that make growing the AAA business difficult. Other facts There has been no transfer of any amount to Company A's share capital account that resulted in it becoming tainted under section 197-50 of the ITAA 1997. The Taxpayer does not have capital losses that would be unutilised at the end of the 20YY income year. The cost base of the Taxpayer's interest in the Company A shares will be lower than the demerger benefit it will receive. Assumptions The Taxpayer will choose to obtain a roll-over under subsection 125-55(1). Immediately after the in-specie distribution, the market value of the assets of Company A will exceed the total amount (as shown in its books of account) of its liabilities and share capital.

Relevant legislative provisions: Income Tax Assessment Act 1936 (ITAA 1936) Subsection 6(1) | Section 44 | Section 45B | Section 109RA | Section 109J | Section 109C | Section 177D | Income Tax Assessment Act 1997 (ITAA 1997) Section 104-25 | Section 104-135 | Section 112-105 | Section 112-115 | Section 115-30 | Section 125-55 | Section 125-65 | Section 125-70 | Section 125-75 | Section 125-80 | Corporations Act 2001 Subsection 254V(2)

Reasons for decision: Summary: The Taxpayer will be entitled to choose demerger rollover relief pursuant to section 125-55 of the ITAA 1997 as a result of the demerger. | Detailed Reasoning - Detailed reasoning: Subsection 125-55(1) of the ITAA 1997 provides as follows: You can choose to obtain a roll-over if: (a) you own an ownership interest in a company or trust (your original interest ); and (b) the company or trust is the head entity of a demerger group; and (c) a demerger happens to the demerger group; and (d) under the demerger, a CGT event happens to your original interest and you acquire a new or replacement interest (your new interest ) in the demerged entity. The requirements in each of the above paragraphs are examined in turn below: | Detailed Reasoning - Paragraph 125-55(1)(a) and paragraph 125-55(1)(b): These paragraphs will be satisfied in this case for the following reasons: ● The Taxpayer owns shares in Company A. ● Company A is the head entity of a demerger group that includes various demerger subsidiaries. A 'demerger group' is defined in subsection 125-65(1) as comprising the head entity of the group and one or more demerger subsidiaries. Company A is the head company of the group because no other member of the group owns ownership interests in it: subsection 125-65(3). There are various demerger subsidiaries of Company A. | Detailed Reasoning - Paragraph 125-55(1)(c): This paragraph will be satisfied as a ' demerger ' under section 125-70 is proposed to happen to the demerger group. Specifically, the conditions for a ' demerger ' specified in section 125-70 will be met for the following reasons: ● There is a restructuring of the demerger group under which a member of the group (Company A) will dispose of Z% of its ownership interests in another member of the demerger group (Company X) to owners of the original interests in the head entity of the group (the shareholders of Company A): paragraph 125-70(1)(a) and subparagraph 125-70(1)(b)(i). ● Under the restructuring, a CGT event will happen to the Taxpayer's interest in Company A, and the Taxpayer will acquire a new interest (and nothing else) in Company X: subparagraph 125-70(1)(c)(i). The relevant CGT event in this case would be CGT event G1, which concerns capital payments for shares. CGT event G1 applies in this case for the following reasons: ● Paragraph 104-135(1)(a) is satisfied. Company A will make a payment to the Taxpayer in respect of the shares the Taxpayer owns in Company A: paragraph 104-135(1)(a). This payment is comprised of the Taxpayer's portion of the in specie distribution of Z% of Company A's ordinary shares and newly created 'K Class' equivalent shares in Company X. Under section 104-135, the payment can include giving property. CGT event A1 does not apply in the manner contemplated under paragraph 104-135(1)(a) since there is no disposal of any share owned by the Taxpayer in Company A. CGT event C2 does not apply in the manner contemplated under paragraph 104-135(1)(a) since the proposal does not involve an end to the Taxpayer's ownership of its shares in Company A under any of the circumstances prescribed under subsection 104-25(1). ● Paragraph 104-135(1)(b) is satisfied. There is at least some part of the payment that is not a dividend. ' Dividend ' in this regard is defined in subsection 6(1) of the ITAA 1936 to include distributions made by a company to any of its shareholders, but excludes ' property distributed by a company to shareholders…. where the amount of the moneys paid or credited, or the amount of the value of the property, is debited against an amount standing to the credit of the share capital account of the company '. It is proposed that the value of the Company X shares distributed will be partly debited against Company A's share capital account. The portion of the distribution debited against the share capital account is not a ' dividend ' and consequently paragraph 104-135(1)(b) will be satisfied. It is also noted that there is no evidence on the facts provided in this case to suggest the existence of an arrangement under subsection 6(4) which provides an exception to the abovementioned rule. ● Paragraph 104-135(1)(c) is satisfied. The payment will not be included in the Taxpayer's assessable income. Part of the payment that is debited to the share capital account is a return of capital; the remaining part will be a ' demerger dividend ' which is not assessable income or exempt income: subsection 44(4) of the ITAA 1936. ● The acquisition of new interests by the Taxpayer under the proposal will happen only because it owns shares in Company A. The in specie distribution of Company A's shares in Company X is made only to its shareholders. Consequently paragraph 125-70(1)(d) will be satisfied. ● The new interests acquired will be the ' ownership interests in a company ' (paragraph 125-70(1)(e)(i)), being shares in Company X. ● Neither the original interests (being the Taxpayer's shares in Company A) nor the new interests (the shares it will acquire in Company X) ' are in a trust that is a non-complying superannuation fund ': paragraph 125-70(1)(g). ● The requirements of subsection 125-70(2) will be met, thereby satisfying the requirement in paragraph 125-70(1)(h). This is because: ● each shareholder in Company A will acquire the same proportion of shares in Company X as it had in Company A just before the proposed demerger; and ● just after the demerger, each shareholder will have the same proportionate total market value of shareholding in Company A and Company X as it had in Company A just before the demerger. The number and class of shares which will be transferred to each Company A shareholder under the Demerger will correspond to the proportion and class of share each Company A shareholder currently holds in Company A. Under the proposed restructure, the proportionate market value of the Taxpayer's and other shareholders' shares in both Company A and Company X just after the demerger will be the same as that of their original interests in Company A just before the demerger. It is noted that the effect of section 125-75 is that certain ownership interests (acquired under an employee share scheme) in Company A are disregarded if they represent not more than 3% of the total ownership interests in Company A. While the AAA group also operates an ESOP, some or all of the options currently on issue will be cancelled prior to the Company X demerger such that those options represent less than X% of the total ownership interests in Company A. | Detailed Reasoning - Paragraph 125-55(1)(d): As mentioned above, under the terms of the proposed demerger CGT event G1 will happen to the Taxpayer's interest in Company A. The Taxpayer will obtain a new interest (shares) in Company X. Accordingly paragraph 125-55(1)(d) will be satisfied. | Detailed Reasoning - Exceptions in subsection 125-55(2): As the Taxpayer is not a foreign resident, the exception in subsection 125-55(2) does not apply to it. As the conditions in section 125-55 will be satisfied under the terms of the proposed demerger, the Taxpayer may choose to obtain a roll-over under that provision. | Summary: Pursuant to subsection 125-80(2) of the ITAA 1997, the Taxpayer's CGT cost base for their shares in Company X acquired under the Company X Demerger will be apportioned between their original Company A shares and their new Company X shares. | Detailed Reasoning - Detailed reasoning: Subsection 125-80(2) provides the following: | Detailed Reasoning - 125-80(2): If you choose the roll-over, the first element of the cost base and reduced cost base of: (a) each new interest that you are not taken to have acquired before 20 September 1985; and (b) if not all of your original interests ended under the demerger - each of your remaining original interests that you acquired on or after 20 September 1985; is such proportion of the sum of the cost bases of all your original interests that you acquired on or after 20 September 1985 (worked out just before the demerger) as is reasonable having regard to the matters specified in subsection (3). Therefore when the Taxpayer chooses the roll-over, under subsection 125-80(2) the first element of its CGT cost base for: ● each of its new shares in Company X; and ● each share it holds in Company A; is the proportion of the cost bases of all its shares in Company A (calculated just before the demerger) ' as is reasonable '. We note in applying subsection 125-80(2) that all Company A shareholders acquired their shares in Company A after 19 September 1985. The provision also requires that reference be made to the matters specified in subsection 125-80(3). This subsection provides: The matters are: (a) the market values of your remaining original interests just after the demerger, or an anticipated reasonable approximation of those market values; and (b) the market values of your new interests just after the demerger, or an anticipated reasonable approximation of those market values. In short: ● the total pre-demerger cost base of the Applicant's shares in Company A must be apportioned between its post-demerger Company A and Company X shares; and ● in doing so, the market value of the Company A and Company X shares just after the demerger must be taken into account. | Summary: For the purposes of Division 115 of the ITAA 1997, the Taxpayer, as a shareholder of Company A (Company A Shareholder) will be taken to have acquired the Company X shares under the Company X Demerger on the same date as it acquired its corresponding shares in Company A. | Detailed Reasoning - Detailed reasoning: Demergers under Division 125 of the ITAA 1997 fall within the scope of a ' replacement asset roll-over ' under the terms of Subdivision 112-C: see section 112-105 and item 14C in the table in section 112-115. Under item 2 in the table in subsection 115-30(1), ' a CGT asset that the acquirer acquired as a replacement asset for a replacement-asset roll-over (other than a roll-over covered by paragraph 115-34(1)(c)) ' is taken to have been acquired ' when the acquirer acquired the original asset involved in the roll-over ' for the purposes of several discount capital gains provisions in Division 115. In this case, for the purposes of section 115-30: ● the exception in paragraph 115-34(1)(c) does not apply; and ● the Taxpayer's shares in Company X (being the CGT asset acquired as a replacement asset for the ' replacement asset roll-over ' that is the demerger) will be taken to have been acquired when the Taxpayer acquired its shares in Company A (being the ' original asset involved in the roll-over '). | Summary: The Commissioner will not make a determination under subsection 45B(3) in respect of any demerger benefit or capital benefit arising from the Company X Demerger. | Detailed Reasoning - Detailed reasoning: Subsection 45B(3) of the ITAA 1936 allows the Commissioner to make a determination in relation to a demerger benefit and a capital benefit. However for this provision to apply, the relevant scheme must fall within the scope of section 45B. Subsection 45B(2), which details various conditions for the application of section 45B, provides as follows: | Detailed Reasoning - 45B(2): This section applies if: (a) there is a scheme under which a person is provided with a demerger benefit or a capital benefit by a company; and (b) under the scheme, a taxpayer (the relevant taxpayer ), who may or may not be the person provided with the demerger benefit or the capital benefit, obtains a tax benefit; and (c) having regard to the relevant circumstances of the scheme, it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for a purpose (whether or not the dominant purpose but not including an incidental purpose) of enabling a taxpayer (the relevant taxpayer ) to obtain a tax benefit. The application of the conditions in each of the above paragraphs is considered below. | Detailed Reasoning - Paragraph 45B(2)(a): 'Scheme ' is defined in section 995-1 of the Income Tax Assessment Act 1997 as ' any arrangement ' or ' any scheme, plan, proposal, action, course of action, or course of conduct, whether unilateral or otherwise '. Being a proposed plan or course of action contemplated by the AAA group, the demerger will be considered a ' scheme ' under the terms of the prescribed definition. The relevant scheme in this case to which section 45B applies is the business restructure that comprises principally of the demerger, but also includes the possibility of a subsequent merger with, or acquisition of, other entities. The distribution of the Company X shares to the Taxpayer will be considered a ' demerger benefit ' and a ' capital benefit' for the following reasons: ● A person is ' provided with a demerger benefit ' if ' a company provides the person with ownership interests in that or another company ': paragraph 45B(4)(a). Under the terms of the demerger, Company A will provide the Taxpayer with shares in Company X, and will thereby be considered to be provided with a demerger benefit as defined in paragraph 45B(4)(a). ● A person is also ' provided with a capital benefit' if a company provides 'ownership interests in a company to a person' : paragraph 45B(5)(a). Subsection 45B(6) provides that ' a person is not provided with a capital benefit to the extent that the provision of interests, the distribution or the thing done referred to in subsection (5) involves the person receiving a demerger dividend'. ' Demerger dividend ' is defined as ' part of a demerger allocation that is assessable as a dividend under subsection 44(1) or that would be so assessable apart from subsections 44(3) and (4) '. Section 44 applies in respect of ' dividends ' paid to the shareholder, which in turn is defined in subsection 6(1) to exclude property distributed by a company to shareholders where the amount of the value of the property is debited against an amount standing to the credit of the share capital account of the company. Not all of the Company X share distribution will be debited against an amount standing to the credit of Company A's share capital account. The portion of the distribution that is not debited to the Share capital account is a ' demerger dividend '. This amount cannot be regarded as a ' capital benefit ' pursuant to subsection 45B(6). However, the remaining amount - being the amount of the distribution debited against the Share capital account - will be a ' capital benefit ' under the terms of paragraph 45B(5)(a), being ownership interests in Company X that are not demerger dividends. | Detailed Reasoning - Paragraph 45B(2)(b): The meaning of ' obtains a tax benefit ' is prescribed in subsection 45B(9) as follows: A relevant taxpayer obtains a tax benefit if an amount of tax payable, or any other amount payable under this Act, by the relevant taxpayer would, apart from this section, be less than the amount that would have been payable, or would be payable at a later time than it would have been payable, if the demerger benefit had been an assessable dividend or the capital benefit had been an assessable dividend. As considered above, the Taxpayer will be entitled to choose the demerger rollover relief pursuant to section 125-55 of the ITAA 1997 as a result of the demerger of Company X. This means that, when the rollover choice is exercised under subsection 125-55(1), the Taxpayer will obtain a ' tax benefit ' since no CGT event will be triggered at the time of the distribution - specifically any capital gains and the cost base adjustments in CGT event G1 under section 104-135 will be ignored on the exercise of the rollover choice; this is compared to the situation in which the distribution is treated as an assessable dividend and brought into account in the year of the distribution. | Detailed Reasoning - Paragraph 45B(2)(c): The relevant circumstances which must be considered in the assessment of whether there exists a more-than-incidental purpose of enabling a taxpayer to obtain a tax benefit are outlined in subsection 45B(8). They are considered in turn below. | Detailed Reasoning - Paragraph 45B(8)(a): This paragraph prescribes the following ' relevant circumstance ': ' the extent to which the demerger benefit or capital benefit is attributable to capital or the extent to which the demerger benefit or capital benefit is attributable to profits (realised and unrealised) of the company or of an associate (within the meaning in section 318) of the company;.. ' On the facts of this case: ● The in-specie distribution of Company X shares is a distribution of a capital asset of Company A which will result in a debit to Company A's share capital account and to a another account. ● In this regard, paragraph 15 in TR 2003/8 expresses the following view: In deciding whether, as a question of fact, a distribution has been made out of profits derived by the company in cases where the distribution is not formally acknowledged as such, a substantive approach should be adopted. There does not need to be a formal debiting of an account of profit of the company. So long as the market value of the company assets exceeds the total amount (as shown in its books of account) of its liabilities and share capital what remains is profits. If the distribution is not debited to share capital the distribution is one of profits. The above is not determinative of this issue but is taken into consideration as part of the assessment of the scheme as a whole. | Detailed Reasoning - Paragraph 45B(8)(b): This paragraph provides: 'the pattern of distributions of dividends, bonus shares and returns of capital or share premium by the company or by an associate (within the meaning in section 318) of the company;' In this regard it is noted that Company A has never paid dividends to its shareholders. | Detailed Reasoning - Paragraphs 45B(8)(c) to (f): These paragraphs require an examination of the tax characteristics of the particular shareholder in question in determining the relevant circumstances of the scheme. In general the following characteristics of the Taxpayer, and the provisions to which they relate, have been noted as follows: ● the Taxpayer does not have capital losses that would be unutilised at the end of the 20XX income year: paragraph 45B(8)(c); ● the Taxpayer acquired its interests in the company after 20 September 1985: paragraph 45B(8)(d); ● the Taxpayer Is an Australian resident: paragraph 45B(8)(e); and ● the cost base of the Taxpayer's interest in the Company A shares will be lower than the demerger benefit it will receive: paragraph 45B(8)(f). | Detailed Reasoning - Paragraph 45B(8)(h): This paragraph requires that regard be had to whether the interest held by the owners of the head entity after the distribution is the same as the interest would have been if an equivalent dividend had been paid instead of the distribution of the share capital. In this case the ATO view as set out in paragraph 70 of PS LA 2005/21 is that the Taxpayer's ownership interests in Company A will not be altered as a result of the distribution: In the context of demerger, this circumstance would be limited to demergers where the transfer of ownership interests involves 'distributions' (that is, returns) of share capital or share premium. Ordinarily however, a demerger should not disturb the head entity shareholder's existing ownership interest in the way described, owing to the requirements of the proportion test in subsection 125-70(2) of the ITAA 1997. As a consequence, it is unlikely that this circumstance will have significant relevance for demergers. | Detailed Reasoning - Paragraph 45B(8)(i): Under this provision, if the scheme involves the provision and subsequent disposal of ownership interests, the period for which the ownership interests are held and the time at which the arrangement for the disposal of those shares is entered into are taken into account as relevant considerations. In this case there is no proposal to dispose of Company X after the demerger. It has also been stated in the facts of this case that there is also currently no intention on the part of Company A, Company X or Company A Shareholders to in any way deal with their interests in Company X following the demerger should it proceed. | Detailed Reasoning - Paragraph 45B(8)(j): This provision requires consideration of any profits or assets of the demerging entity that might be attributable to, or acquired under transactions with, associated entities. In PS LA 2005/21, it is stated at paragraph 82 that: '..this relevant circumstance exposes whether the demerger relief is being used as a device for distributing corporate earnings to owners of the head entity. If it is established that part of the profits or assets of the demerging entity are referable to those of an associate and are not explainable by the demerging entity's need to be a viable, stand-alone entity, this is suggestive of a purpose of enabling a taxpayer to obtain a tax benefit by way of non-assessable dividend…' There is no evidence on the facts provided that suggests that the profits or assets of Company A and Company X may be attributable to transactions involving an associate rather than by Company X itself as a viable, stand-alone entity. There are now commercial reasons for the demerger to allow Company X to operate independently; and Company X is currently in a position to operate as a stand-alone entity. | Detailed Reasoning - Paragraph 45B(8)(k): This paragraph requires that regard be had to ' any of the matters referred to in subsection 177D(2) ', which are matters prescribed for the purposes of determining the ' dominant purpose ' test in Part IVA. In the context of section 45B, however, they are to be applied in determining the ' more than incidental ' test specific to the provision. The factors prescribed in subsection 177D(2) focus on indicia that may reveal the true objectives of the relevant scheme. It is recognised that many of the considerations taken into account under this provision may overlap with those already mentioned above. The circumstances which the Commissioner considers relevant to the assessment of the scheme in this case, and the corresponding paragraphs in subsection 177D(2) to which they relate, are as follows: ● The manner in which the scheme is carried out (paragraph 177D(2)(a)) is the business restructure which consists primarily of the demerger. ● An inquiry into the manner of the scheme is an objective inquiry into the reasons a taxpayer had for entering into it (see paragraph 86 in PS LA 2005/21). In this regard, it is submitted in the Application, and it has been accepted for the purposes of this Ruling, that the demerger would achieve various commercial advantages: ● it would place Company X and the AAA Foreign business in a better position in terms of market positioning and growth potential; ● it would enable capital to be raised for Company X more easily; ● it would result in business efficiencies, including the following: ● management efficiencies and synergies; ● improved governance efficiencies; ● employee incentives and access to talent; ● reporting; ● independence and growth opportunities; and ● cost inflation; and ● it would allow flexibility for future transactions, including the acquisition and merger opportunities for Company A as mentioned above. These considerations have a significant bearing on the determination of the purpose for which the demerger is proposed. ● The substance of the scheme (paragraph 177D(2)(b)) can be discerned from its effects: paragraph 88 in PS LA 2005/21. In this respect, this consideration overlaps to some extent with that in paragraph 177D(2)(d), under which regard must be had to the result in relation to the operation of the tax acts that, but for this Part (or section 45B, in this context), would be achieved by the scheme. The effects of the scheme on the parties to the demerger are primarily the (anticipated) commercial positions of Company X and Company A following the demerger, as well as the capital benefit or demerger benefit afforded to Company A and its shareholders. The question as to whether the capital and demerger benefits are sufficiently outweighed by the commercial objectives of the proposal such that they may be regarded as merely an incidental purpose of the scheme is determined by taking into account the previous and following other considerations. ● The time at which the scheme was entered into is also a relevant consideration under paragraph 177D(2)(c). In respect of the timing of the scheme it is stated in the facts above that the timing of the scheme is based largely or primarily on commercial considerations. ● Paragraphs 177D(2)(e) to (h) require a consideration of the change in the financial position of, or other consequences to, the taxpayer or any person who has a connection with the taxpayer, as a result of the scheme. They also require a consideration of the nature of the relationship between the taxpayer and such a person. In the present case, the demerger results in the acquisition by the Taxpayer and other Company A shareholders of shares in Company X; that is, an asset owned previously by Company A is now directly owned by the Taxpayer, which as stated in PS LA 2005/21 ' delivers to the head entity's shareholders an asset which they can liquidate, exchange or use as financial security ', being a commercial benefit separate to the tax advantage derived from the scheme. Upon taking into account the abovementioned circumstances, it is the Commissioner's view that the scheme was not carried out for a more than incidental purpose of enabling a taxpayer to obtain a tax benefit under paragraph 45B(2)(c). The matters which the Commissioner has considered persuasive in reaching this conclusion are as follows: ● The scheme is driven largely by the various commercial objectives articulated in the Application and mentioned above. ● In particular, the various reasons provided for the demerger and for the timing of the demerger are accepted as business objectives that form the essential purpose of the scheme. ● The tax benefit obtained by a taxpayer is, on the basis of the submissions provided, merely incidental to the primary purposes of the demerger. For these reasons, the Commissioner will not make a determination under subsection 45B(3) in respect of this scheme. | Summary: Division 7A of the ITAA 1936 does not apply to the distributions to be made under the Company X Demerger. | Detailed Reasoning - Detailed reasoning: Division 7A will not apply to the distributions to be made under the Company X demerger as: ● part of the distribution is a demerger dividend and is therefore excluded from the operation of Division 7A under section 109RA of the ITAA 1936; and ● in any event, the entirety of the distribution discharges a debt obligation and is therefore excluded from Division 7A by virtue of section 109J of the ITAA 1936. | Detailed Reasoning - Demerger dividend: Section 109RA provides that Division 7A does not apply to a demerger dividend to which section 45B does not apply. ' Demerger dividend ' is defined in subsection 6(1) of the ITAA 1936 as: '….that part of a demerger allocation that is assessable as a dividend under subsection 44(1) or that would be so assessable apart from subsections 44(3) and (4)…' Paragraph 44(1)(a) provides: The assessable income of a shareholder in a company (whether the company is a resident or a non-resident) includes: (a) if the shareholder is a resident: (i) dividends (other than non-share dividends) that are paid to the shareholder by the company out of profits derived by it from any source; and (ii) all non-share dividends paid to the shareholder by the company; In this case the in-specie distribution to the Taxpayer is categorised as follows: ● the part of the payment that is debited to Company A's share capital account is not a dividend. This is because the definition of a ' dividend ' does not include ' moneys paid or credited by a company to a shareholder or any other property distributed by a company to shareholders….where the amount of the moneys paid or credited, or the amount of the value of the property, is debited against an amount standing to the credit of the share capital account of the company ': subsection 6(1). Therefore it cannot be a demerger dividend. However this amount will in any case be excluded from the operation of section 109C for reasons explained in further detail below. ● The remaining part is a dividend because it is a ' distribution made by a company ' to its shareholders: see definition of ' dividend ' under subsection 6(1). Prima facie we take it that the dividends are, pursuant to subsection 44(1)(a)(i), taken to be paid out of profits. In this regard we refer to TR 2003/8, which in paragraph 13 states: In most cases a company which distributes property to its shareholders and debits part of the value of that property to its share capital account would debit the remaining part to another account or reserve. Where that account or reserve does not represent share capital, it would, for subsection 44(1) purposes, represent profits derived by the company so that the amount debited to it would be included in the shareholder's assessable income under that subsection. The ruling provides that: 6. In the case of a resident shareholder the amount by which the money value of the property exceeds the amount debited to the share capital account will be included in the shareholder's assessable income to the extent that the dividend is paid (or taken to be paid) out of profits derived by the company. 8. For the purposes of paragraphs 6 and 7, the dividend is paid out of profits derived by the company if, immediately after the distribution of property, the market value of the assets of the company exceeds the total amount (as shown in the company's books of account) of its liabilities and share capital. In addition, if the dividend described in paragraphs 6 and 7 is a repayment by a company of an amount paid-up on the share, the dividend is taken to be paid out of profits derived by the company. It is taken as an assumption under this Ruling that the market value of the assets of Company A exceeds the total amount (as shown in its books of account) of its liabilities and share capital. Based on the considerations above, the amount not debited to the share capital account: ● is considered a dividend paid out of Company A's profits, and therefore falls within the scope of section 44(1); ● in turn also falls within the definition of ' demerger dividend ' under subsection 6(1) since it is the part of the demerger allocation that would (but for subsections 44(3) and (4)) be assessable under subsection 44(1); and ● given also that section 45B does not apply to the dividend, it falls within the scope of section 109RA, and consequently Division 7A does not apply to it. | Detailed Reasoning - Discharge of obligation to pay a debt: In addition to the above, it is considered that the entirety of the distribution will fall outside the scope of Division 7A by virtue of section 109J. Section 109J provides: A private company is not taken under section 109C to pay a dividend because of the payment of an amount, to the extent that the payment: (a) discharges an obligation of the private company to pay money to the entity; and (b) is not more than would have been required to discharge the obligation had the private company and entity been dealing with each other at arm's length. The in specie dividend will be declared by the board of Company A pursuant to the Company A Constitution prior to the distribution of the dividend. Under subsection 254V(2) of the Corporations Act 2001 , if a company has a constitution and it provides for the declaration of dividends, ' the company incurs a debt when the dividend is declared' . The subsequent payment of the dividend - being the actual in specie distribution under the demerger - is a discharge of this debt and falls accordingly within the scope of paragraph 109J(a). Paragraph 109J(b) will also be satisfied as the payment will comprise the in specie distribution of shares as per the declaration and is the precise amount of the debt. Therefore it is considered that section 109J will apply to the distribution of dividends in this case. As such section 109C will not apply to the proposed payment.