Private ruling: Demerger
Date of advice: 25 June 2021
Published: September 2021

Ruling: Q1: Will the shareholders of Company X be able to elect to apply demerger roll-over under section 125-55 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes | Q2: Will the shareholders of Company X who choose demerger roll-over relief in respect of their shares, disregard any capital gain or loss made in respect of CGT event C2 happening to their shares pursuant to subsection 125-80(1) of the ITAA 1997? | A2: Yes | Q3: Will the first element of the cost base and the reduced cost base of the shares in Company X and Company Y be subject to adjustment under subsection 125-80(2) of the ITAA 1997 where a shareholder of Company X chooses demerger roll-over relief pursuant to subsection 125-55(1) of the ITAA 1997? | A3: Yes | Q4: Will the shareholders of Company X who choose demerger roll-over relief in respect of their shares be taken, for the purpose of Division 115 of the ITAA 1997, to have acquired a proportionate number of shares in Company Y on the same date as their shares in Company X pursuant to item 2 of the table in subsection 115-30(1) of the ITAA 1997? | A4: Yes | Q5: Will the Commissioner confirm that all, or any part, of the distribution of Company Y shares to Company X shareholders that is a dividend will constitute a demerger dividend, and therefore be neither assessable income nor exempt income pursuant to subsections 44(3) to 44(5) of the Income Tax Assessment Act 1936 (ITAA 1936)? | A5: Yes | Q6: Will section 45 or section 45A of the ITAA 1936 apply to the whole or any part of the proposed demerger scheme? | A6: No | Q7: Will the Commissioner make a determination under paragraph 45B(3)(a) of the ITAA 1936 that section 45BA of the ITAA 1936 applies in respect of the whole or any part of the demerger benefit provided to the Australian tax resident shareholders of Company X in relation to the proposed demerger scheme? | A7: No | Q8: Will the Commissioner make a determination under paragraph 45B(3)(b) of the ITAA 1936 that section 45C of the ITAA 1936 applies in respect of the whole or any part of the capital benefit provided to the Australian tax resident shareholders of Company X in relation to the proposed demerger scheme? | A8: No | Q9: If the value of the Company Y shares distributed exceeds the amount debited to the share capital account and, apart from subsections 44(3) and (4), would be treated as an assessable dividend under subsection 44(1) of the ITAA 1936, will it be treated as a dividend that may give rise to a liability to withholding tax pursuant to section 128B of the ITAA 1936 and withholding tax collection obligations under subdivision 12-F or 12A-C of Schedule 1 of the Tax Administration Act 1953 (TAA)? | A9: No | Q10: Will Company X disregard any capital gain under CGT event A1 upon the proposed transfer of its shares in Company Y to its shareholders under section 125-155 of the ITAA 1997? | A10: Yes | Q11: Under the proposed transfer of shares in Company Y to Company X shareholders, will Company X be required under subsection 45D(1A) of the ITAA 1936 to give a copy of a notice to its shareholders? | A11: No This ruling applies for the following period: Income year ended 30 June 20xx The scheme commences on: 1 July 20xx

Relevant facts and circumstances: Background Company X Company X is an Australian private company. All the shareholders of Company X acquired their shares after 20 September 1985. Company Y Company Y is an Australian private company. Proposed restructure Company X will demerge all its interests in Company Y to Company X shareholders in proportion to their current shareholding. Reasons for the Proposed demerger A number of commercial reasons were provided as the reason for undertaking a demerger. Other matters Company X will not make an election under subsection 44(2) of the ITAA 1936. There is no intention or proposal for the sale of the shares in Company Y or Company X by the Company X shareholders following the demerger. The share capital account of Company X is not tainted within the meaning of Division 197 of the ITAA 1997. Relevant legislative provisions Income Tax Assessment Act 1936 section 6 Income Tax Assessment Act 1936 section 44 Income Tax Assessment Act 1936 section 45 Income Tax Assessment Act 1936 section 45A 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 section 45D Income Tax Assessment Act 1936 section 128B Income Tax Assessment Act 1936 section 177D Income Tax Assessment Act 1997 section 104-10 Income Tax Assessment Act 1997 section 104-25 Income Tax Assessment Act 1997 section 115-30 Income Tax Assessment Act 1997 subdivision 125-B Income Tax Assessment Act 1997 section 125-55 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 Questions 1 to 3 Summary Company X shareholders can choose to obtain roll-over relief under Subdivision 125-B of the ITAA 1997 upon the demerger of Company Y by Company X. Detailed reasoning In order for the demerger CGT outcomes contained in Division 125 of the ITAA 1997 to apply to a company or trust, a number of defined terms must be satisfied, including: • demerger group (subsection 125-65(1) of the ITAA 1997) • demerger (subsection 125-70(1) of the ITAA 1997) • demerged entity (paragraph 125-70(6)(a) of the ITAA 1997), and • demerging entity (paragraph 125-70(7)(a) of the ITAA 1997). Demerger Group A demerger group comprises one head entity and at least one demerger subsidiary (subsection 125-65(1) of the ITAA 1997). The demerger group in this case comprises Company X as the head entity and includes Company Y as a demerger subsidiary. Company X will be the head entity because: • no other member of the demerger group holds ownership interests in Company X (subsection 125-65(3) of the ITAA 1997), and • there will be no other company or trust capable of being a head entity of a demerger group of which Company X could be a demerger subsidiary (subsection 125-65(4) of the ITAA 1997). Company Y will be a demerger subsidiary of Company X because Company X owns ownership interests in Company Y that carry more than 20% of the rights to any distribution of income and capital, and the right to exercise more than 20% of the voting power of Company Y (subsection 125-65(6) of the ITAA 1997). Demerger Subsection 125-70(1) of the ITAA 1997 describes when a demerger happens. A demerger will happen to the Company X demerger group because: • there will be a restructuring (paragraph 125-70(1)(a) of the ITAA 1997), and Company X will dispose of at least 80% of its Company Y shares to the owners of Company X (subparagraph 125-70(1)(b)(i) of the ITAA 1997) • under the restructuring, CGT event C2 will happen to Company X shares under the demerger, and Company X shareholders will acquire new shares in Company Y and nothing else (subparagraph 125-70(1)(c)(i) of the ITAA 1997) • CGT event A1 will happen upon the disposal of shares in Company Y. Company Y shares will be acquired by Company X shareholders on the basis of their ownership of shares in Company X (paragraph 125-70(1)(d) and subparagraph 125-70(1)(e)(i) of the ITAA 1997) • paragraph 125-70(1)(f) of the ITAA 1997 repealed • neither Company X nor Company Y are superannuation funds (paragraph 125-70(1)(g) of the ITAA 1997) • Company X shareholders will acquire Company Y shares in the same proportion as they own Company X shares just before the demerger (paragraph 125-70(2)(a) of the ITAA 1997) • each of the Company X shareholders will own shares in Company X and Company Y that (just after the demerger) represent the same proportionate total market value as their Company X shares represented (just before the demerger) (paragraph 125-70(2)(b) of the ITAA 1997) • under the scheme, there will be no buy-back of shares for the purposes of Division 16K of Part III of the ITAA 1936 (subsection 125-70(4) of the ITAA 1997), and • there will be no rollover available under another provision for any CGT events that happen to the Company X shares under the restructure (subsection 125-70(5) of the ITAA 1997). Company Y is the demerged entity Relevantly, subsection 125-70(6) of the ITAA 1997 defines a demerged entity to be a former member of a demerger group in which ownership interests are acquired by shareholders of the head entity under a demerger. In the present circumstances, Company Y is the demerged entity since the Company X shareholders receive shares in Company Y under a demerger. Company X is the demerging entity Relevantly, subsection 125-70(7) of the ITAA 1997 defines a demerging entity to be a member of a demerger group who disposes of at least 80% of its total ownership interests in another member of the demerger group to owners of original interests in the head entity under a demerger. In the present circumstances, Company X is the demerging entity since it disposes of 100% of its shares in Company Y to the Company X shareholders under a demerger. Can the Company X shareholders choose demerger rollover? Subsection 125-55(1) of the ITAA 1997 relevantly provides that demerger rollover may be chosen if: • a shareholder owns a share in a company - the Company X shareholders satisfy this requirement • the company is the head entity of a demerger group - this requirement is satisfied • a demerger happens to the demerger group - this requirement is satisfied, and • under the demerger a CGT event happens to the original interest (Company X shares) and a new or replacement interest is acquired in the demerged entity - this requirement will be satisfied as CGT event C2 happens to the Company X shares when the Company X shareholders receive Company Y shares under the demerger. As a result, Company X shareholders will be eligible to choose rollover under subsection 125-55(1) of the ITAA 1997. Capital gains and cost base adjustments for the Company X shareholders If a Company X shareholder chooses demerger roll-over: • it will disregard any capital gain made in respect of CGT event C2 that happens to its Company X shares (subsection 125-80(1) of the ITAA 1997), and • the first element of the cost base and reduced cost base of the Company X shares and the corresponding Company Y shares acquired under the demerger, will be the sum of its original cost bases (just before the demerger) of the Company X shares, apportioned over those Company X and Company Y shares on a reasonable basis having regard to the market values (just after the demerger) of the Company X shares and Company Y shares, or a reasonable approximation of those market values (subsections 125-80(2) and (3) of the ITAA 1997). If a Company X shareholder does not choose demerger roll-over: • it will not be entitled to disregard any capital gain made in respect of CGT event G1 that happens to its Company X shares under the demerge, and • the cost base and reduced cost base of the Company X shares and Company Y shares will be calculated in the same manner set out in the preceding paragraph. Question 4 Summary The shareholders of Company X will be taken to have acquired shares in Company Y on the same date as their shares in Company X pursuant to item 2 of the table in subsection 115-30(1) of the ITAA 1997. Detailed reasoning By operation of item 2 of the table in subsection 115-30(1) of the ITAA 1997, a CGT asset acquired as a replacement under a "replacement asset roll-over" is taken to have been acquired when the taxpayer acquired the original asset involved in the roll-over. The phrase "replacement asset roll-over" is defined in section 995-1 of the ITAA 1997 as meaning the circumstance where a taxpayer can defer a capital gain or loss from one CGT event until a later CGT event happens where ownership of one CGT asset ends and another one is acquired. The definition refers to the list of replacement asset roll-overs in section 112-115 of the ITAA 1997. Item 14C in the table in section 112-115 of the ITAA 1997 refers to a Division 125 of the ITAA 1997 demerger as being a replacement asset roll-over. As a demerger is specifically included in this list, a share received under the demerger for which demerger roll-over relief is available and chosen will be an asset acquired under a replacement asset roll-over. Accordingly, the date of acquisition of the Company Y shares for a Company X shareholder will be taken to be the date they acquired their original Company X shares if they elect roll-over under subsection 125-55(1) of the ITAA 1997. Question 5 Summary All or any part of the distribution of Company Y shares to Company X 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. Detailed reasoning Is a dividend paid under the demerger? Subsection 44(1) of the ITAA 1936 includes in a shareholder's assessable income a dividend, as defined in subsection 6(1) of the ITAA 1936, paid to a shareholder out of company profits. Capital reduction amount The definition of a dividend in subsection 6(1) of the ITAA 1936 excludes amounts debited against an amount standing to the credit of the share capital account of the company (paragraph (d) of the subsection 6(1) of the ITAA 1936 definition of a dividend). As the capital reduction amount will be debited against an amount standing to the credit of the share capital account (as that term is defined in subsection 6(1) of the ITAA 1936) of Company X it will not be a dividend, as defined in subsection 6(1). Therefore, the capital reduction amount will not be assessable income of the shareholders of Company X for the purposes of subsection 44(1) of the ITAA 1936. Dividend The definition of a dividend includes any amount distributed or credited by a company to any of its shareholders. Therefore, the distribution of the Company Y shares will, in part, constitute a dividend of the Company X shareholders. The total amount of the dividend will be the market value of the Company Y shares at the time of the demerger excluding the amount debited to the share capital account of Company X. In general, a dividend satisfied by a distribution of property (such as shares in a subsidiary) will be a dividend paid out of profits derived if, immediately after the distribution of that property, the market value of the assets of the company exceed the total amount (as shown in the company's books of account) of its liabilities and share capital (see paragraph 8 of Taxation Ruling TR 2003/8). However, a demerger dividend is taken not to have been paid out of profits and is neither an assessable income nor an exempt income amount (subsections 44(3) and (4) of the ITAA 1936) where: • the dividend is a demerger dividend (as defined in subsection 6(1) of the ITAA 1936) • the head entity does not elect that subsections 44(3) and (4) of the ITAA 1936 do not apply to the demerger dividend (subsection 44(2) of the ITAA 1936), and • subsection 44(5) of the ITAA 1936 is satisfied. In the present circumstances, the dividend paid to the Company X shareholders under the demerger would satisfy the conditions necessary to be a demerger dividend and would therefore be neither assessable income nor exempt income pursuant to subsections 44(3) and 44(4) of the ITAA 1936. Question 6 Summary The Commissioner will not make a determination that section 45 or section 45A of the ITAA 1936 apply to the whole or any part of the proposed arrangement. Detailed reasoning Section 45 Subsection 45(1) of the ITAA 1936 provides: This section applies in respect of a company that, whether in the same year of income or in different years of income, streams the provision of shares (other than shares to which subsection 6BA(5) applies) and the payment of minimally franked dividends to its shareholders in such a way that: a) the shares are received by some shareholders but not all shareholders, and b) some or all of the shareholders who do not receive the shares receive or will receive minimally franked dividends. Where section 45 of the ITAA 1936 applies, subsection 45(2) provides that: The value of the share at the time that the shareholder is provided with the share is taken, for the purposes of this Act, to be a dividend that is unfrankable (within the meaning of subsection 995-1(1) of the Income Tax Assessment Act 1997 ) and that is paid by the company, out of profits of the company, to the shareholder at that time. Subsection 45(3) of the ITAA 1936 provides that a dividend is "minimally franked" if: ... it is not franked, or is franked to less than 10%, in accordance with section 202-5 or 208-60 of the Income Tax Assessment Act 1997 . Section 45A Subsection 45A(1) of the ITAA 1936 provides: This section applies in respect of a company that, whether in the same year of income or in different years of income, streams the provision of capital benefits and the payment of dividends to its shareholders in such a way that: a) the capital benefits are, or apart from this section would be, received by shareholders (the advantaged shareholders) who would, in the year of income in which the capital benefits are provided, derive a greater benefit from the capital benefits than other shareholders; and b) it is reasonable to assume that the other shareholders (the disadvantaged shareholders) have received, or will receive, dividends. Where section 45A of the ITAA 1936 applies, subsection 45A(2) provides that: The Commissioner may make, in writing, a determination that section 45C applies in relation to the whole, or a part, of the capital benefits. A determination does not form part of an assessment. A capital benefit is defined in subsection 45A(3) of the ITAA 1936 as follows: A reference to the provision of a capital benefit to a shareholder in a company is a reference to any of the following: a) the provision to the shareholder of shares in the company; b) the distribution to the shareholder of share capital or share premium; c) something that is done in relation to a share that has the effect of increasing the value of a share (which may or may not be the same share) held by the shareholder. Subsection 45A(4) of the ITAA 1936 provides that ''greater benefit from capital benefits" means: The circumstances in which a shareholder would, in a year of income, derive a greater benefit from capital benefits than another shareholder include, but are not limited to, any of the following circumstances existing in relation to the first shareholder and not in relation to the other shareholder: a) some or all of the shares in the company held by the shareholder were acquired, or are taken to have been acquired, before 20 September 1985; b) the shareholder is a non-resident; c) the cost base (for the purposes of Part IIIA) of the relevant share is not substantially less than the value of the applicable capital benefit; d) the shareholder has a net capital loss for the year of income in which this capital benefit is provided; e) the shareholder is a private company who would not have been entitled to a rebate under former section 46F if the shareholder had received the dividend that was paid to the disadvantaged shareholder; f) the shareholder has income tax losses. Application of sections 45 and 45A With respect to the proposed demerger, it is noted that the return of capital to be paid to each Company X shareholder will be proportionate to the number of shares each Company X shareholder holds in Company X. Accordingly, there will be no streaming of shares, capital benefits or dividends to Company X shareholders. Based on the above, sections 45 and 45A of the ITAA 1936 do not apply to the proposed demerger of Company Y by Company X. Accordingly, the Commissioner will not make a determination under subsection 45A(2) of the ITAA 1936. Question 7 & 8 Summary 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 Company X shareholders under the proposed arrangement. Detailed reasoning Subsection 45B(1) of the ITAA 1936 provides that the purpose of section 45B is to ensure that relevant amounts are treated as dividends for tax purposes if the capital and profit components of a demerger allocation do not reflect the circumstances of the demerger, or certain payments, allocations or distributions are made in substitution for dividends. Subsection 45B(2) of the ITAA 1936 sets out the conditions that must be met in order for section 45B to apply. Relevantly, this section applies if: • there is a scheme under which a person is provided with a demerger benefit or capital benefit by a company (paragraph 45B(2)(a) of the ITAA 1936), and • under the scheme a taxpayer, who may or may not be the person provided with the demerger benefit or the capital benefit, obtains a tax benefit (paragraph 45B(2)(b) of the ITAA 1936), and • having regard to the relevant circumstances of the scheme, it would be concluded that the person, or one of the persons, entered into the scheme or carried out the scheme or any part of the scheme for a purpose, other than an incidental purpose, of enabling a taxpayer to obtain a tax benefit (paragraph 45B(2)(c) of the ITAA 1936). Where the requirements of subsection 45B(2) of the ITAA 1936 are met, subsection 45B(3) empowers the Commissioner to make a determination under either or both of section 45BA in relation to a demerger benefit and section 45C in relation to a capital benefit. The effect of a determination made under paragraph 45B(3)(a) of the ITAA 1936 is that part or all of a demerger benefit will be treated as not being a demerger dividend (subsection 45BA(1) of the ITAA 1936). The effect of a determination made under paragraph 45B(3)(b) of the ITAA 1936 is that part or all of a capital benefit will be an unfranked dividend paid to the relevant taxpayer out of profits (subsections 45C(1) and (2) of the ITAA 1936). Scheme A 'scheme' for the purposes of section 45B of the ITAA 1936 is taken to have the same meaning as provided in subsection 177A(1) of Part IVA of the ITAA 1936. That definition is widely drawn and includes any agreement, arrangement, understanding, promise, undertaking, scheme, plan, or proposal. In particular, a scheme is anything that satisfies any of the terms in the statutory definition. In the present circumstances, the transfer of shares in Company Y to the Company X shareholders under the demerger constitutes the relevant scheme for the purposes of section 45B of the ITAA 1936. Demerger benefit and capital benefit The provision of ownership interests to a shareholder under a demerger constitutes the shareholder being provided with a demerger benefit (subsection 45B(4) of the ITAA 1936). Therefore, under the proposed scheme, the market value of the Company Y shares provided to the Company X shareholders constitutes a demerger benefit. The provision of those Company Y shares also constitutes a capital benefit to the extent it is not a demerger dividend (paragraph 45B(5)(a) and subsection 45B(6) of the ITAA 1936). As such, the market value of the Company Y shares distributed under the demerger less the demerger dividend is a capital benefit provided to the Company X shareholders. Tax benefit Subsection 45B(9) of the ITAA 1936 provides, inter alia , that a relevant taxpayer 'obtains a tax benefit' if an amount of tax payable by that taxpayer would, apart from the operation of section 45B, be less than the amount that would have been payable if the 'demerger benefit' had been an assessable dividend or the capital benefit had been a dividend. As a result of the demerger, the Company X shareholders would, apart from the operation of section 45B of the ITAA 1936, receive a demerger dividend equal to the market value of the shares in Company Y at the time of the demerger less the amount debited to share capital that is neither assessable income nor exempt income. The tax payable by Company X shareholders on the demerger would be higher if the demerger benefit was an assessable dividend. Accordingly, Company X shareholders will obtain a tax benefit for the purposes of section 45B. More than incidental purpose Given that the proposed demerger is a scheme that provides a tax benefit to the Company X shareholders, the operation of section 45B of the ITAA 1936 turns on the objective purpose test in paragraph 45B(2)(c). This paragraph provides that the section will apply if enabling the shareholder to obtain the tax benefit is a more than incidental purpose of the scheme. The requisite purpose is to be determined having regard to the relevant circumstances of the scheme which are listed inclusively in subsection 45B(8) of the ITAA 1936. Each of the circumstances must be considered in order to determine whether or not, individually or collectively, they reveal the existence of the requisite purpose. Relevant circumstances The relevant circumstances include the tax and non-tax (i.e. business and other financial) implications of the scheme, the latter covered largely by the matters in subsection 177D(2) of the ITAA 1936, which are included in subsection 45B(8) of the ITAA 1936 by virtue of paragraph (k). In this case, the nature of the scheme indicates that the more pertinent circumstances are those covered by paragraphs (a), (b), (i), (j) and (k) of subsection 45B(8) of the ITAA 1936. Paragraph 45B(8)(a) of the ITAA 1936 refers to the extent to which the capital benefit is attributable to capital or profits (realised and unrealised) of the company or an associate (within the meaning of section 318 of the ITAA 1936) of the company. In the circumstances of the capital benefit provided under this scheme, it is considered that they appropriately reflect a return of share capital to the Company X shareholders. In the present case, the proposed demerger will result in a return of capital and a demerger dividend sourced from realised and unrealised profits which are considered to be an appropriate allocation of share capital and profits in accordance with Law Administration Practice Statement PS LA 2005/21 - Application of section 45B of the Income Tax Assessment Act 1936 to demergers (PSLA 2005/21). Therefore, this factor does not incline for, or against, a conclusion as to the requisite purpose. Paragraph 45B(8)(b) of the ITAA 1936 refers to the pattern of distributions made by a company or an associate of the company. In this case, it should not be concluded that the present distribution is in substitution for a dividend. There is nothing to suggest that the present distribution is in substitution for a dividend. Therefore, this factor does not incline for, or against, a conclusion as to the requisite purpose. Paragraph 45B(8)(i) of the ITAA 1936 directs attention to those cases where the scheme of demerger involves the provision of ownership interests and the later disposal of those interests, or an increase in the value of ownership interests and the later disposal of those interests. The demerger arrangement does not involve the later disposal of ownership interests and there is no intention that Company X shareholders will dispose of the shares in Company Y or its shares in Company X following the demerger. Therefore, this factor does not incline for, or against, a conclusion as to the requisite purpose. Paragraph 45B(8)(j) of the ITAA 1936 applies to circumstances where the profits and assets of the demerging entity are attributable to or acquired under transactions with associated entities. This relevant circumstance aims to expose instances where demerger relief is being used as a vehicle for distributing corporate earnings by way of non-assessable dividend. In this case, there are no profits derived by Company X or assets held by Company X that are attributable to transactions with Company Y or other related parties. Therefore, this factor does not incline for, or against, a conclusion as to the requisite purpose. 45B(8)(k) Part IVA matters This circumstance requires regard to be had to any of the matters referred to in paragraphs 177D(2)(a) to (h) of the ITAA 1936. After considering the relevant facts including the business and commercial reasons for the demerger, it is considered that none of the matters in paragraphs 177D(2)(a) to (h) of the ITAA 1936 incline towards a requisite purpose. Conclusion Having regard to the relevant circumstances of the proposed scheme, as set out in subsection 45B(8) of the ITAA 1936, it is considered that the proposed demerger is not being undertaken for the more than incidental purpose of obtaining a tax benefit. Accordingly, the Commissioner will not make a determination under subsection 45B(3) of the ITAA 1936 that section 45BA or section 45C will apply to the whole, or any part, of any benefit provided to the Company X shareholders under the proposed arrangement. Question 9 The demerger dividend will not give rise to a liability to withholding tax pursuant to section 128B of the ITAA 1936 or withholding tax collection obligations under Subdivision 12-F or Subdivision 12A-C of Schedule 1 of the TAA. Detailed reasoning Section 128B of the ITAA 1936, which forms part of Division 11A of the ITAA 1936, sets out the circumstances in which a liability to non-resident dividend withholding tax may arise (as well as the circumstances in which a liability to non-resident interest and royalty withholding tax may arise). Subsection 128B(3D) states: This section does not apply to a demerger dividend to which section 45B does not apply. Subdivisions 12-F and 12A-C of Schedule 1 of the TAA sets out the circumstances in which an obligation to collect non-resident dividend withholding tax may arise (as well as the circumstances in which an obligation to collect non-resident interest and royalty withholding tax may arise). Subdivision 12A-C applies in the context of attribution-MITs that are withholding-MITs. Section 12-300 of Schedule 1 of the TAA states: This Subdivision does not require an entity: (a) to withhold an amount from a * dividend, from interest (within the meaning of Division 11A of Part III of the Income Tax Assessment Act 1936) or from a * royalty if no * withholding tax is payable in respect of the dividend, interest or royalty; or (b) to withhold from a dividend, from interest (within the meaning of that Division) or from a royalty more than the withholding tax payable in respect of the dividend, interest or royalty (reduced by each amount already withheld from it under this Subdivision). In essence, section 12-300 of Schedule 1 of the TAA prevents an obligation to collect non-resident dividend withholding tax from arising in circumstances where no liability to non-resident dividend withholding tax exists under section 128B of the ITAA 1936. Subdivision 12A-C of Schedule 1 of the TAA only creates an obligation to collect non-resident dividend withholding tax in respect of a deemed payment of a dividend if an actual payment of the dividend would have fallen within the remit of subdivision 12-F (see paragraphs 12A-215(2)(b) and 12A-220(2)(b)). "demerger dividend" is defined in subsection 6(1) to mean: ... 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). In this respect, the "demerger allocation" as defined in subsection 6(1) is "the total market value of the allocation represented by the ownership interests disposed of by a member of a demerger group under a demerger to the owners of ownership interests in the head entity" - that is, the value of the Company Y shares disposed of to the Company X shareholders. The part of the demerger allocation that is a "demerger dividend" is not capable of giving rise to a liability to withholding tax pursuant to section 128B or withholding tax collection obligations under Subdivision 12-F or 12A-C of Schedule 1 of the TAA. Question 10 Summary Company X can disregard under section 125-155 of the ITAA 1997 any capital gain or capital loss arising from CGT event A1 happening to its ownership interests in Company Y upon the demerger of Company Y by Company X. Detailed reasoning Section 125-155 of the ITAA 1997 provides that a demerging entity may ignore capital gains or capital losses arising from certain CGT events (including CGT event A1) happening to its ownership interests in a demerged entity under a demerger. In the present case: • Company X is the demerging entity • CGT event A1 will happen when Company X disposes of its shares in Company Y and transfers them to the Company X shareholders (per section 104-10 of the ITAA 1997), and • this disposal happens under a demerger. Therefore, any capital gain or loss under CGT event A1 made by Company X on the disposal of its Company Y shares under the demerger will be disregarded (section 125-155 of the ITAA 1997). Question 11 Summary As a consequence of the proposed transfer of shares in Company Y to Company X shareholders, Company X will not be required under subsection 45D(1A) of the ITAA 1936 to give a copy of a notice to its shareholders. Detailed reasoning Subsection 45D(1) of the ITAA 1936 provides: "If the Commissioner makes a determination under section 45A, 45B or 45C, the Commissioner must give a copy of the determination, to the company concerned (which, in the case of a demerger benefit referred to in section 45B, is the head entity of the demerger group). As the Commissioner will not make a determination under sections 45A or 45B of the ITAA 1936 respectively, Company X will not be required to give a copy of a notice under subsection 45D(1A) of the ITAA 1936 to its shareholders.