Private ruling: Proposed demerger
Date of advice: 16 February 2018
Published: June 2018
Ruling period: Year ended 30 June 2018
Date scheme commenced: July 2017

Ruling: Q1: Will the shareholders of Company A be able to choose to obtain a roll-over under the demerger relief provisions in Division 125 of the ITAA 1997? | A1: Yes | Q2: For the shareholders of Company A who choose to obtain demerger roll-over in respect of their shares, will subsection 125-80(1) of the ITAA 1997 apply to disregard any capital gain made from CGT event G1 happening to their shares? | A2: Yes | Q3: Will the first element of the cost base and the reduced cost base of the shares in Company A and ListCo be subject to adjustment under subsection 125-80(2) of the ITAA 1997? | A3: Yes | Q4: Will the shareholders of Company A who choose to obtain demerger roll-over 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 ListCo on the same date as their shares Company A pursuant to item 2 of the table at subsection 115-30(1) of the ITAA 1997? | A4: Yes | Q5: Will the dividend to be paid to Company A shareholders as part of the demerger transactions be treated as a dividend that is not paid out of profits and is not assessable or exempt under subsections 44(3) and 44(4) of the ITAA 1936 respectively? | A5: Yes | Q6: Will section 45A of the ITAA 1936 apply to the whole or any part of the 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 shareholders of Company A in relation to the 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 shareholders of Company A in relation to the Demerger Scheme? | A8: No | Q9: As a consequence of section 125-155 of the ITAA 1997, will Company A disregard any capital gain under CGT even A1 upon the proposed transfer of the remaining shares in ListCo to its shareholders? | A9: Yes | Q10: As a consequence of the proposed transfer of the shares in ListCo to the Company A shareholders, would Company A be required under subsection 45D(1A) of the ITAA 1936 to give a copy of a notice to its shareholders? | A10: No

Relevant facts and circumstances: Company A is a private company resident in Australia for income tax purposes and is the holding company of the Company A group of businesses (‘ the Company A Group ’). The Company A Group is proposing to list part of its businesses (the ‘ Businesses ’) on the ASX to enable those businesses to be operated and grow independently of the other assets and businesses that will be retained by the Group. Following the listing, the shares in the listed entity (‘ Listco ’) that continue to be held by the Company A Group will be demerged to Company A’s shareholders. Shareholdings in Company A The only class of issued shares in Company A are ordinary shares. All Company A shareholders are Australian tax residents and all shares are post-CGT assets. Commercial rationale for the IPO and demerger The IPO and subsequent demerger are to be effected to enable the businesses: ● to gain access to new capital streams to further exploit growth opportunities ● to rationalise debt ● to provide an opportunity for others to invest in ListCo; and ● to enhance liquidity by having ListCo’s shares held directly by Company A’s shareholders Proposed transactions The relevant transactions are proposed to occurs as follows: ● The IPO will occur as a combination of: ● ListCo issuing shares to new investors; and ● Company A selling a portion of its shares in ListCo to new investors ● Following the IPO, the Company A Group will transfer its remaining shares in ListCo to the Company A shareholders by way of dividend and return of capital in proportion to their shareholdings in Company A The Company A shareholders will enter into a voluntary escrow agreement under which they will be restricted for a period of time from disposing of their shares in ListCo.

Relevant legislative provisions: Section 104-135 Income Tax Assessment Act 1997 | Section 112-115 Income Tax Assessment Act 1997 | Section 115-25 Income Tax Assessment Act 1997 | Section 115-30 Income Tax Assessment Act 1997 | Section 125-65 Income Tax Assessment Act 1997 | Section 125-70 Income Tax Assessment Act 1997 | Section 125-80 Income Tax Assessment Act 1997 | Section 125-155 Income Tax Assessment Act 1997 | Section 995 Income Tax Assessment Act 1997 | Section 44(3) Income Tax Assessment Act 1936 | Section 44(4) Income Tax Assessment Act 1936 | Section 45A Income Tax Assessment Act 1936 | Section 45BA Income Tax Assessment Act 1936 | Section 45C Income Tax Assessment Act 1936 | Section 45D(1A) Income Tax Assessment Act 1936

Reasons for decision: Summary: Yes, the shareholders of Company A will be able to choose to obtain a roll-over under the demerger relief provisions in Division 125 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Division 125 of the ITAA 1997 provides an entity CGT relief for a demerger. Subsection 125-55(1) states that an entity can choose to obtain a roll-over if: (a) you own an ownership interest in the company (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 | Detailed Reasoning - (a) You own an ownership interest in a company: Each of the rulees owns ordinary shares in Company A. Company A is the company referred to in paragraph 125-55(1)(a). The only ownership interests in Company A are the Company A ordinary shares that are owned by the rulees. Each of these ordinary shares in Company A is an ‘original interest’ for the purposes of Division 125. | Detailed Reasoning - (b) The company is the head entity of a demerger group: Subsection 125-65(1) provides that a demerger group consists of the head entity of the group and at least one demerger subsidiary. Company A is the head entity of a demerger group. The demerger group consists of Company A and its subsidiaries. | Detailed Reasoning - (c) a demerger happens to the demerger group: The meaning of demerger is set out in section 125-70. Subsection 125-70(1) states that a demerger happens to a demerger group if: (a) there is a restructuring of the demerger group; and (b) under the restructuring: (i) members of the demerger group dispose of at least 80% of their total ownership interests in another member of the demerger group to owners of original interests in the head entity of the demerger group;...and (c) under the restructuring: (i) a CGT event happens to an original interest owned by an entity in the head entity of the group and the entity acquires a new interest and nothing else; …and (d) the acquisition by entities of new interests happens only because those entities own or owned original interests; and (e) the new interests acquired are: (i) if the head entity is a company – ownership interests in a company:... and (f) [repealed] (g) neither the original interests nor the new interests are in a trust that is a non-complying superannuation fund, and (h) the requirements of subsection (2) are met | Detailed Reasoning - Restructuring of the demerger group: The demerger steps which involve the Company A Shareholders acquiring interests in ListCo amount to a restructuring of the Company A Group, which is the demerger group. | Detailed Reasoning - Disposal of interests to owners: Under subparagraph 125-70(1)(b)(ii), a restructure can be achieved by members of the demerger group disposing of at least 80% of their total ownership interests in another member of the demerger group to owners of original interests in the head entity of the demerger group. A member of the Company A Group will transfer 100% of the shares that it owns in ListCo to the Company A shareholders on implementation of the demerger, meaning that the requirements in subparagraph 125-70(1)(b)(ii) are satisfied. | Detailed Reasoning - Acquisition of new interests and nothing else: Paragraph 125-70(1)(c) requires that under the restructuring, whether or not a CGT event happens to an entity’s original interest in Company A, the shareholder acquires a new interest and nothing else. Company A shareholders will acquire new ownership interests in the demerged entity, ListCo, and will not receive anything else. | Detailed Reasoning - Acquisition of new interests: The Company A shareholders will only receive shares in ListCo because they hold the original interests in Company A. The ListCo shares will be transferred to the Company A shareholders in satisfaction of return of capital/dividend payable because they are shareholders in Company A. | Detailed Reasoning - Type of new interests acquired: The interests which will be provided to the Shareholders will be shares in ListCo which are ownership interests in a company. The requirement in paragraph 125-70(1)(e), that the new interest is an ownership interest in a company where the head entity is a company, is satisfied. | Detailed Reasoning - Non-complying superannuation fund: Company A and ListCo are companies and the ownership interests in the companies are ordinary shares. The original and new interests are not interests in a trust that is a non-complying superannuation fund. | Detailed Reasoning - Meeting the requirements of subsection 125-70(2): Subsection 125-70(2)(the continuity of proportionate interests test) provides: Each owner (an original owner ) of original interests in the head entity of the demerger group must: (a) acquire under the demerger, the same proportion, or as nearly as practicable the same proportion, of new interests in the demerged entity as the original owner owned in the head entity just before the demerger; and (b) just after the demerger, have the same proportionate total market value of ownership interests in the head entity and demerged entity as the original owner owned in the head entity just before the demerger The only ownership interests in both Company A and ListCo are ordinary shares which confer proportionate voting, capital and dividend distribution rights on the holders of the respective shares. The requirements of subsection 125-70(2) will be satisfied given that the disposal of the shares in ListCo to the existing Company A shareholders will be distributed based on each owner’s proportionate shareholding in Company A. Each original Company A ordinary shareholder will have the same proportionate interest in the combined total market value of Company A and the demerged entity as they had in Company A before the demerger. | Detailed Reasoning - (d) CGT event happens to original interest and new interest acquired in the demerged entity: CGT event G1 will happen in relation to the shares held by the rulees in Company A to the extent that Company A makes a return of capital to its shareholders. Under the demerger steps, the Company A shareholders will acquire shares in ListCo (the demerged entity). The requirements of subsection 125-55(1) will be satisfied for each of the rulees because: ● each rulee owns an ownership interest in Company A – the original interest; ● Company A is the head entity of a demerger group; ● A demerger will happen to the demerger group; and ● Under the demerger, a CGT event (CGT event G1) will happen to each rulee’s original interest in Company A and each rulee acquires a new interest in the demerged entity, ListCo. Therefore, the rulees will be eligible to choose under subsection 125-55(1) to obtain a roll-over. | Detailed Reasoning - Question 2: For the shareholders of Company A who choose to obtain demerger roll-over in respect of their shares, will subsection 125-80(1) of the ITAA 1997 apply to disregard any capital gain made from CGT event G1 happening to their shares? | Summary: Yes, the shareholders of Company A who choose to obtain demerger roll-over in respect of their shares will be able to disregard any capital gain made from CGT event G1 happening to their shares, as subsection 125-80(1) will apply. | Detailed Reasoning - Detailed reasoning: CGT event G1 will happen in respect of shares held by Company A shareholders at the time that the capital reduction amount is satisfied through the transfer of shares in the demerged entity. The proposed return of capital by Company A to its shareholders is satisfied by a transfer of the remaining shares in ListCo, this will be a payment made to the Company A shareholders in respect of shares they own in Company A and paragraph 104-135(a) is satisfied. Subsection 125-80(1) ITAA 1997 provides that, ‘If you choose the roll-over, a capital gain or capital loss you make from a CGT even happening under the demerger to an original interest you own is disregarded’. If roll-over is chosen under subsection 125-55(1), any resulting capital gain arising in respect of CGT event G1 should be disregarded pursuant to subsection 125-80(1). | Detailed Reasoning - Question 3: Will the first element of the cost base and the reduced cost base of the shares in Company A and ListCo be subject to adjustment under subsection 125-80(2) of the ITAA 1997? | Summary: Yes, the first element of the cost base and the reduced cost base of the shares in Company A and ListCo will be subject to adjustment under subsection 125-80(2) ITAA 1997. | Detailed Reasoning - Detailed reasoning: Company A shareholders will be required under section 125-80 ITAA 1997 to make cost base adjustments in respect of their existing shares in Company A and the new shares they receive upon the proposed demerger of ListCo. CGT event G1 will happen to the Company A shareholders’ original interests in Company A to the extent of the return of capital that is proposed to be made by Company A. Further, the shareholders will make a capital gain as the amount of the return of capital will be greater than the cost base of their respective shares. To the extent that a Company A shareholder chooses to obtain a demerger roll-over, subsection 125-80(2) provides that the total aggregate cost base of the shareholder’s original interests prior to the proposed demerger is to be allocated to the first element of the cost base and reduced cost base of each new interest (in ListCo) and each original interest (in Company A) they hold in such proportion as is reasonable having regard to the matters set out in subsection 125-80(3). The relevant matters in subsection 125-80(3) are the market values of the shareholder’s new interests, and of the remaining original interests, just after the proposed demerger, or an anticipated reasonable approximation of those market values. Accordingly, each Company A shareholder will be required to transfer some of their cost base in their original interest in Company A to their newly acquired interests in ListCo. The precise allocation will be based on the proportion of each company’s respective value. | Detailed Reasoning - Question 4: Will the shareholders of Company A who choose to obtain demerger roll-over 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 ListCo on the same date as their shares in Company A pursuant to item 2 of the table at subsection 115-30(1) of the ITAA 1997? | Summary: Yes, the shareholders of Company A who choose to obtain demerger roll-over in respect of their shares, will be taken for the purpose of Division 115 ITAA 1997 to have acquired a proportionate number of shares in ListCo on the same date as their shares in Company A pursuant to item 2 of the table at subsection 115-30(1) ITAA 1997. | Detailed Reasoning - Detailed reasoning: The acquisition date of the ListCo shares is relevant for determining whether or not Company A shareholders will be eligible to reduce any capital gain on any subsequent sale of those ListCo shares by any CGT discount for which they are eligible. One of the conditions which must be satisfied before a CGT discount can be applied is that ListCo shares were owned for at least 12 months (subsection 115-25(1)). By operation of item 2 of the table in subsection 115-30(1), 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 subsection 995-1(1) as meaning the circumstance where a taxpayer can defer a capital gain or loss from one CGT even 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. Item 14C in the table in section 112-115 refers to a Division 125 demerger as being a replacement asset roll-over. As a demerger is specifically included in this list, a share received under the demerger will be an asset acquired under a replacement asset roll-over. Accordingly, the date of acquisition of the ListCo shares for Company A shareholder will be taken to be the date they acquired their original Company A shares if they elect roll-over under section 125-55. | Detailed Reasoning - Question 5: Will the dividend to be paid to Company A shareholders as part of the demerger transactions be treated as dividend that is not paid out of profits and is not assessable or exempt under subsections 44(3) and 44(4) of the ITAA 1936 respectively? | Summary: Yes, the dividend to be paid to Company A shareholders as part of the demerger transactions will be treated as a dividend that is not paid out of profits and is not assessable or exempt under subsections 44(3) and 44(4) ITAA 1936. | Detailed Reasoning - Detailed reasoning: Subsection 44(1) provides that a ‘dividend’ is assessable for an Australian resident shareholder to the extent that it is paid out of profits. Subsection 44(2) provides that subsections 44(3) and 44(4) will apply to a demerger dividend unless the head entity elects (in writing) within one month of deciding which of its shareholders will receive ownership interests in the demerged entity under the demerger that these subsections do not apply. Company A will not make this election. Subsection 44(3) provides that a demerger dividend is deemed not to be paid out of profits. This in turn has the effect that a demerger dividend is not assessable income or exempt income by reason of the application of subsection 44(4). 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 ListCo shares disposed of to the Company A shareholders. The demerger dividend will be the dividend to be paid by Company A, which will be satisfied by the transfer of the ListCo shares to the Company A shareholders. This dividend prima facie will be assessable in the hands of the Company A shareholders under subsection 44(1). The dividend will also be a demerger dividend and subsections 44(3) and 44(4) will apply with the result that the demerger dividend will be deemed not to be paid out of profits and will be neither assessable income nor exempt income in the hands of Company A shareholders. Subsections 44(3) and 44(4) should not be precluded from applying by operation of subsection 44(5) on the basis that just after the demerger, all of CGT assets owned by the demerged entity and its demerged subsidiaries will be used directly in the carrying on of the demerged entity’s business. The dividend to be paid as part of the demerger transactions should be treated as a dividend that is not paid out of profits and is not assessable income or exempt income under subsections 44(3) and 44(4). | Detailed Reasoning - Question 6: Will section 45A of the ITAA 1936 apply to the whole or any part of the demerger scheme? | Summary: No, section 45A ITAA 1936 will not apply to the whole or any part of the demerger scheme. | Detailed Reasoning - Detailed reasoning: Section 45A of the ITAA 1936 applies in circumstances where capital benefits are streamed to certain shareholders who derive a greater benefit from the receipt of capital (the advantaged shareholders) and it is reasonable to assume that the other shareholders (the disadvantaged shareholders) have received or would receive dividends. With respect to the proposed demerger: ● All of the issued shares in Company A are ordinary shares which have proportionate rights distributions of capital and dividends ● All of the Company A shareholders are residents of Australia, and all shares are post-CGT assets ● Under the proposed demerger, the amount of the return of capital and dividend to be paid to each shareholder will be proportionate to the number of shares held by that shareholder There are no advantaged shareholders as there are no shareholders who would derive a greater benefit from capital benefits than other shareholders. There will also be no streaming of capital benefits and dividends to Company A’s shareholders. Section 45A will have no application to the proposed demerger. | Detailed Reasoning - Question 7: 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 shareholders of Company A in relation to the demerger scheme? | Summary: No, the Commissioner will not 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 shareholders of Company A in relation to the demerger scheme. | Detailed Reasoning - Detailed reasoning: Subsection 45B(2) ITAA 1936 applies to schemes where paragraphs 45B(2)(a) are met, these being: (a) A person is provided with a demerger or capital benefit (b) A taxpayer obtains a tax benefit (c) It would be concluded in all the relevant circumstances that any person who entered into or carried out the scheme or any part of the scheme did so for a more than incidental purpose of enabling a taxpayer to obtain a tax benefit According to subsection 45B(4) ITAA 1936, a person is ‘provided with a demerger benefit’ if in relation to a demerger a company provides the person with ownership interest in a company, or something is done in relation to an ownership interest owned by the person which increases the value of any ownership interest owned by the person. | Detailed Reasoning - Demerger benefit: A ‘demerger benefit’ is defined in subsection 45B(4) to include the provision by a company of an ownership interest in that or another company. The provision of the shares in ListCo under the proposed demerger transactions will constitute a ‘demerger benefit’. | Detailed Reasoning - A tax benefit: A taxpayer obtains a tax benefit if any amount payable under ITAA 1936 or 1997 would be less than an amount payable of payable at a later time but for the application of section 45B. There will be a tax benefit because the if the demerger benefit was received as an assessable dividend, the assessable income of Company A shareholders and their tax payable would likely be more than if they receive the proposed demerger benefit. | Detailed Reasoning - Relevant purpose of obtaining a tax benefit: Paragraph 45 of PS LA 2005/21 states, ‘It is expected that most, if not all, schemes of demerger will have a purpose of enabling taxpayers (that is, the head entity’s shareholders) to obtain a tax benefit. Whether it constitutes a more than incidental purpose of the scheme is a matter to be determined objectively from the relevant circumstances of the scheme. If the business or commercial purpose for the scheme is not sufficiently cogent, it is likely that the tax purpose will be more than incidental…’ Firstly, before exploring the relevant circumstances set out in subsection 45B(8) ITAA 1936, the taxpayers’ arguments for entering into the scheme will be set out below: ● To gain access to new capital streams to further exploit growth opportunities ● To rationalise debt ● To provide an opportunity for others to invest in ListCo; and ● To enhance liquidity by having ListCo’s shares held directly by Company A’s shareholders Paragraph 45B(8)(a) relates to 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. The PS LA provides for two ways of attributing the demerger benefit. The first is where an amount of capital is contributed and is precisely identifiable as contributing to a return to shareholders (a ‘tracing’ approach), while the second involves apportioning share capital over the assets of the business (a ‘slice’ attribution). A ‘reasonable’ approach is also able to be adopted in certain circumstances. The amount of the capital return reflects the part of the share capital of Company A that is referable to the assets that will cease to be owned by the Company A group following the demerger. This approach represents a reasonable allocation given the circumstances. | Detailed Reasoning - Paragraph 45B(8)(b) the pattern of distributions of dividends, bonus shares and returns of capital or share premium by the company: Paragraph 45B(8)(b) directs attention to the pattern of distribution of dividends, bonus shares and returns of share capital or share premium. The PS LA sets out that an interruption to the normal pattern of profit distribution and its replacement with a distribution under a demerger would suggest dividend substitution. Company A has regularly paid any dividends to its shareholders – these dividends have been paid out of the profits derived by group entities. The amount of dividends paid by Company A has varied from year to year, after allowing for the expected funding requirements of the businesses. The future payment of dividends by the Company A group will depend, inter alia, on the assets to be retained by the Company A group, the amount of income received from those assets and the funding requirements of these businesses. Any change in the dividend payment profile of Company A will be an ordinary incident of the proposed demerger. | Detailed Reasoning - Paragraph 45B(8)(c) whether the relevant taxpayer has capital losses that, apart from the scheme, would be carried forward to a later year of income: None of the shareholders of Company A currently have any capital losses carried forward. Paragraph 45B(8)(d) whether some or all of the shares in the company held by the relevant taxpayer were acquired, or are taken to have been acquired, by the relevant taxpayer before 20 September 1985 All shares in Company A are post-CGT assets. This factor is not relevant in this analysis. | Detailed Reasoning - Paragraph 45B(8)(e) whether the relevant taxpayer is a non-resident: All shareholders in Company A are Australian tax residents. Paragraph 45B(8)(f) whether the cost base (for the purposes of the ITAA 1997) of the relevant share is not substantially less than the value of the applicable demerger benefit The combined cost base to the shareholders of their shares in Company A is substantially less than the value of the remaining shares in ListCo that will be demerged to the shareholders. Paragraph 45B(8)(h) if the scheme involves the distribution of share capital or share premium – whether the interest held by the relevant taxpayer after the distribution is the same as the interest would have been in an equivalent dividend had been paid instead of the distribution of share capital or share premium As set out in paragraph 71 of PS LA 2005/21, ‘…a demerger should not disturb the head entity shareholder’s existing ownership interest… 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’. The taxpayers maintain the same proportion of interest before and after the demerger. If the scheme involves the provision of ownership interests and the later disposal of those interests, or an increase in the value of the ownership interests and the later disposal of those ownership interests – the period for which the ownership interests were held and when the arrangement for the disposal of the ownership interests was entered into The demerger of the shares in ListCo will occur after the Company A Group has sold a portion of its existing ListCo shares into the IPO. Further, the Company A shareholders will enter into a voluntary escrow agreement under which they agree not to sell their ListCo shares for a period of time. The scheme does not involve a disposal of ownership interests. | Detailed Reasoning - Any of the matters referred to in subsection 177D(2): Paragraph 45B(8)(k) of the ITAA 1936 requires that regard be had to any of the matters referred to in subparagraphs 177D(2). | Detailed Reasoning - The manner in which the scheme was entered into or carried out and the form and substance of the scheme – paragraphs 177D(2)(a) and (b): These paragraphs direct attention to the manner in which the scheme was entered into or carried out and the form and the substance of the scheme. The taxpayer has set out a number of reasons for the proposed demerger that are designed to facilitate the future growth and expansion of the Businesses that are owned by ListCo. The benefits of the demerger appear to be genuine and will flow from the transactions. There does not appear to be a tax-related purpose for implementing this scheme. | Detailed Reasoning - The time at which the scheme was entered into and the length of the period during which the scheme was carried out – paragraph 177D(2)(c): Paragraph 177D(2)(c) looks to the time and length of the scheme. The demerger happens after the IPO and capital raising. Escrow arrangements have been put into place to restrict the shareholders disposing of shares. The taxpayer argues that the time at which the demerger is undertaken is wholly related to commercial objectives of the respective businesses. We accept the taxpayer’s argument. | Detailed Reasoning - The result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme – paragraph 177D(2)(d): Paragraph 177D(2))d) refers to the result in relation to the operation of the income tax legislation that would be achieved but for ‘this Part’. PS LA 2005/21 at paragraph 91 interprets ‘this Part’ to be a reference to s45B. If section 45B does not apply, a part of the demerger dividend could be assessable to the Company A shareholders. However, the transactions appear to be motivated by commercial reasons and this factor is neutral in the assessment of whether any person is entering into the scheme for a not incidental purpose of obtaining a tax benefit. Any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme – paragraph 177D(2)(e) Subparagraph 177D(2)(e) of the ITAA 1936 directs attention to any change in the financial position of the head entity’s owners that results, will result, or may reasonably be expected to result, from the scheme. The taxpayers state that although the shareholders will, following the demerger, have an interest in the same assets as they held prior to the demerger, the nature of those assets will have changed materially. However, the shareholders’ financial position will have been restructured in a manner which enhances their potential value. Any change in the financial position of any person who has, or has had, any connection (whether of a business, family, or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme and any other consequence for the relevant taxpayer, or for any person referred to in subparagraph (f), of the scheme having been entered into or carried out – paragraphs 177D(2)(f) and (g) The financial position of shareholders is only changed to the extent of any increase in the market value and liquidity of the direct interests they receive in the Demerged entity relative to the market value and liquidity of the indirect interests that they presently hold. The nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in paragraph (f) – paragraph 177D(2)(h) The demerger is being undertaken to separate the Businesses from the assets and businesses to be held by the Company A Group to put the Businesses in a position to maximise their ability to grow and expand. Overall, having regard to the commercial objectives and benefits sought to arise from the demerger, these factors in s177D(2)(a) to (h) would not support the conclusion that the demerger was undertaken for a purpose of obtaining a tax benefit. | Detailed Reasoning - Question 8: 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 shareholders of Company A in relation to the Demerger Scheme? The Commissioner will not make a determination under section paragraph 45B(3)(b) ITAA 1936 that section 45C ITAA 1936 applies in respect of the whole or any part of the capital benefit provided to the shareholders of Company A in relation to the demerger scheme for the reasons set out in question 7 above. | Detailed Reasoning - Question 9: As a consequence of section 125-155 of the ITAA 1997, will Company A disregard any capital gain under CGT event A1 upon the proposed transfer of the remaining shares in ListCo to its shareholders? | Summary: Yes, as a consequence of section 125-155 ITAA 1997, Company A will disregard any capital gain under CGT event A1 upon the proposed transfer of the remaining shares in ListCo to its shareholders. | Detailed Reasoning - Detailed reasoning: Section 125-155 ITAA 1997 states, ‘Any capital gain or capital loss a demerging entity makes from CGT event A1, CGT event C2, CGT event C3 or CGT event K6 happening to its ownership interests in a demerged entity under a demerger is disregarded’. The requirements of section 125-155 are satisfied for the following reasons: ● The member of the Company A consolidated group which transfers the ListCo shares to the Company A shareholders is a demerging entity as it is a member of the demerger group of which Company A is head entity ● CGT event A1 will happen to the shares in the demerged entity (ListCo), being the sale of the remaining ListCo shares to the Company A shareholders ● It is anticipated that the Company A consolidated group will make a capital gain from CGT event A1 happening ● The sale of the remaining ListCo shares will happen under a demerger Section 125-155 applies such that Company A (as head company of the consolidated group, a member of which will transfer the ListCo shares) will disregard any capital gain or capital loss arising from CGT event A1 happening to the sale of the remaining shares in ListCo to the Company A shareholders. | Detailed Reasoning - Question 10: As a consequence of the proposed transfer of the shares in ListCo to the Company A shareholders, would Company A be required under subsection 45D(1A) of the ITAA 1936 to give a copy of a notice to its shareholders? | Summary: Company A is not required to give a copy of a notice to its shareholders under subsection 45D(1A) ITAA 1936. | Detailed Reasoning - Detailed reasoning: Under subsection 45D(1), 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. Under subsection 45D(1A), the company must, in the case of a determination under section 45A or 45B, give a copy of the notice to the advantaged shareholder referred to in section 45A or the relevant taxpayer referred to in section 45B. However, as the Commissioner is not making a determination under either section 45A or 45B in relation to the proposed demerger, there is not requirement for the Commissioner to make a determination and therefore not requirement for the company to make a notice of the determination.