Private ruling: Proposed demerger
Date of advice: 8 July 2015
Published: July 2015
Ruling period: 1 July 2014 - 30 June 2015 | 1 July 2015 - 30 June 2016
Date scheme commenced: 1 July 2014

Ruling: Q1: Will the transfer of Company A's 100% shareholding in Company B to the Shareholders satisfy the requirements for demerger roll-over relief in Division 125 of the Income Tax Assessment Act 1997 (ITAA 1997) such that the Shareholders can choose to obtain a roll-over pursuant to section 125-55 of the ITAA 1997? | A1: Yes.

Relevant facts and circumstances: Company A is a resident private company, whose trading operations include the manufacture, installation and repair of products. Company A's ordinary shares are: • A% owned by Shareholder A (who is a resident), which are all pre-CGT assets • B% owned by Shareholder B (who is a resident), of which two-thirds are pre-CGT assets, and • C% owned by Shareholder C (who is a resident), of which none are pre-CGT assets. Company A owns two properties (Properties), with: • Property 1, being where Company A's trading operations are conducted from, and • Property 2, being leased to various commercial tenants. Company A proposes to undertake a corporate restructure, which will involve the following: • the establishment of a private company (Company B), to which Company A will subscribe to all of the ordinary shares • the formation of a tax consolidated group comprising of Company A and Company B • the transfer of the Properties from Company A to Company B at their respective market values • Company A demerging 100% of its ordinary shares in Company B to Shareholder A, Shareholder B and Shareholder C (Shareholders). Under the proposed demerger, the Shareholders will: • receive an in-specie distribution of all the ordinary shares in Company B in the same proportion as the ordinary shares they hold in Company A, via Company A disposing its shareholding in Company B • receive a return of share capital from Company A • receive a demerger dividend from Company A • each compulsorily apply the demerger allocation (i.e. return of share capital plus demerger dividend) to acquire the same proportion of new interests in Company B as each holds in Company A before the demerger, and • maintain the same proportionate market value of ownership interests in Company A and Company B as each has in Company A before the demerger. Accounting for the proposed demerger will be completed in the following manner: • the demerger dividends will be debited to the retained profits of Company A • the returns of share capital will be debited to the share capital account of Company A. The corporate restructure is required for the following reasons: • to maximise enterprise value by separating the Properties from Company A's trading operations • for asset protection purposes, as the Shareholders wish to move the Properties from Company into a separate entity (being Company B) • to facilitate a possible sale of the trading business when a potential purchaser does not wish to acquire a property portfolio.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 section 104-135 | Income Tax Assessment Act 1997 Subdivision 125-B | Income Tax Assessment Act 1997 subsection 125-55(1) | Income Tax Assessment Act 1997 subsection 125-60(1) | Income Tax Assessment Act 1997 subsection 125-65(1) | Income Tax Assessment Act 1997 subsection 125-65(3) | Income Tax Assessment Act 1997 section 125-70

Reasons for decision: Summary: Division 125 of the ITAA 1997 allows owners of ownership interests in the head entity of a demerger group to obtain a roll-over to defer capital gains tax (CGT) consequences for the CGT event that happen to their interests under the demerger. Subsection 125-55(1) of the ITAA 1997 states that entities can choose to obtain a roll-over if: (a) they own an ownership interest in a company (b) the company is the head entity of a demerger group (c) a demerger happens to the demerger group, and (d) under the demerger, a CGT event happens to their original ownership interest and they acquire a new ownership interest in the demerged entity. They own an ownership interest in a company Subsection 125-60(1) of the ITAA 1997 states than an ownership interest in a company includes a share in the company. This requirement is satisfied as each of the Shareholders owns ordinary shares in Company A. The company is the head entity of a 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 of Company A as the head entity and includes Company B as a demerger subsidiary. Company A will be the head entity because no other member of the demerger group owns shares in Company A: subsection 125-65(3) of the ITAA 1997. Company B will be a demerger subsidiary of Company A because Company A will own 100% ownership interests in Company B: subsection 125-65(6) of the ITAA 1997. A demerger happens to the demerger group Under subsection 125-70(1) of the ITAA 1997 a demerger will happen to the demerger group comprising of Company A and Company B, because: (a) there will be a restructuring of the demerger group (b) under the restructuring, Company A will dispose of its 100% ownership interest in Company B to the Shareholders (c) under the restructuring, CGT event G1 under section 104-135 of the ITAA 1997 will happen to shares in Company A due to the Shareholders receiving new ownership interests in Company B (d) the acquisition by the Shareholders of the new ownership interests in Company B will happen only because they own the original ownership interests in Company A (e) the new ownership interests in Company B acquired by the Shareholders will be ordinary shares (f) neither the Shareholder's original ownership interests in Company A or new ownership interests in Company B will be in a trust that is a non-complying superannuation fund, and (g) the requirements of subsection 125-70(2) of the ITAA 1997 will be met, because of the following: • the Shareholders will each acquire, under the demerger, the same proportion of new ownership interests in Company B as each owns in Company A just before the demerger, and • just after the demerger, each of the Shareholders will have the same proportionate total market value of ownership interests in Company A and Company B as each has in Company A just before the demerger. (h) none of the exceptions in subsections 125-70(4) and 125-70(5) applies. Under the demerger, a CGT event happens to their ownership interest and they acquire a new ownership interest in the demerged entity Company B will be a demerged entity under subsection 125-70(6) of the ITAA 1997, as it will be a former member of a demerger group as a result of a demerger in which its ownership interests will be acquired by the Shareholders. As stated earlier, CGT event G1 under section 104-135 of the ITAA will happen to the Shareholder's interest in Company A due to each receiving ownership interest in Company B. | Detailed Reasoning - Conclusion:: A demerger will happen within the meaning of section 125-70 of the ITAA 1997. The shareholders in Company A will be entitled to choose the roll-over under section 125-55 of the ITAA 1997 upon the demerger of Company B's shares by Company A.