Private ruling: Demerger
Published: June 2014
Ruling period: Income year ended 30 June 2014 | Income year ended 30 June 2015 | The scheme is proposed to commence | During the income year ended 30 June 2014

Ruling: Q8: Will the Commissioner seek to make a determination under section 45B of the ITAA 1936 that section 45BA or section 45C of the ITAA 1936 applies to the whole, or any part, of the demerger allocation received by the Company X shareholders? Advice No.

Relevant facts and circumstances: Overview The scheme to which this ruling applies involves the transfer by Company X of its wholly owned subsidiary, Company Y to the Company X shareholders under a demerger. Company X Company X is the parent company of a privately-owned Australian corporate group. Company X is the head company of a tax-consolidated group. Company Y Company Y is currently a 100% subsidiary of Company X. Company Y has a number of wholly owned subsidiaries. These subsidiaries undertake a range of businesses. Distributions under the proposed demerger On the date when the Demerger is to occur (the Implementation Date), Company X will: • reduce its share capital by an amount equal to the debit to share capital which will be applied proportionately against the Company X Shares on issue (the Capital Reduction Amount); • declare a demerger dividend equal to the excess of the value of Company Y Shares distributed to the Company X shareholders over the total Capital Reduction Amount (the Demerger Dividend); and • satisfy its obligation to pay the Capital Reduction Amount and the Special Dividend to the Company X shareholders by procuring Company Y Group to transfer all of its Company Y Shares to the Company X shareholders (the Demerger Allocation). Each Shareholder will be entitled to receive the same number of shares in Company Y of each class as the Company X Shares that they own on the Implementation Date. Reasons for the demerger The current group structure is not commercially optimal, and places the group in a position of commercial disadvantage. Company Y needs to be demerged from the Company X group in order to create a structure that will: • be independent of the Company X funding and guarantee arrangements; • allow the business of Company Y to establish stand-alone debt and funding facilities; and • allow the Company Y management team to pursue and fund future growth opportunities via external capital sources. Other matters All of the Company X shareholders are, and will be residents of Australia for tax purposes at the relevant times. All of the Company X shareholders hold their Company X shares on capital account for tax purposes. All of the Company X shares that the Company X shareholders acquired before 20 September 1985, are and will remain, pre-CGT assets within the meaning of section 149-10 of the ITAA 1997 at all relevant times. Company X's share capital account is not, and will not become tainted within the meaning of Division 197 of the ITAA 1497. Company X shareholders who are eligible to make a choice to obtain demerger roll-over relief under Division 125 of the ITAA 1997 in respect of the demerger will do so. Just after the demerger, at least 50% by market value of the CGT assets of Company Y and its demerger subsidiaries will be used directly, or indirectly, in one or more businesses carried on by Company Y or any of its demerger subsidiaries. Company X will not make an election in writing under subsection 44(2) of the ITAA 1936 for subsections 44(3) and 44(4) not to apply to the Company X shareholders.

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 1997 section 104-10 | Income Tax Assessment Act 1997 section 104-135 | Income Tax Assessment Act 1997 Division 125 | 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 125-80 | Income Tax Assessment Act 1997 section 125-155

Reasons for decision: Summary: 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). | Detailed Reasoning - 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). | Summary: CGT event G1 CGT event G1 will happen in relation to each Company X share owned by a Company X shareholder at the time Company X made the payment of the capital reduction amount under the demerger (which was applied to the acquisition of the Company Y shares) (section 104-135). Capital gain A Company X shareholder will make a capital gain when CGT event G1 happened if the capital reduction amount exceeds the cost base of the Company X share. The capital gain is equal to the amount of the excess. No capital loss can be made from CGT event G1 (subsection 104-135(3)). A capital gain made when CGT event G1 happened is disregarded if the Company X shareholder acquired the Company X share before 20 September 1985 (pre-CGT Company X share) (subsection 104-135(5) of the ITAA 1997). Demerger roll-over Company X and Company Y are part of a demerger group under subsection 125-65(1) of the ITAA 1997. A demerger, as defined under section 125-70 of the ITAA 1997, happened to the Company X demerger group under the demerger. An Company X shareholder can choose to obtain demerger roll-over under subsection 125-55(1) for their Company X shares. Demerger roll-over relief is chosen for pre-CGT Company X shares Company X shareholders who choose demerger roll-over relief for their pre-CGT Company X shares are taken to have acquired the corresponding Company Y shares under the demerger before 20 September 1985 (subsections 125-55(1), 125-80(5) and 125-80(6) of the ITAA 1997). Demerger roll-over relief is chosen for post-CGT Company X shares Company X shareholders who acquired their Company X shares on or after 20 September 1985 (post-CGT Company X shares) disregard any capital gain made when CGT event G1 happened if they choose demerger roll-over relief (subsections 125-55(1) and 125-80(1) of the ITAA 1997). If a Company X shareholder chooses demerger roll-over relief for their post-CGT Company X shares, they must recalculate the cost base and reduced cost base of their Company X and Company Y shares. The first element of the cost base and reduced cost base of each post-CGT Company X share and corresponding Company Y share received under the demerger is worked out as follows: • take the sum of the cost bases of the post-CGT Company X shares (just before the demerger); and • apportion that sum over the post-CGT Company X shares and corresponding new Company Y shares received under the demerger. The apportionment of this sum is done 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 125-80(3) of the ITAA 1997). Acquisition date of the Company Y shares For the purpose of determining eligibility to make a discount capital gain, a Company Y share received by a Company X shareholder under the Demerger will be taken to have been acquired on the date the shareholder acquired, for CGT purposes, the corresponding Company X shares (item 2 of the table in subsection 115-30(1)). This will be the case whether or not the shareholder chooses demerger roll-over. | Detailed Reasoning - Detailed reasoning: Demerger roll-over enables a shareholder to choose to disregard a capital gain made as a result of CGT event G1 happening when a non-assessable payment is made in relation to a share under a demerger. The demerger roll-over provisions in Division 125 of the ITAA 1997 contain a number of conditions for eligibility to choose demerger roll-over relief. The main conditions that are relevant to the Scheme are: (a) a shareholder owns a share 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 the original interest and a new or replacement interest is acquired in the demerged entity and nothing else. Under the scheme, the conditions for choosing demerger roll-over under Division 125 of the ITAA 1997 are satisfied in respect of the demerger of Company Y shares. As a consequence, the demerger concessions in Division 125 of the ITAA 1997 are available to the Company X shareholders in respect of the demerger of Company Y. | Summary: Any dividend arising under the demerger is a demerger dividend (subsection 6(1) of the ITAA 1936). In the absence of an election under subsection 44(2) of the ITAA 1936, any demerger dividend is neither assessable income nor exempt income of the participating Company X shareholders (subsections 44(3) and (4) of the ITAA 1936). As the capital reduction amount was debited to Company X's share capital account it is not a dividend, as defined in subsection 6(1) of the ITAA 1936 (see the exclusion contained in paragraph (d) of the definition of a dividend contained in subsection 6(1) of the ITAA 1936). | Detailed Reasoning - Detailed reasoning: 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. Paragraph (d) of the definition of dividend in subsection 6(1) of the ITAA 1936 provides that a dividend excludes amounts debited against an amount standing to the credit of the share capital account of the company. 'Share capital account' is defined in subsection 975-300(3) of the ITAA 1997 as an account that the company keeps of its share capital, or any other account created on or after 1 July 1997 where the first amount credited to the account was an amount of share capital. However, subsection 975-300(3) of the ITAA 1997 provides that an account is not a share capital account if it is tainted. A share capital account is tainted if an amount to which Division 197 of the ITAA 1997 applies is transferred to the share capital account where the account is not already tainted. Company X has stated that its share capital account remains untainted. In the circumstances of this demerger, Company X will debit a capital reduction amount to its 'share capital account' as defined in section 975-300 of the ITAA 1997. This amount is therefore not a dividend for the purposes of subsection 6(1) of the ITAA 1936 and is not assessable as a dividend under subsection 44(1) of the ITAA 1936. However, Company X shareholders receive a dividend to the extent that the market value of the Company Y shares distributed under the demerger exceeded the amount debited against the share capital account (see Taxation Ruling TR 2003/8). This dividend is neither an assessable income nor an exempt income amount (subsections 44(3) and 44(4) of the ITAA 1936) if: • the dividend is a demerger dividend (as defined in subsection 6(1) of the IAA 1936); • the head entity did not elect that subsections 44(3) and 44(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, each of the conditions detailed above is satisfied. Therefore, the dividend received by Company X shareholders under the demerger is neither assessable income nor exempt income by operation of subsections 44(3) and 44(4) of the ITAA 1936. | Summary: Section 45 of the ITAA 1936 will not apply to treat the value of the Company Y shares received by Company X shareholders under the demerger as an unfranked dividend paid by Company X. The Commissioner will not make a determination under subsection 45A(2) of the ITAA 1936 that section 45C applies to the whole or any part of the any capital benefit provided to Company X shareholders under the demerger. The Commissioner will not make a determination under paragraph 45B(3)(a) of the ITAA 1936 that section 45BA of the ITAA 1936 applies to the whole or any part of any demerger benefit provided to Company X shareholders under the demerger. The Commissioner will not make a determination under paragraph 45B(3)(b) of the ITAA 1936 that section 45C of the ITAA 1936 applies to the whole or any part of the capital benefit provided to Company X shareholders under the demerger. | Detailed Reasoning - Detailed Reasoning: Section 45 of the ITAA 1936 Section 45 of the ITAA 1936 applies where a company streams the provision of shares and the payment of minimally franked dividends to its shareholders in such a way that the shares are received by some shareholders and minimally franked dividends are received by other shareholders. Minimally franked dividends are dividends which are not franked or are franked to less than 10%. Based on the information provided and having regard to the circumstances of the scheme, section 45 of the ITAA 1936 will not apply to the whole or any part of any demerger benefit received by the Company X shareholders. Section 45A of the ITAA 1936 Section 45A of the ITAA 1936 is an anti-avoidance provision that applies where capital benefits are streamed to certain shareholders (the advantaged shareholders) who derive a greater benefit from the receipt of capital, and it is reasonable to assume that the other shareholders (the disadvantaged shareholders) have received or will receive dividends. Where the Commissioner makes a written determination under subsection 45A(2) of the ITAA 1936 that section 45C of the ITAA 1936 applies in relation to the whole or part of the capital benefits, the capital benefits will be treated as unfranked dividends paid out of the company's profits. Based on the information provided and having regard to the circumstances of the scheme, section 45A of the ITAA 1936 will not apply to the whole or any part of any demerger benefit provided to the Company X shareholders and the Commissioner will not make a determination under subsection 45A(2) that section 45C of the ITAA 1936 applies. Sections 45B, 45BA and 45C of the ITAA 1936 The purpose of section 45B of the ITAA 1936 is to ensure that relevant amounts distributed to shareholders of a company are treated as dividends for tax purposes if: (a) components of a demerger allocation as between capital and profit do not reflect the circumstances of the demerger; or (b) certain payments, allocations and distributions are made in substitution for dividends (subsection 45B(1) of the ITAA 1936). Subsection 45B(2) of the ITAA 1936 provides that the 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; (b) under the scheme the taxpayer obtains a tax benefit as defined in subsection 45B(9) of the ITAA 1936; and (c) having regard to the relevant circumstances of the scheme, it would be concluded that the scheme was entered into or carried out for a more than incidental purpose of enabling the taxpayer to obtain the tax benefit. In the circumstances of this case, while the conditions of paragraphs 45B(2)(a) and 45B(2)(b) of the ITAA 1936 are met, the requisite purpose (paragraph 45B(2)(c) of the ITAA 1936) of enabling Company X shareholders to obtain a tax benefit (by way of a demerger benefit or a capital benefit), is not present. Accordingly, the Commissioner will not make a determination under paragraph 45B(3)(a) or 45B(3)(b) of the ITAA 1936 that either section 45BA or 45C of the ITAA 1936 applies to the scheme to which this Ruling relates.

Question 1: Will any capital gain or capital loss that Company X makes from CGT event A1 happening to its shareholding in Company Y as a result of the demerger be disregarded pursuant to section 125-155 of the Income Tax Assessment Act 1997 (ITAA 1997)? | Question 2: Will CGT event G1 pursuant to section 104-135 of the ITAA 1997 happen for the Company X shareholders as a result of the demerger? | Question 3: Will the Commissioner confirm that the Company X shareholders will be entitled to choose demerger roll-over relief pursuant to section 125-55 of the ITAA 1997 in relation to the demerger? | Question 4: Will the Commissioner confirm that, should the Company X shareholders chose roll-over relief under section 125-55 of the ITAA 1997, they will be taken to have acquired the Company Y shares that they receive under the demerger on the same date as the date when they acquired their corresponding Company X shares? | Question 5: Will the Commissioner confirm that all or any part of the in-specie distribution of Company Y shares to the Company X shareholders that constitutes a 'dividend' for the purposes of subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936) will be a 'demerger dividend' as defined in subsection 6(1) of the ITAA 1936, and that it will be neither assessable income nor exempt income pursuant to subsections 44(3) and 44(4) of the ITAA 1936? | Question 6: Will section 45 of the ITAA 1936 apply to the whole or any part of any demerger allocation provided to the Company X shareholders under the demerger? | Question 7: Will section 45A of the ITAA 1936 apply to the whole or any part of any demerger allocation provided to the Company X shareholders under the demerger?