Private ruling: Demerger of Company B by Company A
Published: July 2014
Ruling period: 1 July 2014 to 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Will any capital gain arising from the disposal by Company A of the shares it holds in its subsidiary Company B to the Company A shareholders under the demerger be disregarded pursuant to section 125-155 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes

Relevant facts and circumstances: The scheme that is subject of this ruling involves the proposed demerger of Company B by Company A. Company A Company A is the head entity of the demerger group. All shares in Company A are post-CGT assets. Company B Company B is a subsidiary of Company A. Proposed demerger Company A proposes to undertake a restructure under which 100% of its shareholding in Company B will be distributed to the holders of ordinary shares in Company A (Company A shareholders). Under the restructure, the owners of shares in Company A will receive shares in company B (and nothing else) in the same proportion of their existing shares in Company A.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 125-155

Reasons for decision: Summary: Section 125-155 of the ITAA 1997 provides that a demerging entity may disregard the capital gains or losses arising from CGT event A1 happening to its ownership interests in a demerged entity under a demerger. | Detailed Reasoning - Demerger: Subsection 125-70(1) of the ITAA 1997 describes when a demerger happens. A demerger will happen to the Company A demerger group because: • 125-70(1)(a) - there is a restructuring taking place. • 125-70(1)(b)(i) - Company A will dispose of 100% of its shares in Company B to the Company A shareholders. • 125-70(1)(c) - CGT Event G1 happens to original interests owned in Company A and the Company A shareholders will acquire a new interest (being shares in Company B) and nothing else. • 125-70(1)(d) - This condition is satisfied in the current transactions as the Company A shareholders will receive shares in Company B only because they are shareholders in Company A. • 125-70(1)(e) - the interests acquired by the Company A shareholders are ownership interests in a company (that is, shares in Company B). • 125-70(1)(g) - neither the original interests nor the new interests are in a trust that is a non-complying superannuation fund. • 125-70(1)(h) - the owners of shares in Company A will receive shares in company B (and nothing else) in the same proportion as their existing shares in Company A. | Detailed Reasoning - Ownership interests: An ownership interest in a company is defined in paragraph 125-60(1)(a) of the ITAA 1997 as a share in the company or an option, right or similar interest issued by the company that gives the owner an entitlement to acquire a share in the company. | Detailed Reasoning - CGT event A1 happens: Section 104-10 of the ITAA 1997 states that CGT event A1 happens when you dispose of a CGT asset. In this instance, the transfer of the Company B shares from Company A to the Company A shareholders constitutes a disposal of a CGT asset. | Detailed Reasoning - Company B is the demerged entity: Under paragraph 125-70(6)(a) of the ITAA 1997 an entity that is a former member of a demerger group is a demerged entity if, under a demerger that happens to the group, ownership interests in the entity are acquired by shareholders in the head entity of the group. Since the Company A shareholders will acquire ownership interests in Company B under the demerger, Company B is the demerged entity. | Detailed Reasoning - Company A is the demerging entity: Paragraph 125-70(7)(a) of the ITAA 1997 provides the meaning of demerging entity as follows: An entity that is a member of a *demerger group just before the *CGT event referred to in section 125-155 happens is a demerging entity if, under a *demerger that happens to the group: (a) the entity (either alone or together with other 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 In this instance, Company A will be the demerging entity as it will dispose of 100% of its ownership interest in Company B to the Company A shareholders (being the owners of the original interests in the head entity of the demerger group). The exceptions provided at subsections 125-70(4) and (5) of the ITAA 1997 relating to off-market buy backs and roll-over under another provision of the ITAA 1997, respectively, do not apply to the demerger. In conclusion, any capital gain arising from the disposal by Company A of the shares it holds in Company B to the Company A shareholders under the demerger can be disregarded pursuant to section 125-155 of the ITAA 1997.