Private ruling: Demerger
Date of advice: 22 December 2020
Published: March 2021
Ruling period: 1 July 20XX to 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will any capital gain or capital loss from CGT event A1 in section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997) happening on the disposal of shares in Demerged Co (the Distribution) pursuant to section 125-155 of the ITAA 1997 be disregarded by Head Co? | A1: Yes | Q2: Will Head Co have an obligation to withhold tax on the Distribution under section 128B of the Income Tax Assessment Act 1936 (ITAA 1936)? | A2: No | Q3: Will the Commissioner make a determination in respect of or under section 45A of the ITAA 1936 that section 45C of the ITAA 1936 will apply because of the Distribution? | A3: No | Q4: Will the Commissioner make a determination in relation to the Distribution under: (1) paragraph 45B(3)(a) that section 45BA of the ITAA 1936 applies to all or part of a demerger benefit, or (2) paragraph 45B(3)(b) that section 45C of the ITAA 1936 applies to all or part of a capital benefit, and if so: (3) will the Commissioner make a further determination under subsection 45C(3) that all or part of the capital benefit was paid under a scheme for which a non-incidental purpose was to avoid franking credits arising in relation to the Distribution? | A4: (1) No (2) No (3) The question is not relevant given the answer to (2).

Relevant facts and circumstances: Head Co is an Australian-resident company listed on the Australian Securities Exchanges (ASX) and is the head company of a consolidated group for the purposes of Part 3-90. The Head Co consolidated group had two subsidiary members, Subco A and Subco B. Each conducted a business markedly different in nature from the other. The business conducted by Subco A had for many years been the main business of the group, but in recent years, the business conducted by Subco B, had increased considerably and was competing with the business of Subco A for capital and management resources. The distinct characteristics, assets and risk profiles of the two businesses required distinct growth strategies, capital structures, financial policies and management incentives in order to optimise the performance of each business into the future. Head Co's board instituted a strategic review to consider the optimal corporate and capital structure for its businesses. A number of options were considered, and in the end, the board decided to demerge the business of Subco B to Head Co's shareholders. The arguments advanced in favour of the demerger were: • shareholders would have greater flexibility to choose their level of investment in each business, given their different characteristics, assets and risk profiles • distinct business plans and growth strategies could be pursued for each business • shareholders would have greater investment choice • greater flexibility and discipline would be possible when pursuing growth opportunities for each business • each business could adopt a capital structure and financial policies appropriate to its needs • it would be possible to better align management incentives with underlying strategy, performance and shareholder value creation, and • it was anticipated that Subco B's business, if separated from the Head Co group, would attract a new set of investors who would not otherwise invest in Head Co. The Head Co group undertook some preparatory restructuring by • incorporating a new wholly-owned subsidiary member, New Co, within the consolidated group, and • transferring Head Co's shares in Subco B to New Co. A Separation Deed was entered into between Head Co and New Co which included arrangements for transitional services and standard mutual indemnities in respect of the historical businesses to ensure the economic exposure for any historical liabilities remained with the relevant business. Under these arrangements, Head Co was entitled to payment of a dividend from New Co for the period leading up to the separation, reflecting after-tax revenue derived by the New Co group during that period, net of operating costs. All intercompany loans between Head Co group members and New Co group members were settled before the separation. New Co hired a board and management team with a diverse range of expertise in the kind of business that Subco B carried on, and developed a business plan and growth strategy focussed on that business. An Extraordinary General Meeting was held at which Head Co shareholder approved: • under subsection 256C(1) of the Corporations Act 2001, an equal reduction (within the meaning of subsection 256B(2) of that Act) of Head Co's share capital under section 256B of that Act, to be applied equally against each Head Co share at the Record Date, and • an in specie distribution (the Distribution) of x% (x ≥ 80) of New Co shares to Head Co shareholders, in satisfaction of the capital reduction amount and a demerger dividend. At the time of the Distribution, Head Co shareholders were allocated a fixed number of New Co shares for each Head Co share they held at the Record Date. Head Co retained (100 - x)% of the shares in New Co. Head Co accounted for the demerger by: • debiting its share capital account by the capital reduction amount approved at the Extraordinary General Meeting, and • debiting its retained earnings by the market value of the New Co shares in the Distribution less the capital reduction amount. The capital reduction amount was worked out taking into account the particular circumstances of the demerger. Other matters All issued shares in Head Co were of the same class, as were all issued shares in New Co. Just before the Distribution: • no foreign resident entities held a non-portfolio interest (within the meaning of section 960-195) in Head Co, nor had any done so for a 12-month period during the 24 months preceding the demerger • no Head Co shareholder beneficially held more than 20% of Head Co's shares, and • Head Co's share capital account was not tainted (within the meaning of Division 197). Head Co did not make an election under subsection 44(2) that subsections 44(3) and (4) will not apply. Just after the Distribution, of the CGT assets owned by New Co and Subco B, at least 50% by market value were used, directly or indirectly, in the business carried on by Sub Co B. Head Co's dividend policy has been consistent for many years.


Reasons for decision: Summary: CGT event A1 happened in relation to Head Co's disposal of x % (x ≥ 80) of its shares in New Co to its shareholders. That disposal, together with preliminary restructuring within the Head Co consolidated group, brought about a demerger (as defined in subsection 125-70(1)). Head Co is a demerging entity (as defined in subsection 125-70(7)) and New Co a demerged entity (as defined in subsection 125-70(6)) in relation to the demerger. The shares are ownership interests (as defined in subsection 125-60(1)). Accordingly, any capital gain or capital loss Head Co makes as a result of CGT event A1 happening in relation to the disposal is disregarded under section 125-155. The single entity rule in section 701-1 is relaxed to the extent that it does not frustrate this intended outcome of the law. | Detailed Reasoning - Detailed reasoning: Section 125-155 states that: 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. Relevant definitions The term 'demerging entity' is defined in subsection 125-70(7) 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 interest in another member of the demerger group to owners of original interests in the *head entity of the demerger group; or (b) ... A 'demerged entity' is an entity that was a member of a demerger group to which a demerger happened under which ownership interests in the entity were acquired by shareholders in the head entity of the group (if the head entity was a company) or unitholders or holders of interests in the head entity (if the head entity was a trust) (subsection 125-70(6)). An 'ownership interest' in a company is 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 (paragraph 125-60(1)(a)). An ownership interest in a trust is a unit or other interest in the trust, or an option, right or similar interest issued by the trustee that gives the owner an entitlement to acquire a unit or other interest in the trust (paragraph 125-60(1)(b)). A 'demerger group' comprises a head entity and one or more demerger subsidiaries (subsection 125-65(1)). Either may be a company, or a trust in relation to which CGT event E4 is capable of applying to all of the units and interests in it (subsection 125-65(2). A company or trust is the head entity of a demerger group if: • no other member of the group owns ownership interests in it (subsection 125-65(3)), and • it is not a demerger subsidiary of a company or trust in another demerger group (subsection 125-65(4), unless it is a listed company or listed widely held trust in which one or more members of the other group hold a total of less than 80% of its ownership interests and it chooses that a sufficient number of those members are not members of its demerger group (subsection 125-65(5)). A company or trust is a demerger subsidiary of another company or trust that is a member of a demerger group if the other company or trust, alone or together with other members of the group, owns, or has the right to acquire, ownership interests in the company or trust that carry between them: • the right to receive more than 20% of any distribution of income or capital by the company or trustee, and • in the case of a company, the right to exercise, or control the exercise of, more than 20% of the voting power of the company (subsections 125-65(6) and (7)). A 'demerger' happens to a demerger group if there is a restructuring of the group (paragraph 125-70(1)(a)) such that: • under the restructuring, by one or a combination of the following means, members of the demerger group stop owning at least 80% of the total ownership interests owned by members of the group in another member of the group: - disposal of the ownership interests to owners of original interests in the head entity of the group - ending of the ownership interests and issuing of new interests to owners of original interests in the head entity, or - dilution of the ownership interests through the issue of new ownership interests in the other member to owners of original interests in the head entity (paragraph 125-70(1)(b)) • under the restructuring, whether or not a CGT event happens to an original interest owned by an entity in the head entity, the entity acquires only a new interest and nothing else (paragraph 125-70(1)(c)) • entities acquire new interests only because they own or owned original interests (paragraph 125-70(1)(d)) • if the head entity is a company the new interests must be ownership interests in a company; or if the head entity is a trust, the new interests must be ownership interests in a trust (paragraph 125-70(1)(e)) • neither the original interests nor the new interests are in a trust that is a non-complying superannuation fund (paragraph 125-70(1)(g), and • each owner (an 'original owner') of original interests in the head entity must: - acquire, under the demerger, the same proportion (as nearly as practicable) of new interests in the demerged entity as the original owner owned in the head entity just before the demerger; and - 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 (paragraph 125-70(1)(h) and subsection 125-70(2)). The term 'restructuring' in paragraph 125-70(1)(a) has its ordinary business meaning, which is the reorganisation of a group of companies or trusts. All steps occurring under a single plan or reorganisation (generally the proposal that is presented to the affected owners of original interests in the head entity of the demerger group) will usually constitute the restructuring. These may include transactions occurring before and / or after the transactions mentioned in paragraph 125-70(1)(b), so must be taken into account in determining whether the conditions in subsections 125-70(1) and (2) are satisfied. See further Taxation Determination TD 2020/6 Income tax: what is a 'restructuring' for the purposes of subsection 125-70(1) of the Income Tax Assessment Act 1997? | Detailed Reasoning - Single entity rule - interaction with section 125-155: Broadly, a consolidated group is treated, for income tax purposes, as a single entity. This is brought about by section 701-1 (the 'single entity rule'), which provides that if an entity is a subsidiary member of a consolidated group for any period, it and any other subsidiary member of the group are taken to be parts of the head company of the group, rather than separate entities, during that period, for the purposes of: • working out the amount of the head company's, or entity's, liability (if any) for income tax calculated by reference to any income year in which any of the period occurs or any later year, and • working out the amount of the head company's, or entity's, loss of a particular sort for any such income year. Section 701-1 refers to these purposes as the 'head company core purposes', or the 'entity core purposes' (as applicable). Where a consolidated group would also be a demerger group, if not for the single entity rule, the question arises whether the single entity rule applies to forestall the existence of the demerger group and therefore any potential application of section 125-155, which involves the head company core purposes. This problem potentially arises because a demerger group must comprise at minimum a head entity and one demerger subsidiary. The Commissioner's view concerning this scenario is stated in Taxation Determination TD 2004/48 Income tax: consolidation: capital gains: for the purposes of Subdivision 125-C of the Income Tax Assessment Act 1997, can the head company of a consolidated group meet the requirements of a demerging entity in subsection 125-70(7) where a subsidiary member is demerged from the group? The Determination states, at paragraph 6: In our view, the single entity rule does not prevent recognition of the demerged entity, and the group's membership interests in the demerged entity, just before the relevant CGT event happens. The head company can meet the requirements of a demerging entity in subsection 125-70(7) of the ITAA 1997. That is, the demerger group consists of the head company and the demerged subsidiary, even if there are other interposed subsidiary members. This is consistent with CGT events in relation to the demerger happening to the head company under the single entity rule. | Detailed Reasoning - CGT event G1: CGT event G1 happens if: • a company makes a payment to a shareholder in respect of a share they own in the company (other than where CGT event A1 or C2 happens in relation to the share) • some or all of the payment (the 'non-assessable part') is not a dividend or an amount taken to be a dividend under section 47, and • the payment is not included in the shareholder's assessable income (subsection 104-135(1)). The event happens when the company makes the payment (subsection 104-135(2)). The shareholder makes a capital gain if the amount of the non-assessable part exceeds the share's cost base (subsection 104-135(3)). They cannot make a capital loss (note 1 to subsection 104-135(3)). CGT event G1 happens to the shareholders of the head entity of a demerger group that is a company if a demerger happens to the demerger group and the share capital account of the company is debited by an amount in relation to the distribution of new interests in the demerged entity to the shareholders. The amount is a return of capital to shareholders, and as such is not a dividend, so is not assessable under subsection 44(1). However, this is subject to certain anti-avoidance provisions. The return of capital is a capital benefit, which may be subject to a determination under subsection 45A(2) or paragraph 45B(3)(b). In that case, all or part of the capital benefit would be deemed to be an unfranked dividend under section 45C, so would be assessable under subsection 44(1). See further the reasons for decision in questions 3 and 4. A roll-over is available to resident shareholders (and in restricted circumstances, to non-resident shareholders) under section 125-55 where CGT event G1 happens in relation to a demerger as just described. | Detailed Reasoning - Application to the present case: Head Co's disposal of shares in New Co resulted in CGT event A1 happening to those shares, which were ownership interests in New Co. Head Co was the head entity of a demerger group that included itself, New Co and Subco B as demerger subsidiaries (all of which were also members of the Head Co consolidated group). There was a restructuring of the demerger group which included the preparatory internal restructure, transactions pursuant to the Separation Deed, and Head Co's disposal of at least 80% of its shares in New Co. Under the restructuring, the conditions in paragraphs 125-70(1)(b), (c), (d), (e) and (g) were satisfied. The first of the proportion tests in subsection 125-70(2) was satisfied because each Head Co shareholder received a fixed number of New Co shares for each Head Co share they held, and the shareholders between them received all the New Co shares that Head Co disposed of. This, and the fact that all of the Head Co shares were of the same class, as were all the New Co shares, ensured that the second of the proportion tests was also satisfied. CGT event G1 is the only CGT event that happened in relation to Head Co shareholders' Head Co shares because of the capital reduction that formed part of the Distribution (in respect of which the Commissioner will make no determination under subsection 45A(2) or paragraph 45B(3)(b): see questions 3 and 4). The only provision under which a roll-over is available in relation to CGT event G1 is section 125-55. Therefore, subsection 125-70(5) does not apply. Therefore, a demerger happened to the demerger group. The single entity rule did not apply in relation to the Head Co consolidated group to prevent the recognition of a demerger group for the purposes of section 125-155. Head Co was a demerging entity, and New Co a demerged entity in relation to the demerger, and CGT event A1 happened to the ownership interests (shares) in New Co that Head Co disposed of under the demerger. Therefore, any capital gain or capital loss from CGT event A1 happening to the shares is disregarded. | Summary: Section 128B does not apply to the part of the Distribution that is a demerger dividend (or would be apart from section 45B) as section 45B does not apply to the demerger dividend. Therefore, Head Co has no obligation to withhold tax on the Distribution under section 128B. | Detailed Reasoning - Applicable law: Subsection 128B(4) makes a person who derives income to which section 128B applies that consists of a dividend liable to pay income tax on that income at the rate declared by Parliament. Subsection 128B(1) states that section 128B applies to income derived on or after 1 January 1968 by a non-resident that consists of a dividend paid by a company that is a resident. However, this is subject to certain exceptions including that set out in subsection 128B(3D), which states that section 128B does not apply to a demerger dividend to which section 45B does not apply. A 'demerger dividend' is 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) (subsection 6(1)). A 'demerger allocation' is the sum of the market values of the allocations represented by: • the ownership interests issued by a demerged entity in itself under a demerger to the owners of ownership interests in the head entity of the relevant demerger group, and • the ownership interests disposed of by a member of the demerger group under the demerger to those owners (subsection 6(1)). A dividend includes any distribution made by a company to any of its shareholders, whether in money or other property, and any amount credited by a company to any of its shareholders as shareholders. However, a dividend does not include moneys paid or credited, or property distributed, by a company to shareholders where the amount of the money or the value of the property is debited against an amount standing to the credit of the company's share capital account (subsection 6(1)). Subsection 44(1) provides that the assessable income of a shareholder of a company (whether resident or non-resident) includes: • if the shareholder is a resident, dividends paid to the shareholder by the company out of profits derived by it from any source • if the shareholder is a non-resident, dividends paid to the shareholder by the company to the extent to which they are paid out of profits derived by it from sources in Australia. However, subsection 44(2) states that subsections 44(3) and (4) apply to a demerger dividend unless the head entity of the relevant demerger group makes an election within the prescribed time that they not apply. Subsection 44(3) states that section 44 applies to a demerger dividend as if it had not been paid out of profits, which means the demerger dividend is not included in the assessable income of shareholders in the head entity under subsection 44(1). Subsection 44(4) provides that a demerger dividend is not assessable income and is not exempt income. However, subsection 44(5) prevents subsections 44(3) and (4) from applying unless CGT assets owned by the demerged entity or a demerger subsidiary representing at least 50% by market value (or a reasonable approximation of market value) of all the CGT assets owned by the demerged entity and its demerger subsidiaries are used, directly or indirectly, in one or more businesses carried on by one or more of those entities. In applying subsection 44(5), CGT assets that are ownership interests in a demerger subsidiary are to be disregarded unless they are used in a business referred to in that subsection (subsection 44(6)). | Detailed Reasoning - Application to the present case: The market value of the New Co shares that Head Co disposed of to its shareholders under the Distribution is the demerger allocation. The demerger dividend is that part of the demerger allocation that is not debited to Head Co's share capital account because of the capital reduction approved by Head Co's shareholders. It would be assessable under subsection 44(1) were it not for subsections 44(3) and (4). Head Co has not made the election referred to in subsection 44(2), and the requirement in subsection 44(5) is satisfied, so that neither subsection prevents subsections 44(3) and (4) from applying. As explained in the reasons for decision in relation to question 4, section 45B does not apply to the demerger dividend. Therefore, section 128B does not apply to the demerger dividend, and so Head Co has no obligation to withhold an amount under that section in relation to the demerger dividend. | Summary: Section 45A would only apply in circumstances where a company streams capital benefits to some shareholders and dividends to other shareholders. The distribution of New Co shares by Head Co to its shareholders does not constitute streaming of this kind. Therefore, section 45A has no application. | Detailed Reasoning - Detailed reasoning: Section 45A applies where a company, whether or not in the same year of income, streams the provision of capital benefits and the payment of dividends to its shareholders in such a way that: • the capital benefits are (or would be apart from that section) received by shareholders who would, in the year of income the benefits are provided, derive a greater benefit from them than other shareholders, and • it is reasonable to assume that the other shareholders have received, or will receive, dividends (subsection 45A(1)). The Commissioner may make a determination in writing that section 45C applies in relation to all or part of the capital benefits (subsection 45A(2)). The provision of a capital benefit means any of the following: • the provision to the shareholder of shares in the company • the distribution to the shareholder of share capital or share premium, or • something that is done in relation to a share that has the effect of increasing the value of a share (whether or not the same share) held by the shareholder (subsection 45A(3)). The circumstances in which a shareholder would derive a greater benefit from capital benefits than another in a year of income include where the following applies to the first shareholder but not the second: • some or all of the shares were acquired before 20 September 1985 • the shareholder is a non-resident • the cost base of the relevant share is not substantially less than the value of the capital benefit • the shareholder has a net capital loss for the year of income in which the capital benefit is provided, or • the shareholder has income tax losses (subsection 45A(4)). If the Commissioner makes a determination as mentioned above, the effect of section 45C is that the amount of the capital benefit, or a part of it, is taken for the purposes of the income tax law to be an unfranked dividend paid by the company to the shareholder at the time the shareholder is provided with the capital benefit. | Detailed Reasoning - Application to the present case: Because all Head Co shareholders are treated equally in the sense that they each receive a fixed number of New Co shares under the demerger for every Head Co share they hold, and nothing else, the streaming of capital benefits and dividends that section 45A refers to is not present. The shares they receive are shares in New Co, not shares in 'the company' (being Head Co); however, part of the in specie distribution is a return of share capital to Head Co shareholders, which is a capital benefit. Head Co shareholders with more Head Co shares than others will benefit more from this than those others, but again there is no streaming. Therefore, the Commissioner will not make a determination under subsection 45A(2) that section 45C applies to all or part of the capital benefit. | Summary: The restructuring of the demerger group of which Head Co was the head entity, under which a demerger happened to the demerger group, was a scheme under which: • Head Co's shareholders were provided with both a demerger benefit (in the form of shares in New Co) and a capital benefit (in the form of a distribution of share capital) • Head Co's shareholders obtained a tax benefit because neither the demerger dividend nor the return of capital were included in their assessable income, and • Head Co obtained a tax benefit because it disregards any capital gain it made from the disposal of its shares in New Co, the underlying assets of which have appreciated significantly in value due to the increase of Subco B's business since Head Co acquired it. Nevertheless, having regard to the relevant circumstances of the scheme, it is concluded that the persons who entered into or carried out the scheme did not do so for a more than incidental purpose of enabling Head Co and its shareholders to obtain those tax benefits. Accordingly, section 45B has no application. | Detailed Reasoning - Applicable law: The purpose of section 45B is to treat amounts as dividends where either the capital/profit split of a demerger dividend does not reflect the circumstances of a demerger, or certain payments, allocations and distributions are substituted for dividends (subsection 45B(1)). The section applies if: (a) there is a scheme under which a person (which includes a company: subsection 6(1) and subsection 995-1(1)) is provided with a demerger benefit or a capital benefit by a company (b) under the scheme, a taxpayer ('the relevant taxpayer'), who may or may not be the person provided with the demerger benefit or capital benefit, obtains a tax benefit, and (c) having regard to the relevant circumstances of the scheme, it would be (objectively) concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of it did so for a purpose of enabling a taxpayer (the relevant taxpayer) to obtain a tax benefit. The requisite purpose may or may not be the dominant purpose, but does not include an incidental purpose (subsection 45B(2)). The Commissioner may make a determination in writing that section 45BA applies to all or part of the demerger benefit, or that section 45C applies to all or part of the capital benefit (subsection 45B(3)). The effect of applying section 45BA is that all or part of the demerger benefit is taken for the purposes of the income tax law not to be a demerger dividend. Where the benefit is the provision of ownership interests, the amount of the demerger benefit is the market value of the interests at the time they were provided (paragraph 45BA(2)(a)). This means that all or part of what would otherwise have been the demerger dividend is brought to tax under subsection 44(1). The effect of applying section 45C is that all or part of the capital benefit is taken for the purposes of the income tax law to be an unfranked dividend paid by the company to the shareholder or relevant taxpayer at the time the capital benefit is provided to them. That effect would include reducing or eliminating the non-assessable amount mentioned in paragraph 104-135(1)(b) because part or all of what would otherwise have been the non-assessable amount no longer satisfies the condition in that paragraph or that in paragraph 104-135(1)(c). That is, all or part of the capital component of the distribution of ownership interests would be taxed as an unfranked dividend instead of contributing to a capital gain under CGT event G1 that the shareholder could defer by choosing a roll-over. A scheme means any arrangement; or any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise (subsection 45B(10) and subsection 995-1(1)). An arrangement means any arrangement, agreement, understanding, promise or undertaking, whether express or implied, and whether or not enforceable (or intended to be enforceable) by legal proceedings (subsection 995-1(1)). A person is provided with a demerger benefit if in relation to a demerger: • a company provides the person with ownership interests in that or another company, or • something is done in relation to an ownership interest owned by the person that increases the value of an ownership interest (whether or not the same one) owned by the person (subsection 45B(4)). A person is provided with a capital benefit if: • they are provided with ownership interests in a company • share capital or share premium is distributed to them, or • something is done in relation to an ownership interest that increases the value of an ownership interest (whether or not the same one) that is held by the person (subsection 45B(5)). However, to the extent that the provision of interests, the distribution or the thing done involves the person receiving a demerger dividend, the person is not provided with a capital benefit (subsection 45B(6)). A relevant taxpayer obtains a tax benefit if an amount of tax payable, or any other amount payable under the income tax law, by the relevant taxpayer would, apart from this section, be less than the amount that would have been payable, or would be payable at a later time than it would have been payable, if the demerger benefit or the capital benefit had been an assessable dividend (subsection 45B(9)). There are a number of ways in which a tax benefit may be obtained by a relevant taxpayer under a demerger: • any demerger dividend is not assessable as a dividend, or otherwise, if subsections 44(3) and (4) apply • Australian resident owners of ownership interests in the head entity of the demerger group may choose a roll-over under section 125-55, which means: - they can disregard any capital gain from a CGT event happening to their original interests in the head entity under the demerger (subsection 125-80(1)) - if they held any pre-CGT original interests in the head entity, an equivalent proportion of the ownership interests they receive in the demerged entity under the demerger become pre-CGT assets as well (subsections 125-80(4) to (6)) - if they had held original interests in the head entity for 12 months or more, they could dispose of the corresponding ownership interests they receive in the demerged entity immediately and still attract the CGT discount (if they satisfied the other conditions for the discount) (section 115-25 and table item 2 of subsection 115-30(1)). Also: • the demerging entity disregards any capital gain (or capital loss) it makes under (for example) CGT event A1 from the disposal of its ownership interests in the demerged entity under the demerger (section 125-155), and • CGT event J1 does not happen to a demerged entity or a member of a demerger group under a demerger (section 125-160). The relevant circumstances of a scheme include (subsection 45B(8)): (a) the extent to which the demerger benefit or capital benefit is attributable to capital or to profits (realised and unrealised) of the accompany or an associate of the company (within the meaning of section 318) (b) the pattern of distributions of dividends, bonus shares and returns of capital or share premium by the company or an associate (c) whether the relevant taxpayer has capital losses that, apart from the scheme, would be unutilised (ie not utilised according to the meaning of 'utilise' in section 960-20) at the end of the relevant year of income (d) whether some or all of the ownership interest in the company or in an associate of the company held by the relevant taxpayer were acquired, or are taken to have been acquired, by the relevant taxpayer before 20 September 1985 (e) whether the relevant taxpayer is a non-resident (f) whether the cost base of the relevant ownership interest is not substantially less than the value of the applicable demerger benefit or capital benefit (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 if an equivalent dividend had been paid instead of the distribution of share capital or share premium (i) if the scheme 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: (i) the period for which the ownership interests are held by the holder of the interests, and (ii) when the arrangement for the disposal of the ownership interests was entered into (j) in the case of a demerger: (i) whether the profits of the demerging entity and demerged entity are attributable to transactions between the entity and an associate (within the meaning of section 318) of the entity, and (ii) whether the assets of the demerging entity and demerged entity were acquired under transactions between the entity and an associate (within the meaning of section 318) of the entity, and (k) any of the matters referred to in subsection 177D(2). The matters referred to in subsection 177D(2) (which are considered in the present context in order to establish whether there is a more than incidental purpose of enabling the relevant taxpayer to obtain a tax benefit - see Law Administration Practice Statement PS LA 2005/21 Application of section 45B of the Income Tax Assessment Act 1936 to demergers (PS LA 2005/21) at paragraph 83) are: (a) the manner in which the scheme was entered into or carried out (b) the form and substance of the scheme (c) the time at which the scheme was entered into and the length of the period during which the scheme was carried out (d) the result in relation to the operation of the Act that would be achieved by the scheme, if not for section 45B (note: the actual reference in paragraph 177D(2)(d) is to 'this Part', meaning Part IVA. The correct context here is section 45B: see PS LA 2005/21 at paragraphs 89-92) (e) 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 (f) 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 (g) any other consequence for the relevant taxpayer, or for any person referred to in paragraph (f), of the scheme having been entered into or carried out, and (h) 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). | Detailed Reasoning - Application to the present case: The definition of 'scheme' is sufficiently broad to encompass the sequence of steps of the restructuring of the demerger group under which the demerger happens to the group. Under the restructuring, Head Co provides Head Co shareholders with ownership interests in a company, being shares in New Co, which is a demerger benefit. The part of the in specie distribution that comprises the demerger dividend is not also a capital benefit, but the capital component of the distribution comprises share capital distributed to Head Co shareholders, so is a capital benefit. Therefore, there is a scheme under which Head Co shareholders, being persons, are provided with a demerger benefit and a capital benefit by Head Co, which is a company. Further, Head Co shareholders receive a tax benefit because the demerger benefit (being the demerger dividend) is neither assessable income nor exempt income, and the capital benefit (being a return of capital) is not assessable income. Therefore, less tax is payable by Head Co shareholders, or it is payable at a later date, than would be the case if the demerger benefit or capital benefit had been an assessable dividend. Also, Australian resident shareholders that made a capital gain under CGT event G1 could choose a roll-over under section 125-55 with the consequence that. In weighing up the relevant circumstances of the scheme listed in subsection 45B(8), it is decided that, on balance, the requisite purpose referred to in paragraph 45B(2)(c) is not present, and therefore section 45B will not apply. It follows that the Commissioner will not make a determination under either paragraph 45B(3)(a) or (b), and therefore will not make a further determination under subsection 45C(3).

This ruling applies for the following period : | All legislative references below are to the ITAA 1936 or the ITAA 1997 unless specified otherwise.