Private ruling: Head entity of a demerger group
Published: February 2013
Ruling period: 1 July 2012 to 30 June 2014
Date scheme commenced: 1 July 2012

Ruling: Q1: Will the proposed arrangement satisfy the requirements for demerger relief under Division 125 of the Income Tax Assessment Act 1997 (ITAA 1997) so that any capital gain or loss that Company A makes on disposal of its shares in Company B will be disregarded pursuant to section 125-155 of the ITAA 1997? | A1: No

Relevant facts and circumstances: Company A proposes to undertake a restructure by way of demerger, under which 100% of its shareholding in Company B will be distributed to Company A shareholders. Company A owns 100% of the shares in Company B. Company A shareholders are a mixture of companies and individuals. At least one of the Company A shareholders, that is a company, owns ownership interests in Company A that carry more than 20% of the rights to any distribution of income and capital, and the right to exercise more than 20% of the voting power of Company A.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 Division 125 | Income Tax Assessment Act 1997 Subsection 125-65(1) | Income Tax Assessment Act 1997 Subsection 125-65(3) | Income Tax Assessment Act 1997 Subsection 125-65(6) | Income Tax Assessment Act 1997 Section 125-70 | Income Tax Assessment Act 1997 Subsection 125-70(1) | Income Tax Assessment Act 1997 Paragraph 125-70(1)(b) | Income Tax Assessment Act 1997 Subsection 125-70(6) | Income Tax Assessment Act 1997 Paragraph 125-70(6)(a) | Income Tax Assessment Act 1997 Subsection 125-70(7) | Income Tax Assessment Act 1997 Paragraph 125-70(7)(a) | Income Tax Assessment Act 1997 Section 125-155

Reasons for decision: Summary: As a demerger does not happen, any capital gain or loss under CGT event A1 made by Company A on the disposal of its Company B shares under the proposed restructure will not be disregarded. | Detailed Reasoning - Demerger provisions in Division 125 of the ITAA 1997: In order for the demerger CGT outcomes contained in Division 125 of the ITAA 1997 to apply to shareholders and members of a company group, a number of defined terms must be satisfied including: · demerger group (subsection 125-65(1) of the ITAA 1997); · demerger (subsection 125-70(1) of the ITAA 1997); · demerged entity (paragraph 125-70(6)(a) of the ITAA 1997); and · demerging entity (paragraph 125-70(7)(a) of the ITAA 1997). | Detailed Reasoning - Demerger Group: A demerger group comprises one head entity and at least one demerger subsidiary (subsection 125-65(1) of the ITAA 1997). The Applicant has stated that the demerger group in this case comprises Company A as the head entity and Company B as a demerger subsidiary. However, information provided by the Applicant shows that there are a number of additional entities that would be included in the demerger group. | Detailed Reasoning - Head entity: Subsection 125-65(3) of the ITAA 1997 states that a company or trust is the head entity of a demerger group if no other member of the group owns ownership interests in the company or trust. Company A will not be the head entity because other members of the group hold ownership interests in Company A and there will be another company or trust capable of being a head entity of the demerger group of which Company A would be a demerger subsidiary. | Detailed Reasoning - Demerger subsidiary: Subsection 125-65(6) of the ITAA 1997 states that a company is a demerger subsidiary of another company that is a member of a demerger group if the other company, either alone or together with other members of the group owns ownership interests in Company A that carry more than 20% of the rights to any distribution of income and capital, and the right to exercise more than 20% of the voting power of Company A. Information provided by the Applicant shows that Company A will be a demerger subsidiary because other companies own ownership interests in Company A that carry more than 20% of the rights to any distribution of income and capital, and the right to exercise more than 20% of the voting power of Company A. | Detailed Reasoning - A Demerger does not happen: Section 125-70 of the ITAA 1997 defines the meaning of a demerger. Subsection 125-70(1) of the ITAA 1997 provides a number of conditions that must be satisfied in order for a demerger to happen to a demerger group. In particular, paragraph 125-70(1)(b) of the ITAA 1997 provides that one the requirements of subparagraphs (i) to (iv) must be met. In the present case, because Company A is not the head entity of the demerger group, any disposal by Company A of its Company B shares to the owners of Company A will not have the effect of transferring shares to owners of ownership interests in the head entity. As a result, the proposed restructure scheme fails the requirements of paragraph 125-70(1)(b) of the ITAA 1997. | Detailed Reasoning - Company B is not the demerged entity: Relevantly, subsection 125-70(6) of the ITAA 1997 defines a demerged entity to be a former member of a demerger group in which ownership interests are acquired by shareholders of the head entity under a demerger. In the present circumstances, Company B will not be a demerged entity since Company A shareholders will not receive shares in Company B under a demerger. | Detailed Reasoning - Company A is not the demerging entity: Relevantly, subsection 125-70(7) of the ITAA 1997 defines a demerging entity to be a member of a demerger group who disposes of at least 80% of its total ownership interests in another member of the demerger group to owners of original interests in the head entity under a demerger. In the present circumstances, Company A will not be a demerging entity since the disposal of 100% of its shares in Company B to Company A shareholders will not happen under a demerger. | Detailed Reasoning - Can Company A disregard the capital gain or capital loss?: 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. However, in the present case as Company A is not a demerging entity, and the CGT event A1 that would happen when Company A disposes of its shares in Company B and transfers them to Company A shareholders (per section 104-10 of the ITAA 1997) does not happen under a demerger, any capital gain or loss under CGT event A1 made by Company A on the disposal of its Company B shares under the demerger will not be disregarded.

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