Private ruling: Proposed Demerger and Group Restructure
Published: May 2015
Ruling period: Year ended 30 June 2015 | Year ended 30 June 2016 | Year ended 30 June 2017
Date scheme commenced: 1 July 2014

Ruling: Q1: Will any capital gain or capital loss made by the demerging entity (Company B) as a result of the demerger of each D Business Entity be disregarded under section 125-155 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes | Q2: Will the in specie distribution of shares in the D Business Entities (i.e. the demerged entities) constitute a demerger dividend and therefore be non-assessable non-exempt income under subsection 44(4) of the Income Tax Assessment Act 1936 (ITAA 1936)? | A2: Yes | Q3: Will the Commissioner make a determination under subsection 45B(3) of the ITAA 1936 that section 45BA or section 45C of the ITAA 1936 will apply? | A3: No | Q4: Will the Commissioner confirm that Division 7A of the ITAA 1936 will not apply to the in-specie distribution of assets made to the Shareholder under the demerger arrangement? | A4: Yes Issue 2- Group restructure | Q5: Will the disposal of the shares in the D Business Entities by the Shareholder to Company C qualify for roll-over under Subdivision 122-A of the ITAA 1997 where no shares are issued as consideration for the disposal of the shares? | A5: Yes | Q6: On joining the Company C tax consolidated group, will the work in progress of each D Business Entity be considered a work in progress asset such that the head company will become entitled to a tax deduction under section 25-95 of the ITAA 1997 for the tax cost setting amount allocated to the asset? | A6: Yes | Q7: Would the ATO seek to apply Part IVA of the ITAA 1936 to any aspect of the scheme being proposed? | A7: No

Relevant facts and circumstances: 1. This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. 2. Company A is the current holding company of a corporate group of entities. 3. The shares in Company A are wholly owned by the trustee of a discretionary trust (the Shareholder). 4. Company A has $2 of share capital on issue, which is represented by post-CGT shares. 5. Company A has a substantial franking account balance, significant retained earnings represented by realised profits and a history of paying significant dividends. 6. The Company A corporate group (the Group) conducts four different business operations. 7. The Group plans to undertake a restructure to separate one of its business operations (the D Business) from its current ownership structure under which it is ultimately owned by Company A. 8. The D Business is conducted through a number of entities which, prior to the restructure, are all wholly owned by Company B. 100% of the shares in Company B are owned by Company A. 9. The proposed steps to complete the restructure (the Restructure) are as follows: (a) The D Business Entities will be demerged to the Shareholder via an in-specie distribution. As the shares in the D Business Entities are wholly owned by Company B, the in-specie distribution of the shares will occur through Company B and Company A to the Shareholder. (b) The Shareholder will then dispose of its interests in the D Business Entities to Company C for no consideration, with Company C becoming the holding entity of the D Business Entities. (c) The Shareholder will elect for roll-over to apply under Subdivision 122-A of the ITAA 1997 to disregard any capital gain or capital loss on the disposal of the shares in the D Business Entities to Company C. (d) Company C will form a tax consolidated group as the head company of the tax consolidated group. The D Business Entities will become subsidiary entities of the tax consolidated group for the purposes of Part 3-90 of the ITAA 1997. (e) The tax cost setting amount of assets held by the D Business Entities will be reset under Division 705 of the ITAA 1997. (f) A number of D Business Entities will have carry forward tax losses at the joining time. To the extent that the D Business Entities have carry forward tax losses at the joining time, the head company will choose to cancel those losses under section 707-145 of the ITAA 1997. (g) It is expected that the Restructure and the formation of the tax consolidated group will occur over a short period of time, which may be finalised prior to 30 June 2015, but may also straddle into early period of the 2016 financial year. Proposed accounting treatment of the Restructure 1. The proposed accounting treatment of the Restructure will be in accordance with generally accepted accounting principles. 2. As the D Business Entities, Company A, Company B and Company C are all entities under 'common control' (i.e. are all directly and indirectly wholly owned by the Shareholder), these entities would be scoped out of the application of AASB 3: Business Combinations and AASB Interpretation 17: Distribution of Non-cash Assets to Owners. Accordingly, these entities will not be required to record the transactions at 'fair value'. 3. The accounting approach that will be taken for the transaction will be to treat the transaction as though it (effectively) has not occurred from the perspective of the Shareholder. This will mean that the relevant entities will not seek to reduce any share capital of any of the entities as part of the transaction. Furthermore, should there be a requirement to record a dividend for accounting purposes or an investment in the D Business Entities, the amount recorded is expected to be no more than the current original share capital amount of the D Business Entities. Reasons for the Restructure and business efficiencies 4. The proposed Restructure will enable the Group to move the D Business to a separate sister structure (owned ultimately by the same owners). Thus the Group will have a flatter structure going forward. 5. The Group sees a significant number of business efficiencies that could evolve from the proposed Restructure including: (a) the ability to appoint independent senior management teams (including a board) to the D Business, which can be completely separate from the business's other operations; (b) by separating out each business group, each business group can independently strive to achieve their significant, ambitious projections for growth and seek independent funding of their operations and projected growth in the future (if required); (c) the dissection of the business groups may further assist in enhanced asset protection of the separate business operations; (d) the ability to achieve their objective that each business group be self-sustaining, independently funded and operated in due course over a longer period of time. (e) Whilst the Group does not have a current plan for an IPO, it is noted that the demerger of the D business group and the isolation of its other business operations could assist in a future IPO and create opportunities to introduce capital or other investors into various business lines to expand or to reorganise the relevant business structure. (f) From an income tax compliance and efficiency perspective, the number of D Business Entities could be significantly simplified by treating the D Business group as one single entity under tax consolidation. The restructure of the D Business group would also facilitate the single clean tax consolidated group for this business line. The formation and transfer of the D Business Entities to a Consolidated Group 1. As part of the isolation of the D business group business, the Group proposes to incorporate a new holding company for the D business e.g. Company C. 2. 100% of the shares in Company C will be owned by the Shareholder. 3. Another new company, Company E will also be incorporated, which will be a wholly owned subsidiary of Company C and a tax consolidated group will be formed with Company C as head company of the tax consolidated group. 4. As previously noted, once the D Business Entities are demerged to the Shareholder, this trust will then transfer, for no consideration, the shares in the D Business Entities to Company C as head company of the tax consolidated group. 5. The major asset held by the D Business Entities, other than cash, trade debtors and loans, is a work in progress asset. The work in progress asset represents works performed by a D Business Entity for other entities, which has yet to be billed to the other entities.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 6 | Income Tax Assessment Act 1936 section 44 | 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 1936 section 177A | Income Tax Assessment Act 1936 section 177C | Income Tax Assessment Act 1936 section 177D | Income Tax Assessment Act 1936 section 177F | Income Tax Assessment Act 1997 section 25-95 | Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 Subdivision 122-A | Income Tax Assessment Act 1997 Division 125 | Income Tax Assessment Act 1997 section 125-55 | Income Tax Assessment Act 1997 section 125-60 | 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 | Income Tax Assessment Act 1997 section 701-55(5C) | Income Tax Assessment Act 1997 section 701-63(6)

Reasons for decision: Summary: 6. Any capital gain or capital loss made by Company B on the disposal of its shares in each D Business Entity to the Shareholder will be disregarded pursuant to section 125-155 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: 7. Division 125 of the ITAA 1997 contains relief from the possible CGT consequences of a demerger. In particular, it provides that certain capital gains or capital losses made by members of a demerger group under the demerger be disregarded. Specifically, section 125-155 of the ITAA 1997 states: 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. 8. In order for the demerger CGT outcomes contained in Division 125 of the ITAA 1997 to apply, 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 (subsection 125-70(6) of the ITAA 1997); and • demerging entity (subsection 125-70(7) of the ITAA 1997). | Detailed Reasoning - Demerger Group: 9. 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 Company A as the head entity and includes each D Business Entity as a demerger subsidiary. 10. Company A will be the head entity because: • no other member of the demerger group holds ownership interests in Company A (subsection 125-65(3) of the ITAA 1997); and • there will be no other company or trust capable of being a head entity of a demerger group of which Company A could be a demerger subsidiary (subsection 125-65(4) of the ITAA 1997). In this regard, it is noted that although the Shareholder holds all the ownership interests in Company A, it is a discretionary trust and therefore CGT event E4 is not capable of apply to its interests. The Shareholder therefore cannot be the head entity or part of the demerger group (see subsection 125-65(2) of the ITAA 1997). 11. Each D Business Entity will be a demerger subsidiary of Company A because Company A owns (via its ownership of Company B) ownership interests in each D Business Entity 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 each D Business Entity (subsection 125-65(6) of the ITAA 1997). As previously noted, Company A also owns 100% of the shares in Company B and therefore Company B will also be a demerger subsidiary. | Detailed Reasoning - Demerger: 12. Subsection 125-70(1) of the ITAA 1997 describes when a demerger happens. A demerger will happen to the Company A demerger group because: • there will be a restructuring (paragraph 125-70(1)(a) of the ITAA 1997), and Company B (which is a member of the demerger group) will dispose of at least 80% of its shares in each D Business Entity to the owners of Company A (subparagraph 125-70(1)(b)(i) of the ITAA 1997); • under the restructuring, no CGT event will happen to the shares in Company A when the each distribution is made under the demerger, and the Shareholder will acquire new shares in each D Business Entity and nothing else (subparagraph 125-70(1)(c)(ii) of the ITAA 1997); • shares in each D Business Entity will be acquired by the Shareholder on the basis of its ownership of shares in Company A (paragraph 125-70(1)(d) and subparagraph 125-70(1)(e)(i) of the ITAA 1997); • paragraph 125-70(1)(f) of the ITAA 1997 has been repealed; • neither Company A nor each D Business Entity are superannuation funds (paragraph125-70(1)(g) of the ITAA 1997); • The Shareholder will acquire shares in each D Business Entity in the same proportion (100%) as they owned shares in Company A just before the demerger (paragraph 125-70(2)(a) of the ITAA 1997); • The Shareholder will own shares in Company A and each D Business Entity that (just after the demerger) represent the same proportionate total market value as their Company A shares represented (just before the demerger) (paragraph 125-70(2)(b) of the ITAA 1997); • under the scheme, a buy-back of shares for the purposes of Division 16K of Part III of the ITAA 1936 will not occur (subsection 125-70(4) of the ITAA 1997); and • there will be no roll-over available under another provision for any CGT events that happen to the Company A shares under the restructure (subsection 125-70(5) of the ITAA 1997). | Detailed Reasoning - Each D Business Entity will be a demerged entity: 13. 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. 14. In the present circumstances, each D Business Entity will be a demerged entity since the Shareholder (as the only shareholder in Company A) will receive shares in each D Business Entity under a demerger. | Detailed Reasoning - Company B will be the demerging entity: 15. 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. 16. In the present circumstances, Company B will be the demerging entity since it will dispose of 100% of its shares in each D Business Entity to the sole shareholder of Company A (the Shareholder) under a demerger. | Detailed Reasoning - Conclusion: 17. As previously highlighted, section 125-155 of the ITAA 1997 provides that any capital gain or capital loss made by a demerging entity from certain CGT events (including CGT event A1) happening to its ownership interests in a demerged entity under a demerger is disregarded. 18. As detailed above, in the present case: • Company B will be the demerging entity, • CGT event A1 will happen when Company B disposes of its shares in each D Business Entity to the sole shareholder of Company A (the Shareholder)(per section 104-10 of the ITAA 1997), and • this disposal will happen under a demerger. 19. Therefore, any capital gain or capital loss under CGT event A1 made by Company B on the disposal of its shares in each D Business Entity under the demerger will be disregarded (section 125-155 of the ITAA 1997). | Summary: 20. The shares in each D Business Entity received by the sole shareholder in Company A (the Shareholder) under the scheme will be a demerger dividend that is neither assessable income nor exempt income pursuant to subsections 44(3) and 44(4) of the ITAA 1936. | Detailed Reasoning - Detailed reasoning: 21. Subsection 44(1) of the ITAA 1936 includes in a shareholders assessable income any dividend, as defined in subsection 6(1) of the ITAA 1936, paid to the shareholder out of profits derived by the company from any source, if the shareholder is a resident of Australia. 22. Subsections 44(3) and 44(4) of the ITAA 1936 however provide that a demerger dividend is treated as if it had not been paid out of profits and is not assessable income or exempt income. 23. A demerger dividend is defined in subsection 6(1) of the ITAA 1936 as that part of a demerger allocation that is assessable as a dividend under subsection 44(1) of the ITAA 1936 or that would be so assessable apart from subsections 44(3) and 44(4) of the ITAA 1936. 24. Subsection 6(1) of the ITAA 1936 defines demerger allocation to mean: (a) the total market value of the allocation represented by the ownership interests issued by the demerged entity in itself under a demerger to the owners of ownership interests in the head entity of the demerger group; or (b) the total market value of the allocation represented by the ownership interests disposed of by a member of a demerger group under a demerger to the owners of ownership interests in the head entity. 25. The market value of the shares in each D Business Entity will be the demerger allocation. The demerger allocation paid by Company A to its shareholder will be solely made up of a demerger dividend. 26. This dividend will satisfy the definition of a demerger dividend under subsection 6(1) of the ITAA 1936, and subsections 44(3) and 44(4) of the ITAA 1936 will apply provided subsection 44(5) of the ITAA 1936 is satisfied. 27. Subsection 44(5) of the ITAA 1936 requires that, just after the demerger, CGT assets owned by the demerged entity or a demerger subsidiary representing at least 50% of market value of all the CGT (or a reasonable approximation of market value) owned by the demerged entity and its demerger subsidiaries are used directly or indirectly in one or more business carried on by one or more of those entities. 28. Based on the information provided, it is accepted that, just after the demerger, at least 50% of market value of all the CGT assets owned by each demerged entity will be used directly or indirectly in the business carried on by each entity. The requirements of subsection 44(5) of the ITAA 1936 will therefore be satisfied and will not apply to exclude subsections 44(3) and 44(4) of the ITAA 1936. 29. Company A as the head entity of the demerger group will not make an election, under subsection 44(2) of the ITAA 1936, to not apply subsections 44(3) or 44(4) of the ITAA 1936. 30. In accordance with the above, it is considered that the shares in each D Business Entity received by the sole shareholder in Company A (the Shareholder) under the scheme will be a demerger dividend that is neither assessable income nor exempt income pursuant to subsections 44(3) and 44(4) of the ITAA 1936. 31. It is noted that the concept of a demerger dividend is also subject to the dividend integrity measure in sections 45B to 45D of the ITAA 1936. In particular, section 45BA of the ITAA 1936 explains that where a determination under paragraph 45B(3)(a) of the ITAA 1936 is made, the whole or part of the demerger benefit is taken not to be a demerger dividend. The potential application of these provisions is considered below. | Summary: 32. While the conditions of paragraphs 45B(2)(a) and 45B(2)(b) of the ITAA 1936 will be met, the requisite purpose of enabling a relevant taxpayer to obtain a tax benefit, by way of a demerger benefit or capital benefit, is not present. In other words, having regard to the relevant circumstances of the scheme set out in subsection 45B(8) of the ITAA 1936, it would not be concluded that any of the parties to the demerger entered into or carried out the proposed scheme to obtain a tax benefit in the form of a demerger benefit or a capital benefit. As a result, the Commissioner will not make a determination under subsection 45B(3) of the ITAA 1936 that either section 45BA or section 45C of that ITAA 1936 will apply. | Detailed Reasoning - Detailed reasoning: 33. Subsection 45B(1) of the ITAA 1936 provides that the purpose of section 45B of the ITAA 1936 is to ensure that relevant amounts are treated as dividends for tax purposes if the capital and profit components of a demerger allocation do not reflect the circumstances of the demerger, or certain payments, allocations or distributions are made in substitution for dividends. 34. Subsection 45B(2) of the ITAA 1936 sets out the conditions that must be met in order for section 45B of the ITAA 1936 to apply. Relevantly, this section applies if: • there is a scheme under which a person is provided with a demerger benefit or capital benefit by a company (paragraph 45B(2)(a) of the ITAA 1936); and • under the scheme a taxpayer, who may or may not be the person provided with the demerger benefit or the capital benefit, obtains a tax benefit (paragraph 45B(2)(b) of the ITAA 1936); and • having regard to the relevant circumstances of the scheme, it would be concluded that the person, or one of the persons, entered into the scheme or carried out the scheme or any part of the scheme for a purpose, other than an incidental purpose, of enabling a taxpayer to obtain a tax benefit (paragraph 45B(2)(c) of the ITAA 1936). 35. Where the requirements of subsection 45B(2) of the ITAA 1936 are met, subsection 45B(3) of the ITAA 1936 empowers the Commissioner to make a determination under either or both of section 45BA of the ITAA 1936 in relation to a demerger benefit and section 45C of the ITAA 1936 in relation to a capital benefit. 36. The effect of a determination made under paragraph 45B(3)(a) of the ITAA 1936 is that part or all of a demerger benefit will be treated as not being a demerger dividend (subsection 45BA(1) of the ITAA 1936). 37. The effect of a determination made under paragraph 45B(3)(b) of the ITAA 1936 is that part or all of a capital benefit will be an unfranked dividend paid to the relevant taxpayer out of profits (subsections 45C(1) and (2) of the ITAA 1936). | Detailed Reasoning - Scheme: 38. A 'scheme' for the purposes of section 45B of the ITAA 1936 is taken to have the same meaning as provided in subsection 177A(1) of Part IVA of the ITAA 1936. That definition is widely drawn and includes any agreement, arrangement, understanding, promise, undertaking, scheme, plan, or proposal. In particular, a scheme is anything that satisfies any of the terms in the statutory definition. 39. In the present circumstances, the relevant scheme for the purposes of section 45B of the ITAA 1936 is considered to be the transfer of shares in each D Business Entity to the Shareholder (as a result of its shareholdings in Company A) under the demerger. | Detailed Reasoning - Demerger benefit and capital benefit: 40. The provision of ownership interests to a shareholder under a demerger constitutes the shareholder being provided with a demerger benefit (subsection 45B(4) of the ITAA 1936). Therefore, under the proposed scheme, the market value of the shares in each D Business Entity provided to the Shareholder will constitute a demerger benefit. 41. It is noted that generally the provision of shares will also constitute a capital benefit to the extent that it is not a demerger dividend (paragraph 45B(5)(a) and subsection 45B(6) of the ITAA 1936). In this case however, as there will be no capital component to the demerger allocation, the whole of the distribution will be a demerger dividend and therefore no capital benefit will arise. | Detailed Reasoning - Tax benefit: 42. Subsection 45B(9) of the ITAA 1936 provides, inter alia, that a relevant taxpayer 'obtains a tax benefit' if an amount of tax payable by that taxpayer would, apart from the operation of section 45B, be less than the amount that would have been payable if the 'demerger benefit' had been an assessable dividend or the capital benefit had been a dividend. | Detailed Reasoning - Beneficiaries of the Shareholder: 43. As a result of the demerger, the Shareholder would, apart from the operation of section 45B of the ITAA 1936, receive a demerger dividend equal to the market value of the shares in each D Business Entity at the time of the demerger. 44. It is considered that the tax ultimately payable by beneficiaries of the Shareholder on the demerger would be less than if the demerger benefit was an assessable dividend. This would still be the case even if Company A had sufficient franking credits to enable the demerger benefit to be fully franked (see paragraph 38 of Practice Statement Law Administration PS LA 2005/21). 45. Accordingly, the beneficiaries of the Shareholder will obtain a tax benefit for the purposes of section 45B of the ITAA 1936. | Detailed Reasoning - More than incidental purpose: 46. Given that the proposed demerger is a scheme that will provide a tax benefit to the beneficiaries of the Shareholder, the operation of section 45B of the ITAA 1936 turns on the objective purpose test in paragraph 45B(2)(c) of the ITAA 1936. This paragraph provides that the section will apply if enabling the shareholder to obtain the tax benefit is a more than incidental purpose of the scheme. 47. The requisite purpose is to be determined having regard to the relevant circumstances of the scheme which are listed inclusively in subsection 45B(8) of the ITAA 1936. Each of the circumstances must be considered in order to determine whether or not, individually or collectively, they reveal the existence of the requisite purpose. 48. The relevant circumstances include the tax and non-tax (i.e. business and other financial) implications of the scheme, the latter covered largely by the matters in paragraph 177D(b) of the ITAA 1936, which are included in subsection 45B(8) of the ITAA 1936 by virtue of paragraph (k). 49. In respect of the relevant circumstances contained in subsection 45B(8) of the ITAA 1936 the following points are noted: • Paragraph 45B(8)(a) of the ITAA 1936 directs attention to the composition, as between share capital and profits (realised and unrealised), of the demerger benefit provided to the head entity's owners. In the present case, the proposed demerger benefit will be attributed solely to profits. In this regard, it is noted that Company A has minimal share capital on issue and significant retained earnings. The contributed capital in the other demerger subsidiaries is also minimal. The demerger dividend is predominantly attributable to unrealised profits or value in each D Business Entity. It is arguable that a portion of the contributed capital should be allocated to the demerger. It is however considered that the absence of same is a function of the negligible amount of share capital of Company A, rather than being reflective of any attempt to misattribute either share capital or profit amounts to the distribution. As a consequence, this circumstance does not incline towards the conclusion as to requisite purpose. • Paragraph 45B(8)(b) of the ITAA 1936 directs attention to the pattern of distributions of dividends, bonus shares and returns of capital or share premium by the company or an associate (within the meaning in section 318 of the ITAA 1936) of the company. Over the past five years, Company A has regularly paid substantial dividends to its shareholder. This factor inclines against a conclusion as to the requisite purpose. • Paragraphs 45B(8)(c)to 45B(8)(f) of the ITAA 1936 require consideration to be given to the tax characteristics of the owners of the head entity and thus to determine the tax effects of the scheme. In the current circumstances, based on the information provided, these considerations are either not relevant or do not incline towards the requisite purpose. • Paragraph 45B(8)(i) of the ITAA 1936 directs attention to those cases where the scheme of demerger involves the provision of ownership interests and the later disposal of those interests, recognising that the proceeds on disposal of such ownership interests provide the equivalent of a cash dividend in a more tax-effective form. In this case, the scheme does not involve a planned 'sale' of the D Business Group and as such on this basis this factor is not relevant. It is also noted that under the proposed scheme the Shareholder will, following the demerger, transfer the shares in each D Business Entity to Company C. This will however not result in the value of the interests being realised as beneficial ownership will stay the same and roll-over relief under Subdivision 122-A of the ITAA 1997 chosen. • The circumstances enumerated in paragraph 177D(b) of the ITAA 1936 and incorporated by operation of paragraph 45B(8)(k) of the ITAA 1936 are primarily concerned with the commercial or business effects of the demerger. Under the scheme, it is apparent that a substantial purpose of the demerger is to achieve the separation of the group's distinct business operations which is intended to promote business efficiencies, including the ability to pursue independent business strategies tailored to meeting their own specific commercial objectives. This is consistent with the underlying object of the demerger measures. | Detailed Reasoning - Conclusion: 50. Taking the above into consideration, it is therefore considered that, while the conditions of paragraphs 45B(2)(a) and 45B(2)(b) of the ITAA 1936 will be met, the requisite purpose of enabling a relevant taxpayer to obtain a tax benefit (by way of a demerger benefit) is not present. Accordingly, if the scheme were to go ahead as proposed, the Commissioner would not make a determination under paragraph 45B(3)(a) of the ITAA 1936 that section 45BA of the ITAA 1936 applies to the 'demerger benefit' provided under the proposed scheme. Similarly, as a capital benefit does not arise, the Commissioner will also not make a determination under paragraph 45B(3)(b) of the ITAA 1936 that section 45C of that ITAA 1936 applies. | Summary: 51. The in-specie distribution of assets made to the Shareholder under the Restructure will not be subject to Division 7A of the ITAA 1936. | Detailed Reasoning - Detailed reasoning: 52. The demerger of the D Business Entities by Company B (and thus Company A) to the Shareholder will involve the provision of property. Accordingly, on face value, section 109C of the ITAA 1936 will potentially apply to the demerger. 53. Section 109RA of the ITAA 1936 however stipulates that Division 7A of the ITAA 1936 does not apply to a demerger dividend to which section 45B of the ITAA 1936 does not apply. 54. As detailed above, it is considered that the in-specie distribution of assets made under the Restructure will be a demerger dividend and section 45B of the ITAA 1936 will not apply. Accordingly, the exception in section 109RA of the ITAA 1936 will apply and Division 7A of the ITAA 1936 will have no application to the proposed distribution. | Summary: 55. The requirements in Subdivision 122-A of the ITAA 1997 will be met when the Shareholder disposes of its shares in each D Business Entity to Company C. The Shareholder will therefore be entitled to choose to obtain roll-over relief from any capital gain or capital loss made from CGT event A1 happening from this transaction. | Detailed Reasoning - Detailed reasoning: 56. Under Subdivision 122-A of the ITAA 1997, a trustee can choose to utilise the roll-over provisions if one of the trigger events happen and the conditions of the subdivision are met. The trigger events include CGT event A1 disposal of an asset or all the assets to a company; D1 Creating contractual or other rights in the company; D2 granting an option to the company; D3 concerning mining issues and F1 granting a lease to the company. 57. Under the current proposal, CGT event A1 will occur when the Shareholder disposes of its shares in each D Business Entity to Company C. This preliminary requirement of the provision will therefore be met. 58. The additional conditions that must be satisfied to be entitled to roll-over relief are set-out in sections 122-20,122-25 and 122-35 of the ITAA 1997. | Detailed Reasoning - Section 122-20 of the ITAA 1997: 59. Subsections 122-20(1) and 122-20(2) of the ITAA 1997 state that the consideration the trustee receives for the trigger event happening must be only: (a) shares in the company; or (b) for a disposal of a CGT asset, or all the assets of a business, to the company (a disposal case) shares in the company and the company undertaking to discharge one or more liabilities in respect of the asset or all the assets of the business. 60. Under the proposed scheme, the Shareholder will receive no consideration for the transfer of its shares in each D Business Entity to Company C. 61. Although subsection 122-20(1) of the ITAA 1997 contemplates that ordinarily a transferee company will issue shares in respect of any assets transferred to it, the provision does not specifically require that consideration must be provided in respect of the transfer. Rather, the requirement is that where consideration is given by the company, it must either be shares in the company or shares in the company and the company undertaking to discharge one of more liabilities in respect of the asset or assets of the business. 62. As a result, it is considered that the requirements in subsections 122-20(1) and 122-20(2) of the ITAA 1997 will not apply in the current circumstances and will not affect the trustee's eligibility for roll-over under Subdivision 122-A of the ITAA 1997. 63. Similarly, as the Shareholder will receive no consideration for the transfer of its shares in each D Business Entity to Company C, the conditions in subsection 122-20(3) and 122-20(4) of the ITAA 1997, which concern the market value of the shares received, will not be relevant. | Detailed Reasoning - Section 122-25 of the ITAA 1997: 64. Section 122-25 of the ITAA 1997 contains further conditions that must be satisfied before roll-over can be chosen. Relevantly these are: • the trustee must own all of the shares in the company just after the disposal of the asset (subsection 122-25(1) of the ITAA 1997) - this requirement will be satisfied under the proposed scheme because the Shareholder will own all of the shares in Company C. • Company C must not be an exempt entity (subsection 122-25(5) of the ITAA 1997) - this requirement will be satisfied in this case; and • the trust must be a resident trust for CGT purposes and the company, an Australian resident (subsection 122-25(7) of the ITAA 1997) - this requirement will be satisfied in this case as both the Shareholder and Company C are Australian resident entities. | Detailed Reasoning - Section 122-35 of the ITAA 1997: 65. Section 122-35 of the ITAA 1997 provides additional conditions that must be met if the company undertakes to discharge one of more liabilities as part of the disposal. 66. This provision will not apply to the current proposal as Company C will not discharge any liabilities as part of its acquisition of the shares in each D Business Entity. | Detailed Reasoning - Conclusion- eligibility for Subdivision 122-A roll-over relief: 67. As the above conditions, where applicable, will be met, the Shareholder will be entitled to choose roll-over under Subdivision 122-A of the ITAA 1997. If roll-over is chosen, any capital gain or capital loss made by the Shareholder as a result of the disposal of the shares in each D Business Entity will therefore be disregarded (subsection 122-40(1) of the ITAA 1997). | Summary: 68. The work in progress of each D Business Entity on joining the tax consolidated group will be a WIP amount asset and therefore a work in progress amount. Company C, as head company of the tax consolidated group, will therefore be entitled to a tax deduction under section 25-95 for the tax cost setting amount allocated to this asset. | Detailed Reasoning - Detailed reasoning: 69. On joining a consolidated group, the assets brought into the group by the joining entity (subsidiary member) must be identified for the purpose of working out their tax cost setting amount under Division 705 of the ITAA 1997 and then setting this tax cost setting amount for the income tax purposes of the head company under the relevant subsection in section 701-55 of the ITAA 1997 (refer to subsection 701-10(4) of the ITAA 1997). 70. A WIP amount asset is a type of right to future income. It is however treated as a reset cost base asset and not a retained cost base asset. Where an asset is identified as a WIP amount asset, the head company may be able to claim a deduction for its reset tax cost base under section 25-95 and subsection 701-55(5C) of the ITAA 1997. 71. According to subsection 701-63(6) of the ITAA 1997, a WIP amount asset means: an asset that is in respect of work (but not goods) that has been partially performed by a recipient mentioned in paragraph 25-95(3)(b) for a third entity but not yet completed to the stage where a recoverable debt has arisen in respect of the completion or partial completion of the work. 72. At the time that they join the Company C consolidated group, some D Business Entities will have work in progress relating to business contracts. This work in progress primarily represents costs that have been incurred by the D Business Entities but, under the business agreements, are not charged to the third party until a later point in time. 73. Based on the information provided, it is considered that the work in progress of each D Business Entity at the joining time will be a WIP amount asset as it is an asset relating to work that has been partially performed by a D Business Entity for a third party, but, in accordance with the relevant agreement, has not yet been completed to the stage where a recoverable debt has arisen. 74. As the work in progress of each D Business Entity will constitute a WIP amount asset, these assets will be treated as reset cost base assets for the purposes of working out the tax cost setting amount under Division 705 of the ITAA 1997. 75. The tax treatment outlined in subsection 701-55(5C) of the ITAA 1997 and section 25-95 of the ITAA 1997 will then apply. The effect of these provisions is such that Company C will be taken to have paid a 'work in progress amount', equal to the tax cost setting amount, in the income year in which the joining time occurs. Consequently, in accordance with subsections 25-95(1) and 25-95(2) of the ITAA 1997, Company C will then be entitled to deduct: (a) in the income year in which joining time occurs, that portion of the work in progress amount that, as at the end of the income year, a recoverable debt has arisen or is reasonably expected to arise within 12 months after the amount was paid; and (b) the remainder of the work in progress amount in the following income year. | Summary: 76. The Commissioner will not seek to apply Part IVA of the ITAA 1936 to the proposed scheme. | Detailed Reasoning - Detailed reasoning: 77. Part IVA of the ITAA 1936 is a general anti-avoidance provision that gives the Commissioner the discretion to cancel all or part of a 'tax benefit' that has been obtained, or would be obtained, by a taxpayer in connection with a scheme to which Part IVA of the ITAA 1936 applies. This discretion is found in section 177F of the ITAA 1936. 78. Part IVA of the ITAA 1936 applies to any scheme entered into or carried out after 27 May 1981. The criteria that must be satisfied for Part IVA of the ITAA 1936 to apply are: a) there is a 'scheme' as defined in section 177A of the ITAA 1936; b) there is a tax benefit obtained in connection with the scheme (paragraph 177D(a) of the ITAA 1936); and c) having regard to the eight factors identified in paragraph 177D(b) of the ITAA 1936, it would be concluded that the scheme was entered into or carried out for the dominant purpose of enabling a taxpayer to obtain a tax benefit. | Detailed Reasoning - Scheme: 79. In order for the general anti-avoidance provisions to apply, there must be a scheme. A scheme is defined as any agreement, arrangement, understanding, promise or undertaking - whether express or implied and whether legally enforceable or not - and any scheme, plan, proposal, course of action or course of conduct (section 177A of the ITAA 1936). 80. The decision of FCT v Peabody 94 ATC 4663 highlighted that the scope of the scheme is essential to the operation of Part IVA of the ITAA 1936. The reasoning behind this is that the definition of tax benefit in section 177C of the ITAA 1936 effectively requires consideration of what would have occurred had the particular scheme not been entered into. 81. In the case of Federal Commissioner of Taxation v. Hart [2004] HCA 26; 217 CLR 216; 206 ALR 207; 2004 ATC 4599; 55 ATR 712 at [43] Justices Gummow and Hayne noted that in respect of the definition of 'scheme': Th[e] definition is very broad. It encompasses not only a series of steps which together can be said to constitute a "scheme" or a "plan" but also (by its reference to "action" in the singular) the taking of but one step. 82. In our view, the scheme for present purposes can be identified as comprising the following steps: (a) the demerger of each D Business Entity to the shareholder of Company A; (b) The incorporation of Company C and its subsidiary entity; (c) the formation of the consolidated group with Company C as the head entity; (d) the transfer of the shares in each D Business Entity by the Shareholder to Company C as the head entity; and (e) the making of the choice by the Shareholder to obtain the CGT roll-over relief under Subdivision 122-A of the ITAA 1997 in relation to the disposal of their shares in each D Business Entity to Company C. 83. The Commissioner's view of the 'scheme' as described above includes the steps leading to and entering into the disposal of each D Business Entity by Company A to the Shareholder and then to Company C. Accordingly, the 'scheme' involves more than just the isolated steps to bring into effect the two CGT concessions. 84. These steps would constitute a scheme under its wide definition in section 177A(1) of the ITAA 1936. | Detailed Reasoning - Tax benefit: 85. For the purposes of Part IVA of the ITAA 1936, a tax benefit is defined in section 177C of the ITAA 1936. Under subsection 177C(1) of the ITAA 1936, the definition of tax benefit relevantly includes: • the non-inclusion of income that would otherwise have been included in the assessable income of a taxpayer in a year of income, had the scheme not been entered into or carried out; and • a deduction being allowable to the taxpayer in relation to a year of income where the whole or a part of that deduction would not have been allowable, or might reasonably be expected not to have been allowable, to the taxpayer in relation to that year of income if the scheme had not been entered into or carried out. 86. Subsection 177C(1) of the ITAA 1936 allows two ways of determining whether a tax benefit has been obtained in connection with a scheme. The first is that the relevant tax benefit would not have been obtained if the scheme had not been entered into or carried out. The second is that the relevant tax benefit might reasonably be expected not to have been obtained if the scheme had not been entered into or carried out. 87. In the current circumstances, there are various tax concessions that will obtained as part of the scheme which include: • the receipt of a substantial non-assessable demerger dividend by the Shareholder; • any capital gain or capital loss made by Company B from the disposal of the shares in each D Business Entity will be disregarded under section 125-155 of the ITAA 1997; • any capital gain or capital loss made by the Shareholder from disposing of the shares in each D Business Entity to Company C will be disregarded under Subdivision 122-A of the ITAA 1997; and • the entitlement to deductions associated with the formation of the consolidated group including the allocation of the tax cost setting amount to revenue assets. 88. On face value, these tax concessions would not constitute a tax benefit as such because the benefit is attributable to the making of a choice that is provided for in ITAA 1936 or ITAA 1997 (see subsection 177C(2) of the ITAA 1936). 89. The tax benefit exception in subsection 177C(2) of the ITAA 1936 is however conditional on the relevant scheme not being entered into for the purpose of creating the preconditions necessary for making the relevant choice (subparagraph 177C(2)(a)(ii) of ITAA 1936). The proposed restructure involves a number of sequential steps. Although there are tax concessions associated with these 'steps', they do not appear to be initiated to obtain a tax benefit but more so to enable the D business group to be separated from the business' other streams which is being done for business efficiency reasons. Taking these matters in account, it is considered that the 'steps' of the scheme will not primarily be undertaken to enable the applicable 'choice' to be made and therefore subparagraph 177C(2)(a)(ii) of the ITAA 1936 will have no application. 90. The identification of a tax benefit also necessarily requires consideration of the income tax consequences, but for the operation of Part IVA, of an 'alternative hypothesis' or an 'alternative postulate'. This is what would have happened or might reasonably be expected to have happened if the particular scheme had not been entered into or carried out. 91. Based on the information provided, it is also considered that a tax benefit will not arise when taking into account an alternative postulate. 92. Because a tax benefit will not be obtained in connection with the proposed scheme, Part IVA of the ITAA 1936 will have no application.