Private ruling: Demerger
Date of advice: 25 February 2020
Published: April 2020
Ruling period: Income year ending 30 June 2020
Date scheme commenced: 1 July 2019

Ruling: Q1: Will any capital gain or capital loss that Company X makes from CGT event A1 happening to its shareholding in Company Y be disregarded pursuant to section 125-155 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes | Q2: Will Company X have an obligation to withhold tax under section 12-210 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953) on the Demerger Distribution? | A2: No | Q3: As a consequence of the transfer of its shares in Company Y to its shareholders, will Company X Limited be required under subsection 45D(1A) of the Income Tax Assessment Act 1936 (ITAA 1936) to give a copy of a notice to its shareholders? | A3: No

Relevant facts and circumstances: Company X and Company Y are both companies incorporated in Australia. Company X owned more than 20% of the ordinary shares in Company Y. Company X transferred more than 80% of the ordinary shares it owned in Company Y to the shareholders of Company X. Company X was the head entity of a demerger group. Company Y was a demerger subsidiary of Company X. Immediately before the demerger, Company Y had on issue fully paid ordinary shares. Immediately before the demerger, Company X's share capital account was not tainted (within the meaning of Division 197 of the ITAA 1997). Company X did not elect under subsection 44(2) of the ITAA 1936 that subsections 44(3) and (4) of the ITAA 1936 will not apply to the demerger dividend for all Company X shareholders. Just after the demerger, CGT assets owned by Company Y and its demerger subsidiaries representing at least 50% by market value of all the CGT assets owned by those entities were used in carrying on a business by those entities (subsection 44(5) of the ITAA 1936). The Demerger Distribution that effected the demerger consisted of an amount debited to the share capital account of Company X and a Demerger Dividend debited to the retained profits of Company X.


Reasons for decision: Summary: Company X will be able to disregard any capital gain from CGT event A1 happening as a result of the transfer of its shares in Company Y to the shareholders of Company X in accordance with section 125-155 of the ITAA 1997, because the transfer of shareswill be a demerger under section 125-70 of the ITAA 1997. Company X will not have an obligation to withhold tax on the Demerger Distribution under section 12-210 of Schedule 1 to the TAA 1953 as the amount debited to the share capital account of Company X is not a 'dividend' as defined in subsection 6(1) of the ITAA 1936, and there is no withholding tax payable in respect of the Demerger Dividend as subsection 128B(3D) of the ITAA 1936 applies. As the Commissioner will not make a determination under section 45A or section 45B of the ITAA 1936 in respect the transfer of shares in Company Y to Company X shareholders, the Commissioner will not give a copy of a determination to Company X, and therefore Company X is not required under subsection 45D(1A) of the ITAA 1936 to give a copy of the Commissioner's notice of a determination to its shareholders.