Private ruling: Demerger
Date of advice: 29 April 2021
Published: July 2021
Ruling period: Income years ending 30 June 2021 and 30 June 2022
Date scheme commenced: 1 July 2020

Ruling: Q1: Will any capital gain or capital loss that Company X makes from CGT event A1 from the transfer of its share in Company Y under the demerger be disregarded pursuant to section 125-155 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes | Q2: Will the Commissioner make a determination in relation to the demerger under: • paragraph 45B(3)(a) of the Income Tax Assessment Act 1936 (ITAA 1936) that section 45BA applies, or • paragraph 45B(3)(b) of the ITAA 1936 that section 45C applies, or • subsection 45C(3) of the ITAA 1936? | A2: No | Q3: 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 dividend? | 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 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. Having regard to the relevant circumstances of the scheme: It follows that the Commissioner will not make a further determination under subsection 45C(3) of the ITAA 1936. Company X will not have an obligation to withhold tax on the demerger dividend 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.