Private ruling: Demerger
Ruling period: Year ended 30 June 2010
Date scheme commenced: 1 July 2009

Ruling: Question and answer: | Will any capital gain or loss made from the disposal by Company X of its shares and options in Company Y by in specie distribution to Company X shareholders be disregarded? | Yes.

Relevant facts and circumstances: Company X is a resource developer. Company X announced to the Australian Securities Exchange (ASX) that it intended to restructure into two companies, Company X and Company Y. Immediately prior to the demerger, Company X was an Australian resident company. Before the demerger, company X had ordinary shares on issue. It also had unlisted options issued. Company X distributed Company Y shares to all Company X shareholders in proportion to their share holding in Company X as at the Record Date. There were no other ownership interests in Company X just before the demerger. The demerger of Company Y from Company X was effected by a reduction in the share capital of Company X and by payment of a demerger dividend that was satisfied by an in specie distribution of Company Y shares held by Company X. Company X retained a small number of shares. Company X accounted for the distributions that effected the demerger by debiting its share capital account by $x (the capital reduction amount), and debiting Reserves (retained income/accumulated losses) by $x and making a corresponding credit to the Investments in Company Y account of $x. The dividend amount was an amount equal to the difference between the market value of Company Y on the Implementation Date and the capital reduction amount. Company X expected that a number of advantages would accrue to its shareholders as a result of the demerger of Company Y. Company X shareholders voted at a general meeting to approve an ordinary resolution to reduce the share capital of Company X by an amount which represents the share capital of Company X which was applied to the Company Y investment. Company X shareholders received one Company Y share for each x Company shares they held on the Record Date. As a result of the demerger, Company X shareholders owned shares in both Company X and Company Y. None of the Company X shareholders acquired their shares in Company X before XX September 19XX. Company X confirmed that capital gains tax (CGT) assets representing more than 50% of the market value of all the CGT assets of Company Y and its subsidiaries would be used directly or indirectly in a business carried on by Company Y or its subsidiaries just after the merger. Company X confirmed that there have been no transfers to its share capital account, as defined in section 975-300 of the ITAA 1997 from any of its other accounts and accordingly its share capital account was not tainted (within the meaning of Division 197 of the ITAA 1997). Company X has never paid a dividend to its shareholders. Company X confirmed it did not make an election under subsection 44(2).

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 125-155. | Income Tax Assessment Act 1997 Section 125-65. | Income Tax Assessment Act 1997 Section 125-70.

Reasons for decision: Summary: Section 125-155 of the Income Tax Assessment Act 1997 (ITAA 1997) provides 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. Under the scheme to which this Ruling applies, CGT event A1 happened when Company X disposed of its Company Y shares to Company X shareholders (section 104-10 of the ITAA 1997). In order for Company X to disregard any capital gain or capital loss made from CGT event A1 happening on the disposal of its shares in Company Y, this disposal must occur under a demerger within the meaning of Division 125 of the ITAA 1997. | Detailed Reasoning - Did the disposal of the Company Y shares happen under a demerger?: For a demerger to happen for the purposes of Division 125 of the ITAA 1997, there must be a demerger group. A demerger group comprises one head entity and at least one demerger subsidiary (subsection 125-65(1) of the ITAA 1997). For the purposes of this scheme, the demerger group includes Company X as the head entity and Company Y as demerger subsidiary. Company X is the head entity of a demerger group because at the time of the restructure: · no member of the demerger group owned any ownership interests in Company X (subsection 125-65(3) of the ITAA 1997); and · no other company or trust was capable of being the head entity of a demerger group of which Company X could be a demerger subsidiary (subsection 125-65(4) of the ITAA 1997). · Company Y was a demerger subsidiary of Company X at the time of the scheme, because at that time Company X owned ownership interests that carried the right to: · receive more than X0 per cent of any distribution of income or capital by Company Y; and · exercise more than X0 per cent of the voting power in Company Y (subsection 125-65(6) of the ITAA 1997). | Detailed Reasoning - Did a demerger happen?: A demerger happened (within the meaning of subsections 125-70(1)-(5) of the ITAA 1997) to the Company X demerger group under the scheme because: · there was a restructuring (paragraph 125-70(1)(a) of the ITAA 1997), under which at least 80% of the ownership interests that Company X owned in Company Y were transferred to Company X ownership interest holders (subparagraph 125-70(1)(b)(i) of the ITAA 1997); · under the restructuring, CGT Event G1 (section 104-135 of the ITAA 1997) happened to Company X shares, and Company X shareholders received nothing other than new shares in Company Y (subparagraph 125-70(1)(c)(i) of the ITAA 1997); · Company X shareholders received shares in Company Y under the restructure on the basis that they were shareholders of Company X (paragraph 125-70(1)(d) of the ITAA 1997 and subparagraph 125-70(1)(e)(i) of the ITAA 1997); · at the time of the restructure, neither Company X nor Company Y were superannuation funds within the meaning of that term in section 10 of the Superannuation Industry (Supervision) Act 1993 (paragraph 125-70(1)(g) of the ITAA 1997); · the restructure does not constitute an off-market share buy-back for the purposes of Division 16K of Part III of the ITAA 1936 (subsection 125-70(4) of the ITAA 1997); · no other roll-over is available under another provision of the ITAA 1936 or ITAA 1997 (subsection 125-70(5) of the ITAA 1997); and · under the restructure, each Company X ownership interest holder acquired the same proportion of ownership interests in Company Y as the ownership interests they owned in Company X just before the demerger, and just after the demerger each Company X ownership interest holder owned the same proportionate total market value of Company X ownership interests and Company Y ownership interests as they owned in Company X just before the demerger (paragraphs 125-70(2)(a) and (b) and subsection 125-70(3) of the ITAA 1997). | Detailed Reasoning - Is Company X the demerging entity?: A demerging entity is a member of a demerger group that disposes of at least 80% of its ownership interests in another member of the demerger group to owners of original interests in the head entity under a demerger (subsection 125-70(7) of the ITAA 1997). Under the restructure, Company X is a demerging entity because it disposed of at least 80% of its shares in Company Y to Company X shareholders (subparagraph 125-70(7)(a) of the ITAA 1997). | Detailed Reasoning - Can Company X disregard any capital gain or capital loss made under the demerger?: Since any capital gain or capital loss Company X will make from CGT event A1 happening on the disposal of Company Y shares occurs under a demerger, the capital gain or capital loss is disregarded as a result of section 125-155 of the ITAA 1997.

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