Private ruling: Demerger
Published: February 2014
Ruling period: Year ended 30 June 2014 | Year ended 30 June 2015
Date scheme commenced: 1 July 2013

Ruling: Q1: Will the transfer of shares in Company B to Company A) shareholders satisfy the requirements of Division 125 of the Income Tax Assessment Act 1997 (ITAA 1997) such that the Company A shareholders can choose a demerger roll-over under section 125-55 of the ITAA 1997? | A1: Yes | Q2: If the Company A shareholders choose roll-over relief, will the Commissioner treat the time of acquisition of their Company B shares as being the same as the time of acquisition of their Company A shares for the purposes of applying the capital gains tax (CGT) discount provisions in Division 115 of the ITAA 1997? | A2: Yes | Q3: Will any dividends paid to Company A shareholders under the scheme be demerger dividends that are neither assessable income nor exempt income, pursuant to subsections 44(3) and 44(4) of the Income Tax Assessment Act 1936 (ITAA 1936)? | A3: Yes | Q4: Will the Commissioner make a determination under paragraph 45B(3)(a) or 45B(3)(b) of the ITAA 1936 that section 45BA or 45C of the ITAA 1936 applies to the whole, or any part, of any benefit provided to Company A shareholders under the demerger? | A4: No

Relevant facts and circumstances: The restructure scheme to which this Ruling applies involves the transfer by way of a demerger, by Company A of 100% of its shareholding in its subsidiary, Company B, to the shareholders of Company A.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 104-135(5) | Income Tax Assessment Act 1997 Division 110 | Income Tax Assessment Act 1997 Division 112 | Income Tax Assessment Act 1997 Division 125 | Income Tax Assessment Act 1997 section 125-55 | 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 1936 Division 16K of Part III | 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 177D

Reasons for decision: Summary: The shareholders of Company A will be entitled to choose demerger rollover relief pursuant to section 125-55 of the ITAA 1997. For the purpose of determining eligibility for a discount capital gain, the Company B shares received by an Company A shareholder will be taken to have been acquired on the date the shareholder acquired, for CGT purposes, the corresponding Company A shares (item 2 in the table in subsection 115-30(1) of the ITAA 1997). This is the case whether demerger roll-over relief is chosen or not. For all other CGT purposes, an Company A shareholder acquired their Company B shares on the date that the Company B shares were transferred to them by Company A, being the Implementation Date (subsection 109-5(2) of the ITAA 1997). Subsection 44(1) of the ITAA 1936 includes in a shareholder's assessable income any dividend, within the meaning of that term in subsection 6(1) of the ITAA 1936, paid to a shareholder out of company profits. This dividend is neither an assessable income nor an exempt income amount (subsections 44(3) and 44(4) of the ITAA 1936) if: · the dividend is a demerger dividend (as defined in subsection 6(1) of the ITAA 1936); · the head entity did not elect that subsections 44(3) and 44(4) of the ITAA 1936 do not apply to the demerger dividend (subsection 44(2) of the ITAA 1936); and · subsection 44(5) of the ITAA 1936 is satisfied. In the demerger of Company B by Company A, each of the conditions are satisfied. Therefore, any dividend received by Company A shareholders under the demerger is neither assessable income nor exempt income. Section 45B of the ITAA 1936 applies to ensure that relevant amounts are treated as dividends for taxation purposes if: · components of a demerger allocation as between capital and profit do not reflect the circumstances of the demerger or · certain payments, allocations and distributions are made in substitution for dividends. In this case, while the conditions of paragraphs 45B(2)(a) and 45B(2)(b) of the ITAA 1936 are met, the requisite purpose of enabling an ENT shareholder to obtain a tax benefit (by way of a demerger benefit or a capital benefit) is not present. Accordingly, the Commissioner will not make a determination under paragraphs 45B(3)(a) or 45B(3)(b) of the ITAA 1936 that either sections 45BA or 45C of the ITAA 1936 applies to the scheme to which this Ruling relates.