Private ruling: Proposed demerger of Company Z by Company Y
Published: April 2012

Ruling: Q1: Will the Commissioner of Taxation (the Commissioner) confirm that any capital gain or capital loss arising from the disposal by Company Y of the shares it holds in its wholly owned subsidiary Company Z in the proposed demerger arrangement will be disregarded under section 125-155 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes | Q2: Will the Commissioner confirm that Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) will not apply to the proposed demerger? | A2: In the ruling application, Company Y has not been identified as a relevant taxpayer for the purpose of Part IVA of the ITAA 1936. Therefore it is not necessary to answer this question.


Relevant legislative provisions: 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 Division 125.

Reasons for decision: Summary: Any capital gain or capital loss arising from the disposal by Company Y of the shares it holds in Company Z in the proposed demerger arrangement will be disregarded under section 125-155 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: In order for the demerger CGT outcomes contained in Division 125 of the ITAA 1997 to apply to shareholders and members of a company group, 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 (paragraph 125-70(6)(a) of the ITAA 1997), and demerging entity (paragraph 125-70(7)(a) of the ITAA 1997). | Detailed Reasoning - Demerger Group: 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 Y as the head entity and includes Company Z as a demerger subsidiary. Company Y will be the head entity because: no other member of the Company Y group holds ownership interests in Company Y (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 Y could be a demerger subsidiary (subsection 125-65(4) of the ITAA 1997). Company Z will be a demerger subsidiary of Company Y because Company Y owns ownership interests in Company Z 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 Company Z (subsection 125-65(6) of the ITAA 1997). | Detailed Reasoning - Demerger: Subsection 125-70(1) of the ITAA 1997 describes when a demerger happens. A demerger will happen to the Company Y demerger group because: there will be a restructuring (paragraph 125-70(1)(a) of the ITAA 1997), and Company Y will dispose of at least 80% of its Company Z shares to the owners of Company Y (subparagraph 125-70(1)(b)(i) of the ITAA 1997); under the restructuring, CGT event A1 will happen to Company Y and the Company Y shareholders will acquire new shares in Company Z and nothing else (subparagraph 125-70(1)(c)(i) of the ITAA 1997); CGT event A1 will happen upon the disposal of shares in Company Y. Company Z shares will be acquired by the Company Y shareholders on the basis of their ownership of shares in Company Y (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 repealed; neither Company Y nor Company Z are superannuation funds (paragraph125-70(1)(g) of the ITAA 1997); Company Y shareholders will acquire Company Z shares in the same proportion as they own Company Y shares just before the demerger (paragraph 125-70(2)(a) of the ITAA 1997); each of the Company Y shareholders will own shares in Company Y and Company Z that (just after the demerger) represent the same proportionate total market value as their Company Y shares represented (just before the demerger) (paragraph 125-70(2)(b) of the ITAA 1997); under the scheme, there will be no buy-back of shares for the purposes of Division 16K of Part III of the ITAA 1936 (subsection 125-70(4) of the ITAA 1997); and there will be no rollover available under another provision for any CGT events that happen to the Company Y shares under the restructure (subsection 125-70(5) of the ITAA 1997). | Detailed Reasoning - Company Z is the demerged entity: 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. In the present circumstances, Company Z will be the demerged entity since the Company Y shareholders will receive shares in Company Z under the proposed demerger. | Detailed Reasoning - Company Y is the demerging entity: Relevantly, 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. In the present circumstances, Company Y is the demerging entity since it will dispose of 100% of its shares in Company Z to Company Y shareholders under the proposed demerger. | Detailed Reasoning - Can Company Y disregard the capital gain or capital loss?: Section 125-155 of the ITAA 1997 provides that a demerging entity may ignore capital gains or capital losses arising from certain CGT events (including CGT event A1) happening to its ownership interests in a demerged entity under a demerger. In the present case: Company Y will be the demerging entity, CGT event A1 will happen when Company Y disposes of its shares in Company Z and transfers them to the Company Y shareholders (per section 104-10 of the ITAA 1997), and this disposal will happen under a demerger. Therefore, any capital gain or capital loss made by Company Y from CGT event A1 happening on the disposal of its Company Z shares under the demerger will be disregarded (section 125-155 of the ITAA 1997). | Summary: It is not necessary to rule on this question as Company Y is not the relevant taxpayer for the purpose of Part IVA of the ITAA 1936. | Detailed Reasoning - Detailed reasoning: Section 177D of the ITAA 1936 provides that Part IVA applies to any scheme entered into where a taxpayer (referred to as the relevant taxpayer) has obtained, or would but for section 177F of the ITAA 1936 obtain, a tax benefit and, after having regard to the matters listed in paragraphs 177D(b)(i) to (viii) of the ITAA 1936, it would be concluded that one of the persons who entered into or carried out the scheme did so for the dominant purpose of enabling the taxpayer to obtain a tax benefit from the scheme. Company Y has not been identified as the 'relevant taxpayer' for the purpose of section 177D of the ITAA 1936.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Overview: The scheme that is the subject of this ruling involves the proposed demerger of Company Z by Company Y. | Company Y is the head company of a consolidated group for tax purposes. | Company Y has ordinary and other classes of shares on issue. | Company Z is a wholly-owned subsidiary of Company Y. | At the time of the proposed demerger, Company Z will have ordinary and other classes of shares on issue. | All of the shares currently on issue in Company Z are post-CGT. | Proposed demerger of Company X from Company Y: Company Y proposes to undertake a restructure under which 100% of its shareholding in Company Z will be distributed to the holders of the ordinary and other classes of shares in Company Y (Company Y shareholders). Under the proposal, the owners of the ordinary and other classes of shares in Company Y will receive ordinary and other classes of shares in Company Z (and nothing else) in the same proportion to their existing shareholding of ordinary and other classes of shares in Company Y. | Accounting for the distribution: In accounting for the proposed demerger, Company Y will register in its books of account the current market value of Company Z by debiting an amount to share capital and the remainder to an asset revaluation reserve.