Private ruling: Demerger
Date of advice: 1 October 2018
Published: October 2018
Ruling period: Income year ending 30 June 20XX.
Date scheme commenced: XX XX 20XX.

Ruling: Q1: Will Company X disregard any capital gain or capital loss from CGT event A1 happening on the disposal of shares in Company Y, pursuant to section 125-155 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes. | Q2: Does GCT event J1 happen to Company Y or any member of the demerger group under the demerger? | A2: No. | Q3: Will the Commissioner make a determination in relation to the Distribution under: ● paragraph 45B(3)(a) of the Income Tax Assessment Act 1936 (ITAA 1936) that section 45BA of that Act applies to all or part of a demerger benefit, or ● paragraph 45B(3)(b) of the ITAA 1936 that section 45C of that Act applies to all or part of a capital benefit, and if so: ● will the Commissioner make a further determination under paragraph 45C(3) of the ITAA 1936 that all or part of the capital benefit was paid under a scheme for which a non-incidental purpose was to avoid franking credits arising in relation to the Distribution? | A3: No, the Commissioner will not make a determination in relation to the Distribution under paragraph 45B(3)(a) or (b) or subsection 45C(3) of the ITAA 1936. | Q4: Will Company X have an obligation to withhold tax on the demerger dividend paid to non-resident shareholders under section 128B of the ITAA 1936? | A4: No.

Relevant facts and circumstances: Background Company X announced to the Australian Securities Exchange (ASX) its intention to demerge its subsidiary, Company Y, subject to final Board approval, third party consents, regulatory and shareholder approvals. The demerger is intended to be accomplished via an in-specie distribution (the Distribution) of XX% (at least 80%) of Company X shares in Company Y to eligible Company X shareholders under a court-approved scheme of arrangement (the Scheme). The Distribution will comprise a return of capital and a dividend. Company Y shares will be split before the Distribution is made to ensure that each eligible Company X shareholder will be entitled to receive one ordinary share in Company Y for each ordinary share they hold in Company X at the Record Date. Company X Company X is an Australian resident public company listed on the ASX and the head company of an Australian income tax consolidated group for the purposes of Part 3-90 of the ITAA 1997. Company X’s registered shareholders comprise both Australian residents and foreign residents. All company X’s shares on issue are fully-paid ordinary shares. There will be no other ownership interests (as defined in subsection 125-60(1) of the ITAA 1997) at the time of the Distribution. Company Y Company Y is an Australian resident company. Before the Distribution, Company Y was a wholly-owned subsidiary of Company X Company Y and all its wholly-owned subsidiaries were subsidiary members of the consolidated group of which Company X is the head company. The Distribution The Distribution will be undertaken by a reduction of share capital under section 256B of the Corporations Act 2001 and a court approved scheme of arrangement under Part 5.1 of the Corporations Act 2001. Under the scheme of arrangement, on the Implementation Date, Company X will transfer XX% of the shares in Company Y to the shareholders of Company X. Company X will retain the remainder of the shares in Company Y. The reduction in capital will be spread evenly across all the Company X shares on issue. The capital reduction amount will be worked out by multiplying the balance of Company X’ share capital account by the ratio of the market value of the distributed Company Y shares to the sum of that market value and the market value of Company X just after the Distribution. The market values will be worked out by reference to the volume-weighted average price (VWAP) of Company Y shares and Company X shares for the first five business days starting from the date of the commencement of trading of Company Y shares on the ASX. The dividend component of the Distribution will be the difference between the market value of the distributed Company Y shares (worked out as above) and the capital reduction amount. Shareholders will receive one Company Y share for each Company X share they hold on the Record Date. Immediately after the Implementation Date, Company Y will be listed for quotation on the ASX and will commence trading. Accounting treatment of the Distribution Company X will account for the Distribution by debiting its share capital account by the capital reduction amount and debiting the dividend component of the Distribution to a reserve in accordance with Australian accounting standards. Reasons for the Distribution Company X considers the Distribution will: ● enable Company X to focus on businesses with strong future earnings growth prospects ● provide shareholders with an investment in two companies with different investment attributes and allow them the opportunity to increase or decrease their exposure to Company Y by trading in its shares ● simplify Company X’s portfolio in one step with less potential for disruption and better value for shareholders than alternatives such as a trade sale or initial public offering. Other matters Immediately before the Distribution, Company X’s share capital account will not be tainted (within the meaning of Division 197 of the ITAA 1997). Company X will not elect under subsection 44(2) of the ITAA 1936 that subsections 44(3) and (4) of the ITAA 1936 will not apply to any demerger dividend. Just after the Distribution is made, CGT assets owned by Comany Y and its demerger subsidiaries representing at least 50% by market value of all the CGT assets owned by those entities will be used in carrying on a business by those entities. Company X has consistently over many years distributed most of its profits to shareholders as dividends.

Relevant legislative provisions: 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 128B | Income Tax Assessment Act 1936 Part III Division 16K | Income Tax Assessment Act 1936 Section 177D | Income Tax Assessment Act 1936 Section 318 | Income Tax Assessment Act 1997 Section 104-135 | Income Tax Assessment Act 1997 Section 104-175 | Income Tax Assessment Act 1997 Section 104-182 | Income Tax Assessment Act 1997 Section 104-520 | Income Tax Assessment Act 1997 Division 125 | Income Tax Assessment Act 1997 Section 125-55 | Income Tax Assessment Act 1997 Section 125-60 | Income Tax Assessment Act 1997 Section 125-65 | Income Tax Assessment Act 1997 Section 125-70 | Income Tax Assessment Act 1997 Section 125-75 | Income Tax Assessment Act 1997 Section 125-80 | Income Tax Assessment Act 1997 Section 125-85 | Income Tax Assessment Act 1997 Subdivision 125-C | Income Tax Assessment Act 1997 Section 125-155 | Income Tax Assessment Act 1997 Section 125-160 | Income Tax Assessment Act 1997 Subdivision 126-B | Income Tax Assessment Act 1997 Division 701 | Income Tax Assessment Act 1997 Section 701-1 | Income Tax Assessment Act 1997 Section 701-85 | Income Tax Assessment Act 1997 Section 960-20 | Income Tax Assessment Act 1997 Section 975-500 | Income Tax Assessment Act 1997 Section 975-505 | Income Tax Assessment Act 1997 Subsection 995-1(1) | Corporations Act 2001 Part 5.1 | Corporations Act 2001 Section 256C | Corporations Act 2001 Subparagraph 411(4)(a)(ii)

Reasons for decision: Summary: Any capital gain or capital loss from CGT event A1 happening on disposal of shares in Company Y by Company X as the head company of the Company X income tax consolidated group will be disregarded under section 125-155. | Detailed Reasoning - Detailed reasoning: Division 125 contains relief from the possible CGT consequences of a demerger. Subdivision 125-C provides that certain capital gains or losses made by members of a demerger group under the demerger are disregarded. (Section 125-1) In particular, section 125-155 provides that any capital gain or capital loss which a ‘demerging entity’ makes from CGT events A1, C2, C3 or K6 happening to its ownership interests in a ‘demerged entity’ under a ‘demerger’ is disregarded. The relevant elements that are required to be satisfied for section 125-155 to apply are considered below. Demerger group A demerger group comprises the ‘head entity’ and one or more ‘demerger subsidiaries’. (Subsection 125-65(1)) Members of the demerger group must either be companies or trusts where CGT event E4 is capable of applying to all the units and interests in the trust. (Subsection 125-65(2)) A company or trust will be the head entity of a demerger group if no other member of the group owns ‘ownership interests’ in it.(Section 125-65(3)) However, a company or trust cannot be the head entity if it and all its demerger subsidiaries, are also demerger subsidiaries of another company or trust in another demerger group. (Subsection 125-65(4)) A company or trust is a ‘demerger subsidiary’ of another company or trust that is a member of a demerger group if the other company or trust, either alone or together with other members of the group, owns, or has the right to acquire, ownership interests in the company or trust that carry between them: (a) the right to receive more than 20% of any distribution of income or capital by the company or trustee; or (b) (in the case of a company) the right to exercise, or control the exercise of, more than 20% of the voting power of the company.( Subsections 125-65(6) and (7)) An ‘ownership interest’ in a company is a share in the company or an option, right or similar interest issued by the company that gives the owner an entitlement to acquire a share in the company. (Paragraph 125-60(1)(a)) An ownership interest in a trust is a unit or other interest in the trust, or an option, right or similar interest issued by the trustee that gives the owner an entitlement to acquire a unit or other interest in the trust. (Paragraph 125-60(1)(b)) Demerger A ‘demerger’ happens to a demerger group if there is a restructuring of the demerger group, (Paragraph 125-70(1)(a)) and under the restructuring: (Paragraph 125-70(1)(b)) ● members of the demerger group dispose of at least 80% of their total ownership interests in the demerged entity to owners of original interests in the head entity of the group; or ● at least 80% of the total ownership interests of members of the demerger group in the demerged entity end and new interests are issued to owners of original interests in the head entity; or ● the demerged entity issues sufficient new ownership interests in itself such that owners of original interests in the head entity own at least 80% of the total ownership interests in the demerged entity; or ● some combination of the above three processes happens with the effect that members of the demerger group stop owning at least 80% of the total ownership interest owned by members of the demerger group in another member of the group. Further requirements that must be met are as follows: ● whether or not a CGT event happens to an original interest owned by an entity in the head entity of the group, the entity acquires a new interest and nothing else (Paragraph 125-70(1)(c)) ● the acquisition by entities of new interests happens only because those entities own or owned original interests (Paragraph 125-70(1)(d)) ● the new interests acquired are ownership interests in a company, if the head entity is a company; or are ownership interests in a trust, if the head entity is a trust (Paragraph 125-70(1)(e)) ● neither the original interests nor the new interests are in a trust that is a non-complying superannuation fund (Paragraph 125-70(1)(g)) ● each owner (the ‘original owner’) of original interest in the head entity of the demerger group must acquire the same proportion, or as nearly as practicable the same proportion, of the new interests in the demerged entity as the original owner owned in the head entity just before the demerger (Paragraph 125-70(1)(h) and paragraph 125-70(2)(a)), and ● each original owner, just after the demerger, must have the same proportionate total market value of ownership interests in the head entity and demerged entity as they owned in the head entity just before the demerger. (Paragraph 125-70(2)(b)) A share buy-back that is an off-market purchase for the purposes of Division 16K of Part III of the ITAA 1936 is not a demerger.( Subsection 125-70(4)) Further, there is no demerger in circumstances where an owner of original interests can obtain a roll-over under a provision outside Division 125 for all of the CGT events that happened to the owner’s original interests under the circumstances. (Subsection 125-70(5)) Exception to proportion tests – employee share schemes Certain ownership interests in an entity are disregarded for the purposes of the proportion tests in paragraphs 125-70(2)(a) and (b) if, just before the demerger, those interests (taking into account either or both of their number and value) represented not more than 3% of the total ownership interests in the entity. (Subsection 125-75(1)) These include an ownership interest in a company, other than a fully-paid ordinary share, that an entity acquired a beneficial interest in under an employee share scheme, to which Subdivision 83A-B and the provisions referred to in paragraphs 83A-33(1)(a) to (c) or paragraphs 83A-35(1)(a) and (b) apply, or to which Subdivision 83A-C applies. (Subsection 125-75(2)) Demerged entity A demerged entity is an entity that is a former member of a demerger group if under the demerger that happens to the group, ownership interests in the entity are acquired by shareholders in the head entity of the group (if it is a company) or unitholders or holders of interests in the head entity (if it is a trust). (Subsection 125-70(6)) Demerging entity A demerging entity is an entity that is a member of a demerger group just before the CGT event referred in section 125-155 happens, and under a demerger that happens to the group the entity, alone or together with other members of the demerger group, stops owning at least 80% of their total ownership interests in another member of the demerger group including by disposing of the interest to owners of original interests. (Subsection 125-70(7)) Interaction between the single entity rule and Division 125 Division 701 sets out the core rules that determine how the income tax liability of a consolidated group is worked out. The single entity rule, set out in section 701-1, treats an entity that becomes a subsidiary member of the group and other subsidiary members as parts of the head company rather than as separate entities throughout the period the entity remains a subsidiary member. However, this single entity treatment applies only for the purposes of determining the income tax liability, or loss of a particular sort, of the head company and the entity for any income year in which any of the period occurs, or any later income year (the ‘head company core purposes’ and ‘entity core purposes’).(Subsections 701-1(2) and (3)) Taxation Ruling TR 2004/11 Income tax: consolidation: the meaning and application of the single entity rule in Part 3-90 of the Income Tax Assessment Act 1997 confirms that the single entity rule has the effect that the actions and transactions of a subsidiary member are treated as having been undertaken by the head company and the assets of a subsidiary member of the group are taken to be owned by the head entity while the subsidiary remains a member of the consolidated group. (Paragraph 8 of TR 2004/11) Further, Taxation Determination TD 2004/48 Income tax: consolidation: capital gains: for the purposes of Subdivision 125-C of the Income Tax Assessment Act 1997, can the head company of a consolidated group meet the requirements of a demerging entity in subsection 125-70(7) where a subsidiary member is demerged from the group? explains that the head company can meet the requirements of a demerging entity in subsection 125-70(7) even if there are other interposed subsidiary members. In particular, paragraphs 4 to 6 state: ● when a demerged entity is a member of a consolidated group, consideration needs to be given to the interaction of the demerger provisions with the single entity rule in section 701-1 of the ITAA 1997. Under the single entity rule, the subsidiary members of a consolidated group are treated as parts of the head company (and not separate entities) for the group's income tax purposes. ● however, the single entity rule does not apply to defeat a clearly intended outcome under provisions outside the consolidation rules (such as Parts 3-1 and 3-3 of the ITAA 1997). In such cases, intra-group interests, or legal entities that are part of the head company for consolidation purposes, require a level of recognition in applying provisions that have regard to such interests and entities (for example, in determining eligibility for a concession). Paragraphs 8(c) and 26 to 28 of Taxation Ruling TR 2004/11 explain the Commissioner's view that reading the Act as a whole achieves this outcome (and without the need to rely on section 701-85 of the ITAA 1997). ● in our view, the single entity rule does not prevent recognition of the demerged entity, and the group's membership interests in the demerged entity, just before the relevant CGT event happens. The head company can meet the requirements of a demerging entity in subsection 125-70(7) of the ITAA 1997. That is, the demerger group consists of the head company and the demerged subsidiary, even if there are other interposed subsidiary members. This is consistent with CGT events in relation to the demerger happening to the head company under the single entity rule. | Detailed Reasoning - Application to the facts: Is there a demerger group, and if so, what is the relevant demerger group? Just before the distribution, the single entity rule is set aside, as mentioned in TD 2004/48, for the purpose of determining whether there is a demerger group of which Company X is the head entity and Company Y and subsidiaries of Company Y are demerger subsidiaries, and if so, whether a demerger happens to the demerger group when the distribution is made. This approach also permits section 125-155 to apply to Company X in that event, which is consistent with the head company core purposes in subsection 701-1(2). Under this interpretation of the single entity rule, Company Y and its subsidiaries are demerger subsidiaries of Company X. Company X will be the head entity of a demerger group comprising itself, Company Y and Company Y’s subsidiaries for the purposes of Division 125 because at the time of the restructure no other member of the demerger group will own ownership interests in Company X. Further, there is no other company (or trust) capable of being a head entity of a demerger group of which Company X could be a demerger subsidiary. Does a demerger happen to the demerger group? A demerger will happen to the demerger group of which Company X is the head entity as: ● by distributing the Company Y shares to its shareholders, Company X will effect a restructuring of the Company X demerger group for the purposes of paragraph 125-70(1)(a) ● under the restructuring, Company X will dispose of XX% of its ownership interests (shares) in Company Y to Company X shareholders, being the owners of original interests (shares) in Company X (subparagraph 125-70(1)(b)(i)) ● under the restructuring, a CGT event will happen to the Company X shares, and Company X shareholders will receive shares in Company Y, being the ‘new interests’, and nothing else (subparagraph 125-70(1)(c)(i)) ● Company X shareholders will receive shares in Company Y solely on the basis of their shareholding in Company X (paragraph 125-70(1)(d)) ● Company X is a company and the new interests acquired, being Company Y shares, are ownership interests in a company (subparagraph 125-70(1)(e)(i)) ● neither Company X nor Company Y is a trust that is a non-complying superannuation fund (paragraph 125-70(1)(g)) ● each of the Company X shareholders will acquire the same proportion of new interests in the demerged entity (the shares in Company Y distributed to Company X shareholders) as the proportion of shares they owned in Company X just before the demerger (paragraph 125-70(2)(a)) ● just after the demerger, each of the Company X shareholder will have the same proportionate total market value of shares in Company X and Company Y as they owned in Company X just before the demerger (paragraph 125-70(2)(b)) ● the restructuring will not constitute an off-market share buy-back subject to Division 16K of Part III of the ITAA 1936 (subsection 125-70(4)), and ● no other roll-over will be available in the circumstances under another provision of the ITAA 1936 or ITAA 1997 (subsection 125-70(5)) Company X will be a demerging entity by virtue of the operation of the single entity rule. Company X will dispose of XX% of its ownership interests (shares) in Company Y to the owners of original interests (Company X shareholders) in Company X. Accordingly, Company X will be a demerging entity for the purposes of Division 125. Consequences of demerger for Company X In relation to the demerger that happens to the Company X group, Company X will be the demerging entity and Company Y and subsidiaries of Company Y will be demerged entities. Under the demerger, CGT event A1 will happen to Company X’ ownership interests in Company Y. As all requirements of section 125-155 are satisfied in the circumstances of the proposed demerger, any capital gain or capital loss Company X will make from CGT event A1 happening to the shares in Company Y that Company X will transfer to Company X shareholders under the demerger will be disregarded. | Summary: CGT event J1 will not happen to Company Y or to another member of the demerger group under the demerger. | Detailed Reasoning - Detailed reasoning: For CGT event J1 to occur the conditions specified in section 104-175 must be satisfied. Broadly, these conditions are that there was a roll-over under Subdivision 126-B involving a CGT asset (the roll-over asset) transferred between two members of the same wholly owned group, and the recipient (and current owner of) the roll-over asset stops being a 100% subsidiary of the company that was the ultimate holding company of the group at the time of the rollover. However, CGT event J1 does not happen if the recipient company ceases to be a subsidiary member of a consolidated group at the ‘break-up time’. (Section 104-182) Nor does CGT event J1 happen to a demerged entity or a member of a demerger group under a demerger. (Section 125-160) As a result of the Company X demerger of Company Y, Company Y and its subsidiaries will cease to be subsidiary members of the Company X consolidated group on the implementation date, and will cease to be 100% subsidiaries of Company X at that time. CGT event J1 will not happen to Company Y and its subsidiaries as a result of ceasing to be subsidiary members of a consolidated group on the demerger implementation date, being also the ‘break-up’ time. Nor will CGT event J1 happen to Company Y, any of its subsidiaries or to Company X under the demerger. | Summary: The Commissioner will not make a determination in relation to the Distribution under paragraph 45B(3)(a) that section 45BA applies to all or part of a demerger benefit. Nor will the Commissioner make a determination in relation to the Distribution under paragraph 45B(3)(b) that section 45C applies to all or part of a capital benefit. It follows that the Commissioner will not make a further determination under subsection 45C(3). | Detailed Reasoning - Detailed reasoning: The purpose of section 45B is to treat amounts as dividends where either the capital/profit split of a demerger dividend does not reflect the circumstances of a demerger, or certain payments, allocations and distributions are substituted for dividends. (Subsection 45B(1)) The section applies if: (a) there is a scheme under which a person is provided with a demerger benefit or a capital benefit by a company (b) under the scheme, a taxpayer (‘the relevant taxpayer’), who may or may not be the person provided with the demerger benefit or capital benefit, obtains a tax benefit, and (c) having regard to the relevant circumstances of the scheme, it would be (objectively) concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of it did so for a purpose of enabling a taxpayer (the relevant taxpayer) to obtain a tax benefit. The requisite purpose may or may not be the dominant purpose, but does not include an incidental purpose. (Subsection 45B(2)) The Commissioner may make a determination in writing that section 45BA applies to all or part of the demerger benefit, or that section 45C applies to all or part of the capital benefit.( Subsection 45B(3)) In the latter case, the Commissioner may make a further determination under subsection 45C(3) ) that all or part of the capital benefit was paid under a scheme for which a non-incidental purpose was to avoid franking credits arising. The effect of applying section 45BA is that all or part of the demerger benefit is taken for the purposes of the income tax law not to be a demerger dividend. Where the benefit is the provision of ownership interests, the amount of the demerger benefit is the market value of the interests at the time they were provided. This means that all or part of what would otherwise have been the demerger dividend is brought to tax in the hands of the company’s shareholders under subsection 44(1) as subsections 44(3) and (4) would not apply. The effect of section 45C applying to a capital benefit is that the amount of the capital benefit, or part of the benefit, is taken to be an unfranked dividend paid by the company to the shareholder or relevant taxpayer at the time that the shareholder or relevant taxpayer is provided with the capital benefit. The effect of a determination under subsection 45C(3) is that on the day the notice of the determination is served in writing on the company, a franking debit of the company arises in respect of the capital benefit. The amount of the debit is the amount of the franking credit on a dividend of an amount equal to the capital benefit or the part of the benefit had the company paid such a dividend at the time it provided the capital benefit, and fully franked it. A scheme means any arrangement; or any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise. (Subsection 45B(10) and subsection 995-1(1)) An arrangement means any arrangement, agreement, understanding, promise or undertaking, whether express or implied, and whether or not enforceable (or intended to be enforceable) by legal proceedings. (Subsection 995-1(1)) A person is provided with a demerger benefit if in relation to a demerger: ● a company provides the person with ownership interests in that or another company; or ● something is done in relation to an ownership interest owned by the person that increases the value of an ownership interest (whether or not the same one) owned by the person. (Subsection 45B(4)) A person is provided with a capital benefit if: ● they are provided with ownership interests in a company ● share capital or share premium is distributed to them; or ● something is done in relation to an ownership interest that increases the value of an ownership interest (whether or not the same one) that is held by the person. (Subsection 45B(5)) However, to the extent that the provision of interests, the distribution or the thing done involves the person receiving a demerger dividend, the person is not provided with a capital benefit. (Subsection 45B(6)) A relevant taxpayer obtains a tax benefit if an amount of tax payable, or any other amount payable under the income tax law, by the relevant taxpayer would, apart from section 45B, be less than the amount that would have been payable, or would be payable at a later time than it would have been payable, if the demerger benefit or the capital benefit had been an assessable dividend. (Subsection 45B(9)) The relevant circumstances of the scheme that the Commissioner must have regard to in order to determine whether or not the requisite purpose exists include those set out in subsection 45B(8), paragraphs (a) to (k) as follows: (a) the extent to which the demerger benefit or capital benefit is attributable to capital or to profits (realised and unrealised) of the company or an associate of the company (within the meaning of section 318). It is the Commissioner’s view that where it is not possible to precisely trace the amount of capital contributed by the head entity’s shareholders that is invested in the demerged entity, that amount should be determined in accordance with the relative market value of the demerged entity to the corporate group (Practice Statement PS LA 2005/21, paragraph 57) (b) the pattern of distributions of dividends, bonus shares and returns of capital or share premium by the company or an associate (c) whether the relevant taxpayer has capital losses that, apart from the scheme, would be unutilised (ie not utilised according to the meaning of ‘utilise’ in section 960-20) at the end of the relevant year of income (d) whether some or all of the ownership interest in the company or in an associate of the company held by the relevant taxpayer were acquired, or are taken to have been acquired, by the relevant taxpayer before 20 September 1985 (e) whether the relevant taxpayer is a non-resident (f) whether the cost base of the relevant ownership interest is not substantially less than the value of the applicable demerger benefit or capital benefit (h) if the scheme involves the distribution of share capital or share premium – whether the interest held by the relevant taxpayer after the distribution is the same as the interest would have been if an equivalent dividend had been paid instead of the distribution of share capital or share premium (i) if the scheme involves the provision of ownership interests and the later disposal of those interests, or an increase in the value of ownership interests and the later disposal of those interests: (i) the period for which the ownership interests are held by the holder of the interests; and (ii) when the arrangement for the disposal of the ownership interests was entered into (j) in the case of a demerger: (i) whether the profits of the demerging entity and demerged entity are attributable to transactions between the entity and an associate of the entity; and (ii) whether the assets of the demerging entity and demerged entity were acquired under transactions between the entity and an associate of the entity; and (k) any of the matters referred to in subsection 177D(2). The matters referred to in subsection 177D(2) are: (a) the manner in which the scheme was entered into or carried out (b) the form and substance of the scheme (c) the time at which the scheme was entered into and the length of the period during which the scheme was carried out (d) the result in relation to the operation of the Act that would be achieved by the scheme, if not for section 45B (e) any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme (f) any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result, or may reasonably be expected to result, from the scheme (g) any other consequence for the relevant taxpayer, or for any person referred to in paragraph (f), of the scheme having been entered into or carried out (h) the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in paragraph (f). Application to the demerger by Company X of Company Y The definition of ‘scheme’ is sufficiently broad to encompass the sequence of steps required to carry out the demerger. Under the demerger, Company X provides its shareholders with ownership interests in a company, being shares in Company Y, which is a demerger benefit. The part of the Distribution that comprises the demerger dividend is not also a capital benefit, but the capital component of the Distribution (the capital reduction amount) comprises share capital distributed to Company X shareholders, and is a capital benefit. Therefore there is a scheme under which Company X shareholders, being persons, are provided with a demerger benefit and a capital benefit by Company X. Further, Company X shareholders receive a tax benefit because the demerger (being the demerger dividend) is neither assessable income nor exempt income, and the capital benefit (being a return of capital) is not assessable income. Therefore less tax is payable by Company X shareholders, or it is payable at a later date, than would be the case if the demerger benefit or capital benefit had been an assessable dividend. Also, Company X receives a tax benefit if it makes a capital gain under CGT event A1 on the disposal of Company Y shares to its shareholders because it may disregard the gain (see the answer to question 1); and CGT event J1 will not trigger in relation to any roll-over assets within the Company X group when Company Y and its subsidiaries leave the Company X consolidated group and the demerger group of which Company X is the head entity (see the answer to question 2). Relevant circumstances Having regard to the relevant circumstances of the scheme as set out in subsection 45B(8): ● paragraph (a) inclines strongly against the requisite purpose as the method of working out the capital/profit split of the Distribution is based on the relative market value of Company Y to the Company X group ● paragraph (b) inclines against the requisite purpose as the history of Company X evidences a consistent pattern of paying out the majority of its profits to shareholders in the form of dividends, rather than accumulating the profits to be distributed all at once in a tax effective manner ● because of Company X’s diverse shareholder profile, paragraphs (c) to (f) are neutral, or at most incline only slightly toward the requisite purpose ● paragraph (h) is not a relevant factor given that the proportion tests in subsection 125-70(2) are satisfied in relation to the demerger ● paragraph (i) does not incline toward the requisite purpose as there is no arrangement for a later disposal of Company Y shares that Company X shareholders receive. Company X shareholders will make their own decisions as to how long to retain their Company Y shares before disposing of them ● paragraph (j) does not incline towards the requisite purpose as Company X has not concentrated assets or profits in Company Y so as to effect a tax-free distribution of assets and profits to Company X shareholders through their ownership of Company Y shares beyond that required for Company Y to continue carrying on its own businesses in a viable manner. Nor is Company X to be drained of the resources it needs to continue its remaining businesses in a viable manner. As for the factors in paragraphs 177D(2)(a) to (h) referred to in paragraph 45B(8)(k): ● the manner in which Company X proposes to carry out the scheme is to effect a business restructure by means of a demerger of Company Y and its subsidiaries. Company X has a strong commercial rationale for the restructuring and why it chose a demerger over other means of disposing of the majority of its interest in Company Y ● the form of the scheme is the steps involved in carrying out the demerger in accordance with the conditions in subsection 125-70(1). The economic substance of the scheme is that Company X shareholders will continue to own directly shares in Company Y that they had previously owned indirectly through Company X, and Company X will have reduced its share capital proportionately with the relative market value of Company Y and the combined Company X and Company Y groups. Company Y and Company X will be able to concentrate on their respective businesses ● the timing of the scheme is driven primarily by changes in the business climate ● apart from section 45B, the results in relation to the operation of the Act that would be achieved by the scheme are that: ● resident Company X shareholders will be able to choose roll-over in relation to CGT event G1 that happens to their shares under the demerger (Section 125-55) ● the pre-demerger cost bases of shareholders’ post-CGT Company X shares will be apportioned across those shares and the corresponding Company Y shares the shareholders receive under the demerger (Sections 125-80 and 125-85) ● resident shareholders will not be taxed on the dividend component of the Distribution they receive (Subsections 44(3) and (4)) ● withholding tax will not be payable on the dividend component of the Distribution received by non-resident taxpayers (see answer to question 4) ● Company X shareholders who hold pre-CGT shares in Company X and who choose the roll-over will receive new pre-CGT interests in Company Y (Section 125-80) ● Company X will disregard any capital gain or capital loss on the disposal of Company Y shares under the demerger ● CGT event J1 does not happen to Company X or to Company Y or any of its subsidiaries under the demerger ● the demerger delivers to Company X shareholders direct ownership of interests in Company Y that they previously owned indirectly through Company X, in theory leaving them in the same economic position as before. In practice, direct ownership of the Company Y shares provides Company X shareholders with a choice to dispose of or exchange the shares or use them as a financial security. ● the demerger will result in a diminution of Company X’s assets, as it will cease to own XX% of Company Y shares. ● other consequences are listed under the heading ‘Reasons for the Distribution’ in the facts, to the extent they are not already covered above ● the nature of the relevant connections are the relationships between Company X and its shareholders as shareholders. The significance of those relationships for income tax purposes is that distributions of Company X’ profits are assessable income of its shareholders. The proposed demerger will preserve the economic substance of these relationships. It will not make special provision for some shareholders as against others: rather, it will provide benefits to all shareholders in proportion to their shareholding. Conclusion Taking into account the relevant circumstances above, while there are undoubtedly tax benefits to Company X shareholders and to Company X from the demerger, the overriding reasons for carrying out the demerger are commercial in nature. Therefore, while objectively there is a purpose of enabling relevant taxpayers to obtain tax benefits, that purpose is incidental to the commercial purposes of the demerger. Accordingly, the Commissioner will not make a determination under paragraph 45B(3)(a) that section 45BA applies in relation to the demerger benefit identified above, and will not make a determination under paragraph 45B(3)(b) that section 45C applies to the capital benefit identified above. Since no determination will be made under paragraph 45B(3)(b), it follows that the Commissioner will make no additional determination under subsection 45C(3). | Summary: Company X will not be required to withhold an amount of non-resident dividend withholding tax from the demerger dividend received by non-resident shareholders. | Detailed Reasoning - Detailed reasoning: Subsection 128B(4) makes a person who derives income to which section 128B applies that consists of a dividend liable to pay income tax on that income at the rate declared by Parliament. Subsection 128B(1) states that section 128B applies to income derived on or after 1 January 1968 by a non-resident that consists of a dividend paid by an Australian resident company. However, this is subject to certain exceptions including that set out in subsection 128B(3D), which states that section 128B does not apply to a demerger dividend to which section 45B does not apply. Application to the demerger by Company X of Company Y Section 45B does not apply to the demerger dividend that will be distributed as a result of the demerger of Company Y by Company X (see the reasons for decision for question 3 above). Accordingly, Company X will not be required to withhold an amount under section 128B from the demerger dividend received by non-resident shareholders.

Legislative references in this Ruling are to provisions of the Income Tax Assessment Act 1936 (ITAA 1936), or to provisions of the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise indicated.