Private ruling: Demerger
Date of advice: 11 November 2016
Published: March 2017
Ruling period: Income year ending 30 June 201X
Date scheme commenced: 1 July 201X

Ruling: Q1: Will the Commissioner confirm that the Arrangement satisfies the requirements for demerger relief under Division 125 so that any capital gain or capital loss arising from the disposal by Entity1 of the shares it holds in Entity2 will be disregarded under section 125-155 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes

Relevant facts and circumstances: Background Entity1 is the head entity of a tax consolidated group ( the Group ) consisting of a number of wholly owned subsidiaries, including Entity2. Entity2 owns more than X0% of the ordinary shares in Investment Co, an Australian resident company. Arrangement (The Demerger) On the implementation date, under the demerger of Entity2 by Entity1, Entity1 will make an in specie distribution whereby all the issued shares in Entity2, held by Entity1, will be transferred to Entity1's shareholders. Entity1 shareholders will receive one share in Entity2 for each share they hold in Entity1. Under the demerger, Entity1 shareholders will acquire shares in Entity2 and nothing else. There will be no other company or trust capable of being a head entity of the demerger group of which Entity1 could be a demerger subsidiary. Under the scheme, there will be no off-market buy-back of shares for the purpose of Division 16K of Part III of the Income Tax Assessment Act 1936 . Reasons for the demerger The Applicant advises various reasons for the demerger. Other Matters The share capital account is not tainted for the purposes of Division 197 of the ITAA 1997.

Relevant legislative provisions: Income Tax Assessment Act 1936 Division 16K of Part III, | Income Tax Assessment Act 1997 Subsection 104-10(1), | Income Tax Assessment Act 1997 Division 125, | Income Tax Assessment Act 1997 Section 125-1, | Income Tax Assessment Act 1997 Subsection 125-60(1), | Income Tax Assessment Act 1997 Section 125-65, | Income Tax Assessment Act 1997 Subsection 125-65 (1), | Income Tax Assessment Act 1997 Subsection 125-65 (3), | Income Tax Assessment Act 1997 Subsection 125-65 (4), | Income Tax Assessment Act 1997 Subsection 125-65 (5), | Income Tax Assessment Act 1997 Subsection 125-65 (6), | Income Tax Assessment Act 1997 Section 125-70, | Income Tax Assessment Act 1997 Subsection 125-70(1), | Income Tax Assessment Act 1997 Subsection 125-70(2), | Income Tax Assessment Act 1997 Subsection 125-70(4), | Income Tax Assessment Act 1997 Subsection 125-70(5), | Income Tax Assessment Act 1997 Subsection 125-70(6), | Income Tax Assessment Act 1997 Subsection 125-70(7), | Income Tax Assessment Act 1997 Subdivision 125-C, | Income Tax Assessment Act 1997 Section 125-155, and | Income Tax Assessment Act 1997 Division 197.

Reasons for decision: Summary: All references to legislation within this ruling are to the ITAA 1997 unless otherwise specified. | Detailed Reasoning - Division 125: Division 125 relates to demerger relief where entities can obtain Capital Gains Tax (CGT) relief for a demerger. Section 125-1 provides: Owners of ownership interests in the head entity of a demerger group can obtain a roll-over to defer CGT consequences for the CGT events that happen to their interests under the demerger (see Subdivision 125-B). Capital gains and capital losses made by members of the demerger group from certain CGT events that happen under the demerger are disregarded (see Subdivision 125-C). Subdivision 125-C Subdivision 125-C allows certain capital gains or capital losses made by members of a demerger group under a demerger to be disregarded. One of the consequences of a demerger for members of a demerger group is that any capital gain or capital loss that a demerging entity makes from CGT events A1, C2, C3 or K6 happening to ownership interests in a demerged entity under a demerger is disregarded (section 125-155). | Detailed Reasoning - Are the requirements of section 125-155 satisfied?: Section 125-155 provides: 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. Accordingly, there are a number of elements that are required to be satisfied to qualify for demerger relief. Ownership Interest Subsection 125-60(1) provides that: An ownership interest in a company or trust is: (a) for a company, 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; and (b) for a trust, 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. In the present case, Entity1 owns all of the shares in Entity2. As an ownership interest is defined to include a share in the company as per paragraph 125-60(1)(a), Entity1 therefore has an ownership interest in Entity2. Demerger Group Subsection 125-65(1) provides that a demerger group comprises the head entity of the group and one or more demerger subsidiaries. Subsection 125-65(3) provides that a company or trust is the head entity of a demerger group if no other member of the group owns 'ownership interests' in the company or trust. Subsection 125-65(4) provides that: If apart from this subsection, a company or trust would be the *head entity of a *demerger group and the company or trust, and all of its *demerger subsidiaries, are also demerger subsidiaries of another company or trust in another demerger group, the first-mentioned company or trust is not the head entity of a demerger group. Subsection 125-65(5) provides that: A company or trust (the first company or trust ) that would, apart from this subsection, be a member of a demerger group is not a member of the demerger group if: (a) the first company or trust owns, either alone or together with another company or trust that would, apart from this subsection, be a member of the *demerger group, more than 20% but less than 80% of the *ownership interests in a *listed public company or *listed widely held trust; and (b) the listed public company or listed widely held trust chooses that the first company or trust not be a member of the demerger group Subsection 125-65(6) provides that: A company is a demerger subsidiary of another company or a trust that is a member of a *demerger group if the other company or the trust, either alone or together with other members of the group, owns, or has the right to *acquire, *ownership interests in the company that carry between them: (a) the right to receive more than 20% of any distribution of income or capital by the company; or (b) the right to exercise, or control the exercise of, more than 20% of the voting power of the company. In the present case, Entity1 will therefore be the head entity of the demerger group because no other member of the group holds ownership interests in Entity1 and there will be no other company or trust capable of being head entity: subsection 125-65(3). Entity2 will be a demerger subsidiary of Entity1 because Entity1 will wholly own the membership interests in Entity2 that carry more than X0% of the rights to any distribution of income and capital, and the right to exercise more than X0% of the voting power of Entity2: subsection 125-65(6). Accordingly, the demerger group comprises of Entity1 and Entity2. Demerger Subsection 125-70(1) provides: A demerger happens to a *demerger group if: (a) there is a restructuring of the demerger group; and (b) under the restructuring: (i) members of the demerger group *dispose of at least 80% of their total *ownership interests in another member of the demerger group to owners of original interests in the *head entity of the demerger group; or (ii) at least 80% of the total ownership interests of members of the demerger group in another member of the demerger group end and new interests are issued to owners of original interests in the head entity; or (iii) the demerged entity issues sufficient new ownership interests in itself with the result that owners of original interests in the head entity own at least 80% of the total ownership interests in the demerged entity; or (iv) some combination of the processes referred to in subparagraphs (i), (ii) and (iii) happens with the effect that members of the demerger group stop owning at least 80% of the total ownership interests owned by members of the demerger group in another member of the group; and (c) under the restructuring: (i) a *CGT event happens to an original interest owned by an entity in the head entity of the group and the entity *acquires a new interest and nothing else; or (ii) no CGT event happens to an original interest owned by an entity in the head entity of the group and the entity acquires a new interest and nothing else; and (d) the acquisition by entities of new interests happens only because those entities own or owned original interests; and (e) the new interests acquired are: (i) if the head entity is a company - ownership interests in a company; or (ii) if the head entity is a trust - ownership interests in a trust; and (f) (Repealed by No 168 of 2006) (g) neither the original interests nor the new interests are in a trust that is a *non-complying superannuation fund; and (h) the requirements of subsection (2) are met. Subsection 125-70(2) provides: Each owner (an original owner ) of original interests in the *head entity of the *demerger group must: (a) *acquire, under the *demerger, the same proportion, or as nearly as practicable the same proportion, of new interests in the *demerged entity as the original owner owned in the head entity just before the demerger; and (b) just after the demerger, have the same proportionate total *market value of *ownership interests in the head entity and demerged entity as the original owner owned in the head entity just before the demerger Subsection 125-70(4) provides: A buy-back of *shares that is an off-market purchase for the purposes of Division 16K of Part III of the Income Tax Assessment Act 1936 is not a *demerger. Subsection 125-70(5) provides: Circumstances where an owner of original interest can obtain a roll-over under a provision of this Act outside this Division for all of the CGT events that happened to the owner's original interests under the circumstances cannot be a demerger . In the present case, a demerger under section 125-70 will happen to the demerger group. Demerged Entity Subsection 125-70(6) provides the meaning of a demerged entity as: An entity that is a former member of a *demerger group is a demerged entity if, under a *demerger that happens to the group, *ownership interests in the entity are acquired by: (a) shareholders in the *head entity of the group; or (b) unitholders or holders of interests in the head entity of the group. In the present case, Entity2 will be the demerged entity under paragraph 125-70(6)(a) as it will be the former member of a demerger group consisting of Entity1 and Entity2. A demerger, as outlined above, will happen to the group, where the ownership interests in Entity2 will be acquired by shareholders in Entity1, the head entity of the group. Demerging Entity Subsection 125-70(7) provides the meaning of a demerging entity as: An entity that is a member of a *demerger group just before the *CGT event referred to in section 125-155 happens is a demerging entity if, under a *demerger that happens to the group: (a) the entity (either alone or together with other members of the demerger group) *dispose of at least 80% of their total *ownership interests in another member of the demerger group to owners of original interests in the *head entity of the demerger group; or (b) at least 80% of the total ownership interests of that entity and of other members of the demerger group in another member of the demerger group end and new interests are issued to owners of original interests in the head entity; or (c) the demerged entity issues sufficient new ownership interests in itself with the result that owners of original interests in the head entity own at least 80% of the total ownership interests in the demerged entity; or (d) some combination of the processes referred to in paragraphs (a), (b) and (c) happens with the effect that members of the demerger group stop owning at least 80% of the total ownership interests owned by members of the demerger group in another member of the group. In the present case, Entity1 will qualify as a demerging entity under paragraph 125-70(7)(a). This is because Entity1 will dispose of at least 80% of their total ownership interests in Entity2, another entity of the demerger group, to the group of owners of original interests in Entity1, the head entity of the demerger group. Entity1's shareholders will be the owners of the original interests in Entity1, the head entity of the demerger group. Entity1 will also be a member of a demerger group just before the CGT event referred to in section 125-155 happens. CGT Event A1 Subsection 104-10(1) provides that CGT event A1 happens if you dispose of a CGT asset. In the present case, CGT event A1 will happen to Entity1, a demerging entity, upon disposal of its ownership interests in Entity2 to Entity1 shareholders by way of an in specie distribution. | Detailed Reasoning - Conclusion: As all of the requirements of section 125-155 are satisfied, any capital gain or loss made by Entity1 from CGT event A1 happening on the disposal of Entity2 shares under the demerger will be disregarded (section 125-155).