Private ruling: Demerger relief
Published: September 2014
Ruling period: Year ending 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: For the purposes of section 125-155 of the Income Tax Assessment Act 1997 (ITAA 1997), is a capital gain or capital loss made under CGT event A1, C2, C3 or K6 that happens under the demerger, disregarded for Company X? | A1: Yes. | Q2: For the purposes of section 125-160 of the ITAA 1997, does CGT event J1 happen to Company X under the demerger? | A2: No.


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 125-65. | Income Tax Assessment Act 1997 Section 125-70. | Income Tax Assessment Act 1997 Section 125-155. | Income Tax Assessment Act 1997 Section 125-160.

Reasons for decision: Summary: Any capital gain or loss made under CGT event A1, C2, C3 or K6 from the disposal by Company X of its shares in Company Y under the demerger is disregarded as section 125-155 of the ITAA 1997 applies. | Detailed Reasoning - Detailed reasoning: Section 125-155 of the ITAA 1997 provides that any capital gain or capital loss a demerging entity makes from CGT event A1, C2, C3 or K6 happening to its ownership interests in a demerged entity under a demerger is disregarded. In the present case, 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). In this case, the demerger group includes Company X as the head entity and Company Y as a 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 20 per cent of any distribution of income or capital by Company Y; and • exercise more than 20 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 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 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 Income Tax Assessment Act 1936 (ITAA 1936) (subsection 125-70(4) of the ITAA 1997); • no 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 made from CGT event A1 happening on the disposal of Company Y shares occurred under a demerger, the capital gain or capital loss is disregarded as a result of section 125-155 of the ITAA 1997. | Detailed Reasoning - Question 2: Section 125-160 of the ITAA 1997 states that CGT event J1 does not happen to a demerged entity or a member of a demerger group under a demerger. As discussed further above, Company X was a member of a demerger group and a demerger happened. Therefore, section 125-160 of the ITAA 1997 applies and consequently CGT event J1 does not happen to Company X under the demerger.

Relevant facts: Company X is a public company and a resident of Australia for tax purposes. | Company Y is a public company whose ordinary shares are quoted for trading on the Australian Securities Exchange (ASX). | Company X's shareholding in Company Y represented more than 20% of the total issued capital in Company Y. | Company X has undertaken a demerger of more than 80% of its total shareholding in Company Y. The demerger proceeded by way of an in specie distribution by Company X of its Company Y shares to its shareholders. | (a) Company X transferred more than 80% of its Company Y shares to its shareholders by way of an equal capital reduction for the purposes of the Corporations Act 2001 , and | (b) each shareholder (registered on the distribution Record Date) received a proportionate share of the Company Y shares in accordance with their proportionate shareholding in Company X. No other distribution was received by the shareholders from Company X. | At the time of the demerger, Company X's retained profits account showed an accumulated loss. Company X accounted for the distribution by debiting its share capital account by the market value of the Company Y shares (the capital reduction amount). That is, there was no dividend amount with respect to the distribution. | Just after the demerger of Company Y, at least 50% of the market value of capital gains tax (CGT) assets owned by Company Y and its subsidiaries were used in carrying on a business by those entities. | Immediately prior to the demerger, Company X had no options on issue. | Company X's share capital account has not been tainted within the meaning of Division 197 of the ITAA 1997. | Company X will not make an election under subsection 44(2) of the ITAA 1936. | Company X has never paid a dividend to its shareholders. | At the time of the demerger, Company Y did not own membership interests in Company X and Company X was not a demerger subsidiary in another demerger group.