Private ruling: Demerger and proposed initial public offering
Date of advice: 24 August 2022
Published: November 2022
Ruling period: Year ending 30 June 20XX | Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will Company A's shareholders remain entitled to choose demerger roll-over relief for the demerger of the shares in Company B under section 125-55 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes | Q2: Will Company A remain entitled to disregard any capital gain under CGT event A1 upon the transfer of its shares in Company B to its shareholders under section 125-155 of the ITAA 1997? | A2: Yes | Q3: The value of the Company B shares distributed exceeds the amount debited to the share capital account and would otherwise be assessable as a dividend under subsection 44(1) of the Income Tax Assessment Act 1936 (ITAA 1936). Will the excess continue to be treated as a demerger dividend that is not paid out of profits and is not assessable or exempt income under subsections 44(3) and 44(4) of the Income Tax Assessment Act 1936 (ITAA 1936)? | A3: Yes | Q4: Will the Commissioner make a determination in respect of the demerger or capital benefit provided to the shareholders of Company A under: (a) Paragraph 45B(3)(a) of the ITAA 1936 that section 45BA of the ITAA 1936 applies in respect of the whole or any part of the demerger benefit; or (b) Paragraph 45B(3)(b) of the ITAA 1936 that section 45C of the ITAA 1936 applies in respect of the whole or any part of the capital benefit. | A4: No | Q5: Will the demerger and subsequent proposed limited-offer capital raising constitute a scheme to which section 177C and 177D of the ITAA 1936 apply such that the Commissioner will make a determination under subsection 177F(1) that Part IVA of the ITAA 1936 applies? | A5: No

Relevant facts and circumstances: Company A Company A is an Australian private company. The demerger of its subsidiary (Company B) was finalised in XXXX. Immediately prior to the demerger of Company B, Company A owned 100% of the shares in Company B (Business X) and 100% of the shares in Company C (Business Y). Company A was the head entity of the income tax consolidated group. Company A shareholding Immediately prior to the demerger, Company A had more than one class of shares on issue. There were no other equity interests (including shares, options or similar rights) on issue in Company A. The share classes will continue to rank equally for distributions. Historically only annual dividend distributions have been made. No capital distributions have occurred, with the exception of the capital returned as part of the demerger of Company B. All shareholders are Australian residents for income tax purposes and have continually held their shares on capital account. Business X (Company B) Company B operates Business X. Company B is the head entity of an income tax consolidated group. Since the demerger of Company B, Company B has been owned directly by the Company A shareholders. The shareholdings in Company B were exactly the same as the shareholdings in Company A (with the exception that the total value of Company A's share capital was split between Company A and Company B under the demerger). The share classes will continue to rank equally for distributions. Historically only annual dividend distributions have been made (no capital distributions have occurred). Business Y (Company C) Company C operates Business Y. Since the demerger, Company C has been actively seeking to expand its business. A number of opportunities have been actively sought. Commercial drivers for the demerger The purpose of the demerger was to fully separate Business X from Business Y. A number of commercial reasons were provided as the reason for undertaking a demerger. Restructuring steps to implement the demerger Company A undertook the following transactions to ultimately demerge Company B from the group. These transactions will be referred to collectively as the restructure steps. The taxpayer had confirmed that the market valuations, and any valuation at the time of the demerger, had been made in accordance with the ATO market valuation guidelines. Distribution components To determine how much share capital had been invested in Business X, the relative market value of Company B to the rest of the corporate group had been used in accordance with ATO Practice Statement Law Administration 2005/21 (PS LA 2005/21). The return of capital component was debited to Company A's share capital account. The dividend component was debited to Company A's retained earnings account. Proposed IPO Company B is proposing to IPO. A number of commercial reasons were provided as the reason for undertaking an IPO. Extensive evidence requested, including minutes from board meetings and third-party information, was provided in support. Other Matters Company A has not made an election under subsection 44(2) of the ITAA 1936 that subsections 44(3) and (4) of the ITAA 1936 do not apply to the demerger dividend. There has been no transfer of any amount to Company A's share capital account that resulted in it becoming tainted under section 197-50 of the ITAA 1997. The shareholders advise that when Company B left the income tax consolidated group, exit allocable cost amount calculations were prepared, and where applicable, capital gains arising from CGT event L5 were included in Company A's relevant income tax return.

Relevant legislative provisions: Income Tax Assessment Act 1936 subsection 6(1) | 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 Part IVA | 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 section 104-135 | 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 125-155

Reasons for decision: Summary: Company A's shareholders will remain eligible to elect to apply demerger relief under section 125-55 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Division 125 of the ITAA 1997 provides demerger relief from the CGT consequences of a demerger. The shareholders of Company A would be eligible to choose demerger relief for any CGT consequences of the demerger provided they had met all of the conditions of subsection 125-55(1) of the ITAA 1997 as follows: (a) You own an ownership interest in a company (the original interest); (b) The company is the head entity of a demerger group; (c) A demerger happens to the demerger group; and (d) Under the demerger, a CGT event happens to your original interest and you acquire a new or replacement interest in the demerged entity. However, subsection 125-55(2) of the ITAA 1997 states that you cannot choose to obtain a roll-over for an original interest if: (a) You are a foreign resident; and (b) The new interest you acquire under the demerger in exchange for that original interest is not taxable Australian property just after you acquire it. At the time of the demerger of Company B (and at all relevant times since the demerger of Company B) there have been no foreign resident shareholders of Company A. The exclusion in subsection 125-55(2) of the ITAA 1997 will not apply. Company A's shareholders were able to choose to obtain a roll-over provided they satisfied the requirements of subsection 125-55(1) of the ITAA 1997. These requirements are considered below. | Detailed Reasoning - (a) You own an ownership interest in a company: An ownership interest in a company is defined by section 125-60 of the ITAA 1997 as a share or similar interest (including an option or right) issued by a company that gives the owner an entitlement to acquire a share in the company. Each of the Company A shareholders owned shares in Company A prior to the demerger. Company A is the company referred to in subsection 125-55(1)(a) of the ITAA 1997. There were no other rights or similar equity interests held in Company A. Each of the shares in Company A were ownership interests in a company (an original interest) pursuant to section 125-60 of the ITAA 1997. | Detailed Reasoning - (b) The company is the head entity of a demerger group: Subsection 125-65(1) of the ITAA 1997 provides that a demerger group consists of the head entity of the group and at least one demerger subsidiary (being a subsidiary that it holds a minimum 20% interest). The demerger group in this case was comprised of Company A as the head entity and included Company B as a demerger subsidiary. None of the Company A shareholders could be the head entity of the demerger group. Company A was the head entity of the demerger group because: Company B was a demerger subsidiary of Company A because Company A held ownership interests in Company B that carried 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 B (subsection 125-65(6) of the ITAA 1997). (c) A demerger happens to the demerger group The meaning of 'demerger' is set out in section 125-70 of the ITAA 1997. Subsection 125-70(1) states that 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;... 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;...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:... and (f) [repealed] (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. The elements for a demerger of a demerger group are examined below. | Detailed Reasoning - Restructuring of the demerger group: Taxation Determination Income tax: what is a 'restructuring' for the purposes of subsection 125-70(1) of the Income Tax Assessment Act 1997? (TD 2020/6) sets out the Commissioner's views of what is a 'restructuring' for the purposes of subsection 125-70(1) of the ITAA 1997. A restructuring of a demerger group takes on its ordinary business meaning, referring to the reorganisation of a group of companies or trusts. As to which steps will form part of the restructuring is a question of fact. However, all the steps which occur under a single plan of reorganisation will usually constitute the restructuring. The commercial understanding and objectively inferred plan for reorganisation will determine which steps or transactions will form part of the restructuring of the demerger group. In this case, the objectively inferred purpose of the restructuring was to fully separate Business X from Business Y. | Detailed Reasoning - IPO: The restructuring of a demerger group is not necessarily confined to the steps or transactions that deliver the ownership interests in an entity to the owners of the head entity of the demerger group, but may include previous and / or subsequent transactions in a sequence of transactions. Now that Company B is proposing an IPO, we must consider whether the sequence of transactions, that include both the demerger and the now proposed IPO, should be considered to be part of the 'restructuring' for the purposes of 125-70(1) of the ITAA 1997. For the purposes of demonstrating what steps should form part of a 'restructuring', TD 2020/6 provides examples of demergers accompanied by post-separation capital raisings and / or a post-separation realisation of interests. The examples demonstrate what it means for a demerger and subsequent realisation of interests to be part of a single objective plan. The proposed IPO of Company B could form part of the 'restructuring', if, for example: We have reviewed the objective information provided such as board minutes and third-party documentation. The information evidences the commercial drivers for the demerger and proposed IPO and evidences the group's internal deliberations and planning discussions. Based on the objective evidence provided for this period: Based on the objective evidence provided, the proposed IPO appears to be separate and independent from the demerger transaction rather than a single plan for reorganisation of the group. | Detailed Reasoning - Separation of funding: Other preparatory steps and transactions that commonly form part of the reorganisation of a demerger group and are therefore included in the 'restructuring' are also outlined by TD 2020/6. Demergers provide an avenue for separate businesses to function independently from one another through separation of their ownership structures. In addition to the ultimate separation of ownership, demergers will also involve steps such as transferring assets, forgiving debts between members of the demerger group and entering into new finance arrangements. These preparatory steps are part of the restructuring as they are steps that achieve the overall commercial objective of independence. The commercial drivers for the demerger and proposed IPO were provided to us. Where the IPO assists the commercial drivers of the demerger, it could be argued that both the demerger and the IPO are objectively linked and form part of the 'restructuring'. After consideration of the facts and evidence provided, it is our view that the separation of financing structures delivered by the proposed IPO should not cause the IPO to form part of the 'restructuring'. TD 2020/6 provides the ATO view for common steps that usually occur prior to the delivery of ownerships interests to shareholders under the demerger. The occurrence of these common steps after the demerger does not of itself prevent these steps from forming part of the 'restructuring'. However, the strength of support that these steps should form part of a single plan for reorganisation requires consideration. This includes consideration of factors such as temporal proximity as well as how these steps relate back to the plans as they stood at the demerger time. The IPO was not part of the demerger plans and it is too remote to link ongoing commercial objectives of the businesses as part of a single plan for reorganisation in the absence of any documented internal deliberations or third-party information to suggest otherwise. | Detailed Reasoning - Conclusion: The demerger and subsequent proposed IPO do not form part of a single plan for reorganisation. The plans for IPO appear to be separate and independent from the demerger transaction. The proposed IPO is also too remote to be linked back to the demerger on the basis of completing commercial objectives of the businesses. Accordingly, the proposed IPO should not form part of the 'restructuring' for the purposes of subsection 125-70(1) of the ITAA 1997. The demerger steps which involve the Company A shareholders acquiring direct interests in Company B amount to the 'restructuring' of the demerger group for the purposes of subsection 125-70(1)(a) of the ITAA 1997. | Detailed Reasoning - Disposal of interests to owners: Under subparagraph 125-70(1)(b)(i) of the ITAA 1997, a restructure can be achieved by members of the demerger group disposing 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. Company A transferred 100% of the shares that it owned in Company B to the Company A shareholders on implementation of the demerger, therefore the requirements in subparagraph 125-70(1)(b)(i) of the ITAA 1997 were satisfied. | Detailed Reasoning - Acquisition of new interests and nothing else: Paragraph 125-70(1)(c) of the ITAA 1997 requires that under the restructuring, a CGT event happens to an entity's original interest in Company A and the Company A shareholders acquire a new interest and nothing else. To give effect to the demerger, Company A declared a capital reduction and demerger dividend to its shareholders in proportion to their respective holdings. Company A made an in-specie distribution of the shares it held in Company B to Company A's shareholders. The in-specie distribution triggered CGT event G1 for the Company A shareholders to the extent of the return of capital on their interests held in Company B (section 104-135 of the ITAA 1997). Under the restructuring, Company A shareholders acquired new ownership interests in the demerged entity, Company B, and did not receive anything else. | Detailed Reasoning - New interests a consequence of owning original interests: Paragraph 125-70(1)(d) of the ITAA 1997 requires the new interests to be acquired by the Company A shareholders only because those shareholders own or owned original interests. This requirement was satisfied on the basis that the new interests were acquired as payment for the capital reduction and dividend previously declared in respect of the Company A shareholder's original interests. | Detailed Reasoning - Type of new interests acquired: The interests that were provided to the shareholders were shares in Company B which were ownership interests in a company. The requirement in paragraph 125-70(1)(e) of the ITAA 1997, that the new interests are ownership interests in a company (where the head entity of the demerger group is a company), was satisfied. | Detailed Reasoning - Non-complying superannuation fund: Company A and Company B were companies and the ownership interests in the companies were shares. The original and new interests were not interests in a trust that was a non-complying superannuation fund. The requirement in paragraph 125-70(1)(g) of the ITAA 1997 was satisfied. | Detailed Reasoning - Continuity of proportionate interests: Subsection 125-70(2) of the ITAA 1997 provides that each 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. The ownership interests in both Company A and Company B consisted of the same number of shares. The disposal of the shares in Company B to the Company A shareholders was distributed based on each owner's proportionate shareholding in Company A. Each original Company A shareholder had the same proportionate interest in the combined total market value of Company A and Company B (the demerged entity) as they had in Company A before the demerger. The requirements of subsection 125-70(2) of the ITAA 1997 were satisfied. | Detailed Reasoning - (d) CGT event happens to original interest and new interest acquired in the demerged entity: CGT event G1 was triggered in relation to the shares held by the Company A shareholders in Company A to the extent of the return of capital that Company A made to its shareholders. Under the demerger steps, the Company A shareholders acquired shares in Company B (the demerged entity) via an in-specie distribution. Subsection 125-55(1)(d) of the ITAA 1997 was satisfied. | Detailed Reasoning - Conclusion: All of the requirements of subsection 125-55(1) of the ITAA 1997 continue to be satisfied for each of the Company A shareholders because: Therefore, the Company A shareholders remain entitled to have chosen demerger roll-over under section 125-55 of the ITAA 1997. | Summary: Company A will remain entitled to disregard any capital gain under CGT event A1 that occurred upon the transfer of its shares in Company B under the demerger to the Company A shareholders. | Detailed Reasoning - Detailed reasoning: 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: Therefore, any capital gain or loss under CGT event A1 made by Company A on the disposal of its Company B shares under the demerger will continue to be disregarded (section 125-155 of the ITAA 1997). | Summary: All or any part of the distribution of Company B shares to the Company A shareholders that was a dividend will continue to constitute a demerger dividend, and therefore be neither assessable income nor exempt income pursuant to subsections 44(3) and 44(4) of the ITAA 1936. | Detailed Reasoning - Detailed reasoning: Subsection 44(1) of the ITAA 1936 includes in a shareholder's assessable income a dividend, as defined in subsection 6(1) of the ITAA 1936, paid to a shareholder out of company profits. | Detailed Reasoning - Capital reduction amount: The definition of a dividend in subsection 6(1) of the ITAA 1936 excludes amounts debited against an amount standing to the credit of the share capital account of the company (paragraph (d) of the subsection 6(1) of the ITAA 1936 definition of a dividend). As the capital reduction amount was debited against an amount standing to the credit of the share capital account of Company A (as that term is defined in subsection 6(1) of the ITAA 1936) it was not a dividend, as defined in subsection 6(1) of the ITAA 1936. Therefore, the capital reduction amount was not assessable income of the shareholders of Company A for the purposes of subsection 44(1) of the ITAA 1936. | Detailed Reasoning - Dividend: In general, a dividend satisfied by a distribution of property (such as shares in a subsidiary) will be a dividend paid out of profits derived if, immediately after the distribution of that property, the market value of the assets of the company exceed the total amount (as shown in the company's books of account) of its liabilities and share capital (see paragraph 8 of Taxation Ruling TR 2003/8 Income tax: distributions of property by companies to shareholders - amount to be included as an assessable dividend ). However, a demerger dividend is taken not to have been paid out of profits and is neither assessable income nor exempt income (subsections 44(3) and (4) of the ITAA 1936) where: | Detailed Reasoning - Demerger dividend: Demerger dividend is defined by subsection 6(1) of the ITAA 1936 as part of a demerger allocation that is assessable as a dividend under subsection 44(1) or that would be so assessable apart from subsections 44(3) and (4) of the ITAA 1936. Demerger allocation is defined by subsection 6(1) of the ITAA 1936 and includes the total market value of the allocation represented by the ownership interests disposed of by a member of a demerger group under a demerger to the owners of ownership interests in the head entity. The distribution of the Company B shares, reduced by the return of capital amount, was a demerger dividend as defined in subsection 6(1) of the ITAA 1936. In this case the distribution of the Company B shares, reduced by the return of capital amount, equalled a demerger dividend. | Detailed Reasoning - No election: Company A had not made an election under subsection 44(2) of the ITAA 1936 that subsections 44(3) and (4) of the ITAA 1936 did not apply to the demerger dividend. | Detailed Reasoning - 50% CGT assets test: Subsection 44(5) of the ITAA 1936 provides that subsections 44(3) and 44(4) of the ITAA 1936 do not apply to a demerger dividend unless, just after the demerger, CGT assets owned by the demerged entity or a demerger subsidiary representing at least 50% by market value of all the CGT assets (or a reasonable approximation of market value) owned by the demerged entity and its demerger subsidiaries are used, directly or indirectly, in one or more businesses carried on by one or more of those entities. In applying this test, you disregard any assets that are ownership interests in a demerger subsidiary unless they are used in a business referred to in that subsection. Paragraph 15.64 of the Explanatory Memorandum to New Business Tax System (Consolidation, Value Shifting, Demergers and Other Measures) Act 2002 provides that the rule 'ensures that the demerged entity is a viable, independent entity, capable of conducting business in its own right'. It was proposed that Company B would, following the demerger, operate independently of the Company A group. Following the demerger of Business X, at least 50% of the market value of CGT assets owned by Company B (being the demerged entity) and each of its subsidiaries, was used directly or indirectly in Business X. As such, subsection 44(5) of the ITAA 1936 did not apply. | Detailed Reasoning - Conclusion: The dividend that was paid to the Company A shareholders under the demerger will continue to satisfy the conditions necessary to be a demerger dividend and would therefore be non-assessable nor non-exempt income pursuant to subsections 44(3) and 44(4) of the ITAA 1936. | Summary: The Commissioner will not make a determination under subsection 45B(3) of the ITAA 1936 that section 45BA or section 45C of the ITAA 1936 will apply to the whole, or any part, of any benefit provided to the Company A shareholders under the demerger. | Detailed Reasoning - Detailed reasoning: Subsection 45B(1) of the ITAA 1936 provides that the purpose of section 45B is to ensure that relevant amounts are treated as dividends for tax purposes if the capital and profit components of a demerger allocation do not reflect the circumstances of the demerger, or certain payments, allocations or distributions are made in substitution for dividends. Subsection 45B(2) of the ITAA 1936 sets out the conditions that must be met in order for section 45B to apply. Relevantly, this section applies if: (a) There is a scheme under which a person is provided with a demerger benefit or capital benefit by a company; and (b) Under the scheme a taxpayer, who may or may not be the person provided with the demerger benefit or the capital benefit, obtains a tax benefit; and (c) Having regard to the relevant circumstances of the scheme, it would be concluded that the person, or one of the persons, entered into the scheme or carried out the scheme or any part of the scheme for a purpose, other than an incidental purpose, of enabling a taxpayer to obtain a tax benefit. Where the requirements of subsection 45B(2) of the ITAA 1936 are met, subsection 45B(3) empowers the Commissioner to make a determination under either or both of section 45BA in relation to a demerger benefit and section 45C in relation to a capital benefit. The effect of a determination made under paragraph 45B(3)(a) of the ITAA 1936 is that part or all of a demerger benefit will be treated as not being a demerger dividend (subsection 45BA(1) of the ITAA 1936) and will not be treated as non-assessable non-exempt income. The effect of a determination made under paragraph 45B(3)(b) of the ITAA 1936 is that part or all of a capital benefit will be an unfranked dividend paid to the relevant taxpayer out of profits (subsections 45C(1) and (2) of the ITAA 1936). Practice Statement PS LA 2005/21 Application of section 45B of the Income Tax Assessment Act 1936 to demergers (PS LA 2005/21) is the Commissioner's instruction and practical guidance for tax officers to assess the application of section 45B of the ITAA 1936 for a demerger of an entity. The analysis below references the practice guidance provided by PS LA 2005/21 as relevant. | Detailed Reasoning - Demerger benefit and capital benefit: A demerger benefit is defined in subsection 45B(4) of the ITAA 1936 to include the provision by a company of an ownership interest in that or another company. The provision of the shares in Company B under the demerger constituted a demerger benefit for the Company A shareholders. The provision of the Company B shares also constituted a capital benefit as defined in subsection 45B(5) of the ITAA 1936. However, the provision of Company B shares was only a capital benefit to the extent it was not a demerger dividend (subsection 45B(6) of the ITAA 1936). The distribution of the Company B shares, reduced by the return of capital amount, was a demerger dividend as defined in subsection 6(1) of the ITAA 1936. As such, only the portion of the Company B shares distributed under the demerger attributable to the return of capital was a capital benefit provided to the Company A shareholders. The Company A shareholders were provided with both a demerger benefit and a capital benefit. | Detailed Reasoning - Obtains a tax benefit: Subsection 45B(9) of the ITAA 1936 provides that a relevant taxpayer obtains a tax benefit if an amount of tax payable by that taxpayer would, apart from the operation of section 45B, be less than the amount that would have been payable if the demerger benefit or the capital benefit had been an assessable dividend. As a result of the demerger, the Company A shareholders received shares in Company B. Apart from the operation of section 45B, the income tax consequences for the Company A shareholders would have been disregarded upon receipt of the Company B shares as follows: The tax payable by the Company A shareholders on the demerger would have been higher if the demerger dividend component or the return of capital component had been assessable dividends under subsection 44(1) of the ITAA 1936. Accordingly, the Company A shareholders obtained a tax benefit for the purposes of subsection 45B(9) of the ITAA 1936. Scheme A 'scheme' for the purposes of section 45B of the ITAA 1936 is taken to have the same meaning as provided in subsection 177A(1) of Part IVA of the ITAA 1936. That definition is widely drawn and includes any agreement, arrangement, understanding, promise, undertaking, scheme, plan, or proposal. In particular, a scheme is anything that satisfies any of the terms in the statutory definition. A demerger may be part of a wider scheme which includes a subsequent transaction such as a share buy-back, liquidation or proposed sale of either the demerged entity or the head entity to a third-party. The identification of the scheme and, in particular, whether other transactions connected to the demerger form part of the scheme or not, will depend on the circumstances of the case. However, the 'scheme' is defined, it must be related to the tax benefit obtained. The tax benefit as outlined above is the reduction in tax payable compared to the tax that would otherwise apply if the distribution of the Company B shares had been treated as an assessable dividend. The transfer of the shares in Company B to Company A under the demerger relates directly to the tax benefit obtained under the demerger. It may be argued that the demerger of Company B could be part of a wider scheme for the purposes of section 45B of the ITAA 1936, encompassing also the proposed IPO. An analysis of the connection between the demerger and the proposed IPO is outlined in detail further above in the context of examining these transactions and whether they form part of the 'restructuring' of the group for the purposes of Division 125 of the ITAA 1997. Based on the evidence provided, it was concluded that these transactions were not sufficiently connected and did not form part of a single plan for reorganisation. The plans for IPO appear to be separate and independent from the demerger transaction. The proposed IPO is also too remote to be linked back to the demerger on the basis of completing the commercial objectives of the businesses. This is supported by records of internal deliberations by the company and third-party documentation which objectively demonstrate that the proposed IPO was not contemplated to a degree that could be evidenced to be an agreement, arrangement, understanding, promise, undertaking, scheme, plan or proposal between the directors or shareholders of the Company A group at the time of the demerger. It is our view, consistent with our view of the 'restructuring' outlined further above, that the proposed IPO does not form part of the 'scheme' of the demerger for the purposes of the application of section 45B of the ITAA 1936. The transfer of the shares in Company B to the Company A shareholders under the demerger constituted the relevant scheme for the purposes of section 45B of the ITAA 1936. | Detailed Reasoning - More than incidental purpose: Given that the proposed demerger is a scheme that provides a tax benefit to the Company A shareholders, the operation of section 45B of the ITAA 1936 turns on the objective purpose test in paragraph 45B(2)(c). This paragraph provides that section 45B will apply if enabling the shareholder to obtain the tax benefit is a more than incidental purpose of the scheme. To be an incidental purpose, the tax purpose must be objectively subordinate to the other substantial purposes. For example, if the tax purpose of the demerger merely follows the commercial purpose for the demerger as its natural incident, the tax purpose will be incidental. PS LA 2005/21 also states that Section 45B does not require any inquiry into subjective motives of those carrying out the demerger. It is concerned with determining the objective purpose. In practical terms, the approach to determining objective purpose is that all the relevant circumstances of the scheme, including the commercial reasons advanced for entry into it, are to be properly considered and weighed against the tax benefits conferred. A number of commercial reasons were provided as the reasons for undertaking the demerger. The relevant circumstances of the scheme to be considered are listed in subsection 45B(8) of the ITAA 1936. Each of the circumstances must be considered in order to determine whether or not, individually or collectively, they reveal the existence of the requisite purpose. Having regard to the relevant circumstances of the proposed scheme, as set out in subsection 45B(8) of the ITAA1936, it is considered that the demerger was not being undertaken for the more than incidental purpose ofobtaining a tax benefit. | Detailed Reasoning - Conclusion: The taxpayer had provided factors supporting the commercial objectives for demerger. These are considered against the factors that would incline towards the conclusion that the scheme is being implemented for a more than incidental purpose for the relevant taxpayer to obtain a tax benefit. Notwithstanding that paragraphs 45B(2)(a) and 45B(2)(b) are satisfied, having regard to the relevant circumstances of the scheme as stipulated within subsection 45B(8), it cannot be concluded that the scheme was implemented for a more than incidental purpose of enabling the relevant person/s to obtain a tax benefit for the purposes of paragraph 45B(2)(c). There were substantive business reasons whereby the provision of tax benefits to the Company A shareholders appear to be a mere incident of the demerger rather than a significant purpose of it. Accordingly, the Commissioner will not make a determination under subsection 45B(3) of the ITAA 1936 that section 45BA or section 45C will apply to the whole, or any part, of any benefit provided to the Company A shareholders under the demerger. | Summary: The demerger and subsequent proposed limited-offer capital raising will not constitute a scheme to which section 177C and 177D of the ITAA 1936 apply. The Commissioner will not make a determination under subsection 177F(1) that Part IVA of the ITAA 1936 applies. | Detailed Reasoning - Detailed reasoning: Part IVA of the ITAA 1936 (Part IVA) is a general anti-avoidance provision. The provision gives the Commissioner the power to cancel a 'tax benefit' that has been obtained, or would, but for section 177F of the ITAA 1936, be obtained, by a taxpayer in connection with a scheme to which Part IVA applies. This power is found in subsection 177F(1) of the ITAA 1936. Before the Commissioner can exercise the power in subsection 177F(1) of the ITAA 1936, the following requirements of Part IVA must be satisfied: Section 177D of the ITAA 1936 requires the consideration of whether the dominant purpose of the scheme (being a stronger purpose than the 'more than incidental purpose' considered in section 45B) was to obtain the tax benefit. Regard is to be had to those same 8 factors that were considered further above as part of the section 45B analysis from subsection 177D(2). Regard must be had to the individual circumstances of each case in making a determination under section 177F of the ITAA 1936 to cancel a tax benefit. Law Administration Practice Statement PS LA 2005/24 Application of General Anti-Avoidance Rules (PS LA 2005/24) provides guidance on the application of the Part IVA and other general anti-avoidance rules (GAARs). | Detailed Reasoning - Scheme for Part IVA: A 'scheme' for the purposes of Part IVA of the ITAA 1936 is defined in subsection 177A(1) of Part IVA of the ITAA 1936. This definition of 'scheme' is the same definition referred to by section 45B of the ITAA 1936 and is taken to have the same meaning. As outlined further above, the demerger and subsequent proposed IPO should not constitute a 'scheme' as defined by subsection 177A(1) of Part IVA of the ITAA 1936. Based on the evidence provided, it was concluded that these transactions were not sufficiently connected and did not form part of a single plan for reorganisation. The plans for IPO appear to be separate and independent from the demerger transaction. Evidence to substantiate the facts submitted was requested. The conclusions were reached following an extensive review of the objective information provided such as board minutes and third-party documentation. This view is consistent with the conclusions reached for the assessment of: Section 45B of the ITAA 1936 is a provision specifically designed to allow the Commissioner to ensure the integrity of the demerger relief provisions. Section 45B of the ITAA 1936 considers a 'more than incidental purpose' test when examining the tax benefit under a scheme. The 'more than incidental purpose' is a lower threshold than the 'dominant purpose' contemplated by the general anti avoidance provision of Part IVA of the ITAA 1936. A demerger that the Commissioner can satisfy itself in regards to the application of section 45B should not fall foul of the less specific provisions of Part IVA of the ITAA 1936 for the same scheme of demerger. | Detailed Reasoning - Conclusion: The proposed IPO was not contemplated to a degree that could be evidenced to be an agreement, arrangement, understanding, promise, undertaking, scheme, plan or proposal between the directors or shareholders of the group at the time of the demerger. Accordingly, the demerger and subsequent proposed limited-offer capital raising will not constitute a 'scheme' to which section 177C and 177D of the ITAA 1936 apply. The Commissioner will not make a determination under subsection 177F(1) that Part IVA of the ITAA 1936 applies.

Company A declared a capital reduction and dividend to the Company A shareholders in equal proportions to their shareholding in Company A. The total distribution declared was equal to the market value of the shares in Company B. | Company A demerged Company B by making an in-specie distribution of 100% of its shares in Company B to the Company A shareholders in consideration for the distribution owing to shareholders. | There was a demerger dividend being the difference between the market value of the shares in Company B and the capital reduction. | No other member of the demerger group held ownership interests in Company A (subsection 125-65(3) of the ITAA 1997), and | There was no other company or trust capable of being a head entity of a demerger group of which Company A could be a demerger subsidiary (subsection 125-65(4) of the ITAA 1997). | Prior to the demerger there had been negotiations with third parties regarding an IPO with a sell down component | Prior to the demerger there had been negotiations with third parties that were interested in acquiring shares in Company B | The in-specie distribution of the Company B shares and the subsequent IPO with a sell down component were planned to occur in sequence (for example under a scheme of arrangement) | The sell down component of the IPO was an essential component of the plan starting with the separation of Company B from the group | Certain shareholders were to be specifically excluded from participating in the capital raising and /or sell down | There had been no negotiations or expressions of interest from third parties that were interested in acquiring a share in Company B | The board minutes do not show any planning discussions regarding the possibility of an IPO of Company B | There had been no negotiations with third parties regarding an IPO until an unsolicited approach from a third-party | A sell down was not intended | All shareholders of Company B can participate in the IPO | Each Company A shareholder owned an ownership interest in Company A (the original interest); | Company A was the head entity of a demerger group; | A demerger happened to the demerger group; and | Under the demerger, a CGT event (CGT event G1) was triggered for each shareholder's original interest and a new or replacement interest is acquired in the demerged entity, being Company B. | Company A was the demerging entity; | CGT event A1 was triggered when Company A disposed of its shares in Company B (the demerged entity) and transferred them to the Company A shareholders (per section 104-10 of the ITAA 1997); and | The disposal occurred under the demerger. | The dividend is a demerger dividend (as defined in subsection 6(1) of the ITAA 1936); | The head entity does not elect that subsections 44(3) and (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. | The return of capital amount was not assessable income of the shareholders of Company A for the purposes of subsection 44(1) of the ITAA 1936 as it was excluded from the definition of a dividend in subsection 6(1) of the ITAA 1936. | The Company A shareholders were eligible to apply demerger roll-over relief to disregard any capital gain from CGT event G1 for the return of capital component. | The demerger dividend component (being the market value of the shares reduced by the amount debited to the share capital account) was eligible to be treated as non-assessable non-exempt income for the Company A shareholders. | There must be a 'scheme' as defined in section 177A of the ITAA 1936. | A 'tax benefit', as identified in section 177C of the IAA 1936, was or would have been obtained in connection with the scheme but for subsection 177F(1) of the ITAA 1936. | Having regard to section 177D of the ITAA 1936, the scheme is one to which Part IVA applies. | The 'restructuring' for the purposes of defining what constituted the demerger for application of the demerger relief provisions of Division 125 of the ITAA 1997. | The demerger 'scheme' for the purposes of the application of section 45B of the ITAA 1936.