Private ruling: Demerger
Date of advice: 3 September 2025
Published: 3 November 2025

Ruling: BACKGROUND FACTS: | Company A | 1. Company A an Australian resident company with operations based in Australia. | 2. The number of shareholders in Company A exceeds 50 and as such it is a publicly unlisted company. | 3. There are approximately xx million shares on issue in Company A. | 4. The market value of Company A is $x million and the market value of Company B (discussed below) is $x million. | 5. At the time of the proposed arrangement (discussed below), Company A will have approximately xx million fully paid ordinary shares on issue. There is a small percentage of shareholders that are foreign residents for Australian tax purposes. | 6. There were xx applicants to the private binding ruling application who are shareholders of Company A. These entities will have the same percentage ownership in Company A prior to the demerger as they have in Company B at the completion of the demerger. | 7. The principal activity of Company A is the development of x, which is protected by a trade secret. | Company B: | 8. Company B is registered in a foreign country and is a fully owned subsidiary of Company A, with Company A holding all paid shares of Company B. | 9. Company B has never held any taxable Australian property. | 10. At least 50% of the market value of Company B's capital gains tax (CGT) assets are used directly or indirectly in its business. | 11. Company B's financial statements record that the company had retained profits of $xx as of 30 June 2024. | Proposed demerger: | Reasons for the proposed demerger: | 14. Company A proposes to undertake a demerger for the following commercial reasons: | a. Company A and B have business activities that are involved in, and target, different industries. As such, Company A's involvement in Company B's business is not consistent with the overall strategic focus and goals of Company A's business. That is, the two businesses have different commercial drivers. | b. The proposed demerger will allow for independent investment in the two businesses and increase their ability to raise capital in the future. | i. For instance, investors will be able to invest directly in one of the companies without exposure to the other. | ii. With respect to Company A's business, recent funds were raised for the specific purpose of purchasing new plant and equipment to increase production at its factory. | c. The separation of the two companies will allow each of them to better pursue the target strategies of their own respective businesses and develop independently to each other. | Steps of the proposed demerger: | 15. Company A proposes to implement the demerger through the following steps at the earliest practical opportunity within the year ended 30 June 20xx: | a. Company A will undertake a share split to equalise the total number of shares that Company A and B have on issue to enable the existing shareholders of Company A to maintain their same ownership percentages in Company B post demerger. | b. Company A will make an in-specie distribution to its shareholders (the owners of the original interests in the head entity in the demerger group) the shares it owns in Company B, such that the Company A shareholders will directly own 100% of the shares in Company B in the same proportionate percentages of the shares they held in Company A prior to the demerger. The acquisition of the Company B shares by Company A's shareholders will only occur due to these shareholders owning ordinary shares in Company A. | c. Company A will record the in-specie distribution in the financial statements as: | i. The notional amount to be distributed to Company A's shareholders is $xx million, being the market value of Company B as determined by the directors. | ii. The portion of the in-specie distribution that is attributed to capital will be determined by applying the percentage of Company B portion of the value of the group against the capital account of Company A. | iii. The remaining portion of the value of the in-specie distribution will be the proposed demerger dividend. | iv. The demerger dividend will be debited against Company A's asset revaluation reserve. The asset revaluation reserve takes into account the revaluation of the assets of Company B to market value. | 16. After the implementation of the demerger, the Board of each company is expected to be composed appropriately to reflect each entities independence. | 17. Given each company will have their own Board, CEO and Chief Financial Officer (CFO), it is expected Company A will provide a minimal level of support for continuity purposes for the initial 12 to 18 months period. These will be in areas of accounting and management reporting. The taxation and legal function of Company B will be driven out of the foreign country. Any support provided by Company A will be under a Service Agreement between the 2 companies during the initial transition phase. Funding for Company B will also be accessed directly from the foreign country's capital markets going forward to enable it to be financially and administratively self-sufficient. | 18. The shareholders have no intention to dispose of their shares in Company B after the demerger. | 19. Company A will not make an election pursuant to subsection 44(2) of the ITAA 1936 to disregard subsections 44(3) and (4). | 20. Company A currently has $xx of accumulated losses [1] , which will not materially differ to immediately prior to the demerger. Company A has not previously paid a dividend. Nor has it made a payment that has been taken to be a dividend or was treated as a deemed dividend under either section 45B, Division 7A or section 108 of the ITAA 1936. | 21. Company B currently has $xx in retained earnings [2] , which will not materially differ prior to the demerger. It has less than $xx in paid up capital, being the original shares acquired by Company A. | 22. Neither the original or new interests will be an interest in a trust that is a superannuation fund. | 23. No entity is a member of a tax consolidated group. | Assumptions: | The answers to the questions raised in this Notice of Private Ruling are based on the following assumptions: | 1. No other roll-over under either the ITAA 1936 or 1997 is available. | 2. Company A will not elect that subsection 44(3) and (4) of the ITAA 1997 do not apply to the total demerger dividend for all shareholders. | 3. After the demerger, Company B will be using at least 50% of its CGT assets in its business/es. | If the assumptions listed above are inaccurate, or the actual arrangement is not implemented in the manner described in the facts of this Notice, this private ruling has no effect, and you cannot rely on it. The fact sheet has more information about relying on your private ruling. | This Ruling does not apply to anyone who is subject to the taxation of financial arrangements rules in Division 230 in relation to the scheme outlined in this Ruling. Note: Division 230 will not apply to individuals, unless they have made an election for it to apply.


Relevant legislative provisions: Section 104-135 of the Income Tax Assessment Act 1997 | Division 125 of the Income Tax Assessment Act 1997 | Section 855-15 of the Income Tax Assessment Act 1997 | Section 995-1 of the Income Tax Assessment Act 1997 | Section 6-5 of the Income Tax Assessment Act 1936 | Division 16K of the Income Tax Assessment Act 1936 | Section 44 of the Income Tax Assessment Act 1936 | Division 45B of the Income Tax Assessment Act 1936 | Division 45C of the Income Tax Assessment Act 1936 | Section 128B of the Income Tax Assessment Act 1936 | Section 177A of the Income Tax Assessment Act 1936 | Question 1: | Will you be entitled to choose demerger rollover relief pursuant to section 125-55 of the ITAA 1997 under the proposed arrangement? | Detailed reasoning: | EXPLANATION OF THE LEGISLATION: | DEMERGER RELIEF: | 24. From 1 July 2002, demerger tax relief is available to genuine demergers. As explained in his second reading speech [3] which introduced the measures to Parliament, Mr Slipper (Parliamentary Secretary to the Minister for Finance and Administration) stated: | The tax relief will apply to only genuine demergers and is achieved by requiring underlying ownership to be maintained pre and post a merger and requiring the head entity to demerge at least 80 per cent of its ownership in the demerging entity. Providing tax relief for demergers will increase business efficiency by allowing greater flexibility in restructuring a business and ensuring tax considerations are not an impediment to such restructures. This will provide an overall benefit to the economy and enhance the competitiveness of Australia's business sector through greater opportunities to increase shareholder value by creating more efficient business structures. | 25. The Revised Explanatory Memorandum to the New Business Tax System (Consolidation, Value Shifting, Demergers and Other Measures) Bill 2002 explained that the object of the demerger concessions as: | The CGT relief and dividend exemption will facilitate the demerging of entities by ensuring that tax considerations are not an impediment to restructuring a business. These amendments are based on Recommendation 19.4 of A Tax System Redesigned , and recognise that there should be no taxing event for a restructuring that leaves members in the same economic position as they were just before the restructuring. | When a roll-over is available for a demerger: | 26. The object of Division 125 'is to facilitate the demerging of entities by ensuring that capital gains tax considerations are not an impediment to restructuring a business'. Subdivision 125-B of the ITAA 1997 sets out the rules and consequences for shareholders from a demerger. | 27. Relevantly, subsection 125-55(1) provides the requirements for shareholders to obtain demerger roll-over: | (a) you own an ownership interest in the company (your original interest); and | (b) the company or trust is the head entity of a demerger group; and | (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 (your new interest) in the demerged entity. | 28. Subsection 125-55(2) of the ITAA 1997 provides that a roll-over cannot be chosen 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. | 29. Section 855-15 of the ITAA 1997 provides the five categories of CGT assets that are Australian taxable property, which are broadly: | a. taxable Australian real property | b. a CGT asset that is an indirect Australian real property interest and is not covered in item 5 of the table in section 855-15 (paragraph 29.e) | c. a CGT asset that has been used by the relevant taxpayer at any time in carrying on a business in a permanent establishment and is not covered by item 1, 2 or 5 of the table in section 855-15 (paragraphs 29.a, b or e) | d. an option or right to acquire a CGT asset covered in item 1, 2 or 3 of the table in section 855-15 (paragraphs 29.a, b or c), and | e. a CGT asset that is covered by subsection 104-165(3) (about choosing to disregard a gain or loss on ceasing to be an Australian resident). | Meaning of the term 'ownership interest': | 30. The term 'ownership interest' is defined in subsection 125-60(1) of the ITAA 1997. For an interest in a company, paragraph 125-60(1)(a) provides that it includes a share or an option, right or similar interest in the company. | 31. The term 'share' is defined in subsection 995-1(1) of the ITAA 1997 and includes a share in the capital of the company and includes stock. | Meaning of the term 'head entity of a demerger group': | 32. 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. | 33. Subsections 125-65(3) and (4) of the ITAA 1997 explain that company is a head entity of a demerger group if no other member of the group owns ownership interests in the company. | Meaning of the term 'demerger subsidiary': | 34. Subsections 125-65(6) and (7) provide that a company or trust is a demerger subsidiary if another company or trust in the demerger group owns or has the right to acquire, either alone or together with other group members, ownership interests that carry between them the right to receive 20% of any distribution of income or capital or exercise 20% of the voting power of the company. | Meaning of the term 'demerger': | 35. The meaning of the term 'demerger' is provided in subsection 125-70(1) of the ITAA 1997 as: | (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 interest 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 ownerships interests in itself with the result that owners of original interest in the head entity own at least 80% of the total ownership interest 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. | 36. Subsection 125-70(2) of the ITAA 1997 provides that each of the original owners of the 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 owners 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. | Meaning of the term 'demerged entity': | 37. The meaning of the term 'demerged entity' is provided in subsection 125-70(6) as an entity that was formally a member of a demerger group, and a demerger happens to the group such that the ownership interests in the entity are acquired by either: | a. the shareholders of the head entity of the group, or | b. the unitholders or holders of interests in the head entity of the group. | Capital payment for shares: CGT event G1: | 38. Subsection 104-135(1) of the ITAA 1997 provides that CGT event G1 happens if: | (a) a company makes a payment to you in respect of a share you own in the company (except for CGT event A1 or C2 happening to the share); and | (b) some or all of the payment (the non-assessable part ) is not a dividend, or an amount that is taken to be a dividend under section 47 of the Income Tax Assessment Act 1936 ; and (c) the payment is not included in your assessable income. | The payment can include giving property: see section 103-5. | 39. Relevantly, subsection 6(1) of the ITAA 1936 defines the term 'dividend to include distributions made by a company to any of its shareholders; but excludes 'property distributed by a company to shareholders.... where ... the amount of the value of the property, is debited against an amount standing to the credit of the share capital account of the company'. | Exceptions: off-market buy-backs and roll-over under another provision: | 40. Broadly, where there is a buy-back of shares that is an off-market purchase for the purposes of Division 16K of the ITAA 1936 or the owner of the original interest can obtain a roll-over under another provision, subsections 125-70(4) and (5) respectively provide that these circumstances cannot be a demerger. | APPLICATION TO YOUR CIRCUMSTANCES: | You own an ownership interest - paragraph 125-55(1)(a): | 41. The shareholders own ownership interests in Company A, being the original interests, satisfying paragraph 125-55(1)(a) of the ITAA 1997. | Company is the head entity of a demerger group - paragraph 125-55(1)(b): | 42. Company A holds 100% of the shares in Company B. As Company A holds greater than 20% of the rights to receive distribution of income or capital and more than 20% of the voting power of Company B, Company B is a demerger subsidiary pursuant to subsections 125-65(6) and (7) of the ITAA 1997. | 43. Consistent with subsections 125-65(1), (3) and (4) of the ITAA 1997, the demerger group consists of companies A and B, with Company A being the head entity of the demerger group as no other member of the group owns ownership interests in the company. | 44. As Company A is the head entity of the demerger group, paragraph 125-55(1)(b) of the ITAA 1997 is satisfied. | A demerger happens to the demerger group - paragraph 125-55(1)(c): | 45. Under the proposed arrangement, the following will be implemented: | a. Company B will undertake a share split to equalise the total number of shares that Company A and B have on issue to enable the existing shareholders of Company A to maintain their same ownership percentages in Company B post demerger. | b. Company A will make an in-specie distribution to its shareholders (the owners of the original interests in the head entity in the demerger group) the shares it owns in Company B, such that the Company A shareholders will directly own 100% of the shares in Company B in the same proportionate percentages of the shares they hold in Company A. | c. Company A will record the in-specie distribution in the financial statements as: | i. The notional amount to be distributed to Company A's shareholders is $x million, being the market value of Company B as determined by the directors. | ii. The portion of the in-specie distribution that is attributed to capital will be determined by applying Company B's portion of the value of the group against the capital account of Gravitas. | iii. The remaining portion of the value of the in-specie distribution will be the proposed demerger dividend. | iv. The demerger dividend will be debited against Company A's asset revaluation reserve. The asset revaluation reserve takes into account the revaluation of the assets of Company B to market value. | 46. The shareholders have no intention to dispose of their Company B shares after the demerger. | 47. Subsection 125-70(1) of the ITAA 1997 will be satisfied as under the proposed arrangement: | a. there will be a restructuring of the demerger group (paragraph 125-70(1)(a)) | b. Company A will dispose of 100% of its shares in Company B to its shareholders (which include those listed in paragraph 5) (paragraph 125-70(1)(b)) | c. CGT event G1 will occur in relation to the disposal of the Company B shares from Company A to Company A's shareholders (paragraph 125-70(1)(c)): | i. Company A will make a payment, being the provision of the Company B shares, to its shareholders in respect of the shares they hold in Company B and that payment does not relate to CGT events A1 or C2 happening to the shares as there is no disposal or cancellation of any share owned by the shareholders in Company A, satisfying paragraph 104-135(1)(a) | ii. the payment of the Company B shares will be partly debited against Company A's share capital account and, as such, will not be a dividend or taken to be a dividend, satisfying paragraph 104-135(1)(b), and | iii. the amount of the payment that has been debited to the share capital account is a return to capital. The remaining part will be a 'demerger dividend' under subsection 6(1) of the ITAA 1936, being part of the 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)'. A demerger dividend is not assessable income or exempt income: subsection 44(4) of the ITAA 1936 and paragraph 104-135(1)(c) is satisfied. | d. the acquisition of Company B shares by Company A's shareholders will only occur because the shareholders owned the original interests (paragraph 125-70(1)(d)) | e. the new interests acquired by Company A's shareholders will be shares in Company B (paragraph 125-70(1)(e)) | f. neither the original interests nor the new interests are in a trust that is a non-complying superannuation fund (paragraph 125-70(1)(f)) | g. the requirements in subsection 125-70(2) are satisfied (paragraph 125-70(1)(h)) as each owner (the original owner) of the original interests in Company A: | i. Company A's shareholders will receive the same proportion of shares in Company B as their original shareholding (paragraph 125-70(2)(a), and | ii. just after the demerger, Company A's shareholders will have the same proportionate total market value of shares in Company A and B as was owned by Company A just before the demerger (paragraph 125-70(2)(b)). | 48. As the conditions of subsections 125-70(1) and (2) have been satisfied, the proposed arrangement will be a demerger. | Exceptions: off-market buy-backs and roll-over under another provision: | 49. The proposed arrangement does not involve an off-market purchase for the purposes of Division 16K of the ITAA 1936 and subsection 125-70(4) of the ITAA 1997 will be satisfied. | 50. Subsection 125-70(5) of the ITAA 1997 will also be satisfied as no other roll-overs will be available to Company A's shareholders. | Conclusion: | 51. As the conditions in section 125-55 of the ITAA 1997 in relation to Company A's shareholders that are Australian residents, these shareholders are eligible to choose to obtain a roll-over from the proposed arrangement. | 52. Consistent with subsection 125-55(2) of the ITAA 1997, the less than 1% of Company A's shareholders that are foreign residents will not be eligible for a roll-over under section 125-55 as the Company B's shares will not be taxable Australian property. | Question 2: | Will the in-specie distribution of shares in Company B give rise to assessable income under subsection 44(1) of the ITAA 1936? | EXPLANATION OF THE LEGISLATION | DIVIDENDS: | 53. A demerger dividend is defined in section 6(1) of the ITAA 1936 as 'that 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)'. | 54. Section 44 of the ITAA 1936 specifically includes dividends in a taxpayer's assessable income. Subsection 44(1) provides that the assessable income of a shareholder in a company includes: | (a) if the shareholder is a resident: | (i) dividends (other than non-share dividends) that are paid to the shareholder by the company out of profits derived by it from any source; and | (ii) all non-share dividends paid to the shareholder by the company; and | (b) if the shareholder is non-resident: | (i) dividends (other than non-share dividends) that are paid to the shareholder by the company to the extent to which they are paid out of profits derived by it from sources in Australia; and | (ii) non-share dividends paid to the shareholder by the company to the extent to which they are derived from sources in Australia; and... | Meaning of the term 'dividend': | 55. Subsection 6(1) of the ITAA 1936 states that the term 'dividend' includes: | (a) any distribution made by a company to any of its shareholders, whether in money or other property; and | (b) any amount credited by a company to any of its shareholders as shareholders; | (c) (Repealed): | but does not include: | (d) moneys paid or credited by a company to a shareholder or any other property distributed by a company to shareholders (not being moneys or other property to which this paragraph, by reason of subsection (4), does not apply or moneys paid or credited, or property distributed for the redemption or cancellation of a redeemable preference share), where the amount of the moneys paid or credited, or the amount of the value of the property, is debited against an amount standing to the credit of the share capital account of the company; or | (e) moneys paid or credited, or property distributed, by a company for the redemption or cancellation of a redeemable preference share if: | (i) the company gives the holder of the share a notice when it redeems or cancels the share; and | (ii) the notice specifies the amount paid - up on the share immediately before the cancellation or redemption; and | (iii) the amount is debited to the company's share capital account; | except to the extent that the amount of those moneys or the value of that property, as the case may be, is greater than the amount specified in the notice as the amount paid-up on the share; or | (f) a reversionary bonus on a life assurance policy. | Note: Subsection (4) sets out when paragraph (d) of this definition does not apply. | 56. Subsection 6(4) of the ITAA 1936 provides that paragraph 6(1)(d) of the definition of dividend will not apply if, under an arrangement: | (a) a person pays or credits any money or gives property to the company and the company credits its share capital account with the amount of the money or the value of the property; and | (b) the company pays or credits any money, or distributes property to another person, and debits its share capital account with the amount of the money or the value of the property so paid, credited or distributed. | Demerger dividend not assessable: | 57. Section 44 of the ITAA 1936 further provides that: | (2) Subsections (3) and (4) apply to a demerger dividend unless the head entity elects in writing, within one month after it decides which of its shareholders will receive ownership interests in the demerged entity under the demerger, that those subsections do not apply to the total demerger dividend for all shareholders. | (3) This section applies to the demerger dividend as if it had not been paid out of profits. | (4) A demerger dividend is not assessable income or exempt income. | (5) However, subsections (3) and (4) 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. | (6) In applying subsection (5), disregard any assets that are ownership interests in a demerger subsidiary unless they are used in a business referred to in that subsection. | Application to your circumstances: | 58. Under the proposed arrangement, Company A's shareholders will be provided with shares in Company B in the same proportion of their shareholding in Company A, thereby satisfying the definition of a dividend pursuant to subsection 6(1) of the ITAA 1936. The in-specie distribution attributable to Company A's capital account will in accordance with the proportional value of Company B. The remaining portion of the value of the in-specie distribution will be the demerger dividend in accordance with the definition in subsection 6(1). | 59. Company A will not make an election as described in subsection 44(2) of the ITAA 1936. | 60. Pursuant to subsection 44(5) of the ITAA 1936, after the implementation of the proposed arrangement, the market value of at least 50% of Company B's CGT assets will be used in one or more of its business activities such that subsections 44(3) and (4) will apply to the demerger dividend. | 61. Subsection 44(3) of the ITAA 1936 will apply to deem the demerger dividend not having been paid out of the profits of Company A. | 62. Subsection 44(4) of the ITAA 1936 will apply such that the demerger dividend will not be assessable income or exempt income. | Question 3: | Will the Commissioner make a determination under subsection 45B(3) of the ITAA 1936 that section 45BA or 45C will apply? | EXPLANATION OF THE LEGISLATION: | Schemes to provide certain benefits: | 63. The purpose of section 45B of the ITAA 1936 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. Paragraphs 19 to 21 of Practice Statement Law Administration PS LA 2005/21: Application of section 45B of the Income Tax Assessment Act 1936 to demergers (PS LA 2005/21) state: | ... section 45B, which applies in terms of 'benefits', serves 2 objects. One is concerned only with the provision of 'demerger benefits' and the other is concerned with the provision of 'capital benefits' which may be included in a demerger benefit (the part of a demerger benefit that is not a demerger dividend will also be a capital benefit). The first object pertains only to a demerger that happens within the meaning of section 125-70 of the ITAA 1997. However, the second object of section 45B is not concerned with demergers exclusively and pertains to any other arrangements that result in a capital benefit being provided to a taxpayer. | When a demerger occurs, there is potential for both objects of section 45B to apply as generally the owners of the head entity will be provided with both a demerger benefit and a capital benefit under the demerger. However, officers should appreciate that each of the 2 objects of section 45B is concerned with a different mischief and each has a different scope of application with respect to a demerger. | Despite the differences in application between the 2 objects of section 45B, in the context of demergers, the overall purpose of the section is to act as an integrity measure in support of the demergers legislation. The section guards against the use or structuring of a demerger to accommodate a substantial purpose of delivering a tax benefit to a relevant taxpayer (generally the shareholders of the head entity). Broadly, the mischief that mobilises section 45B is the use of a demerger to deliver value from company to shareholder in a tax-preferred form (whether as a demerger dividend or as capital in substitution for a dividend) as an end in itself and not merely as the natural incident of a business restructure of the demerger group. | 64. Subsection 45B(2) provides that 45B will apply if: | a. there is a scheme under which a person is provided with a demerger or capital benefit by a company | b. a taxpayer (the relevant taxpayer) obtains a tax benefit (this taxpayer may or may not be the person who is provided with the demerger or capital benefit), and | c. having regard to the relevant circumstances of the scheme, it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme, did so for a purpose (whether or not the dominant purpose but not including an incidental purpose) of enabling the taxpayer (the relevant taxpayer) to obtain a tax benefit. | What constitutes a 'scheme': | 65. A 'scheme' is defined in subsection 177A(1) as: | (a) any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable by legal process; and | (b) any scheme, plan, proposal, action, course of action or course of conduct. | Meaning of the term 'demerger': | 66. Paragraph 36 explains that the meaning of the term 'demerger' is provided in subsection 125-70(1) of the ITAA 1997. Paragraphs 24 and 25 of PS LA 2005/21 states: | ... paragraph 15.74 of the Revised EM refers to 'genuine demergers' in contradistinction to 'demergers directed at obtaining the dividend exemption' and Mr Slipper's second reading speech makes plain that genuine demergers are those directed at restructuring a business in the interests of business efficiency. In such cases, the concessionary tax treatment for the head entity's shareholders would normally be regarded as merely a natural incident of a business restructure. On the other hand, in the absence of substantive business reasons for a demerger the income tax benefits it provides for shareholders will assume greater significance. | In other words, to the extent that a demerger is not undertaken for substantive business reasons or to the extent that the capital and profit elements of the demerger allocation do not reflect the circumstances of the demerger, there is a strong likelihood that pursuant to section 45B, it would be viewed as a scheme whereby the provision of tax benefits to the head entity's shareholders is not a mere incident of the scheme but rather a significant purpose of it. | Demerger benefit: | 67. Subsection 45B(4) provides that a person will be 'provided with a demerger benefit' if, in relation to a demerger: | a. they are provided with an ownership interest in a company, or | b. something is done that increases the value of their ownership interest (which may or may not be the same ownership interest). | Capital benefit: | 68. Subsection 45B(5) provides that a person being 'provided with a capital benefit' is a reference to any of: | (a) the provision of ownership interests in a company to the person; | (b) the distribution to the person of share capital or share premium; | (c) something that is done in relation to an ownership interest that has the effect of increasing the value of an ownership interest (which may or may not be the same interest) that is held by the person. | Tax benefit: | 69. In relation to demerger benefits, the meaning of the term 'tax benefit' is provided by subsection 45B(9), which states: | A relevant taxpayer obtains a tax benefit if an amount of tax payable, or any other amount payable under this Act, by the relevant taxpayer would, apart from this section, 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 capital benefit had been an assessable dividend. Relevant circumstances: | 70. Paragraph 45B(2)(c) of the ITAA 1936 requires the Commissioner to consider the 'relevant circumstances' of the scheme as set out in subsection 45B(8). A consideration of these circumstances determines whether any part of the scheme will be entered into for a purpose, other than an incidental purpose, of enabling the relevant taxpayer to obtain a tax benefit. 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. | 71. The test of purpose is an objective one. The question is whether it would be concluded that a person who enters into or carries out the scheme does so for the purpose of obtaining a tax benefit for the relevant taxpayer in respect of the demerger or capital benefit. The purpose does not have to be the most influential or prevailing purpose, but it must be more than an incidental purpose. | 72. The relevant circumstances contained in subsection 45B(8) of the ITAA 1936 cover the circumstances of the company and the tax profile of the shareholders, and include: | (a) the extent to which the demerger benefit or capital benefit is attributable to capital or the extent to which the demerger benefit or capital benefit is attributable to profits (realised and unrealised) of the company or of an associate (within the meaning in section 318) of the company; | (b) the pattern of distributions of dividends, bonus shares and returns of capital or share premium by the company or by an associate (within the meaning in section 318) of the company: | (c) whether the relevant taxpayer has capital losses that, apart from the scheme, would be unutilised (within the meaning of the Income Tax Assessment Act 1997 ) at the end of the relevant year of income; (d) whether some or all of the ownership interests in the company or in an associate (within the meaning in section 318) 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 (for the purposes of the Income Tax Assessment Act 1997 ) of the relevant ownership interest is not substantially less than the value of the applicable demerger benefit or capital benefit; (g) (Repealed by No 101 of 2006) | (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 interest: | (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) for a demerger only: | (iii) whether the profits of the demerging entity and demerged entity are attributable to transactions between the entity and an associate (within the meaning of section 318) of the entity, and | (iv) whether the assets of the demerging entity and demerged entity were acquired under transactions between the entity and an associate (within the meaning of section 318) of the entity; | (k) any of the matters referred to in subsection 177D(2). | 73. The matters referred to in subsection 177D(2) of the ITAA 1936 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). | Effect of determinations under section 45B for demerger benefits: | 74. Subsection 45BA(1) of the ITAA 1936 broadly provides that if the Commissioner makes a determination under subsection 45B(3), the amount of the demerger benefit (or part of the benefit) is taken not to be a demerger benefit for the owner of the ownership interest or the relevant taxpayer at the time when the demerger benefit is provided. | 75. Where the demerger benefit is the provision of an ownership interest, subsection 45BA(2) of the ITAA 1936 provides that the amount of the demerger benefit is the market value of the interest at the time that it is provided. | Effect of determinations under sections 45A and 45B for capital benefits: | 76. Section 45C of the ITAA 1936 provides that if the Commissioner makes a determination under subsections 45A(2) or 45B(3), the amount of the capital benefit (or part of the benefit) is taken to be an unfranked dividend that is paid by the company to the shareholder (or relevant taxpayer) at the time that they are provided with the capital benefit. | Application to your circumstances: | Existence of a scheme: | 77. As explained, the proposed arrangement will satisfy the conditions of subsection 125-70(1) Company A and B also satisfies the meaning of a scheme pursuant to subsection 995-1(1). | Demerger benefit: | 78. The provision of Company B's shares to Company A's shareholders is the provision of a demerger benefit in accordance with paragraph 45B(4)(a) of the ITAA 1936. The directors have determined that the market value of the Company B shares is $xx million, which will be the value of the demerger benefit. | Capital benefit: | 79. The provision of the Company B shares to Company A's shareholders will also be the provision of a capital benefit in accordance with paragraph 45B(5)(a) of the ITAA 1936. The provision of shares also constitutes a capital benefit to the extent it is not a demerger dividend (paragraph 45B(5)(a) and subsection 45B(6)). The market value of Company B's shares distributed under the demerger less the demerger dividend (that is, that amount debited against the share capital account of Company A) is a capital benefit provided to Company A's shareholders. | Tax benefit: | 80. As explained in Question 1, the proposed arrangement will entitle Company A's shareholders to choose to obtain demerger relief pursuant to section 125-55 of the ITAA 1997. As a result of exercising this choice, the shareholders will obtain a tax benefit such that subsection 45B(9) would be satisfied. | 81. Additionally, the demerger dividend component of the in-specie distribution to Company A's shareholders not being assessable to the shareholders pursuant to subsection 44(4) of the ITAA 1936. This will also allow the shareholders to obtain a tax benefit under the proposed demerger arrangement. | Whether the relevant circumstances will be entered into to obtain a tax benefit: | 82. To determine whether any part of the proposed arrangement will be entered into for a purpose, other than an incidental one, to enable a taxpayer to obtain a taxpayer, regard to the relevant circumstances of the scheme as set out in subsection 45B(8) of the ITAA 1936 is as described below: | a. the in-specie distribution of Company B shares to Company A's shareholders is a distribution of capital such that Company A will debit its share capital account. The remaining portion of the value of the in-specie distribution will be the proportion of the demerger divided (paragraph 45B(8)(a) of the ITAA 1936) | b. Company A has accumulated losses of $xx and has not previously paid a dividend. Nor has the company made a payment that has been taken to be a dividend or was treated as a deemed dividend under either section 45B, Division 7A or section 108 of the ITAA 1936. A share split of Company B will occur to enable the Company B shares to be transferred to the shareholders in the same proportion as their shareholding in Company A (paragraph 45B(8)(b) of the ITAA 1936) | c. Company A does not have capital losses that, apart from the scheme, would be unutilised. (paragraph 45B8(c) of the ITAA 1936) | d. as Company A was incorporated in 20xx, none of the ownership interests in the company were acquired before 20 September 1985 (paragraph 45B(8)(d) of the ITAA 1936) | e. less than x% of Company A's xx ordinary shares are held by non-residents (paragraph 45B(8)(e) of the ITAA 1936) | f. the cost base of the Company B shares is $xx per share. With xx shares on issue, the total case base of the shares in Company B is $xx. As explained above, the value of the demerger benefit is $xx million being significantly greater than the cost base of the shares (paragraph 45B(8)(f)) | g. Company A's shareholders will receive the same proportion of Company B shares as their shareholding in Company A, which satisfies the proportion test in subsection 125-70(2) of the ITAA 1997 (paragraph 45B(8)(h) of the ITAA 1936) | h. there is no intention for the Company B shares to be sold after the arrangement ((paragraph 45B(8)(i)) of the ITAA 1936) | i. there is no evidence or suggestion that the profits of Company A and B are attributable to transactions between them and an associate. Nor is there evidence that the assets of the two companies that were acquired between them and an associate (paragraph 45B(8)(j)) | j. in consideration of the factors in paragraph 177D(2): | a. the proposed arrangement is to be implemented for commercial reasons: | i. Company A and B have business activities that are involved in, and target, different industries. As such, Company A's involvement in Company B's business is not consistent with the overall strategic focus and goals of the Company A's business. That is, the two businesses have different commercial drivers. | ii. The proposed demerger will allow for independent investment in the two businesses and increase their ability to raise capital in the future. | 1. For instance, investors will be able to invest directly in one of the companies without exposure to the other. This is particularly pertinent to investors who prefer to invest solely in Company B's business. | 2. With respect to the Company A's business, recent funds were raised for the specific purpose of purchasing new plant and equipment to increase the production at their factory. | iii. The separation of the two companies will allow each of them to better pursue the target strategies of their own respective businesses and develop independently to each other. | b. the form of the scheme comprises of the steps involved in carrying out the demerger will be in accordance with the conditions in subsection 125-70(1) of the ITAA 1997. The economic substance of the scheme is that the shareholders will continue to own directly shares in Company B that they had previously owned indirectly through Company A, and Company A will have reduced its share capital proportionately with the relative market value of Company B. Company A and B will be able to concentrate on their respective businesses. | c. the timing of the proposed demerger will not be implemented so as to take advantage of events or changes of tax that will take place at the time. | d. but for the operation of section 45B of the ITAA of the ITAA 1936: | i. Company A's shareholders will be able to choose roll-over relief in relation to CGT event G1 that happens to Company B's shares under the proposed demerger pursuant to section 125-55 of the ITAA 1997 | ii. Company A's shareholders will not be required to include in their assessable income the dividend component of the distribution they receive pursuant to subsections 44(3) and (4) of the ITAA 1936, and | iii. Company A will be able to disregard any capital gain or loss on the disposal of its Company B shares under the proposed demerger pursuant to section 125-55 of the ITAA 1997. | e. the proposed arrangement results in the ownership of interests in Company B to Company A's shareholders were previously owned by Company A, thereby allowing the shareholders to have direct ownership interests that they previously held indirectly through Company A. Given this, subsequent to the implementation of the demerger, despite stating that they do not have an intention to liquidate Company B shares, ownership of the Company B shares by Company A's shareholders will give them the opportunity to use these assets as financial security. | f. by ceasing to own Company B's shares, the implementation of the proposed arrangement will result in the diminution of Company A's assets, and | g. the proposed arrangement will not make special provision for some shareholders as against others. | 83. The above factors do not lead to a conclusion that any tax benefit obtained from the proposed arrangement will be for more than an incidental purpose. Consequently, the Commissioner will not make a determination under subsection 45B(3) of the ITAA 1936 that sections 45BA or 45C will apply. | [1] as recorded in current management reports. | [2] as recorded in current management reports. | [3] See Peter Slipper MP, Second Reading Speech, New Business Tax System (Consolidation, Value Shifting, Demergers and Other Measures) Bill 2002, Commonwealth of Australia, Senate, Official Hansard , 28 August 2002, page 6018.