Demergers: Checklist for demerger ruling requests

Topic 2 - Demerger requirements

Relevance

This topic is relevant to everyone preparing an application for a Private Ruling or Class Ruling in respect of the application of the demerger measure to an arrangement.

Information needed

To ensure a Division 125 demerger has happened we need information to:

• identify the demerger group, and
• ensure that the demerger requirements are met.

Demerger group

You need to provide the following information so we can identify the demerger group:

• The identity of the head entity, demerger subsidiaries and the demerged entity.
• Details of all ownership interests in the head entity, including:
• a description of each class of ownership interest (if there is more than one class)
• the number of ownership interests in each class
• a description of the rights that ownership interests carry (provide a copy of the head entity's constitution if appropriate), and
• for each head entity owner, provide the percentage of ownership interests held; what type of entity (company, trust, or individual); and whether their ownership interests are pre-CGT or post-CGT.

We recognise that for widely held entities this information may not be known for all shareholders.

• The percentage and type of ownership interests that the head entity holds in the demerged entity just before and just after the demerger.
• Details of the ownership interests that owners of the head entity receive in the demerged entity, including:
• the number and type of demerged entity interests that are acquired by head entity shareholders for each ownership interest held in the head entity, and
• a description of the rights that ownership interests in the demerged entity carry (provide a copy of the demerged entity's constitution if appropriate).

Demerger requirements

You need to provide the following information so we can ensure the Division 125 demerger requirements are met:

• The date that demerger occurred or is expected to occur.
• The method by which the head entity will cease to own at least 80% of its ownership interests in the demerged entity (that is, disposal/transfer, cancellation and reissue, or issue of new shares). Include:
• a description of the steps undertaken to effect the transfer of ownership interests in the demerged entity, and how these steps will be recorded in the financial accounts of the head entity and the demerged entity (that is, specific journal entries), and
• copies of the most recent financial accounts for both the head entity and the demerged entity at the time of the demerger. Also provide an estimated balance sheet at the time of the demerger if materially different.
• What the head entity shareholders receive under the demerger - to show that the nothing else test is satisfied.
• The type of entity the demerged entity is - to show that the same entity test is satisfied.
• An explanation of how the maintenance of ownership test is satisfied:
• (a) Where the head entity and/or demerged entity has a number of different types of ownership interests on issue, explain how the proportion and market value tests are satisfied.
• (b) If some ownership interests are ignored (as employee share scheme shares or rights or adjusting instruments), explain how these interests satisfy the exemption provision.
• Confirm that:
• (a) neither the head entity nor demerged entity is a superannuation trust fund, and
• (b) the off-market share buyback and other CGT rollover relief exceptions do not apply.

If you are preparing a ruling application for a Private Ruling or Class Ruling on the demerger measure relating to members of the demerger group, skip to topic 6.

ITAA 1997 references

Term/phrase	References
Cease to own	Paragraph 125-70(1) (b)
Demerged entity	Sub-section 125-70 (6)
Demerger subsidiaries	Sub-sections 125-65 (6) & (7)
Head entity	Sub-section 125-65(3)
Maintenance of ownership test	Sub-section 125-70(2)
Nothing else test	Paragraph 125-70(1)(c)
Off-market share buyback	Sub-section 125-70(4)
Other CGT roll-over relief	Sub-section 125-70 (5)
Ownership interests	Sub-section 125-60(1)
Ownership interests are ignored	Sub-section 125-70(2) & section 125-75
Same entity test	Paragraph 125-70(1)(e)