For a demerger to qualify for tax relief there are a number of basic tests that need to be satisfied; including the:
- 80% test
- nothing else test
- same entity type test
- maintenance of ownership test, and
- residency test.
[*Note: The residency test is only applicable to CGT events that happened before 12 December 2006 (see former paragraph 125-70(1)(f) of the Income Tax Assessment Act 1997)].
Other eligibility requirements may apply to certain demergers.
This test requires that the demerger group must effectively cease to own at least 80% of the interests it holds in the demerged entity. As noted above, this can occur by disposal of interests, interests ending, swamping or a combination of methods.
Figure 3a: before demerger
Figure 3b: after demerger
Head Company demerges 80% of its interests in Company A and retains 20%.
End of attention
Nothing else test
This test requires that the owners of the head entity must acquire a new interest in the demerged entity and nothing else (for example, they cannot also receive cash). The mere existence of a sale facility for new or original interests will not normally breach this rule.
Same entity type test
This test requires that the new interests must be in the same kind of entity as the original interests. This means that if the head entity is either:
- a company, then the demerged entity must be a company,
- a trust, then the demerged entity must be a trust.
For example, demerging a fixed trust to unit-holders of a fixed trust would satisfy the test. Demerging shares in a company to unit-holders of a fixed trust would not satisfy the test.
Maintenance of ownership test
This test requires that after the demerger:
- each owner of the head entity must own the same proportion of new interests in the demerged entity as they previously owned in the head entity (ignoring any other direct interests they hold in the demerged entity)
- each owner must have the same proportionate total market value of ownership interest in the head entity and in the demerged entity as they owned in the head entity before the demerger. Market value can be a reasonable approximation and can be anticipated by the head entity before the demerger.
In working out whether the proportional ownership tests have been satisfied, the following types of interests may be ignored:
- certain qualifying partly paid shares or rights acquired under an employee share scheme if they total no more than 3% of the ownership interests in the head entity
- certain adjusting instruments in listed entities (for example, reset preference shares or convertible notes) if they total no more than 10% of the ownership interests in the head entity.
This test is relevant only if there are non-resident owners of the head entity and
The test is also only relevant if the CGT events happened before 12 December 2006 (See former paragraph 125-70(1)(f) of the Income Tax Assessment Act 1997).
End of attention
This test required more than half of the original interests in the head entity to be owned by Australian residents, or owned by non-residents whose new interests had the necessary connection with Australia* just after they acquired them.
(*Note: former section 136-25 ITAA 1997 tells you when an asset has the necessary connection with Australia)
Figure 4a: residency requirements not satisfied
Figure 4b: residency requirements satisfied
Owners of the head entity who want to claim rollover relief must satisfy additional residency requirements.
End of attention