Item 5: Demergers
A demerger is a form of restructure. In a demerger, investors in the head entity (for example, shareholders or unit holders) gain direct ownership in an entity that they formerly owned indirectly (the 'demerged entity'). The underlying ownership of the companies or trusts that formed part of the group does not change. The company or trust that no longer owns the entity is known as the 'demerging entity'.
For a demerger to qualify for tax relief, there are a number of eligibility tests that need to be met.
For more information about the eligibility tests, refer to Demergers: overview.
There are integrity measures that may prevent tax relief under the demerger provisions. Section 45B of the Income Tax Assessment Act 1936 may apply if:
- the demerger is not undertaken for substantive business reasons, or
- the capital and profit elements of the demerger allocation do not reflect the circumstances of the demerger.
Our Practice Statement Law Administration PS LA 2005/21 provides administrative and technical guidance on applying the elements of section 45B.
You can find more case studies that show how you apply demerger arrangements to a small-to-medium enterprise at Examples of how section 45B of the Income Tax Assessment Act 1936 may apply to demergers.
To provide certainty to your situation, we recommend you seek a private ruling or class ruling.
The Demergers: Checklist for demerger ruling requests outlines some of the information we generally need when considering private ruling or class ruling applications relating to demergers.
For more information about demergers, refer to Demergers: overview.