Lammat Pty Ltd (Lammat) owns and operates a grain broking business. It also owns 100% of the issued capital in two subsidiaries - Landco Pty Ltd (Landco) and Grainbrok Pty Ltd (Grainbrok). Grainbrok is also involved in grain broking and is affiliated with Lammat's grain broking business, while Landco owns and operates a separate farming business.
Han (an individual) owns 100% of the issued capital in Lammat. All shares in Lammat were acquired by Han prior to 20 September 1985. Lammat's shares in Landco were also acquired prior to 20 September 1985. Han is a director of both Lammat and Landco.
Management and staff in Lammat have dual roles. They manage both a broking business (Lammat) and a farming business (Landco). Until recently, it was common for Lammat to fund activities and capital improvements to the property of Landco.
Lammat is currently negotiating with another grain company to do a merger with their grain broking business. Part of this merger plan involves demerging Landco, so that Lammat & Grainbrok can form a pure grain broking corporate group.
Applicant's stated reasons for demerger
Lammat states a demerger would provide the following commercial benefits:
- Separating the two businesses (grain broking and farming), which have different commercial drivers;
- Facilitate the merger negotiations with the other grain company, who do not want to be involved indirectly with the farming business operated by Landco;
- Enable flexible financing arrangements for the new grain broking group. Post demerger, finance will be secured over the trading inventory of the grain broking group business, rather than using Landco's farm property as part of the security;
- provide asset protection for the farming property. Currently the property is at risk should Lammat run into financial difficulties;
- The net profit of Lammat will no longer support Landco's farming business. This will enable accurate reporting of Landco's financial viability;
- Ability to allocate staff and management to the separate businesses of the demerged entities enabling focus on business outcomes without conflicting priorities;
- Han does not intend to sell his shares in either of the demerged businesses at the time the demerger is proposed; and
- Allow Han to take direct interests in Landco for Han's estate planning purposes.
Commissioner's analysis and decision
In examining the current demerger proposal in relation to the relevant circumstances stated in subsection 45B(8), the Commissioner took into account the following factors:
- The taxpayer's reasons for demerger such as "separating the two businesses as they have different commercial drivers", to enable more "flexible financing arrangements" and separating management, are very common reasons given in demerger cases. While these factors are relevant, it should be understood that the Commissioner does not automatically accept or dismiss these reasons, but requires proper details to establish what weight should be accorded these factors.;
- In this particular case, the Commissioner accepts that the applicants stated reasons above except the last point, are likely to improve the business operations of both Lammat and Landco, with any tax benefits being incidental;
- Another important positive factor is Han's assertion that he has no intention to dispose of his interests in Lammat or Landco after the demerger (paragraphs 73 to 78 of PS LA 2005/21);
- Regarding Han's estate planning however, the Commissioner would not consider this a relevant factor in supporting the business efficiency merits of a demerger of Landco from Lammat (paragraphs 22 & 23 of PS LA 2005/21).
Accordingly, the Commissioner would not make a determination under subsection 45B(3) that sections 45BA or 45C of the ITAA 1936 apply to the proposed demerger.