Example 3- Demerger of subsidiary to promote its business development

The facts

Realco Pty Ltd (Realco) owns 100% of the issued capital in Keljo Pty Ltd (Keljo). Keljo operates a substantial pizza business and also owns passive investments in companies on the Australian Stock Exchange. During the relevant income year, the estimated market value of Keljo is approximately $3,000,000.

Realco operates a successful property development business and owns land originally acquired as an investment. The land has a current value of approximately $2,000,000.

All shares in both Realco and Keljo were acquired prior to 20 September 1985.

Realco now wishes to develop the land it owns into a luxury hotel resort. The hotel project will cost approximately $10,000,000, which Realco intends to raise by issuing new shares in Realco via a public listing.

However the current owners of Realco do not wish any new shareholders in Realco (via the public listing) having any indirect interest in Keljo. Commercial research has also indicated that Realco's proposed public listing would not be viewed favourably by the market, if Realco indirectly owns Keljo's pizza business.

Accordingly, as part of the hotel project scheme, Realco proposes to demerge Keljo. Realco also affirms that none of its shareholders intend to dispose or otherwise deal with their shares in either Realco or Keljo after the demerger.

Applicant's stated reasons for demerger

Realco states a demerger would provide the following commercial benefits:

  • A demerger will assist in the public listing of Realco, as new investors will not have to pay an extra premium to pay for the assets of Keljo;
  • A demerger will allow the totally different businesses of Realco and Keljo, to develop independently of each other; and
  • Asset protection - a demerger will ensure Keljo's established business and passive investments are protected from the financial risks associated with Realco's hotel resort development.

Commissioner's analysis and decision

The Commissioner would accept that the demerger was being undertaken to create two distinct companies operating significantly different businesses, being a property development business and a pizza business.

On examination of the proposed demerger together with the "relevant circumstances" set out in subsection 45B(8), the Commissioner accepts the applicant's stated reasons above are positive "relevant circumstances" that are likely to improve the business structures of both Realco and Keljo. The applicant's statement that the shareholders of Realco have no current intention of disposing of any of their interests in either Realco or Jelkco post demerger is relevant (paragraphs 73 to 78 of PS LA 2005/21).

Accordingly, absent any evidence that is inconsistent with the above, 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.

    Last modified: 03 Feb 2016QC 22770