Zador Pty Ltd (Zador) conducts a business of importing, wholesaling and distributing widgets and other products.
Zador has three shareholders- Noddy Pty Ltd (holding three shares), Carol (holding one share) and Melissa (holding one share). Noddy is wholly owned by Ralph. Ralph is also the managing director of both Noddy and Zador. The shares in both Noddy and Zador were acquired post 20 September 1985.
Ralph is married to Carol and is Melissa's brother.
The corporate structure of Zador and its shareholders is shown below:
Zador and its shareholders pre-demerger
In the relevant income year, Noddy proposes a demerger of Zador. As a step just before demerger, Zador undertakes a one for ten share split in proportion to each shareholder's holding in the company. Accordingly after the share split, Noddy will hold 30 Zador shares and Carol and Melissa will hold 10 Zador shares each.
A day after the share split, Zador is demerged from Noddy. Ralph now holds the Zador shares previously held by Noddy as shown below:
Zador and its shareholders post-demerger
It was agreed between the parties that following the demerger, Ralph will sell five Zador shares each to Carol and Melissa. The consideration for the sale will be the current market value of the shares being $500,000 per Zador share. Accordingly after the sale, Ralph's shareholding in Zador decreases to 20 shares and Melissa and Carol hold 15 Zador shares each.
Zador and its shareholders post Ralph's sale of shares
Applicant's stated reasons for demerger
The following reasons were provided by Noddy for the demerger:
- it would simplify the shareholding structure of Zador for Ralph - by removing Noddy as a shareholder;
- Ralph's asset portfolio would be simplified;
- it would remove one layer of ownership and thereby reduce the administrative costs for the relevant entities;
- The management and shareholding decisions regarding Zador could be done directly through Ralph, rather than through Noddy; and
- As Ralph is intending to take a less active role in the management of Zador, the share sale to both Carol and Melissa was designed to reflect their taking a more active management interest in the business.
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 facts indicated that the demerger was done to facilitate Ralph disposing 20% of his total shares in Zador as soon as practicable after the demerger, rather than to promote any business efficiencies in either Noddy or Zador (paragraphs 73 to 78 and 89 of PS LA 2005/21);
- The disposal (at market value) of the Zador shares by Ralph would be to related parties (paragraphs 81 to 98 of PS LA 2005/21);
- The substance and effect of the scheme involves Ralph obtaining significant tax and financial benefits from the demerger and subsequent sale of 10 of his Zador shares. Ralph would be entitled to the CGT discount concession on the sale of these shares (paragraphs 94 to 95 of PS LA 2005/21);
- The purposes mentioned by Noddy did not disclose any change or improvement to the businesses of the demerger group, apart from managerial changes which were not dependent on undertaking a demerger;
- Some of the reasons for the demerger describe the effect of the demerger (that is, reducing administration costs, simplification of the NFT structure, management decisions being made by Ralph rather than Noddy) and these appear relatively insignificant;
- In the absence of substantial business reasons for the demerger, the significant tax benefits obtained by Ralph assume greater significance (paragraphs 22 to 23 of PS LA 2005/21).
Based on the above facts the Commissioner would make a determination under paragraph 45B(3)(a) of the ITAA 1936 that section 45BA of the ITAA 1936 applies to the demerger benefit provided under the scheme.