ATO Interpretative Decision

ATO ID 2003/323 (Withdrawn)

Income Tax

Capital Gains Tax: Demerger - proportionate ownership test - unequal proportions
FOI status: may be released

This ATO ID is withdrawn as it is a simple restatement of the law and does not contain an interpretative decision.

This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

CAUTION: This is an edited and summarised record of a Tax Office decision. This record is not published as a form of advice. It is being made available for your inspection to meet FOI requirements, because it may be used by an officer in making another decision.

This ATOID provides you with the following level of protection:

If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.

Issue

Is there a 'demerger' under subsection 125-70(1) of the Income Tax Assessment Act 1997 (ITAA 1997) if the owners of original interests in the head entity receive new interests in the demerged entity that are not in the same proportion as their original interests in the head entity?

Decision

No. A restructure where the owners of original interests in the head entity receive new interests in the demerged entity that are not in the same proportion as their original interests in the head entity is not a 'demerger' for the purposes of subsection 125-70(1) of the ITAA 1997.

Facts

Headco is owned by two brothers Peter and Tom. Each owns 50% of the shares in Headco. Subco is a 100% subsidiary of Headco. Headco proposes to restructure the group via a demerger arrangement. Under the arrangement Headco disposes of all of its shares in Subco to Tom and Tom disposes of his shares in Headco to Peter. Just after the arrangement Peter will own 100% of the shares in Headco and Tom will own 100% of the shares in Subco.

Reasons for Decision

Division 125 of the ITAA 1997 allows capital gains tax (CGT) relief for certain CGT events happening under a 'demerger'.

A 'demerger' is defined in subsection 125-70(1) of the ITAA 1997. The definition requires that paragraphs 125-70(1)(a) to (h) of the ITAA 1997 be satisfied. Paragraph 125-70(1)(h) of the ITAA 1997 states that the requirements in subsection 125-70(2) of the ITAA 1997 must also be met.

Subsection 125-70(2) of the ITAA 1997 requires maintenance of proportionate ownership interests as follows:

•: All of the owners must receive the same proportion of new interests in the demerged entity as they held in the head entity just before the demerger;
•: The proportionate market values of the interests in the demerger group as a whole must be maintained before and after the demerger; and
•: The new interests are of a similar kind as the original interests.

Accordingly, if Headco (a 'head entity') disposes of its ownership interests in Subco (the 'demerged entity') to only one of its shareholders under the proposed demerger arrangement, the maintenance of ownership test is not met. The proposed arrangement is therefore not a 'demerger' for the purposes of Division 125 of the ITAA 1997.

Date of decision: 4 April 2003

Year of income: Year ended 30 June 2003

Legislative References:
Income Tax Assessment Act 1997
   Division 125
   subsection 125-70(1)
   subsection 125-70(2)

Keywords
Capital gains tax
CGT roll-over relief
Demerged entity
Demerger
Demerger roll-over
Demerger subsidiary
Head entity
Proportionate test

Business Line: Losses and Capital Gains Tax Centres of Expertise

Date of publication: 16 May 2003

ISSN: 1445-2782

history

	Date:	Version:
	4 April 2003	Original statement
You are here	12 March 2010	Archived

Copyright notice

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).