ATO Interpretative Decision

ATO ID 2004/633

Income Tax

Capital Gains Tax: demerger - CGT event K6 exception - demerged company listed on stock exchange
FOI status: may be released
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Issue

Must a demerged company be a listed company for the exception from CGT event K6 under paragraph 104-230(9)(a) of the Income Tax Assessment Act 1997 (ITAA 1997) to apply to shares in the company?

Decision

Yes. A demerged company must be a listed company for the exception from CGT event K6 under paragraph 104-230(9)(a) of the ITAA 1997 to apply to shares in the company.

Facts

The taxpayer owns shares in a company which has been listed on the Australian Stock Exchange (ASX) for four years. The company is the head entity of a demerger group.

As part of a demerger under Division 125 of the ITAA 1997, the taxpayer received new shares in the demerged entity. The demerged entity listed on the ASX just after the demerger.

Three years after the demerger, the taxpayer sells their shares in the demerged entity and seeks to apply the CGT event K6 exception under paragraph 104-230(9)(a) of the ITAA 1997.

Reasons for Decision

Subsection 104-230(9) of the ITAA 1997 provides the general exceptions from CGT event K6 happening. Under paragraph 104-230(9)(a) of the ITAA 1997 CGT event K6 does not happen when some of the shares in the company referred to in subsection 104-230(2) of the ITAA 1997 were listed on a stock exchange (either in Australia or a foreign country) for at least five years at the time the CGT event referred to in paragraph 104-230(1)(b) of the ITAA 1997 (the other CGT event) happens.

Subsection 104-230(9A) of the ITAA 1997 further provides that the exception under paragraph 104-230(9)(a) applies where:-

1.
the company referred to in subsection 104-230(2) of the ITAA 1997 is a demerged entity (paragraph 104-230(9A)(a))
2.
the demerged entity has not been continuously listed on a stock exchange for at least five years (paragraph 104-230(9A)(b) of the ITAA 1997), and
3.
the demerger happened not more than five years before the other CGT event happened (paragraph 104-230(9A)(c) of the ITAA 1997).

If the above conditions are satisfied, the demerged entity is treated as being listed on the stock exchange at all times when some of the shares of the head entity of the demerger group were so listed (subsection 104-230(9A) of the ITAA 1997).

As the head entity in this case had been listed on the stock exchange for four years at the time of the demerger, the demerged entity is treated as having been listed for those four years. The demerged entity had been listed for a further three years. Therefore, the combined period of the head entity and the demerged entity being listed on the stock exchange is at least five years as required by paragraph 104-230(9)(a) of the ITAA 1997.

The exception from CGT event K6 applied when the taxpayer sold their shares in the demerged entity as provided for by paragraph 104-230(9)(a) of the ITAA 1997 and section 104-230(9A) of the ITAA 1997.

Note: If the head entity had been continuously listed on the stock exchange for at least five years prior to the demerger, the taxpayer would be entitled to the exception from CGT event K6 whenever they sold their shares in the demerged entity.

Date of decision:  12 July 2004

Year of income:  Year ended 30 June 2004

Legislative References:
Income Tax Assessment Act 1997
   paragraph 104-230(1)(b)
   subsection 104-230(2)
   subsection 104-230(9)
   paragraph 104-230(9)(a)
   subsection 104-230(9A)
   paragraph 104-230(9A)(a)
   paragraph 104-230(9A)(b)
   paragraph 104-230(9A)(c)
   Division 125

Keywords
Capital gains tax
CGT events
CGT events K1-K6 - other events
Demerged entity
Demerger
Demerger group

Siebel/TDMS Reference Number:  4123658

Business Line:  Public Groups and International

Date of publication:  30 July 2004

ISSN: 1445-2782

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