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Ruling

Subject: Proposed demerger of Company Z by Company Y

Question 1

Will the Commissioner of Taxation (the Commissioner) confirm that any capital gain or capital loss arising from the disposal by Company Y of the shares it holds in its wholly owned subsidiary Company Z in the proposed demerger arrangement will be disregarded under section 125-155 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Will the Commissioner confirm that Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) will not apply to the proposed demerger?

Answer

In the ruling application, Company Y has not been identified as a relevant taxpayer for the purpose of Part IVA of the ITAA 1936. Therefore it is not necessary to answer this question.

Relevant Facts

Overview:

The scheme that is the subject of this ruling involves the proposed demerger of Company Z by Company Y.

Company Y

Company Y is the head company of a consolidated group for tax purposes.

Company Y has ordinary and other classes of shares on issue.

Company Z

Company Z is a wholly-owned subsidiary of Company Y.

At the time of the proposed demerger, Company Z will have ordinary and other classes of shares on issue.

All of the shares currently on issue in Company Z are post-CGT.

Proposed demerger of Company X from Company Y

Company Y proposes to undertake a restructure under which 100% of its shareholding in Company Z will be distributed to the holders of the ordinary and other classes of shares in Company Y (Company Y shareholders). Under the proposal, the owners of the ordinary and other classes of shares in Company Y will receive ordinary and other classes of shares in Company Z (and nothing else) in the same proportion to their existing shareholding of ordinary and other classes of shares in Company Y.

Accounting for the distribution

In accounting for the proposed demerger, Company Y will register in its books of account the current market value of Company Z by debiting an amount to share capital and the remainder to an asset revaluation reserve.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 177A.

Income Tax Assessment Act 1936 Section 177C.

Income Tax Assessment Act 1936 Section 177D.

Income Tax Assessment Act 1936 Section 177F.

Income Tax Assessment Act 1997 Division 125.

Reasons for decision

Question 1

Summary

Any capital gain or capital loss arising from the disposal by Company Y of the shares it holds in Company Z in the proposed demerger arrangement will be disregarded under section 125-155 of the ITAA 1997.

Detailed reasoning

In order for the demerger CGT outcomes contained in Division 125 of the ITAA 1997 to apply to shareholders and members of a company group, a number of defined terms must be satisfied, including:

Demerger Group

A demerger group comprises one head entity and at least one demerger subsidiary (subsection 125-65(1) of the ITAA 1997). The demerger group in this case comprises Company Y as the head entity and includes Company Z as a demerger subsidiary.

Company Y will be the head entity because:

Company Z will be a demerger subsidiary of Company Y because Company Y owns ownership interests in Company Z that carry more than 20% of the rights to any distribution of income and capital, and the right to exercise more than 20% of the voting power of Company Z (subsection 125-65(6) of the ITAA 1997).

Demerger

Subsection 125-70(1) of the ITAA 1997 describes when a demerger happens. A demerger will happen to the Company Y demerger group because:

Company Z is the demerged entity 

Relevantly, subsection 125-70(6) of the ITAA 1997 defines a demerged entity to be a former member of a demerger group in which ownership interests are acquired by shareholders of the head entity under a demerger.

In the present circumstances, Company Z will be the demerged entity since the Company Y shareholders will receive shares in Company Z under the proposed demerger.

Company Y is the demerging entity

Relevantly, subsection 125-70(7) of the ITAA 1997 defines a demerging entity to be a member of a demerger group who disposes of at least 80% of its total ownership interests in another member of the demerger group to owners of original interests in the head entity under a demerger.

In the present circumstances, Company Y is the demerging entity since it will dispose of 100% of its shares in Company Z to Company Y shareholders under the proposed demerger.

Can Company Y disregard the capital gain or capital loss?

Section 125-155 of the ITAA 1997 provides that a demerging entity may ignore capital gains or capital losses arising from certain CGT events (including CGT event A1) happening to its ownership interests in a demerged entity under a demerger.

In the present case:

Therefore, any capital gain or capital loss made by Company Y from CGT event A1 happening on the disposal of its Company Z shares under the demerger will be disregarded (section 125-155 of the ITAA 1997).

Question 2

Summary

It is not necessary to rule on this question as Company Y is not the relevant taxpayer for the purpose of Part IVA of the ITAA 1936.

Detailed reasoning

Section 177D of the ITAA 1936 provides that Part IVA applies to any scheme entered into where a taxpayer (referred to as the relevant taxpayer) has obtained, or would but for section 177F of the ITAA 1936 obtain, a tax benefit and, after having regard to the matters listed in paragraphs 177D(b)(i) to (viii) of the ITAA 1936, it would be concluded that one of the persons who entered into or carried out the scheme did so for the dominant purpose of enabling the taxpayer to obtain a tax benefit from the scheme.

Company Y has not been identified as the 'relevant taxpayer' for the purpose of section 177D of the ITAA 1936.

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