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Edited version of your written advice
Authorisation Number: 1012693930928
Ruling
Subject: Demerger relief
Question 1
For the purposes of section 125-155 of the Income Tax Assessment Act 1997 (ITAA 1997), is a capital gain or capital loss made under CGT event A1, C2, C3 or K6 that happens under the demerger, disregarded for Company X?
Answer
Yes.
Question 2
For the purposes of section 125-160 of the ITAA 1997, does CGT event J1 happen to Company X under the demerger?
Answer
No.
This ruling applies for the following periods
Year ending 30 June 2015
The scheme commenced on
1 July 2014
Relevant facts
Company X is a public company and a resident of Australia for tax purposes.
Company Y is a public company whose ordinary shares are quoted for trading on the Australian Securities Exchange (ASX).
Company X's shareholding in Company Y represented more than 20% of the total issued capital in Company Y.
Company X has undertaken a demerger of more than 80% of its total shareholding in Company Y. The demerger proceeded by way of an in specie distribution by Company X of its Company Y shares to its shareholders.
Under the distribution:
(a) Company X transferred more than 80% of its Company Y shares to its shareholders by way of an equal capital reduction for the purposes of the Corporations Act 2001, and
(b) each shareholder (registered on the distribution Record Date) received a proportionate share of the Company Y shares in accordance with their proportionate shareholding in Company X. No other distribution was received by the shareholders from Company X.
At the time of the demerger, Company X's retained profits account showed an accumulated loss. Company X accounted for the distribution by debiting its share capital account by the market value of the Company Y shares (the capital reduction amount). That is, there was no dividend amount with respect to the distribution.
Just after the demerger of Company Y, at least 50% of the market value of capital gains tax (CGT) assets owned by Company Y and its subsidiaries were used in carrying on a business by those entities.
Immediately prior to the demerger, Company X had no options on issue.
Company X's share capital account has not been tainted within the meaning of Division 197 of the ITAA 1997.
Company X will not make an election under subsection 44(2) of the ITAA 1936.
Company X has never paid a dividend to its shareholders.
At the time of the demerger, Company Y did not own membership interests in Company X and Company X was not a demerger subsidiary in another demerger group.
Assumptions
None.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 125-65.
Income Tax Assessment Act 1997 Section 125-70.
Income Tax Assessment Act 1997 Section 125-155.
Income Tax Assessment Act 1997 Section 125-160.
Reasons for decision
Question 1
Summary
Any capital gain or loss made under CGT event A1, C2, C3 or K6 from the disposal by Company X of its shares in Company Y under the demerger is disregarded as section 125-155 of the ITAA 1997 applies.
Detailed reasoning
Section 125-155 of the ITAA 1997 provides that any capital gain or capital loss a demerging entity makes from CGT event A1, C2, C3 or K6 happening to its ownership interests in a demerged entity under a demerger is disregarded.
In the present case, CGT event A1 happened when Company X disposed of its Company Y shares to Company X shareholders (section 104-10 of the ITAA 1997).
In order for Company X to disregard any capital gain or capital loss made from CGT event A1 happening on the disposal of its shares in Company Y, this disposal must occur under a demerger within the meaning of Division 125 of the ITAA 1997.
Did the disposal of the Company Y shares happen under a demerger?
For a demerger to happen for the purposes of Division 125 of the ITAA 1997, there must be a demerger group.
A demerger group comprises one head entity and at least one demerger subsidiary (subsection 125-65(1) of the ITAA 1997). In this case, the demerger group includes Company X as the head entity and Company Y as a demerger subsidiary.
Company X is the head entity of a demerger group because at the time of the restructure:
• no member of the demerger group owned any ownership interests in Company X (subsection 125-65(3) of the ITAA 1997); and
• no other company or trust was capable of being the head entity of a demerger group of which Company X could be a demerger subsidiary (subsection 125-65(4) of the ITAA 1997).
Company Y was a demerger subsidiary of Company X at the time of the scheme, because at that time Company X owned ownership interests that carried the right to:
• receive more than 20 per cent of any distribution of income or capital by Company Y; and
• exercise more than 20 per cent of the voting power in Company Y (subsection 125-65(6) of the ITAA 1997).
Did a demerger happen?
A demerger happened (within the meaning of subsections 125-70(1)-(5) of the ITAA 1997) to the Company X demerger group because:
• there was a restructuring (paragraph 125-70(1)(a) of the ITAA 1997), under which at least 80% of the ownership interests that Company X owned in Company Y were transferred to Company X ownership interest holders (subparagraph 125-70(1)(b)(i) of the ITAA 1997);
• under the restructuring, CGT Event G1 (section 104-135 of the ITAA 1997) happened to Company X shares, and Company X shareholders received nothing other than shares in Company Y (subparagraph 125-70(1)(c)(i) of the ITAA 1997);
• Company X shareholders received shares in Company Y under the restructure on the basis that they were shareholders of Company X (paragraph 125-70(1)(d) of the ITAA 1997 and subparagraph 125-70(1)(e)(i) of the ITAA 1997);
• at the time of the restructure, neither Company X nor Company Y were superannuation funds within the meaning of that term in section 10 of the Superannuation Industry (Supervision) Act 1993 (paragraph 125-70(1)(g) of the ITAA 1997);
• the restructure does not constitute an off-market share buy-back for the purposes of Division 16K of Part III of the Income Tax Assessment Act 1936 (ITAA 1936) (subsection 125-70(4) of the ITAA 1997);
• no roll-over is available under another provision of the ITAA 1936 or ITAA 1997 (subsection 125-70(5) of the ITAA 1997); and
• under the restructure, each Company X ownership interest holder acquired the same proportion of ownership interests in Company Y as the ownership interests they owned in Company X just before the demerger, and just after the demerger each Company X ownership interest holder owned the same proportionate total market value of Company X ownership interests and Company Y ownership interests as they owned in Company X just before the demerger (paragraphs 125-70(2)(a) and (b) and subsection 125-70(3) of the ITAA 1997).
Is Company X the demerging entity?
A demerging entity is a member of a demerger group that disposes of at least 80% of its ownership interests in another member of the demerger group to owners of original interests in the head entity under a demerger (subsection 125-70(7) of the ITAA 1997).
Under the restructure, Company X is a demerging entity because it disposed of at least 80% of its shares in Company Y to Company X shareholders (subparagraph 125-70(7)(a) of the ITAA 1997).
Can Company X disregard any capital gain or capital loss made under the demerger?
Since any capital gain or capital loss Company X made from CGT event A1 happening on the disposal of Company Y shares occurred under a demerger, the capital gain or capital loss is disregarded as a result of section 125-155 of the ITAA 1997.
Question 2
Section 125-160 of the ITAA 1997 states that CGT event J1 does not happen to a demerged entity or a member of a demerger group under a demerger.
As discussed further above, Company X was a member of a demerger group and a demerger happened. Therefore, section 125-160 of the ITAA 1997 applies and consequently CGT event J1 does not happen to Company X under the demerger.
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