Edited version of your written advice

Authorisation Number: 1012826546690

Date of advice: 8 July 2015

Ruling

Subject: Proposed demerger

Question 1

Will the transfer of Company A's 100% shareholding in Company B to the Shareholders satisfy the requirements for demerger roll-over relief in Division 125 of the Income Tax Assessment Act 1997 (ITAA 1997) such that the Shareholders can choose to obtain a roll-over pursuant to section 125-55 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following periods:

1 July 2014 - 30 June 2015

1 July 2015 - 30 June 2016

The scheme commences on:

1 July 2014

Relevant facts and circumstances

Company A is a resident private company, whose trading operations include the manufacture, installation and repair of products.

Company A's ordinary shares are:

• A% owned by Shareholder A (who is a resident), which are all pre-CGT assets

• B% owned by Shareholder B (who is a resident), of which two-thirds are pre-CGT assets, and

• C% owned by Shareholder C (who is a resident), of which none are pre-CGT assets.

Company A owns two properties (Properties), with:

• Property 1, being where Company A's trading operations are conducted from, and

• Property 2, being leased to various commercial tenants.

Company A proposes to undertake a corporate restructure, which will involve the following:

• the establishment of a private company (Company B), to which Company A will subscribe to all of the ordinary shares

• the formation of a tax consolidated group comprising of Company A and Company B

• the transfer of the Properties from Company A to Company B at their respective market values

• Company A demerging 100% of its ordinary shares in Company B to Shareholder A, Shareholder B and Shareholder C (Shareholders).

Under the proposed demerger, the Shareholders will:

• receive an in-specie distribution of all the ordinary shares in Company B in the same proportion as the ordinary shares they hold in Company A, via Company A disposing its shareholding in Company B

• receive a return of share capital from Company A

• receive a demerger dividend from Company A

• each compulsorily apply the demerger allocation (i.e. return of share capital plus demerger dividend) to acquire the same proportion of new interests in Company B as each holds in Company A before the demerger, and

• maintain the same proportionate market value of ownership interests in Company A and Company B as each has in Company A before the demerger.

Accounting for the proposed demerger will be completed in the following manner:

• the demerger dividends will be debited to the retained profits of Company A

• the returns of share capital will be debited to the share capital account of Company A.

The corporate restructure is required for the following reasons:

• to maximise enterprise value by separating the Properties from Company A's trading operations

• for asset protection purposes, as the Shareholders wish to move the Properties from Company into a separate entity (being Company B)

• to facilitate a possible sale of the trading business when a potential purchaser does not wish to acquire a property portfolio.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 104-135

Income Tax Assessment Act 1997 Subdivision 125-B

Income Tax Assessment Act 1997 subsection 125-55(1)

Income Tax Assessment Act 1997 subsection 125-60(1)

Income Tax Assessment Act 1997 subsection 125-65(1)

Income Tax Assessment Act 1997 subsection 125-65(3)

Income Tax Assessment Act 1997 section 125-70

Reasons for decision

Division 125 of the ITAA 1997 allows owners of ownership interests in the head entity of a demerger group to obtain a roll-over to defer capital gains tax (CGT) consequences for the CGT event that happen to their interests under the demerger.

Subsection 125-55(1) of the ITAA 1997 states that entities can choose to obtain a roll-over if:

(a) they own an ownership interest in a company

(b) the company is the head entity of a demerger group

(c) a demerger happens to the demerger group, and

(d) under the demerger, a CGT event happens to their original ownership interest and they acquire a new ownership interest in the demerged entity.

They own an ownership interest in a company

Subsection 125-60(1) of the ITAA 1997 states than an ownership interest in a company includes a share in the company.

This requirement is satisfied as each of the Shareholders owns ordinary shares in Company A.

The company is the head entity of a 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 of Company A as the head entity and includes Company B as a demerger subsidiary. 

Company A will be the head entity because no other member of the demerger group owns shares in Company A: subsection 125-65(3) of the ITAA 1997.

Company B will be a demerger subsidiary of Company A because Company A will own 100% ownership interests in Company B: subsection 125-65(6) of the ITAA 1997.

A demerger happens to the demerger group

Under subsection 125-70(1) of the ITAA 1997 a demerger will happen to the demerger group comprising of Company A and Company B, because:

(a) there will be a restructuring of the demerger group

(b) under the restructuring, Company A will dispose of its 100% ownership interest in Company B to the Shareholders

(c) under the restructuring, CGT event G1 under section 104-135 of the ITAA 1997 will happen to shares in Company A due to the Shareholders receiving new ownership interests in Company B

(d) the acquisition by the Shareholders of the new ownership interests in Company B will happen only because they own the original ownership interests in Company A

(e) the new ownership interests in Company B acquired by the Shareholders will be ordinary shares

(f) neither the Shareholder's original ownership interests in Company A or new ownership interests in Company B will be in a trust that is a non-complying superannuation fund, and

(g) the requirements of subsection 125-70(2) of the ITAA 1997 will be met, because of the following:

• the Shareholders will each acquire, under the demerger, the same proportion of new ownership interests in Company B as each owns in Company A just before the demerger, and

• just after the demerger, each of the Shareholders will have the same proportionate total market value of ownership interests in Company A and Company B as each has in Company A just before the demerger.

(h) none of the exceptions in subsections 125-70(4) and 125-70(5) applies.

Under the demerger, a CGT event happens to their ownership interest and they acquire a new ownership interest in the demerged entity

Company B will be a demerged entity under subsection 125-70(6) of the ITAA 1997, as it will be a former member of a demerger group as a result of a demerger in which its ownership interests will be acquired by the Shareholders.

As stated earlier, CGT event G1 under section 104-135 of the ITAA will happen to the Shareholder's interest in Company A due to each receiving ownership interest in Company B.

Conclusion:

A demerger will happen within the meaning of section 125-70 of the ITAA 1997.

The shareholders in Company A will be entitled to choose the roll-over under section 125-55 of the ITAA 1997 upon the demerger of Company B's shares by Company A.

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