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Edited version of private advice

Authorisation Number: 1051833434995

Date of advice: 29 April 2021

Ruling

Subject: Demerger

Question 1

Will any capital gain or capital loss that Company X makes from CGT event A1 from the transfer of its share in Company Y under the demerger be disregarded pursuant to section 125-155 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Will the Commissioner make a determination in relation to the demerger under:

•         paragraph 45B(3)(a) of the Income Tax Assessment Act 1936 (ITAA 1936) that section 45BA applies, or

•         paragraph 45B(3)(b) of the ITAA 1936 that section 45C applies, or

•         subsection 45C(3) of the ITAA 1936?

Answer

No

Question 3

Will Company X have an obligation to withhold tax under section 12-210 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953) on the demerger dividend?

Answer

No

This ruling applies for the following period:

Income years ending 30 June 2021 and 30 June 2022

The scheme commences on:

1 July 2020

Relevant facts and circumstances

Company X and Company Y are both companies incorporated in Australia.

Company X owned more than 20% of the ordinary shares in Company Y.

Company X transferred more than 80% of the ordinary shares it owned in Company Y to the shareholders of Company X.

Company X was the head entity of a demerger group. Company Y was a demerger subsidiary of Company X.

Immediately before the demerger, Company Y had on issue fully paid ordinary shares.

Immediately before the demerger, Company X's share capital account was not tainted (within the meaning of Division 197 of the ITAA 1997).

Company X did not elect under subsection 44(2) of the ITAA 1936 that subsections 44(3) and (4) of the ITAA 1936 will not apply to the demerger dividend for all Company X shareholders.

Just after the demerger, CGT assets owned by Company Y and its demerger subsidiaries representing at least 50% by market value of all the CGT assets owned by those entities were used in carrying on a business by those entities (subsection 44(5) of the ITAA 1936).

The demerger consisted of an amount debited to the share capital account of Company X and a demerger dividend debited to the retained profits of Company X.

Reasons for Decision

Question 1

Company X will be able to disregard any capital gain from CGT event A1 happening as a result of the transfer of its shares in Company Y to the shareholders of Company X in accordance with section 125-155 of the ITAA 1997, because the transfer of shareswill be a demerger under section 125-70 of the ITAA 1997.

Question 2

Having regard to the relevant circumstances of the scheme:

It follows that the Commissioner will not make a further determination under subsection 45C(3) of the ITAA 1936.

Question 3

Company X will not have an obligation to withhold tax on the demerger dividend under section 12-210 of Schedule 1 to the TAA 1953 as the amount debited to the share capital account of Company X is not a 'dividend' as defined in subsection 6(1) of the ITAA 1936, and there is no withholding tax payable in respect of the demerger dividend as subsection 128B(3D) of the ITAA 1936 applies.

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