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Ruling

Subject: Proposed demerger

Question 1

Will the proposed arrangement satisfy the requirements for demerger relief under Division 125 of the Income Tax Assessment Act 1997 (ITAA 1997) so that any capital gain or loss that entity A makes on disposal of its shares in entity B will be disregarded pursuant to section 125-155 of the ITAA 1997?

Answer

Yes.

Question 2

Will the Commissioner make a determination under paragraph 45B(3)(a) of the Income Tax Assessment Act 1936 (ITAA 1936) that section 45BA of the ITAA 1936 applies to the whole or any part of the demerger benefit provided to entity A's shareholders?

Answer

No.

Question 3

Will the Commissioner make a determination under paragraph 45B(3)(b) of the ITAA 1936 that section 45C of the ITAA 1936 applies to the whole or any part of the capital benefit provided to entity A's shareholders?

Answer

No.

This ruling applies for the following period

This ruling applies for a number of periods.

Relevant facts

Proposed demerger.

Relevant legislative provisions

Section 45B of the Income Tax Assessment Act 1936

Subsection 45B(1) of the Income Tax Assessment Act 1936

Subsection 45B(2) of the Income Tax Assessment Act 1936

Paragraph 45B(2)(a) of the Income Tax Assessment Act 1936

Paragraph 45B(2)(b) of the Income Tax Assessment Act 1936

Paragraph 45B(3)(a) of the Income Tax Assessment Act 1936

Paragraph 45B(3)(b) of the Income Tax Assessment Act 1936

Subsection 45B(4) of the Income Tax Assessment Act 1936

Subsection 45B(5) of the Income Tax Assessment Act 1936

Subsection 45B(6) of the Income Tax Assessment Act 1936

Subsection 45B(8) of the Income Tax Assessment Act 1936

Subsection 45B(9) of the Income Tax Assessment Act 1936

Section 45BA of the Income Tax Assessment Act 1936

Section 45C of the Income Tax Assessment Act 1936

Subsection 125-60(1) of the Income Tax Assessment Act 1997

Subsection 125-65(1) of the Income Tax Assessment Act 1997

Subsection 125-65(3) of the Income Tax Assessment Act 1997

Subsection 125-65(6) of the Income Tax Assessment Act 1997

Section 125-70 of the Income Tax Assessment Act 1997

Paragraph 125-70(1)(a) of the Income Tax Assessment Act 1997

Subparagraph 125-70(1)(b)(i) of the Income Tax Assessment Act 1997

Subparagraph 125-70(1)(c)(i) of the Income Tax Assessment Act 1997

Paragraph 125-70(1)(d) of the Income Tax Assessment Act 1997

Subparagraph 125-70(1)(e)(i) of the Income Tax Assessment Act 1997

Paragraph 125-70(1)(g) of the Income Tax Assessment Act 1997

Paragraph 125-70(2)(a) of the Income Tax Assessment Act 1997

Paragraph 125-70(2)(b) of the Income Tax Assessment Act 1997

Subsection 125-70(4) of the Income Tax Assessment Act 1997

Subsection 125-70(5) of the Income Tax Assessment Act 1997

Paragraph 125-70(7)(a) of the Income Tax Assessment Act 1997

Section 125-155 of the Income Tax Assessment Act 1997

Reasons for decision

Question 1

Will the proposed arrangement satisfy the requirements for demerger relief under Division 125 of the ITAA 1997 so that any capital gain or loss that entity A makes on disposal of its shares in entity B will be disregarded pursuant to section 125-155 of the ITAA 1997?

Summary of Reason for Decision

The proposed arrangement will satisfy the requirements for demerger relief under Division 125 of the ITAA 1997 so that any capital gain or loss that entity A makes on disposal of its shares in entity B will be disregarded pursuant to section 125-155 of the ITAA 1997.

Division 125-C of the ITAA 1997

Division 125-C of the ITAA 1997 allows certain capital gains or capital losses made by members of a demerger group under a demerger to be disregarded.

One of the consequence of a demerger for members of a demerger group is that any capital gain or capital loss that a demerging entity makes from a CGT event A1, CGT event C2, CGT event C3 or CGT event K6 happening to ownership interests in a demerged entity under a demerger is disregarded (section 125-155 of the ITAA 1997).

Based on the facts as presented by the applicant, when entity A (a demerging entity) disposes of its ownership interest in entity B (the demerged entity) to entity A's shareholders under the proposed demerger, any capital gain or loss that it will make from CGT event A1, CGT event C2, CGT event C3 or CGT event K6, will be disregarded under section 125-155 of the ITAA 1997.

Reasons for decision

Question 2

Will the Commissioner make a determination under paragraph 45B(3)(a) of the ITAA 1936 that section 45BA of the ITAA 1936 applies to the whole or any part of the demerger benefit provided to entity A's shareholders?

Summary of Reason for Decision

The Commissioner will not make a determination under paragraph 45B(3)(a) of the ITAA 1936 that section 45BA of the ITAA 1936 applies to the whole or any part of the demerger benefit provided to entity A's shareholders.

Section 45B of the ITAA 1936

Section 45B of the ITAA 1936 applies to ensure that relevant amounts are treated as dividends for taxation purposes if:

(a) components of a demerger allocation as between capital and profit do not reflect the circumstances of the demerger; or

(b) certain payments, allocations and distributions are made in substitution for dividends (subsection 45B(1) of the ITAA 1936).

Where the requirements of subsection 45B(2) of the ITAA 1936 are met, paragraph 45B(3)(a) of the ITAA 1936 empowers the Commissioner to make a determination that section 45BA of the ITAA 1936 applies in relation to a demerger.

The effect of section 45BA of the ITAA 1936 applying to a demerger benefit is that the amount of the demerger benefit, or the part of the benefit, is taken not to be a demerger dividend.

Are the requirements of subsection 45B(2) satisfied?

Subsection 45B(2) of the ITAA 1936 provides that section 45B of the ITAA 1936 applies if:

(a) there is a scheme under which a person is provided with a demerger benefit or a capital benefit by a company; and

(b) under the scheme a taxpayer (the relevant taxpayer), who may or may not be the person provided with the demerger benefit or the capital benefit, obtains a tax benefit; and

(c) having regard to the relevant circumstances of the scheme, it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for a purpose (whether or not the dominant purpose but not including an incidental purpose) of enabling a taxpayer (the relevant taxpayer) to obtain a tax benefit.

Demerger benefit and Capital benefit

Subsection 45B(4) of the ITAA 1936 defines the phrase 'provided with a demerger benefit' as follow:

A person is provided with a demerger benefit if in relation to a demerger:

(a) a company provides the person with ownership interests in that or another company; or

(b) something is done in relation to an ownership interest owned by the person that has the effect of increasing the value of an ownership interest (which may or may not be the same ownership interest) owned by the person.

Subsection 45B(5) of the ITAA 1936 defines the phrase 'provided with a capital benefit' as follow:

A reference to a person being provided with a capital benefit is a reference to any of the following:

(a) the provision of ownership interests in a company to the person;

(b) the distribution to the person of share capital or share premium;

(c) something that is done in relation to an ownership interest that has the effect of increasing the value of an ownership interest (which may or may not be the same interest) that is held by the person.

However, if the provision of interests, the distribution or the thing done involves the person receiving a 'demerger dividend' then, to that extent, it cannot be treated as a capital benefit (subsection 45B(6) of the ITAA 1936). In other words, to the extent that the provision of a demerger benefit is not a demerger dividend it will also constitute the provision of a capital benefit.

Based on the facts, paragraph 45B(2)(a) of the ITAA 1936 is satisfied.

Tax benefit

The meaning of the phrase 'obtaining of a tax benefit' is defined in subsection 45B(9) of the ITAA 1936 as follow:

A relevant taxpayer obtains a tax benefit if an amount of tax payable, or any other amount payable under this Act, by the relevant taxpayer would, apart from this section, be less than the amount that would have been payable, or would be payable at a later time than it would have been payable, if the demerger benefit had been an assessable dividend or the capital benefit had been a dividend.

Based on the facts, paragraph 45B(2)(b) of the ITAA 1936 is satisfied.

A more than incidental purpose of enabling a taxpayer to obtain a tax benefit

Section 45B of the ITAA 1936 only applies if, having regard to the relevant circumstances of the scheme, it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for a purpose (whether or not the dominant purpose but not including an incidental purpose) of enabling a taxpayer to obtain a tax benefit. In the majority of matters this will be the critical issue determining whether the provision applies or not.

Having regard to the relevant circumstances of the scheme as set out in subsection 45B(8) of the ITAA 1936, it could not be concluded that any of the parties to the scheme entered into or carried out the scheme for a more than incidental purpose of enabling entity A's shareholders to obtain a tax benefit.

Therefore, the Commissioner will not make determination that section 45BA of the ITAA 1936 applies.

Reasons for decision

Question 3

Will the Commissioner make a determination under paragraph 45B(3)(b) of the ITAA 1936 that section 45C of the ITAA 1936 applies to the whole or any part of the capital benefit provided to entity A's shareholders?

Summary of Reason for Decision

The Commissioner will not make a determination under paragraph 45B(3)(b) of the ITAA 1936 that section 45C of the ITAA 1936 applies to the whole or any part of the capital benefit provided to entity A's shareholders

Section 45B of the ITAA 1936

Where the requirements of subsection 45B(2) of the ITAA 1936 are met, paragraph 45B(3)(b) of the ITAA 1936 empowers the Commissioner to make a determination that section 45BA of the ITAA 1936 applies in relation to a demerger.

In this case, while the conditions of paragraphs 45B(2)(a) and 45B(2)(b) of the ITAA 1936 will be met (see the above), the requisite purpose of enabling entity A's shareholders to obtain a tax benefit (by way of a demerger benefit or a capital benefit) is not present.

Accordingly, the Commissioner will not make a determination under paragraph 45B(3)(b) of the ITAA 1936 that section 45C of the ITAA 1936 apply to the scheme to which this Ruling relates.