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Ruling

Subject: Proposed demerger

Relevant facts and circumstances

A Ltd

A Ltd will be, at the time of the demerger, an Australian resident public company listed on the Australian Securities Exchange (ASX) and the head company of an Australian consolidated tax group for the purposes of Part 3-90 of the Income Tax Assessment Act 1997 (ITAA 1997).

Immediately before the demerger, A Ltd will have on issue a certain number fully paid (listed) ordinary shares (fully paid shares) and a certain number of unlisted partly paid ordinary shares (partly paid shares).

The partly paid shares were issued to executives of A Ltd under Employee Share Plans. According to the A Ltd Board, the terms of issue of the partly paid shares entitle the holders of these shares to participate in the demerger on the same basis as the holders of fully paid shares.

There will not be any other ownership interests in A Ltd just before the demerger.

C Ltd

Just before the demerger, C Ltd will have on issue a certain number of ordinary shares, all of which are owned by B Limited (B Ltd), an indirect wholly-owned subsidiary of A Ltd and a member of the A Ltd consolidated group.

There will not be any other ownership interests in C Ltd just before the demerger.

The demerger of C Ltd

The demerger of C Ltd will be carried out by a capital reduction and a court approved scheme of arrangement which will be approved by the requisite majorities of A Ltd shareholders.

The demerger will be implemented according to its terms on the Implementation Date. On that day:

a) A Ltd will reduce its share capital per A Ltd share (the capital reduction amount); and

b) A Ltd will satisfy the capital reduction by procuring B Ltd to make an in specie distribution to A Ltd shareholders of all of the shares in C Ltd (thereby creating an intercompany loan between A Ltd and B Ltd).

In accordance with the terms of the scheme of arrangement, A Ltd shareholders will be entitled to one C Ltd share for every three shares they own in A Ltd as at the Record Date (rounded to the nearest whole C Ltd.

Sale Facility

In some cases, C Ltd shares which A Ltd shareholders would otherwise have received under the demerger will be transferred instead to a Sale Agent who will sell these shares on the ASX through a Sale Facility. The net proceeds from the sale will then be remitted to the relevant A Ltd shareholder, free of any brokerage costs or stamp duty.

A Ltd shareholders whose shares will be sold through the Sale Facility are:

§ Ineligible Overseas Shareholders; and

§ Eligible Shareholders who were Small Shareholders and who elected to participate in the Sale Facility.

Ineligible Overseas Shareholders are A Ltd's shareholders whose registered addresses are shown in A Ltd's share register on the Record Date.

Small Shareholders are Eligible Shareholders (being A Ltd shareholders who are not Ineligible Overseas Shareholders as described in this Ruling) who will hold 1,000 A Ltd shares or less as at the Record Date.

Accounting for the distribution to effect the demerger

A Ltd will account for the demerger by debiting its share capital by the total capital reduction amount and a Demerger Reserve account by the balance of any demerger distribution. As a consequence, the distribution of the C Ltd shares will be accounted for by A Ltd at the fair value of those shares at the time of the demerger.

The total demerger distribution amount will be ascertained by reference to the volume weighted average price of the C Ltd shares, as traded on the ASX (whether on a deferred or normal settlement basis) over the first five trading days after the Effective Date.

Reasons for the demerger

A Ltd believes that a number of advantages will accrue to its shareholders as a result of the demerger. The key advantages are said to include:

§ increased transparency allowing investors to more appropriately value each business over time;

§ greater investment choice for existing investors; and

§ flexibility for separate boards and management of A Ltd and C Ltd to develop their own corporate strategies and implement capital structures and financial policies appropriate to their businesses.

Other matters

C Ltd will list on the ASX.

A Ltd confirmed that its share capital account is not tainted as defined in Division 197 of the ITAA 1997.

Just after the demerger, at least 50% of the market value of capital gains tax (CGT) assets owned by C Ltd or its subsidiaries were used directly or indirectly in one or more business carried on by C Ltd or any of its subsidiaries.

Reasons for decision

Summary

Question 1

Will any capital gain or loss made by A Ltd in respect of the disposal of its ownership interests in C Ltd under the demerger of C Ltd be disregarded pursuant to section 125-155 of the ITAA 1997?

Answer

Yes

Detailed reasoning

Any capital gain or capital loss a demerging entity makes from CGT event A1, CGT event C2, CGT event C3 or CGT event K6 happening to its ownership interests in a demerged entity under a demerger is disregarded.

Under the scheme to which this Ruling applies, CGT event A1 will happen when A Ltd disposes of its C Ltd shares to A Ltd shareholders.

CGT event C2, C3 or K6 will not happen under this scheme.

For A Ltd to disregard any capital gain or capital loss made from CGT event A1 happening on the disposal of its shares in C Ltd:

§ the disposal must occur under a 'demerger' as defined under section 125-70 of the ITAA 1997;

§ A Ltd must be considered to be a 'demerging entity' as defined under subsection 125-70(7); and

§ C Ltd shares that will be disposed by A Ltd must represent A Ltd's ownership interests in a 'demerged entity' for the purposes of Division 125 of the ITAA 1997.

Did the disposal of the C Ltd 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 comprising one head entity and at least one demerger subsidiary. For the purposes of this scheme, and by virtue of the single entity rule in section 701-1 of the ITAA 1997, the demerger group will include A Ltd as the head entity and C Ltd as a demerger subsidiary.

A Ltd will be the head entity of a demerger group because at the time of the restructure:

§ no other member of the demerger group will own any ownership interests in A Ltd; and

§ no other company or trust will be capable of being the head entity of a demerger group of which A Ltd could be a demerger subsidiary.

C Ltd will be a demerger subsidiary of A Ltd at the time of the restructure, because at that time, and by virtue of the single entity rule in section 701-1 of the ITAA 1997, A Ltd will have the right to receive more than 20% of any distribution of income or capital by C Ltd.

A demerger will happen for the purposes of section 125-70 of the ITAA 1997 to the A Ltd demerger group under the scheme because:

§ there will be a restructuring, under which at least 80% of the shares that A Ltd indirectly owns in C Ltd will be transferred to A Ltd shareholders;

§ under the restructuring, CGT event G1 will happen to ordinary shares owned by A Ltd shareholders who will receive nothing other than new shares in C Ltd;

§ A Ltd shareholders will acquire new shares in C Ltd under the restructure only because they are shareholders of A Ltd;

§ at the time of the restructure, neither the shares in A Ltd nor C Ltd will be interests in a trust that is a superannuation fund within the meaning of that term in section 10 of the Superannuation Industry (Supervision) Act 1993;

§ each A Ltd shareholder will acquire the same proportion of shares in C Ltd as the shares they owned in A Ltd just before the demerger, and just after the demerger each A Ltd shareholder will have the same proportionate total market value of A Ltd shares and C Ltd shares as they owned in A Ltd just before the demerger;

§ the restructure will not constitute an off-market share buy-back for the purposes of Division 16K of Part III of the ITAA 1936; and

§ no other roll-over will be available outside of Division 125 of the ITAA 1997 for CGT event G1 that will happen to ordinary shares owned by A Ltd shareholders.

Are the C Ltd shares that will be disposed of by A Ltd, ownership interests in a demerged entity?

The ordinary shares in C Ltd are ownership interests within the meaning of that term in subsection 125-60(1) of the ITAA 1997.

In addition, C Ltd will be a demerged entity at the time of the restructure within the meaning of that term in subsection 125-70(6) of the ITAA 1997. This is because it will be a former member of the A Ltd demerger group and the C Ltd shares will be acquired by the shareholders of A Ltd (as head entity of that group).

Conclusion

Under the scheme, and by virtue of the single entity rule in section 701-1 of the ITAA 1997, A Ltd will dispose 100% of its ownership interests in C Ltd under a demerger for the purposes of Division 125 of the ITAA 1997. Accordingly, any capital gain or capital loss made by A Ltd from CGT event A1 happening on the disposal of C Ltd shares will be disregarded.