Edited version of private ruling

Authorisation Number: 1011815562874

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Ruling

Subject: Demerger of B Co by A Co

Question 1

Will the demerger of B Co by A Co 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 A Co makes on disposal of its shares in B Co will be disregarded pursuant to section 125-155 of the ITAA 1997?

Answer

Yes.

Question 2

Will A Co have any withholding obligation under section 12-210 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953) in respect of any part of the demerger allocation?

Answer

No.

This ruling applies for the following period:

1 July 2010 - 30 June 2011

Relevant facts and circumstances

Background

A Co proposes to carry out a demerger of all the shares in its wholly owned subsidiary, B Co. The demerger will form the central component of a restructuring of the A Co Group which seeks to create a structural separation and separate stock exchange listing for A Co's A division.

Relevant Entities

A CO

A Co is an Australian resident public company and the head company of an Australian consolidated tax group for the purposes of Part 3-90 of the ITAA 1997.

Prior to the demerger, A Co's business will be comprised of a number of divisions, including the A division.

A Co operates various employee share and option plans. At the time of the demerger there were various outstanding ownership interests in A Co acquired under these plans. The ownership interests comprising adjusting instruments for the purposes of subsections 125-75(4) and (5) of the ITAA 1997 will represent not more than 10% of the ownership interests in A Co. Likewise, the ownership interests to which Subdivision 83A-C applies for the purpose of subsection 125-75(1) and (2) of the ITAA 1997 will represent not more than 3% of the total ownership interests in A Co (taking into account both their number and value).

Employees holding shares issued under an employee share or option plan will participate in the demerger on the same basis as all other A Co shareholders.

There will be no other ownership interests in A Co just before the demerger.

B Co

B Co became a wholly owned subsidiary of A Co at the time of its incorporation. It was incorporated for the purposes of holding either directly or indirectly, all A Co entities and assets relating to the A division.

Pre-demerger transactions

Prior to the demerger, A Co will undertake certain transactions to facilitate the demerger including:

· entering into an Implementation Deed;

· entering into a Demerger Deed; and

· undertaking an internal corporate restructure to ensure that B Co, either directly or indirectly, owns all the companies and assets comprising the A division and A Co owns all the companies and assets relating to the remaining divisions.

The demerger of B Co

The demerger of B Co will be carried out by a capital reduction and a Court approved scheme of arrangement approved by the requisite majorities of A Co shareholders.

The demerger is proposed to be implemented according to its terms on the Implementation Date. On that day A Co will reduce its share capital.

In accordance with the terms of the scheme of arrangement, the capital reduction will be satisfied by A Co shareholders receiving an in specie distribution of one B Co share for every A Co share they owned on the proposed Record Date.

The holders of outstanding performance options in A Co will not receive shares or options in B Co under the demerger. However, the exercise price of each option will be adjusted to reflect the diminution of value in A Co shares resulting from the implementation of the scheme of arrangement.

Sale Facility

A Sale Facility will be made available for Ineligible Overseas Shareholders to enable their demerged B Co shares to be sold on the ASX and the net proceeds remitted to them after deduction of any applicable brokerage, stamp duty and other selling costs, taxes and charges.

Ineligible Overseas Shareholders will be Scheme Shareholders other than Eligible Shareholders as specified in the Scheme Booklet.

Accounting for the distribution to effect the demerger

The B Co shares will be acquired by A Co shareholders by applying the following amounts to be distributed to them by A Co to the acquisition of those B Co shares:

· the Capital Reduction Amount on a per share basis ;and

· the balance of the demerger distribution on a per share basis.

A Co will account for the distributions that effect the demerger by debiting its share capital account (the total capital reduction) and its demerger reserve account by the balance of the demerger distribution.

Reasons for the demerger

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

· ensure that B Co benefits from material capital investment and that A Co is well positioned within a rapidly evolving retail and online environment;

· provide greater investment choice for existing and new investors; and

· allow special purpose management teams to focus on the development of their respective business plans, customers and industry partners.

Other matters

A Co has confirmed that its share capital account (as defined in section 975-300 of the ITAA 1997) as at the date of the demerger will not be tainted within the meaning of Division 197 of the ITAA 1997.

Just after the demerger, at least 50% of the market value of capital gains tax assets owned by B Co or its subsidiaries will be used directly or indirectly in one or more businesses carried on by B Co or any of its subsidiaries.

There will be no off-market buy-back of shares under this scheme, or circumstances where A Co shareholders can obtain roll-over under another provision of the ITAA 1997.

A Co's shareholders include shareholders whose registered address on A Co's register of members is outside of Australia. As mentioned above, a Sale Facility will be in place that will enable the B Co shares of some foreign shareholders to be transferred to a nominee to sell on the shareholders' behalf. However, other foreign shareholders (who are located in jurisdictions where A Co is satisfied that it will be lawful and not unduly onerous (having regard to local securities laws to transfer shares to foreign shareholders)) will receive B Co shares pursuant to the Scheme of Arrangement in the same way as a shareholder whose registered address on A Co's register of members is in Australia.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 6

Income Tax Assessment Act 1936 section 45B

Income Tax Assessment Act 1936 subsection 45B(1)

Income Tax Assessment Act 1936 subsection 45B(2)

Income Tax Assessment Act 1936 paragraph 45B(2)(a)

Income Tax Assessment Act 1936 paragraph 45B(2)(b)

Income Tax Assessment Act 1936 paragraph 45B(3)(a)

Income Tax Assessment Act 1936 paragraph 45B(3)(b)

Income Tax Assessment Act 1936 section 45BA

Income Tax Assessment Act 1936 section 45C

Income Tax Assessment Act 1936 Division 125

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 subsection 125-65(6)

Income Tax Assessment Act 1997 section 125-70

Income Tax Assessment Act 1997 paragraph 125-70(1)(a)

Income Tax Assessment Act 1997 subparagraph 125-70(1)(b)(i)

Income Tax Assessment Act 1997 subparagraph 125-70(1)(c)(i)

Income Tax Assessment Act 1997 paragraph 125-70(1)(d)

Income Tax Assessment Act 1997 subparagraph 125-70(1)(e)(i)

Income Tax Assessment Act 1997 paragraph 125-70(1)(g)

Income Tax Assessment Act 1997 paragraph 125-70(2)(a)

Income Tax Assessment Act 1997 paragraph 125-70(2)(b)

Income Tax Assessment Act 1997 subsection 125-70(4)

Income Tax Assessment Act 1997 subsection 125-70(5)

Income Tax Assessment Act 1997 paragraph 125-70(7)(a)

Income Tax Assessment Act 1997 section 125-155

Taxation Administration Act 1953 subsection 3AA(2)

Taxation Administration Act 1953 section 128(3D)

Taxation Administration Act 1953 section 12-210 of schedule 1

Taxation Administration Act 1953 section 12-300 of schedule 1

Reasons for decision

These reasons for decision accompany the Notice of private ruling for A Co.

Question 1

Division 125 of the ITAA 1997 allows a Capital Gains Tax (CGT) roll-over when a CGT event happens to original interests in a company or trust under a demerger and new or replacement interests are received in the demerged entity.

A 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 its ownership interests in a demerged entity under a demerger, is disregarded pursuant to section 125-155 of the ITAA 1997.

Under the demerger of B Co by A Co, CGT event A1 will happen to A Co when A Co disposes of its ownership interests in B Co to the shareholders of A Co pursuant to section 104-10 of the ITAA 1997. In order for A Co to disregard any capital gain or capital loss made from CGT event A1 happening on the disposal of its ownership interests in B Co the disposal must have occurred under a demerger within the meaning of Division 125 of the ITAA 1997. The conditions for demerger roll-over relief under Division 125 of the ITAA 1997 are considered below.

Ownership Interest

Subsection 125-60(1) of the ITAA 1997 defines ownership interest to include a share in a company. Prior to the demerger, A Co will hold 100 per cent of the shares in B Co. Accordingly, this condition is satisfied.

Demerger Group

A demerger group comprises of one head entity and at least one demerger subsidiary for the purposes of subsection 125-65(1) of the ITAA 1997.

A Co will be the head entity of the demerger group at the time of the arrangement under subsections 125-65(3) and (4) of the ITAA 1997 as:

· no other member of the demerger group will own ownership interests in A Co; and

· there will be no other company or trust that would be capable of being the head entity of a demerger group of which A Co could be a demerger subsidiary.

B Co will be a demerger subsidiary of A Co under subsection 125-65(6) of the ITAA 1997 as A Co will own ownership interests that carry the right to:

· receive 100 per cent of any distribution of income or capital of B Co; and

· exercise 100 per cent of the voting power in B Co.

Accordingly, the demerger group in this case will comprise A Co as the head entity and B Co as its demerger subsidiary.

Demerger

The requirements for a demerger are contained in section 125-70 of the ITAA 1997. A demerger will happen to the A Co demerger group as:

· there will be a restructuring for the purposes of paragraph 125-70(1)(a) of the ITAA 1997, and under the restructuring A Co will dispose of 100 per cent of its existing shares in B Co to A Co shareholders for the purposes of subparagraph 125-70(1)(b)(i) of the ITAA 1997;

· CGT event G1 will happen to A Co shares, and A Co shareholders will acquire new shares in B Co and nothing else for the purposes of subparagraph 125-70(1)(c)(i) of the ITAA 1997;

· under the restructure, B Co shares will be acquired by A Co shareholders on the basis of their ownership of shares in A Co for the purposes of paragraph 125-70(1)(d) and subparagraph 125-70(1)(e)(i) of the ITAA 1997;

· neither A Co or B Co will be a trust that was a superannuation fund for the purposes of paragraph 125-70(1)(g) of the ITAA 1997;

· each A Co shareholder will acquire B Co shares in the same proportion as they owned A Co shares just before the demerger for the purposes of paragraph 125-70(2)(a) of the ITAA 1997;

· each A Co shareholder will own, just after the demerger, the same proportionate total market value of A Co and B Co shares as they owned in A Co just before demerger for the purposes of paragraph 125-70(2)(b) of the ITAA 1997; and

· subsections 125-70(4) of the ITAA 1997 (dealing with off-market share buy-backs) and 125-70(5) of the ITAA 1997 (which addresses roll-over available under another provision) will have no application.

Demerging entity

In accordance with subsection 125-70(7) of the ITAA 1997, A Co will qualify as a demerging entity as it will dispose of 100 per cent (i.e. at least 80%) of its ownership interests in B Co, another member of the demerger group, to A Co shareholders, who were owners of the original interests in A Co.

Demerged entity

In this case, B Co will be the demerged entity as the A Co shareholders will acquire ownership interests in B Co under the demerger arrangement in accordance with subsection 125-70(6) of the ITAA 1997.

Conclusion

Accordingly, when A Co (the demerging company) disposes of its ownership interests in B Co (the demerged entity) to the A Co shareholders under the demerger arrangement, any capital gain or capital loss that it makes will be disregarded under section 125-155 of the ITAA 1997.

Question 2

Dividend

Dividend is defined in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936) to include any distribution made by a company to any of its shareholders.

Section 44(1) of the ITAA 1936 provides that the assessable income of shareholders includes dividends that are paid to a shareholder.

However, the definition of dividend in subsection 6(1) of the ITAA 1936 excludes:

(d) moneys paid or credited by a company to a shareholder or any other property distributed by a company to shareholders (not being moneys or other property to which this paragraph, by reason of subsection (4), does not apply or moneys paid or credited, or property distributed for the redemption or cancellation of a redeemable preference share), where the amount of the moneys paid or credited, or the amount of the value of the property, is debited against an amount standing to the credit of the share capital account of the company;

Amount debited to share capital account not dividend income - not assessable

In the circumstances of this demerger, A Co will debit an amount to its 'share capital account' (as that term is defined in subsection 6(1) of the ITAA 1936 and section 975-300 of the ITAA 1997). This amount will therefore not be a dividend for the purposes of subsection 6(1) of the ITAA 1936 and will not be assessable as a subsection 6(1) dividend under subsection 44(1) of the ITAA 1936.

Demerger dividend

Paragraph 13 of TR 2003/18 states:

In most cases a company which distributes property to its shareholders and debits part of the value of that property to its share capital account would debit the remaining part to another account or reserve. Where that account or reserve does not represent share capital, it would, for subsection 44(1) purposes, represent profits derived by the company so that the amount debited to it would be included in the shareholder's assessable income under that subsection.

The term 'demerger dividend'  is defined in subsection 6(1) of the ITAA 1936 as being that part of a demerger allocation that is assessable as a dividend under subsection 44(1) of the ITAA 1936 or that would be so assessable apart from subsections 44(3) and 44(4) of the ITAA 1936.

On the basis of the definition of demerger allocation in subsection 6(1) of the ITAA 1936, the demerger allocation will be the market value of the shares in B Co transferred to A Co shareholders. Therefore in the circumstances of the present case, the difference between the demerger allocation and the amount debited against the share capital account is a demerger dividend.

Subsections 44(3) and 44(4) of the ITAA 1936 state:

44(3)

This section applies to the demerger dividend as if it had not been paid out of profits.

44(4)

A demerger dividend is not assessable income or exempt income.

Subsection 44(2) of the ITAA 1936 provides that the demerger dividend will be neither assessable income nor exempt income (pursuant to subsections 44(3) and 44(4) of the ITAA 1936) if:

· the head entity does not elect that subsections 44(3) and 44(4) of the ITAA 1936 do not apply to the demerger dividend (subsections 44(2) of the ITAA 1936); and

· subsection 44(5) of the ITAA 1936 is satisfied.

The applicant will not be electing for subsections 44(3) and 44(4) of the ITAA 1936 to not apply to the demerger dividend.

The requirement in subsection 44(5) of the ITAA 1936 is satisfied in the circumstances of this case because more than 50% of the CGT assets (determined by market value) held by B Co and its subsidiaries will be used directly or indirectly in carrying on the business of the casinos.

Accordingly, as subsections 44(3) and 44(4) of the ITAA 1936 will apply and subsection 44(5) of the ITAA 1936 is satisfied, the demerger dividend will be neither assessable income nor exempt income pursuant to subsection 44(2) of the ITAA 1936.

Withholding tax in respect of dividends paid to non-residents

Section 12-210 of Schedule 1 to the TAA 1953 states:

A Company that is an Australian resident must withhold an amount from a *dividend it pays if:


(a) according to the register of the company's members, the entity, or any of the entities, holding the *shares on which the dividend is paid has an address outside Australia; or


(b) that entity, or any of those entities, has authorised or directed the company to pay the dividend to an entity or entities at a place outside Australia.

Section 12-300 of Schedule 1 to the TAA 1953 states:

This Subdivision does not require an entity:

(a) to withhold an amount from a *dividend…if no *withholding tax is payable in respect of the dividend….; or

Pursuant to subsection 3AA(2) of the TAA 1953 the term withholding tax is defined for the purposes of Schedule 1 to the TAA 1953 as having the same meaning as in section 995-1 of the ITAA 1997. Withholding tax is defined in section 995-1 of the ITAA 1997 to include income tax payable under section 128B of the ITAA 1936. In particular, subsection 128B(4) of the ITAA 1936 states:

A person who derives income to which this section applies that consists of a dividend is liable to pay income tax upon that income at the rate declared by the Parliament in respect of income to which this subsection applies.

Section 128B(3D) of the ITAA 1936 provides that no withholding tax will be payable in respect of a demerger dividend to which section 45B does not apply.

Section 45B of the ITAA 1936

Subsection 45B(1) of the ITAA 1936 provides that the purpose of section 45B of the ITAA 1936 is 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 a demerger; or

(b) certain payments, allocations and distributions are made in substitution for dividends.

The Commissioner is empowered under subsection 45B(3) of the ITAA 1936, when the requirements of subsection 45B(2) of the ITAA 1936 are met, to make a determination that sections 45BA or 45C of the ITAA 1936 apply, respectively, in relation to a demerger benefit (see paragraph 45B(3)(a) of the ITAA 1936) or capital benefit (paragraph 45B(3)(b) of the ITAA 1936).

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

The effect of section 45C of the ITAA 1936 applying to a capital benefit is that the amount of the capital benefit, or part of the benefit, is taken to be an unfranked dividend.

Application of subsection 45B(2) of the ITAA 1936

Paragraphs 45B(2)(a) and 45B(2)(b) of the ITAA 1936 are satisfied as there is a scheme under which a person is provided with a demerger benefit or a capital benefit by a company (A Co) and also provided with a tax benefit within the meaning of subsection 45B(9) of the ITAA 1936, due to the dividend exemptions and CGT roll-over relief provided for under Division 125 of the ITAA 1997.

However, the Commissioner is of the view that paragraph 45(2)(c) of the ITAA 1936 is not satisfied as the Commissioner does not consider 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 the dominant purpose of enabling A Co to obtain a tax benefit in connection with the scheme.

A Co has contended, and the Commissioner accepts, that the demerger will be undertaken for genuine commercial reasons. The separation by A Co of its overall business operations is driven by the need for business efficiency. By separating A Co's A division, a more efficient structure can be achieved where all businesses (including A division) will reach their full potential. Therefore the manner in which the demerger of B Co was structured appears no different to normal commercial practice.  

Accordingly, the Commissioner will not make a determination under subsection 45B(3) of the ITAA 1936 that section 45BA of the ITAA 1936 applies in relation to the demerger benefit or that section 45C of the ITAA 1936 applies to the capital benefit, under the scheme to which this ruling relates.

Conclusion

As section 45B of the ITAA 1936 does not apply, pursuant to section 128B(3D) of the ITAA 1936 no withholding tax will be payable in respect of the demerger dividend and therefore section 12-300 of Schedule 1 to the TAA 1953 provides that no withholding is required in respect of the demerger dividend.

In addition, as that part of the demerger allocation debited to the share capital account is not a dividend (refer paragraph (d) of the definition of dividend in subsection 6(1) of the ITAA 1936), A Co will not have any withholding obligation under section 12-210 of Schedule 1 to the TAA 1953 in respect of any part of the demerger allocation.