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Ruling

Subject: Demerger

Question 1

Are the X Trust Unitholders entitled to ignore a capital gain or capital loss made on the CGT event that happens to their units under the demerger pursuant to section 125-55 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Advice

Yes

Question 2

For the purposes of the CGT discount under Division 115 of the ITAA 1997, are the X Trust Unitholders taken to have acquired their units in Y Trust at the same time they acquired their corresponding units in X Trust?

Advice

Yes

Question 3

Is a capital gain or capital loss under CGT event C2 that happens under the demerger disregarded for the X Trust under section 125-155 of the ITAA 1997?

Advice

Yes

This ruling applies for the following period

1 July 2011 to 30 June 2012

The scheme commenced on

1 July 2011

Relevant facts and circumstances

X Trust owns 100% of units in Y Trust.

The trustee of X Trust is A co.

X Trust is currently and has never been operational and has not derived any income or incurred any expenses.

Y Trust is the holding entity of all of the entities in the group.

The trustee of Y Trust is A co.

The demerger is proposed to occur by way of an in-specie distribution of Y Trust units to X Trust unitholders in the following manner:

§ X Trusts' units in Y Trust will be surrendered;

§ Y Trust will issue units in-specie to the unitholders of X Trust; and

§ The Unitholders of X Trust will surrender their units in X Trust.

The surrender of the units above will each trigger CGT event C2.

Under the demerger, the X Trust Unitholders will be issued units in Y Trust in the same proportion to their current unitholdings in X Trust (the in specie distribution).

100% of X Trust's ownership is in the form of units held by the X Trust Unitholders.

All units are post-CGT.

X Trust holds 100% of the ownership interests in Y Trust just before the demerger.

X Trust will hold none of the ownership interests in Y Trust following the demerger.

X Trust and Y Trust are both fixed interest unit trusts taxed under Division 6 of the ITAA 1936.

CGT event E4 is capable of applying to Y Trust and X Trust as they are both unit trusts with a fixed and ascertainable cost base applying to each unit

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-25

Income Tax Assessment Act 1997 Section 104-70

Income Tax Assessment Act 1997 Section 109-10

Income Tax Assessment Act 1997 Division 115

Income Tax Assessment Act 1997 Section 115-25

Income Tax Assessment Act 1997 Section 115-30

Income Tax Assessment Act 1997 Division 125

Income Tax Assessment Act 1997 Section 125-60

Income Tax Assessment Act 1997 Section 125-65

Income Tax Assessment Act 1997 Section 125-70

Income Tax Assessment Act 1997 Section 125-155

Reasons for decision

Question 1

Summary

The X Trust Unitholders will be entitled to choose demerger rollover relief pursuant to section 125-55 of the ITAA 1997.

Detailed reasoning

In order for the demerger CGT outcomes contained in Division 125 of the ITAA 1997 to apply to unitholders and members of a company group, a number of defined terms must be satisfied, including:

§ demerger group (subsection 125-65(1) of the ITAA 1997);

§ demerger (subsection 125-70(1) of the ITAA 1997);

§ demerged entity (subsection 125-70(6) of the ITAA 1997); and

§ demerging entity (subsection 125-70(7) of the ITAA 1997).

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 X Trust as the head entity and includes Y Trust as a demerger subsidiary.

X Trust will be the head entity because:

§ no other member of the X Trust group holds ownership interests in X Trust (subsection 125-65(3) of the ITAA 1997); and

§ there will be no other company or trust capable of being a head entity of a demerger group of which X Trust could be a demerger subsidiary (subsection 125-65(4) of the ITAA 1997).

Y Trust will be a demerger subsidiary of X Trust because X Trust owns ownership interests in Y Trust that carry more than 20% of the rights to receive more than 20% of any distribution of income or capital by the trustee (subsection 125-65(7) of the ITAA 1997).

Demerger

Subsection 125-70(1) of the ITAA 1997 describes when a demerger happens. A demerger will happen to the X Trust demerger group because:

§ there will be a restructuring (paragraph 125-70(1)(a) of the ITAA 1997), and at least 80% of the total ownership interests in Y TRUST ends and new interests are issued to owners of X Trust (subparagraph 125-70(1)(b)(i) of the ITAA 1997);

§ under the restructuring, CGT event C2 will happen to X Trust and X Trust Unitholders will acquire new units in Y Trust and nothing else (subparagraph 125-70(1)(c)(i) of the ITAA 1997);

§ CGT event C2 will happen upon the surrender of units in X Trust. Y Trust units will be acquired by X Trust Unitholders on the basis of their ownership of units in X Trust (paragraph 125-70(1)(d) and subparagraph 125-70(1)(e)(i) of the ITAA 1997);  

§ paragraph 125-70(1)(f) of the ITAA 1997 repealed;

§ neither X Trust nor Y Trust are superannuation funds (paragraph125-70(1)(g) of the ITAA 1997);

§ X Trust Unitholders will acquire Y Trust units in the same proportion as they own X Trust units just before the demerger (paragraph 125-70(2)(a) of the ITAA 1997);

§ each of the X Trust Unitholders will own units in X Trust and Y Trust that (just after the demerger) represent the same proportionate total market value as their X Trust units represented (just before the demerger) (paragraph 125-70(2)(b) of the ITAA 1997);

§ under the scheme, there will be no buy-back of units for the purposes of Division 16K of Part III of the ITAA 1936 (subsection 125-70(4) of the ITAA 1997); and

§ there will be no rollover available under another provision for any CGT events that happen to the X Trust units under the restructure (subsection 125-70(5) of the ITAA 1997).  

Y Trust is the demerged entity 

Relevantly, subsection 125-70(6) of the ITAA 1997 defines a demerged entity to be a former member of a demerger group in which ownership interests are acquired by unitholders of the head entity under a demerger.

Y Trust is the demerged entity since the X Trust Unitholders receive units in Y Trust under a demerger.

X Trust is the demerging entity

Under subsection 125-70(7) of the ITAA 1997, an entity that is a member of a demerger group just before the CGT event referred to section 125-155 happens is a demerging entity if, under the demerger that happens to the group: at least 80% of the total ownership interests of that entity and of other members of the demerger group in another member of the demerger group end and new interests are issued to owners of original interests in the head entity (paragraph 125-70(7)(b)).

X Trust is the demerging entity since it is a member of a demerger group when CGT event C2 happens and Y Trust issues interests to owners of original interests in X Trust.

Can the X Trust Unitholders choose demerger rollover?

Subsection 125-55(1) of the ITAA 1997 relevantly provides that demerger rollover may be chosen if:

§ you own an ownership interest in a company or trust - the X Trust Unitholders satisfy this requirement;

§ the company or trust is the head entity of a demerger group - this requirement is satisfied;

§ a demerger happens to the demerger group - this requirement is satisfied; and

§ under the demerger a CGT event happens to the original interest (X Trust units) and a new or replacement interest is acquired in the demerged entity - this requirement will be satisfied as CGT event C2 happens to the X Trust units when the X Trust Unitholders receive Y Trust units under the demerger and the X Trust units are surrendered.

Therefore X Trust Unitholders will be eligible to choose rollover under subsection 125-55(1) of the ITAA 1997.

Question 2

Summary

For the purposes of accessing the CGT discount, the X Trust Unitholders will be taken to have acquired the new Y Trust units that they receive under the demerger on the date they acquired her corresponding X Trust units.

Detailed reasoning

For a capital gain to be reduced by the CGT discount, one of the conditions that must be satisfied is that the capital gain relates to an asset that was owned for at least 12 months (subsection 115-25(1) of the ITAA 1997).

For the purposes of this 12 month ownership test, item 2 of the table in subsection 115-30(1) of the ITAA 1997 treats a replacement asset, acquired under a replacement-asset rollover, as having been acquired at the time the original asset was acquired. The table in section 112-115 of the ITAA 1997 confirms that demergers under Division 125 of the ITAA 1997 are a form of this rollover (at item 14C).

Consequently, for the purposes of accessing the CGT discount, the X Trust Unitholders will be taken to have acquired the new Y Trust units that they receive under the demerger on the date they acquired their corresponding X Trust units. This will be the case whether or not they choose demerger rollover under section 125-55 of the ITAA 1997.

Question 3

Summary

Any capital gain or capital loss arising from the surrender by X Trust of the units it holds in Y Trust in the proposed demerger arrangement will be disregarded under section 125-155 of the ITAA 1997.

Detailed reasoning

Section 125-155 of the ITAA 1997 provides that a demerging entity may ignore capital gains or capital losses arising from certain CGT events (including CGT event C2) happening to its ownership interests in a demerged entity under a demerger.

In the present case:

§ X Trust is the demerging entity,

§ CGT event C2 will happen when X Trust surrenders its units in Y Trust (per section 104-25 of the ITAA 1997)and new ownership interests are issued to X Trust Unitholders, and

§ this happens under a demerger.

Therefore, any capital gain or loss under CGT event C2 made by X Trust on the surrender of its Y Trust units under the demerger will be disregarded (section 125-155 of the ITAA 1997).