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Ruling

Subject: Capital gains tax - consolidation and demerger

Question 1

Will the Commissioner confirm the rulee's calculation of the proportion of the Company A's shares held by the rulee that are pre-CGT?

Answer

Yes

Question 2

Will the Commissioner confirm that demerger roll-over relief under section 125-80 of the Income Tax Assessment Act 1997 (ITAA 1997) is available to the rulee in relation to the proposed demerger?

Answer

Yes

Question 3

Will the Commissioner confirm that demerger roll-over relief under section 125-80 of the ITAA 1997 is available to the rulee in relation to the proposed demerger?

Answer

Yes

Question 4

Will the Commissioner confirm that if any part of the demerger proceeds is a dividend, it will not be assessable income or non-exempt income under subsection 44(4) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes

Question 5

Will the Commissioner seek to make a determination under section 45B of the ITAA 1936 that sections 45BA or 45C of the ITAA 1936 applies to the whole, or any part, of any capital benefit provided to the rulee under the proposed demerger?

Answer

No

This ruling applies for the following periods:

Financial year ending 30 June 2012

Financial year ending 30 June 2013

The scheme commences on:

1 July 2011

Relevant facts and circumstances

The rulee is an Australian resident and beneficial owner of 100% of the shares in Company A, which is incorporated in Australia.

Company A issued the initial shares to the rulee after 19 September 1985. Some further Company A shares were issued to the rulee in exchange for the rulee's shares in Company D.

Of the shares held in Company D, some are pre-CGT by reason of:

· earlier roll-overs under repealed section 160ZZN (now archived) of the ITAA 1936, and

· bonus issues relating to the pre-CGT shares

The applicant has provided the written elections made by the rulee in regards to the roll-overs. The remaining shares in Company D are post CGT shares.

Background to the demerger

Company A is considering the potential demerger of its interests in Company D by the following steps:

· incorporating a new company (Company B Pty Ltd) which will be a subsidiary of Company A

· Company A will elect to form a consolidated group

· Company A will transfer its Company D shares to Company B as an intra-group dealing

· Company B will be demerged from Company A by way of an in specie distribution of the Company B shares to the rulee

· The distribution to the rulee will be treated as partly a return of capital and partly as a dividend.

Rationale for the demerger

There are commercial business reasons behind the restructure, namely to split the Company A assets into two separate groups, legal separation of interests will allow the individual business needs to be pursued without the cross-referencing of risk, financial performance differences and exposure to very different markets and market conditions.

The rulee prefers to hold the investment in Company D in corporate form rather than by the rulee personally, for asset protection reasons.

Background to Company D

Company D was incorporated in Australia after 19 September 1985. Initially, 100% of the shares in Company D were beneficially held by the rulee.

Subsequently, and at various times Company D issued the rulee with additional shares:

· in exchange for pre-CGT shares held by the rulee, and the rulee chose a roll-over under repealed section 160ZZN of the ITAA 1936

· as bonus shares, and

· as a split under section 193 of the Corporations Law.

Company D allotted further shares to third parties at various times.

Accounting entries

The amount debited to the share capital account of Company A will be calculated by the proportion of the market value of the Company B shares compared to the market value of Company A. The remaining value of the Company B shares distributed will be a dividend.

The amount debited to the retained earnings account will be the balance between Company A's carrying value of Company D and the amount debited to the share capital account.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 44,

Income Tax Assessment Act 1936 section 45B,

Income Tax Assessment Act 1936 subsection 177A,

Income Tax Assessment Act 1936 subsection 177D,

Income Tax Assessment Act 1936 section 160ZZN (archived),

Income Tax Assessment Act 1997 section 104-10,

Income Tax Assessment Act 1997 section 104-35,

Income Tax Assessment Act 1997 section 104-135,

Income Tax Assessment Act 1997 Division 125,

Income Tax Assessment Act 1997 section 125-55,

Income Tax Assessment Act 1997 section 125-65,

Income Tax Assessment Act 1997 section 125-70,

Income Tax Assessment Act 1997 section 125-80,

Income Tax Assessment Act 1997 section 125-155 and

Income Tax (Transitional Provisions) Act 1997 subsection 102-5(1).

Reasons for decision

Note: the former section 160ZZN of the ITAA 1936 is now archived, and was rewritten as Subdivision 122-A of the ITAA 1997 with effect from the 1998­99 financial year.

Question 1

Will the Commissioner confirm the rulee's calculation of the proportion of the Company A shares held by the rulee that are pre-CGT?

Detailed reasoning

Company D Shares

The rulee elected for roll-over relief under section 160ZZN of the ITAA 1936 in respect of the disposal of the various shares which had been acquired by the rulee prior to 20 September 1985, and which had been transferred to Company D in exchange for Company D shares.

160ZZN roll-over

Section 160ZZN of the ITAA 1936 provided for a roll-over in years prior to the 1998­99 financial year, where certain conditions were met as were contained in subsection 160ZZN(2) of the ITAA 1936. The conditions that are relevant to this case are:

o An individual taxpayer who is a resident of Australia, disposes of an asset (a roll-over asset) to a company that is a resident of Australia, and

o Receives as consideration only non-redeemable shares in the company, and

o The market value of the share is substantially the same as the market value of the roll-over asset, and

o Immediately after the disposal the taxpayer is the beneficial owner of all the shares in the company, and

o The roll-over asset is not trading stock of the company immediately after the disposal, and

o The taxpayer makes a written election to apply this subsection.

As all of the above conditions were satisfied, the rulee was eligible and did choose the roll-over under section 160ZZN of the ITAA 1936.

Consequences of the roll-over for the rulee (the shareholder)

Paragraph 160ZZN(7)(a) of the ITAA 1936 provided that the shares issued in consideration for the disposal of the roll-over asset will be taken to have been acquired before 20 September 1985 (pre-CGT) if the roll-over asset was acquired before that date.

Paragraph 160ZZN(7)(b) of the ITAA 1936 provided the rules for working out the cost base of those shares that were post-CGT. However subsection 102-5(1) of the Income Tax (Transitional Provisions) Act 1997 (ITTPA 1997) states that you work out a cost base of the asset by applying the new law to circumstances that occurred before the 1998-99 financial year.

Consequently some of the Company D shares held beneficially by the rulee were taken to be pre-CGT and some of Company D shares were post-CGT.

Consequences of the roll-over for Company D

Paragraph 160ZZN(2)(e) of the ITAA 1936 provided that roll-over assets that are pre-CGT are taken to be pre-CGT when transferred to the company.

Consequently, the shares transferred to Company D were taken to be a mixture of both pre and post-CGT shares.

Further Company D share issues

At a later time, Company D issued a number of bonus shares for every share held. The bonus share issue was paid wholly out of the share premium account of Company D.

If no part of the bonus shares issue was a dividend or taken to be a dividend, then to the extent of the bonus shares issued in respect of pre-CGT shares, those bonus shares will be pre-CGT.

Of the Company D shares held by the rulee that were pre-CGT, then the bonus shares issued in respect of the pre-CGT shares are also pre-CGT.

The remaining bonus shares are post-CGT.

Company D issued further shares to the rulee, in respect of further roll-overs under section 160ZZN of the ITAA 1936 for shares acquired by the rulee after 19^th September 1985..

Subsequently Company D subdivided the shares into a larger number of shares in accordance with section 193 of the Corporations Law at the time.

Taxation Determination TD 95/30 (now withdrawn) states that the subdivision of shares in accordance with section 193 of the Corp Law does not constitute a disposal by the shareholder for capital gains tax purposes. In addition, paragraph 2 of TD 95/30 states:

The subdivided or consolidated shares have the same date of acquisition as the original shares to which they relate. For example, if the original shares were acquired pre-CGT, the subdivided or consolidated shares also have a pre-CGT status.

Company A

At a later time the rulee transferred all of the ordinary shares to Company A in exchange for ordinary shares issued to the rulee.

The rulee elected for roll-over relief under section 160ZZN of the ITAA 1936 in respect of the transfer of the Company D shares.

Under paragraph 160ZZN(2)(e) of the ITAA 1936, those Company D shares that were pre-CGT in the hands of the rulee, are taken to be pre-CGT when acquired by Company A.

For those Company D shares that were acquired by the rulee on or after 20 September 1985, Company A will have acquired them for their indexed cost base in the hands of the rulee at a later date (paragraph 160ZZN(2)(f) of the ITAA 1936, as affected by subsection 102-5(1) of the ITTPA 1997).

Of the Company D shares (the roll-over asset) that were taken to have been acquired by the rulee before 20 September 1985, then the same proportion of Company A shares issued as consideration for the transfer, are also taken to have been acquired by the rulee before that date.

Question 2

Will the Commissioner confirm that the proposed demerger satisfies the requirements for demerger roll-over relief under Division 125 of the ITAA 1997?

Detailed reasoning

Demerger provisions in Division 125 of the ITAA 1997

In order for the demerger capital gains tax (CGT) outcomes contained in Division 125 of the ITAA 1997 to apply to shareholders 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 (paragraph 125-70(6)(a) of the ITAA 1997), and

· demerging entity (paragraph 125-70(7)(a) of the ITAA 1997).

The 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 Company A as the head entity and includes Company B as the demerger subsidiary.

Company A satisfies the definition of the head entity of a demerger group because:

(a) Company B does not have any ownership interests in it (subsection 125-65(3) of the ITAA 1997); and

(b) there is no other entity capable of being the head entity of a demerger group of which Company A could be a demerger subsidiary (subsection 125-65(4) of the ITAA 1997).

Company B will be the demerger subsidiary of Company A because it is proposed that Company A will own shares in Company B that carry the right to receive more than 20% of any distribution of income and capital, and the right to exercise more than 20% of the voting power (subsection 125-65(6) of the ITAA 1997).

A demerger happens

Subsection 125-70(1) of the ITAA 1997 provides a number of conditions that must be satisfied in order for a demerger to happen to a demerger group.

In the case of the Company A demerger group, a demerger happens for the purposes of subsection 125-70(1) of the ITAA 1997 because the following conditions will be satisfied.

A restructure happens

There will be a restructuring (paragraph 125-70(1)(a) of the ITAA 1997), under which Company A will dispose of 100% of the shares it owns in Company B to its shareholder (subparagraph 125-70(1)(b)(i) of the ITAA 1997).

Under the restructure, the Company A shareholder (the rulee) will acquire new shares in Company B and nothing else (subparagraph 125-70(1)(c)(i) of the ITAA 1997).

Company A shareholder

The shares in Company B will be distributed to the rulee as the Company A shareholder on the basis of the rulee's ownership of shares in Company A (paragraph 125-70(1)(d) and subparagraph 125-70(1)(e)(i) of the ITAA 1997).

Just before the restructure, the rulee is an Australian resident and the rulee will beneficially own all of the shares in Company A.

Neither the original interests that the rulee holds in Company A or the new interests the rulee will receive in Company B will be interests in trusts that are superannuation funds within the meaning of that term under section 10 of the Superannuation Industry (Supervision) Act 1993 (paragraph125-70(1)(g) of the ITAA 1997).

Proportionate distribution of demerged entity shares

The number of Company B shares received by the rulee will be in direct proportion to the number of shares the rulee owns in Company A just before the demerger happens (paragraph 125-70(2)(a) of the ITAA 1997).

Just after the demerger, the rulee as the shareholder of Company A and Company B will own the same proportionate total market value of shares in Company B as the rulee held in Company A just before the demerger (paragraph 125-70(2)(b) of the ITAA 1997).

Not a buy-back and no other rollover available

The demerger does not constitute a buy-back of shares for the purposes of Division 16K of Part III of the ITAA 1936 (subsection 125-70(4) of the ITAA 1997); and

No rollover will be available under another provision for any CGT events occurring to the Company A shares as a result of the restructure scheme (subsection 125-70(5) of the ITAA 1997).

Company B is the demerged entity

Subsection 125-70(6) of the ITAA 1997 defines a demerged entity as being a former member of a demerger group in which ownership interests are acquired by shareholders of the head entity under a demerger.

In the present circumstances, Company B will be the demerged entity since the Company A shareholder will receive shares in this entity, which were formerly held by Company A, under the demerger.

Company A is the demerging entity

Subsection 125-70(7) of the ITAA 1997 defines a demerging entity to be a member of a demerger group who disposes of at least 80% of its total ownership interests in another member of the demerger group to owners of original interests in the head entity under a demerger.

As Company A will dispose of 100% of its shares in Company B directly to its shareholder (the rulee) under the demerger, Company A qualifies as the demerging entity for the purposes of subsection 125-70(7) of the ITAA 1997.

Question 3

Will the Commissioner confirm that demerger roll-over relief under section 125-80 of the ITAA 1997 is available to the rulee in relation to the proposed demerger?

Detailed reasoning

Demerger roll-over

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

· a shareholder owns a share in a company - this requirement is satisfied as the shareholder, the rulee owns shares in Company A;

· the company is the head entity of a demerger group - this requirement is satisfied;

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

· under the demerger a CGT event happens to the original interest (in this case, the Company A shares), and a new interest is acquired in the demerged entity (in this case Company B). This requirement will be satisfied as the Company A shareholder will receive shares in Company B.

The exclusion for foreign residents in subsection 125-55(2) of the ITAA 1997 does not apply, as the rulee is a resident of Australia.

Consequently, the rulee will be eligible to choose rollover under subsection 125-55(1) of the ITAA 1997.

Consequences of choosing demerger rollover

To the extent that the Company A shares owned by the rulee are pre-CGT shares, if the rulee chooses demerger roll-over the rulee will be taken to have acquired that proportion of Company B shares the rulee receives under the restructure scheme prior to 20 September 1985 as well (section 125-80 of the ITAA 1997).

If the capital reduction amount is not more than the cost base of the Company A shares, the cost base and reduced cost base of the Company A shares will be reduced (but not below nil) by the capital reduction amount (subsection 104-135(4) of the ITAA 1997).

Question 4

Will the Commissioner confirm that if any part of the demerger proceeds is a dividend, it will not be assessable income or non-exempt income under subsection 44(4) of the ITAA 1936?

Detailed reasoning

Demerger dividend

Subsection 44(1) of the ITAA 1936 includes in a shareholder's assessable income a dividend, as defined in subsection 6(1) of the ITAA 1936, paid to a shareholder out of company profits.

Share capital reduction amount

Paragraph 6(1)(d) of the ITAA 1936 excludes amounts debited against a share capital account of the company from being defined as a dividend. In this case, the share capital reduction amount is accounted for by debiting the share capital account of Company A, meaning that this amount will not be a dividend for the purposes of section 6(1) of the ITAA 1936.

Dividend

Paragraph 8 of Taxation Ruling TR 2003/8 provides that the in specie distribution of property (such as shares in a subsidiary) will be a dividend paid out of profits to the extent it is not debited to the company's share capital account if, immediately after the distribution of that property, the market value of the assets of the company exceed the total amount (as shown in the company's books of account) of its liabilities and share capital.

Consequently, to the extent that the market value (at the time of the demerger) of each Company B share distributed exceeds the amount debited to Company A's share capital account in respect of each Company A share, the remaining amount will be a dividend paid out of profits that would, but for the operation of subsections 44(3) and 44(4) of the ITAA 1936, be an assessable dividend under subsection 44(1) of the ITAA 1936.

However, subsections 44(3) and (4) of the ITAA 1936 provide that a demerger dividend is neither an assessable nor an exempt income amount where:

· the dividend is a demerger dividend (as defined in subsection 6(1) of the ITAA 1936);

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

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

Under the demerger of the Company B shares to the rulee as the Company A shareholder, each of these conditions will be satisfied. Therefore, the dividend paid to the rulee under the proposed demerger will be neither assessable income nor exempt income as a result of the application of subsections 44(2) through (5) of the ITAA 1936.

Question 5

Will the Commissioner seek to make a determination under section 45B of the ITAA 1936 that sections 45BA or 45C of the ITAA 1936 applies to the whole, or any part, of any capital benefit provided to the rulee under the proposed demerger?

Detailed reasoning

Section 45B of the ITAA 1936 - schemes to provide certain benefits

Subsection 45B(1) of the ITAA 1936 provides that the purpose of section 45B of the ITAA 1936 is to treat amounts as dividends for tax purposes if:

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

o certain payments, allocations and distributions are made in substitution for dividends.

Subsection 45B(2) of the ITAA 1936 is the operative provision which explains that section 45B of the ITAA 1936 will apply when:

· there is a scheme under which a person is provided with a demerger benefit or a capital benefit by a company (paragraph 45B(2)(a) of the ITAA 1936);

· under the scheme a taxpayer, who may or may not be the person provided with the demerger benefit or the capital benefit, obtains a tax benefit (paragraph 45B(2)(b) of the ITAA 1936); and

· having regard to the relevant circumstances of the scheme, it would be concluded that the person, or one of the persons, entered into the scheme or carried out the scheme or any part of the scheme for a purpose, other than an incidental purpose, of enabling a taxpayer to obtain a tax benefit (paragraph 45B(2)(c) of the ITAA 1936).

Determinations under subsection 45B(3) of the ITAA 1936

Where the requirements of subsection 45B(2) of the ITAA 1936 are met, subsection 45B(3) of the ITAA 1936 empowers the Commissioner to make a determination that either (or both) section 45BA of the ITAA 1936 applies in relation to a demerger benefit and section 45C of the ITAA 1936 applies in relation to a capital benefit.

The effect of a determination made under paragraph 45B(3)(a) of the ITAA 1936 is that some or all of a demerger benefit will be treated as not being a demerger dividend (subsection 45BA(1) of the ITAA 1936).

The effect of a determination made under paragraph 45B(3)(b) of the ITAA 1936 is that some or all of a capital benefit will be an unfranked dividend paid to the relevant taxpayer out of profits (subsections 45C(1) and (2) of the ITAA 1936).

Scheme

A 'scheme' for the purposes of section 45B of the ITAA 1936 is taken to have the same meaning as provided in subsection 177A(1) of Part IVA of the ITAA 1936. That definition is widely drawn and includes any agreement, arrangement, understanding, promise, undertaking, scheme, plan, or proposal. In particular, a scheme is anything that satisfies any of the terms in the statutory definition.

In the present circumstances, the following feature is considered to constitute the relevant scheme for the purposes of section 45B of the ITAA 1936:

· the transfer of all shares in Company B held by Company A to its shareholder, the rulee under the demerger

Demerger Benefit and Capital Benefit

The provision of ownership interests in a company constitutes the provision of a demerger benefit and a capital benefit for the purposes of section 45B of the ITAA 1936 (subsection 45B(4) and (5) of the ITAA 1936). To the extent that the provision of the ownership interest in a company is a demerger dividend, it will be a demerger benefit, but not a capital benefit (subsection 45B(6) of the ITAA 1936).

In the present scheme therefore, the provision of the Company B shares will constitute both a demerger benefit and a capital benefit for the Company A shareholder for the purposes of section 45B of the ITAA 1936.

Obtaining a tax benefit

A tax benefit is described in subsection 45B(9) of the ITAA 1936 as follows:

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.

The rulee as the Company A shareholder will receive a tax benefit, as defined in subsection 45B(9) of the ITAA 1936 as a consequence of the provision to the rulee of a demerger benefit and capital benefit (being the in specie distribution of Company B shares) which will not be assessable income owing to the operation of subsections 44(4) and (5) of the ITAA 1936, section 125-80 and section 104-35 of the ITAA 1997.

In other words, the tax payable on the demerger benefit and the capital benefit will be less than it would be if it had been an assessable dividend and a dividend respectively. It is therefore accepted that under the scheme, the rulee will obtain a tax benefit.

A more than incidental purpose

The test in paragraph 45B(2)(c) of the ITAA 1936 provides that the section will apply if, objectively, the particular scheme demonstrates a more than incidental purpose of enabling the shareholders (or any one of them) to obtain the tax benefit described above.

The existence of this purpose is to be determined by consideration of the relevant circumstances that are listed inclusively in subsection 45B(8) of the ITAA 1936.

The circumstances in subsection 45B(8) of the ITAA 1936 cover a range of matters which, taken individually or collectively will disclose whether the necessary purpose exists. Each of the circumstances listed in subsection 45B(8), along with any other relevant matters, is considered in turn to determine whether it tends for, against or is neutral as to an overall conclusion that the purpose of providing a tax benefit exists.

Appropriate capital and profit allocation

Paragraph 45B(8)(a) concerns the extent to which the demerger benefit or capital benefit is attributable to capital or to profits of the company or of an associate of the company.

PS LA 2005/21 says at paragraphs 50 and 51:

If the composition of the demerger benefit is inconsistent with the substance (that is, the capital and profit it is attributable to) this would tend to a conclusion that the requisite purpose exists.

51. For instance, if the dividend element of a demerger benefit is not attributable to an amount that could reasonably be regarded as the profit made on or applied to the assets being demerged, this would suggest a purpose of obtaining a non-assessable dividend under the demerger relief.

The capital distributed will be calculated by the proportion of the market value of the Company B shares compared to the market value of the Company A group. The remaining value of the Company B shares distributed will be a dividend.

The amount debited to the retained earnings account will be the balance between Company A's carrying value of Company D and the amount debited to the share capital account.

This indicates that the dividend may be paid out of profits derived by the company.

Pattern of distributions

Paragraph 45B(8)(b) directs attention to the pattern of distributions of dividends, returns of capital or share premium by the company or by an associate of the company.

There is no indication that the pattern of distributions has changed or was interrupted prior to the demerger.

Both Company D and Company A have retained earnings, which are factors to consider in the application of section 45B of the ITAA 1936.

However, a factor that does not incline towards the requisite purpose is that the rulee is the individual to whom any dividends would flow from these retained earnings, both pre and post this proposed demerger.

Shareholders with capital losses

Paragraph 45B(8)(c) is concerned with whether a relevant taxpayer has capital losses that, apart from the scheme, would be carried forward to a later year of income.

The relevant taxpayer, the rulee has no capital losses.

Pre-CGT ownership interests

Paragraph 45B(8)(d) directs attention to whether some or all of the ownership interests in the company or in an associate were acquired, or are taken to have been acquired, by the relevant taxpayer before 20 September 1985.

Some of both Company A shares and Company D shares are pre-CGT.

This is a factor for consideration as to whether the requisite purpose exists, as the companies will form a consolidated group prior to the demerger that has a purpose that is more than incidental, to allow the relevant percentage of Company D shares to retain their pre-CGT status.

However this does not provide any immediate benefit, other than what would be currently available to Company A. As the rulee has stated that there is no immediate or medium term plans to realize those pre-CGT shares, this does not incline towards the requisite purpose.

Residency of owners of the head entity

Paragraph 45B(8)(e) requires consideration of whether the owners of the head entity are non-residents.

The rulee is a resident for Australian income tax purposes. This is not a consideration.

Cost base of the ownership interests

104. Paragraph 45B(8)(f) directs attention to whether the cost base of a relevant ownership interest is not substantially less than the value of the applicable demerger benefit or capital benefit.

Therefore this is not a factor for consideration.

Distributions of share capital or share premium affecting interests held

Paragraph 45B(8)(h) directs attention to whether the interests held by taxpayers after the distribution is the same as the interest would have been if an equivalent dividend had been paid instead of the distribution of share capital or share premium.

The rulee's interests will not change as the rulee will own the same proportion of shares in Company B as the rulee currently owns in Company A. This factor is not a consideration.

Disposal of ownership interests

Paragraph 45B(8)(i) directs attention to whether the scheme involves the provision of ownership interests and the later disposal of those interests, or an increase in the value of ownership interests and the later disposal of those interests.

PS LA 2005/21 discusses this paragraph when it states:

73. Paragraph 45B(8)(i) of the ITAA 1936 directs attention to those cases where the scheme of demerger involves the provision of ownership interests and the later disposal of those interests, or an increase in the value of ownership interests and the later disposal of those interests; recognising that the proceeds on disposal of such ownership interests provide the equivalent of a cash dividend in a more tax-effective form.

74. It is a question of fact whether or not the scheme of demerger involves the later disposal of the ownership interests. In determining whether the scheme of provision and later disposal of ownership interests is suggestive of obtaining a tax benefit, regard is to be had to the length of time the ownership interests are held, including any arrangements to reduce the risk of holding them. The temporal nexus between the demerger and the arrangement for the disposal of the ownership interests must also be considered.

The applicant advises that there are no short or medium term plans for the rulee to dispose of ownership interests in either entity.

Transactions between the entity and an associate

This is not a consideration.

Part IVA matters

Paragraph 45B(8)(k) requires regard be had to any of the matters referred to in subparagraphs 177D(b)(i) to (viii) of the ITAA 1936. Many of the relevant circumstances already discussed above in respect of paragraphs 45B(8)(a) to (j) overlap with the paragraph 177D(b) matters.

Subparagraph 177D(b)(i)

Subparagraph 177D(b)(i) refers to the manner in which a scheme is entered into or carried out. As stated in paragraph 87 of PSLA 2005/21, this subparagraph considers the decisions, steps and events that combine to make up the scheme. In effect, an inquiry into the manner of a scheme is an objective inquiry into the reasons a taxpayer had for entering into it.

It is intended that certain steps are undertaken prior to the demerger, namely forming a consolidated group and transferring the Company D shares to the subsidiary.

The manner in which the scheme will be carried out has commercial business reasons behind it, namely to hold the Company D shares by a corporate entity other than Company A so that the Company D shares can be separated from the other activities of Company A. However there is a more than incidental benefit that will arise, being that the Company D shares will remain predominantly pre-CGT after they are transferred to Company B.

On the other hand there will be no tax benefit accruing to the rulee, the shares that are currently pre­CGT would remain so under the proposed demerger. The rulee will not achieve additional benefits under this demerger other than the previously stated benefits from the separation of interests.

Subparagraph 177D(b)(ii)

Subparagraph 177D(b)(ii) refers to the form and substance of a scheme.

This factor requires an examination of what the scheme appears to do, for example, in a legal sense (form) in comparison to what it actually achieves in a commercial and economic sense (substance). A discrepancy between the form and substance of a scheme is often an indication that it has been implemented in a particular way as a means of obtaining the tax benefit.

We consider that the substance of the scheme will be consistent with its form as the practical effect of the scheme is the same as its form.

Subparagraph 177D(b)(iii)

Subparagraph 177D(b)(iii) directs attention to the time at which the scheme will be entered into and the length of the period during which the scheme will be carried out. The timing and length of the demerger will be undertaken in a logical succession of steps and completed within an acceptable time span. There will be no law change pending or reasonably anticipated. This factor does not incline for or against, a conclusion as to the requisite purpose.

Subparagraph 177D(b)(iv)

Subparagraph 177D(b)(iv) requires regard be had to the result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme. This issue is a matter of identifying the tax results of the scheme if section 45B were not to apply.

If section 45B of the ITAA 1936 were not to apply to the scheme relating to the demerger, there are two possibilities. The first possibility is that the Company D shares are not transferred to Company B and the whole arrangement does not proceed. The second possibility is that the arrangement proceeds, without the benefit of the demerger concessions.

Subparagraph 177D(b)(v)

Subparagraph 177D(b)(v) requires regard be had to any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme.

There will be no change in the financial position of the rulee under the scheme. The aggregate values of these two companies will be similar to the current value of Company A. The only benefit that will accrue is the separation of business activities without income tax being an impediment to the restructure.

Subparagraph 177D(b)(vi)

Subparagraph 177D(b)(vi) requires regard be had to any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme.

This is not a consideration and is neutral with regard to the application of Part IVA.

Subparagraph 177D(b)(vii)

Subparagraph 177D(b)(vii) requires regard be had to any other consequence for the relevant taxpayer, or for any person referred to in subparagraph (vi), of the scheme having been entered into or carried out.

This is not a consideration.

Subparagraph l77D(b)(viii)

Subparagraph 177D(b)(viii) requires regard be had to the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in subparagraph (vi).

This is not a consideration.

Conclusion

Part IVA matters

Having regard to the factors listed in paragraph 177D(b) of the ITAA 1936, and particularly in light of the significant commercial considerations underpinning the decision to carry out a demerger, it is concluded that none of the persons who entered into or carried out the identified schemes did so for the dominant purpose of enabling the identified taxpayer to obtain a tax benefit in connection with the scheme.

Conclusion

Section 45B

Having regard to the relevant circumstances of this scheme, it can be concluded that, objectively, the attainment of a tax benefit by the rulee as the Company A shareholder should be considered no more than an incidental aspect of the overall restructure scheme. In light of the context surrounding the two companies, and the significant commercial objectives evidently driving the decision to demerge Company B from Company A, it cannot be concluded that any party entered into the scheme for the more than incidental purpose of enabling any taxpayer to obtain a tax benefit.

As a consequence, it is considered that the provision of ownership interests in Company B to the Company A shareholder amounts to no more than a necessary element of this substantial business restructure. In such circumstances, the scheme in question is considered to be one which is absent the element of purpose required to enliven the operative provision of section 45B of the ITAA 1936 (subsection 45B(3) of the ITAA 1936).

Accordingly, the Commissioner would not make a determination under paragraph 45B(3)(a) of the ITAA 1936 that section 45BA of the ITAA 1936 applies to the demerger benefit provided under the scheme.

Similarly, the Commissioner would not make a determination under paragraph 45B(3)(b) of the ITAA 1936 that section 45C of the ITAA 1936 applies to the capital benefit provided to the rulee under the scheme.