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Ruling

Subject: Capital gains tax - consolidation and demerger

Question

Will the Commissioner confirm that should the rulee dispose of its interest in Company D post the demerger, no amount should be included in the rulee's assessable income in relation to the disposal of its pre-CGT shares?

Answer

Yes.

This ruling applies for the following periods:

Financial year ended 30 June 2012

Financial year ended 30 June 2013

The scheme commences on:

1 July 2011

Relevant facts and circumstances

The rulee is Company B which is incorporated in Australia.

Company A an Australian resident company owns 100% of the shares currently on issue in Company B.

Company A also owns shares in Company D, which are held on capital account. Some of the shares held in Company D are taken to have been acquired before 20 September 1985 (pre-CGT) by reason of:

· earlier roll-overs under repealed section 160ZZN (now archived) of the Income Tax Assessment Act 1936 (ITAA 1936), and

· bonus issues relating to the pre-CGT shares

The remaining shares in Company D were acquired by Company A on or after 20 September 1985 (post CGT).

It is anticipated that the following steps will happen:

Company A is the head company, and the rulee is a subsidiary company. Together the two companies are a consolidatable group in accordance with section 703-10 of the Income Tax Assessment Act 1997 (ITAA 1997). Company A will elect to form a consolidated group with the rulee.

Company A will transfer its Company D shares to the rulee

The rulee will be demerged from Company A by way of an in specie distribution of all of the rulee's shares to the Company A shareholder.

The demerger will qualify for demerger relief under Division 125 of the ITAA 1997 for both Company A and its shareholder.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10,

Income Tax Assessment Act 1997 Division 125,

Income Tax Assessment Act 1997 section 701-1,

Income Tax Assessment Act 1997 section 701-5,

Income Tax Assessment Act 1997 section 701-40 and

Income Tax Assessment Act 1997 section 703-10.

Reasons for decision

Under subsection 104-10 of the ITAA 1997, a capital gain or loss is disregarded if you acquired the asset before 20 September 1985 (that is, the asset is pre-CGT).

The rulee will acquire the Company D shares by transfer from Company A (the head entity) while the two companies are members of the same consolidated group. Some of the Company D shares currently owned by Company A are pre-CGT.

Single entity rule

The single entity rule in section 701-1 of the ITAA 1997 deems subsidiary members to be parts of the head company rather than separate entities during the period that they are members of the consolidated group.

Taxation Ruling TR 2004/11 states that dealings that are solely between members of the same consolidated group (intra-group dealings) will not result in ordinary or statutory income or a deduction to the group's head company.

Paragraph 9 of TR 2004/11 states:

An example of an intra-group dealing is the transfer of a capital gains tax (CGT) asset from one group member to another. This transfer is not treated for income tax purposes as a disposal or acquisition in the hands of the head company. Although the legal transfer of the CGT asset between the subsidiary members occurs at general law, it has no income tax consequences as the group's head company is taken to be the owner of the asset both before and after the transfer.

It is intended that Company A will make a choice to form a consolidated group with the rulee, and subsequently transfer the Company D shares to the rulee.

In this situation the disposal of the Company D shares will have no capital gains tax consequences for Company A under the single entity rule in section 701-1 of the ITAA 1997.

Under subsection 701-40(1) of the ITAA 1997 the exit history rule applies to assets, liabilities or any business (eligible asset) that becomes that of an entity when it ceases to be a subsidiary member of a group. Subsection 701-40(3) of the ITAA 1997 states that everything that happened in relation to any eligible asset while it was that of the head company, including because of any application of section 701-5 of the ITAA 1997 (the entry history rule), is taken to have happened to the eligible asset as if it had been an eligible asset of the leaving entity.

When the rulee (the leaving entity) exits the consolidated group taking the shares with it, the exit history rule in section 701-40 of the ITAA 1997 will deem the rulee to have acquired the shares at the time acquired by Company A (the head company). The Company D shares will be pre-CGT assets of the rulee in the same proportion that applied when the shares were held by Company A.

Consequently, should the rulee dispose of the pre-CGT Company D shares, any capital gain or loss arising when CGT event A1 happens, will be disregarded under subsection 104-10(5) of the ITAA 1997.