| Disclaimer This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law. You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4. |
Edited version of your private ruling
Authorisation Number: 1012485320234
Ruling
Subject: Demerger of Company Y by Company X
Question 1
Will the capital gain made by Company X on the transfer of shares in Company Y to the Company X Shareholders be disregarded pursuant to section 125-155 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Answer
Yes
This ruling applies for the following periods:
1 July 2012 to 30 June 2013
1 July 2013 to 30 June 2014
The scheme commences on:
1 July 2012
Relevant facts and circumstances
Overview
The scheme that is the subject of this ruling involves the proposed demerger of Company Y by Company X.
Company X
Company X is the head company of a consolidated group for tax purposes.
Company X has four different classes of shares on issue.
Company Y
Company Y is a wholly-owned subsidiary of Company X
At the time of the proposed demerger, Company Y's share structure will mirror those of Company X.
All of the shares currently on issue in Company Y are post-CGT.
Proposed demerger of Company Y from Company X
Company X proposed to undertake a restructure under which 100% of its shareholding in Company Y will be distributed to the holders of shares in Company X.
Under the proposal, the owners of shares in Company X will receive shares in Company Y (and nothing else) in the same proportion to their existing shareholding of ordinary and other classes of shares in Company Y.
Accounting for the proposed demerger
The dividend and return of capital will be satisfied by an in-specie transfer of all of the shares in Company Y to the Company X Shareholders.
The dividend will be debited to the retained profits of Company X.
The return of capital will be debited to the share capital account of Company X.
Each account will be debited for an amount equal to the proportion of the market value of Company Y to the market value of Company X multiplied by the balance of the relevant account.
Under the proposed transaction, each of the Company X Shareholders will receive shares in Company Y in proportion to the market value of their current shareholdings in Company X, as determined by an independent market valuation prepared at the time of the demerger.
Reasons for the proposed demerger
Reasons for the proposed demerger include:
* Attracting equity investors to raise capital;
* Implementing an employee share scheme, and
* Separating the distinct groups to enable increased efficiency and overall improvements.
Reasons for decision
Summary
The capital gain made by Company X on the transfer of shares in Company Y to the Company X Shareholders will be disregarded pursuant to section 125-155 of the ITAA 1997.
Detailed reasoning
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 X as the head entity and includes Company Y as a demerger subsidiary.
Company X will be the head entity because:
• no other member of the group holds ownership interests in Company X (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 Company X could be a demerger subsidiary (subsection 125-65(4) of the ITAA 1997).
Company Y will be a demerger subsidiary of Company X because Company X owns ownership interests (ordinary shares) in Company Y that carry more than 20% of the rights to any distribution of income and capital, and the right to exercise more than 20% of the voting power of Company Y (subsection 125-65(6) of the ITAA 1997).
A demerger happens
Subsection 125-70(1) of the ITAA 1997 describes when a demerger happens. A demerger will happen to the Company X demerger group because:
(a) there will be a restructuring (paragraph 125-70(1)(a) of the ITAA 1997), and Company X will dispose of at least 80% of its Company Y shares to the owners of Company X (subparagraph 125-70(1)(b)(i) of the ITAA 1997);
(b) under the restructuring, CGT event G1 will happen to the Company X shareholders when the return of capital is made under the demerger, and Company X shareholders will acquire new shares in Company Y and nothing else (subparagraph 125-70(1)(c)(i) of the ITAA 1997);
(c) Company Y shares will be acquired by Company X shareholders on the basis of their ownership of shares in Company X (paragraph 125-70(1)(d) and subparagraph 125-70(1)(e)(i) of the ITAA 1997);
(d) neither Company X nor Company Y are superannuation funds (paragraph 125-70(1)(g) of the ITAA 1997);
(e) Company X shareholders will acquire Company Y shares in the same proportion as they own Company X shares just before the demerger (paragraph 125-70(2)(a) of the ITAA 1997);
(f) each of the Company X shareholders will own shares in Company X and Company Y that (just after the demerger) represent the same proportionate total market value as their Company X shares represented (just before the demerger) (paragraph 125-70(2)(b) of the ITAA 1997);
(g) under the scheme, there will be no 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
(h) there will be no rollover available under another provision for any CGT events that happen to the Company X shares under the restructure (subsection 125-70(5) of the ITAA 1997).
Company Y is the demerged entity
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 shareholders of the head entity under a demerger.
In the present circumstances, Company Y is the demerged entity since the Company X shareholders receive shares in Company Y under a demerger.
Company X 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.
In the present circumstances, Company X is the demerging entity since it disposes of 100% of its shares in Company Y to the Company X shareholders under a demerger.
Disregarding capital gains
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 A1) happening to its ownership interests in a demerged entity under a demerger.
In the present case:
• Company X is the demerging entity,
• CGT event A1 will happen when Company X disposes of its shares in Company Y and transfers them to the Company X shareholders (per section 104-10 of the ITAA 1997), and
• this disposal happens under a demerger.
Therefore, any capital gain or loss under CGT event A1 made by Company X on the disposal of its Company Y shares under the demerger will be disregarded (section 125-155 of the ITAA 1997).