Edited version of your private ruling

Authorisation Number: 1012516116979

Ruling

Subject: Proposed Demerger of Subsidiary from the Taxpayer

Question 1

Will the distribution of Subsidiary shares by the Taxpayer to its shareholders be a 'demerger' as defined by section 125-70 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Will any capital gain, or any capital loss, that the Taxpayer makes from CGT event A1 happening to its ownership interests in Subsidiary under the Proposed Demerger be disregarded?

Answer

Yes.

This ruling applies for the following periods:

1 July 20XX to 30 June 20XX

The scheme commences:

Year ended 30 June 20XX

Relevant facts and circumstances

The Taxpayer is a company.

The Taxpayer owns all the shares in another company, Subsidiary.

The Taxpayer proposes to demerge Subsidiary by distributing 100% of the shares in Subsidiary to the Taxpayer's shareholders (the Proposed Demerger).

The Taxpayer's shareholders will receive Subsidiary shares on a proportionate basis for every one of the Taxpayer's share held at the Record Date.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 139CD

Income Tax Assessment Act 1936 Division 16K

Income Tax Assessment Act 1997 Subdivision 83A-C

Income Tax Assessment Act 1997 Division 125

Income Tax Assessment Act 1997 subsection 125-65(1)

Income Tax Assessment Act 1997 paragraph125 -60(1)(a)

Income Tax Assessment Act 1997 subsection 125-65(3)

Income Tax Assessment Act 1997 subsection 125-65(5)

Income Tax Assessment Act 1997 subsection 125-65(6)

Income Tax Assessment Act 1997 section 125-70

Income Tax Assessment Act 1997 subsection 125-70(1)

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

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

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

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

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

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

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

Income Tax Assessment Act 1997 subsection 125-70(2)

Income Tax Assessment Act 1997 paragraph 125-70(6)(a)

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

Income Tax Assessment Act 1997 section 125-75

Former Income Tax Assessment Act 1997 subsection 125-75(1)

Former Income Tax Assessment Act 1997 subsection 125-75(2)

Former Income Tax Assessment Act 1997 subsection 125-75(4)

Former Income Tax Assessment Act 1997 subsection 125-75(5)

Income Tax Assessment Act 1997 section 125-155

Income Tax Assessment Act 1997 section 125-235

Tax Laws Amendment (2009 Budget Measures No. 2) Act 2009 Schedule 1

Tax Laws Amendment (2009 Budget Measures No. 2) Act 2009 section 2

Income Tax (Transitional Provisions) Act 1997 section 125-75

Reasons for decision

These reasons for decision accompany the Notice of private ruling for the TAXPAYER.

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Question 1

Summary

The distribution of Subsidiary shares by the Taxpayer to its shareholders will be a 'demerger' as defined by section 125-70 of the ITAA 1997.

Detailed reasoning

Section 125-70 of the ITAA 1997 contains the definition of a 'demerger' that happens to a 'demerger group'.

The demerger group

Subsection 125-65(1) of the ITAA 1997 provides that a demerger group comprises the 'head entity' of the group and one more demerger subsidiaries.

Subsection 125-65(3) of the ITAA 1997 provides that the head entity of a demerger group is the member of the group in which no other member of the demerger group owns ownership interests.

On the basis of information provided and on the assumption made, the Taxpayer will be the head company of a demerger group. As Subsidiary will be a wholly owned subsidiary of the Taxpayer, it will be a demerger subsidiary within the demerger group (subsection 125-65(6) of the ITAA 1997).

The definition of demerger

The distribution by the Taxpayer of Subsidiary shares to the Taxpayer's shareholders will be a demerger as defined by subsection 125-70(1) of the ITAA 1997 as all the requirements of that subsection will be met:

(a) Paragraph 125-70(1)(a) of the ITAA 1997 will be satisfied because there will be a restructuring of the demerger group.

(b) Paragraph 125-70(1)(b) of the ITAA 1997 will be satisfied because under the restructure, the Taxpayer will dispose of at least 80% of its total ownership interests in Subsidiary to the Taxpayer's shareholders.

(c) Paragraph 125-70(1)(c) of the ITAA 1997 will be satisfied because under the restructure, CGT event G1 will happen to an original interest owned by the Taxpayer's shareholders in the Taxpayer and the Taxpayer's shareholders will acquire a new interest, the Subsidiary shares, and nothing else.

(d) Paragraph 125-70(1)(d) of the ITAA 1997 will be satisfied because the Taxpayer's shareholders will acquire Subsidiary shares only because they own the Taxpayer's shares.

(e) Paragraph 125-70(1)(e) of the ITAA 1997 will be satisfied because the Subsidiary shares will be ownership interests in a company.

(f) Paragraph 125-70(1)(g) of the ITAA 1997 will be satisfied because the Taxpayer's shares and Subsidiary shares are not interests in a trust or superannuation fund.

(g) Paragraph 125-70(1)(h) of the ITAA 1997 will be satisfied because the requirements in subsection 125-70(2) are met. These requirements are discussed below.

The proportion test under subsection 125-70(2)

Subsection 125-70(2) of the ITAA 1997 requires that:

(a) each owner of original interests in the head entity of the demerger group acquire the same proportion, or as nearly as practicable the same proportion, of new interests in the demerged entity as they owned in the head entity just before the demerger; and

(b) just after the demerger, they must have the same proportionate total market value of ownership interests in the head entity and demerged entity as they owned in the head entity just before the demerger.

An ownership interest in a company includes a share in the company or an option, right or similar interest issued by the company that gives the owner an entitlement to acquire a share in the company: paragraph 125-60(1)(a)) of the ITAA 1997.

Not all ownership interests are taken into account for the purposes of the proportion test in subsection 125-70(2) of the ITAA 1997. Certain exclusions exist under section 125-75 of the ITAA 1997. As a result of the exclusions, not all ownership interests in the Taxpayer will be considered in determining whether the proportion test in subsection 125-70(2) of the ITAA 1997 is satisfied.

Under the Proposed Demerger, after applying the exclusions, each shareholder of the Taxpayer will acquire the same proportion of new interests in Subsidiary as they owned in the Taxpayer just before the Proposed Demerger. Furthermore, just after the Proposed Demerger, they will have the same proportionate total market value of ownership interests in the Taxpayer and Subsidiary as they owned just before the Proposed Demerger.

Therefore, the requirements in subsection 125-70(2) of the ITAA 1997 will be met and the distribution of Subsidiary shares by the Taxpayer to its shareholders will be a demerger as defined by subsection 125-70(1) of the ITAA 1997.

Question 2

Summary

Any capital gain, or any capital loss, that the Taxpayer makes from CGT event A1 happening to its ownership interests in Subsidiary under the Proposed Demerger will be disregarded.

Detailed reasoning

Section 125-155 of the ITAA 1997 provides that any capital gain or loss a demerging entity makes from CGT event A1, C2, C3 or K6 happening to its ownership interests in a demerged entity under a demerger is disregarded.

A 'demerging entity' is an entity that is a member of a demerger group just before the CGT event referred to in section 125-155 of the ITAA 1997 happens if, under a demerger, the entity (either alone or together with other members of the demerger group) disposes of at least 80% of their total ownership interests in another member of the demerger group to owners of original interests in the head entity of the demerger group: paragraph 125-70(7)(a) of the ITAA 1997.

As determined for the purposes of Question 1 of this Ruling, the Taxpayer and Subsidiary will be members of a demerger group with the Taxpayer being the head entity of the demerger group.

The Taxpayer will also be a demerging entity. It is a member of the demerger group and under the Proposed Demerger it will dispose of 100% of the ownership interests in Subsidiary to the Taxpayer's shareholders.

A 'demerged entity' is a former member of a demerger group whose ownership interests are acquired under the demerger by shareholders in the head entity of the group: paragraph 125-70(6)(a) of the ITAA 1997

Subsidiary will be a demerged entity as a result of the Proposed Demerger under which the Taxpayer's shareholders will acquire all ownership interests in Subsidiary.

Since any capital gain or capital loss the Taxpayer (a demerging entity) will make from CGT event A1 happening on the disposal of Subsidiary shares (ownership interests in a demerged entity) occurs under a demerger (as determined in question 1 of this ruling), the capital gain or capital loss is disregarded as a result of section 125-155 of the ITAA 1997.