Edited version of your private ruling

Authorisation Number: 1012527378032

Ruling

Subject: Proposed demerger

Question 1

As a consequence of section 125-155 of the Income Tax Assessment Act 1997 (ITAA 1997), will Company A disregard any capital gain under capital gains tax (CGT) event A1, CGT event C2, CGT event C3 or CGT event K6 upon the proposed distribution of its shares in Company B to Company A shareholders?

Answer

Yes.

Question 2

As a consequence of section 125-160 of the ITAA 1997, will CGT event J1 not happen to any member of the Company A demerger group upon the proposed distribution of shares in Company B to Company A shareholders?

Answer

Yes.

Question 3

As a consequence of the proposed distribution of Company A's shares in Company B to Company A shareholders, would Company A be required under subsection 45D(1A) of the Income Tax Assessment Act 1936 (ITAA 1936) to give a copy of a notice to its shareholders?

Answer

No.

Question 4

Will the Commissioner make a determination that section 45 of the ITAA 1936 applies to the whole or any part of the proposed demerger benefit provided to Company A shareholders?

Answer

No.

This ruling applies for the following periods:

Income year ending 30 June 20XX

The scheme commences on:

Income year ending 30 June 20XX

Relevant facts and circumstances

1. Company A has announced its intention to demerge a segment of its business by way of a capital reduction and a scheme of arrangement.

2. The proposed demerger will be implemented on the Demerger Date.

Relevant Entities

Company A

3. Company A is an Australian resident public company listed on the Australian Securities Exchange (ASX) and the head company of an Australian tax consolidated group for the purposes of Part 3-90 of the ITAA 1997.

4. Company A operates various business activities, including Business Activity X.

5. Company A has on issue fully paid listed ordinary shares (ordinary shares) and interests issued under its various employee share schemes (ESS interests). There are no other ownership interests in Company A on issue.

Company B

6. Company B is a wholly owned subsidiary of Company A.

7. Immediately prior to the demerger, Company B and its wholly owned subsidiaries will own Business Activity X.

Pre-demerger transactions

8. Prior to the demerger, Company A will undertake certain transactions to facilitate the demerger including:

· entering into certain agreements with Company B setting out the respective rights and obligations of each entity with respect to the implementation of the demerger;

· undertaking an internal restructure to ensure that, just after the demerger, Business Activity X will be owned by Company B and Company A's remaining businesses will remain part of Company A;

· establishing stand alone funding arrangements for Company B; and

· settling or forgiving various intercompany loans, receivables, and payables (other than ordinary trading receivables).

The proposed demerger of Company B

9. Company A shareholders will vote on the proposed demerger of Company B.

10. Subject to approval by the requisite majority of Company A shareholders, the demerger of Company B will be undertaken by a capital reduction and court approved scheme of arrangement.

11. On the Demerger Date, Company A will reduce its share capital by a specified amount (the capital reduction amount) which will be applied equally against each ordinary share of Company A on issue as at the Scheme Record Date.

12. Company A will also make a distribution of the difference between the fair value of Company B shares and the capital reduction amount (the dividend component). The fair value of Company B shares as traded on the ASX will be determined by reference to the volume weighted average price over the first five trading days.

13. In accordance with the terms of the scheme of arrangement, the capital reduction amount and the distribution comprising the dividend component will be satisfied by Company A making an in specie distribution to Company A shareholders of one share in Company B for every share they hold in Company A on the Scheme Record Date.

Sale Facility

14. In some cases, Company A shares which Company A shareholders would otherwise receive under the demerger will be transferred instead to a Sale Agent who will sell these shares on the ASX through a Sale Facility. The net proceeds from the sale will then be remitted to the relevant Company A shareholder, free of any brokerage costs or stamp duty.

15. Company A shareholders whose shares will be sold through the Sale Facility are Ineligible Overseas Shareholders.

Accounting for the demerger distribution

16. Company A will account for the transfer of the Company B shares to Company A's shareholders by:

· debiting an amount to its share capital; and

· debiting the balance of the demerger allocation to its retained earnings account.

Reasons for the demerger

17. Company A considers the key advantages of the demerger to be as follows:

a) the creation of two distinct ASX listed companies;

b) allowing increased management focus on the separate companies;

c) enabling each company to pursue its own growth agenda and strategic priorities;

d) enabling each company to allocate its own capital resources; and

e) recognition of the different investment profiles of the two companies and hence the provision of investor choice.

Other matters and assumptions

18. Company B expects to commence trading on the ASX prior to the Demerger Date on a deferred settlement basis.

19. Company A's ESS interests have been issued in accordance with Division 83A of the ITAA 1997 and are interests to which either Subdivision 83A-B and subsections 83A-35(3) to 83A-35(9) or Subdivision 83A-C of the ITAA 1997 applies.

20. Just before the demerger, the value of Company A's ESS interests will represent less than 3% of the total value of ownership interests in Company A.

21. Company A's share capital account is not tainted as defined in Division 197 of the ITAA 1997.

22. Company A will not make an election under subsection 44(2) of the ITAA 1936 that subsections 44(3) and 44(4) of the ITAA 1936 will not apply to the dividend component of the demerger distribution.

23. Just after the demerger, at least 50% of the market value of capital gains tax (CGT) assets owned by Company B or its subsidiaries will be used directly or indirectly in one or more businesses carried on by Company B or any of its subsidiaries.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 6(1),

Income Tax Assessment Act 1936 Subsection 44(1),

Income Tax Assessment Act 1936 Subsection 44(2),

Income Tax Assessment Act 1936 Subsection 44(3),

Income Tax Assessment Act 1936 Subsection 44(4),

Income Tax Assessment Act 1936 Section 45,

Income Tax Assessment Act 1936 Paragraph 45(1)(a),

Income Tax Assessment Act 1936 Paragraph 45(1)(b),

Income Tax Assessment Act 1936 Section 45A,

Income Tax Assessment Act 1936 Subsection 45A(1),

Income Tax Assessment Act 1936 Subsection 45A(2),

Income Tax Assessment Act 1936 Subsection 45A(3),

Income Tax Assessment Act 1936 Section 45B,

Income Tax Assessment Act 1936 Subsection 45B(1),

Income Tax Assessment Act 1936 Subsection 45B(2),

Income Tax Assessment Act 1936 Paragraph 45B(2)(a),

Income Tax Assessment Act 1936 Paragraph 45B(2)(b),

Income Tax Assessment Act 1936 Paragraph 45B(2)(c),

Income Tax Assessment Act 1936 Subsection 45B(3),

Income Tax Assessment Act 1936 Paragraph 45B(3)(a),

Income Tax Assessment Act 1936 Paragraph 45B(3)(b),

Income Tax Assessment Act 1936 Subsection 45B(4),

Income Tax Assessment Act 1936 Paragraph 45B(4)(a),

Income Tax Assessment Act 1936 Subsection 45B(5),

Income Tax Assessment Act 1936 Subsection 45B(8),

Income Tax Assessment Act 1936 Subsection 45B(9),

Income Tax Assessment Act 1936 Subsection 45B(10),

Income Tax Assessment Act 1936 Section 45BA,

Income Tax Assessment Act 1936 Subsection 45BA(1),

Income Tax Assessment Act 1936 Section 45C,

Income Tax Assessment Act 1936 Subsection 45C(1),

Income Tax Assessment Act 1936 Subsection 45C(2),

Income Tax Assessment Act 1936 Subsection 45D(1),

Income Tax Assessment Act 1936 Subsection 45D(1A),

Income Tax Assessment Act 1997 Division 83A,

Income Tax Assessment Act 1997 Section 104-175,

Income Tax Assessment Act 1997 Division 125,

Income Tax Assessment Act 1997 Subsection 125-55(1),

Income Tax Assessment Act 1997 Subdivision 125-C,

Income Tax Assessment Act 1997 Section 125-60,

Income Tax Assessment Act 1997 Subsection 125-60(1),

Income Tax Assessment Act 1997 Section 125-65,

Income Tax Assessment Act 1997 Subsection 125-65(1),

Income Tax Assessment Act 1997 Subsection 125-65(3),

Income Tax Assessment Act 1997 Subsection 125-65(4),

Income Tax Assessment Act 1997 Subsection 125-65(6),

Income Tax Assessment Act 1997 Section 125-70,

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

Income Tax Assessment Act 1997 Subparagraph 125-70(1)(b)(i),

Income Tax Assessment Act 1997 Subparagraph 125-70(1)(c)(i),

Income Tax Assessment Act 1997 Subparagraph 125-70(1)(e)(i),

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

Income Tax Assessment Act 1997 Subsection 125-70(2),

Income Tax Assessment Act 1997 Subsection 125-70(3),

Income Tax Assessment Act 1997 Subsection 125-70(4),

Income Tax Assessment Act 1997 Subsection 125-70(5),

Income Tax Assessment Act 1997 Subsection 125-70(6),

Income Tax Assessment Act 1997 Subsection 125-70(7),

Income Tax Assessment Act 1997 Section 125-75,

Income Tax Assessment Act 1997 Subsection 125-75(1),

Income Tax Assessment Act 1997 Subsection 125-75(2),

Income Tax Assessment Act 1997 Section 125-80,

Income Tax Assessment Act 1997 Section 125-155,

Income Tax Assessment Act 1997 Section 125-160,

Income Tax Assessment Act 1997 Subdivision 126-B,

Income Tax Assessment Act 1997 Division 197, and

Income Tax Assessment Act 1997 Subsection 995-1(1).

Reasons for decision

Question 1

Summary

As a consequence of section 125-155 of the ITAA 1997, Company A will disregard any capital gain that arises from CGT event A1, CGT event C2, CGT event C3 or CGT event K6 happening as a result of the proposed distribution of its shares in Company B to Company A shareholders.

Detailed reasoning

Subdivision 125-C of the ITAA 1997 allows members of a demerger group to disregard certain capital gains and capital losses that arise as a result of a demerger. Section 125-155 of the ITAA 1997 provides that any capital gain or capital loss a demerging entity makes from CGT event A1, CGT event C2, CGT event C3 or CGT event K6 happening to its ownership interests in a demerged entity under a demerger is disregarded.

Company A will disregard a capital gain arising from CGT event A1, CGT event C2, CGT event C3 or CGT event K6 happening when it transfers the shares in Company B to Company A shareholders if it is a demerging entity, and the capital gain is from a CGT event happening to its ownership interests in a demerged entity under a demerger.

Is Company A a demerging entity?

An entity is a 'demerging entity' if it is a member of a demerger group just before the relevant CGT event which occurs as a result of a demerger and any one, or any combination of, the following ownership interest changes specified in subsection 125-70(7) of the ITAA 1997 occurs:

· the entity (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,

· 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, or

· the demerged entity (i.e. the exiting group member) issues new ownership interests in itself such that the owners of original interests in the head entity own at least 80% of the total ownership interests in the demerged entity.

Therefore, to determine whether Company A is a demerging entity, it is necessary to identify the demerger group and, in particular, the head entity of the demerger group.

Demerger group

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

Head entity

Company A will be the head entity of a demerger group because at the time of the restructure:

· no other member of the demerger group will own any ownership interests in Company A (subsection 125-65(3) of the ITAA 1997); and

· no other company or trust will be 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).

Demerger subsidiary

Company B will be a demerger subsidiary of Company A at the time of the restructure because, at that time, Company A owns ownership interests in Company B that carry more than 20% of the rights to any distribution of income or capital, and the right to exercise more than 20% of the voting power of Company B (subsection 125-65(6) of the ITAA 1997).

Company A is a demerging entity

Company A will be a demerging entity under the scheme as it is the head entity of the Company A demerger group and it will dispose of 100% of its shares in Company B (a demerger subsidiary of the Company A demerger group) to its shareholders.

Are the Company B shares that will be disposed of by Company A ownership interests in a demerged entity?

The ordinary shares in Company B are ownership interests within the meaning of that term in subsection 125-60(1) of the ITAA 1997.

Company B will be a demerged entity at the time of the restructure within the meaning of that term in subsection 125-70(6) of the ITAA 1997. This is because it will be a former member of the Company A demerger group and the Company B shares will be acquired by the shareholders of Company A (as head entity of that group).

Will the disposal of the Company B shares occur under a demerger?

A demerger (within the meaning of section 125-70 of the ITAA 1997) will happen to the Company A demerger group under the scheme because:

· there will be a restructuring (paragraph 125-70(1)(a) of the ITAA 1997), under which at least 80% of the shares that Company A owns in Company B will be transferred to Company A shareholders (subparagraph 125-70(1)(b)(i) of the ITAA 1997);

· under the restructuring, CGT event G1 will happen to ordinary shares owned by Company A shareholders who will receive nothing other than new shares in Company B (subparagraph 125-70(1)(c)(i) of the ITAA 1997);

· Company A shareholders will acquire new shares in Company B under the restructure only because they are shareholders of Company A (paragraph 125-70(1)(e)(i) of the ITAA 1997);

· at the time of the restructure, neither the shares in Company A nor the new shares in Company B will be interests in a trust that is a superannuation fund (paragraph 125-70(1)(g) of the ITAA 1997);

· each Company A shareholder will acquire the same proportion of shares in Company B as the shares they owned in Company A just before the demerger, and just after the demerger each Company A shareholder will have the same proportionate total market value of Company A shares and Company B shares as they owned in Company A just before the demerger (subsections 125-70(2) and 125-70(3) of the ITAA 1997);

· the restructure will not constitute an off-market share buy-back for the purposes of Division 16K of Part III of the ITAA 1936 (subsection 125-70(4) of the ITAA 1997); and

· no other roll-over will be available outside of Division 125 of the ITAA 1997 for CGT event G1 that will happen to ordinary shares owned by Company A shareholders (subsection125-70(5) of the ITAA 1997).

Can certain ownership interests be disregarded?

Section 125-75 of the ITAA 1997 provides that certain ownership interests may be disregarded for the purposes of determining whether the requirements of subsection 125-70(2) of the ITAA 1997 have been met. At the time of the restructure, in addition to ordinary shares, the ownership interests in Company A will include a number of options, rights, performance shares and retention shares issued under various Company A employee share schemes (ESS interests).

The ESS interests are ownership interests for the purposes of subsection 125-60(1) of the ITAA 1997. However, these ESS interests have been disregarded in working out whether the requirements under subsection 125-70(2) of the ITAA 1997 are met, because they are ownership interests as described in subsection 125-75(2) of the ITAA 1997 and, it has been assumed for the purposes of this Ruling that, just before the demerger, the value of these ownership interests will represent less than 3% of the total ownership interests on issue in Company A (subsection 125-75(1) of the ITAA 1997).

Conclusion

As the requirements in section 125-70 of the ITAA 1997 are met, section 125-155 of the ITAA 1997 will operate such that Company A will disregard any capital gain that arises from CGT event A1, CGT event C2, CGT event C3 or CGT event K6 happening as a result of the proposed distribution of its shares in Company B to Company A shareholders.

Question 2

Summary

As a consequence of section 125-160 of the ITAA 1997, CGT event J1 will not happen to any member of the Company A demerger group upon the proposed distribution of Company A's shares in Company B to Company A shareholders.

Detailed reasoning

CGT event J1 happens under section 104-175 of the ITAA 1997 if roll-over relief under Subdivision 126-B of the ITAA 1997 was chosen in relation to an earlier transfer of a CGT asset and the recipient company subsequently ceased to be a 100% subsidiary of the company that was the ultimate holding company of the group at the time of the roll-over.

However, section 125-160 of the ITAA 1997 provides that CGT event J1 does not happen to a demerged entity or a member of a demerger group under a demerger.

As determined in response to Question 1, under this scheme:

(i) the demerger group includes Company A as head entity and Company B as a demerger subsidiary (section 125-65 of the ITAA 1997);

(ii) Company B will be a demerged entity (as defined in subsection 125-70(6) of the ITAA 1997) at the time of the restructure; and

(iii) a demerger (within the meaning of section 125-70 of the ITAA 1997) will happen to the Company A demerger group.

Accordingly, CGT event J1 will not happen to Company B or any member of the Company A demerger group upon the distribution of Company A's shares in Company B to Company A shareholders.

Question 3

Summary

Company A will not be required under subsection 45D(1A) of the ITAA 1936 to give a copy of a notice to its shareholders as a consequence of the proposed distribution of Company A's shares in Company B to Company A shareholders.

Detailed reasoning

Subsection 45D(1A) of the ITAA 1936 provides that a company must, where the Commissioner has made a determination under section 45A or 45B of the ITAA 1936, give a copy of this notice to the advantaged shareholder referred to in section 45A or the relevant taxpayer referred to in section 45B.

Section 45A of the ITAA 1936

Section 45A of the ITAA 1936 applies in certain circumstances where a company streams capital benefits and the payment of dividends to shareholders in such a way that capital benefits are provided to shareholders who would derive a greater benefit from the capital benefit than other shareholders, with it being reasonable to assume that the other shareholders have received, or will receive, dividends.

Subsection 45A(1) of the ITAA 1936 states:

This section applies in respect of a company that, whether in the same year of income or in different years of income, streams the provision of capital benefits and the payment of dividends to its shareholders in such a way that:

(a) the capital benefits are, or apart from this section would be, received by shareholders (the advantaged shareholders) who would, in the year of income in which the capital benefits are provided, derive a greater benefit from the capital benefits than other shareholders; and

(b) it is reasonable to assume that the other shareholders (the disadvantaged shareholders) have received, or will receive, dividends.

The Commissioner may make a determination under subsection 45A(2) of the ITAA 1936 that section 45C of the ITAA 1936 applies. The effect of such a determination is that the capital benefit is taken to be an unfranked dividend.

A capital benefit is defined in subsection 45A(3) of the ITAA 1936 to include the provision to shareholders of shares in the company, the distribution of share capital or share premium or the doing of something to increase the value of a share held by the person.

Under the proposed demerger, part of the distribution provided by Company A to its shareholders will be sourced from its share capital account and will therefore constitute the provision of a capital benefit. However, the capital benefit will be provided to all of Company A shareholders in the same proportion as their shareholdings. Company A will not discriminate between shareholder types in the implementation of the demerger and the transaction will take one form for all shareholders. Company A shareholders will receive one Company B share for every Company A share they hold on the Scheme Record Date in satisfaction of the capital reduction amount and the distribution comprising the dividend component.

Based on the available evidence, there is nothing in the arrangement to indicate a "streaming" of capital benefits to some shareholders and dividends to other shareholders.

Accordingly, the Commissioner will not make a determination under subsection 45A(2) of the ITAA 1936 that section 45C of the ITAA 1936 applies to the proposed demerger of Company B.

Section 45B of the ITAA 1936

The purpose of section 45B of the ITAA 1936 is to ensure that relevant amounts distributed to shareholders of a company are treated as dividends for tax purposes if:

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

· certain payments, allocations and distributions are made in substitution for dividends (subsection 45B(1) of the ITAA 1936).

Subsection 45B(2) of the ITAA 1936 sets out the conditions that must be met in order for section 45B to apply. Relevantly this section applies if:

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

b) 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

c) 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).

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

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

Each of the conditions set out in subsection 45B(2) of the ITAA 1936 is considered below.

Scheme

A 'scheme' for the purposes of section 45B of the ITAA 1936 is taken to have the same meaning as provided in subsection 995-1(1) of the ITAA 1997 (subsection 45B(10) of the ITAA 1936). That definition is widely drawn and includes any arrangement or any scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise.

The demerger of Company B by way of a scheme of arrangement and capital reduction will constitute a scheme for the purposes of paragraph 45B(2)(a) of the ITAA 1936.

Demerger benefit and capital benefit

The phrase 'provided with a demerger benefit' is defined in subsection 45B(4) of the ITAA 1936 to include:

· the provision by a company to a person of an ownership interest in that or another company; or

· the doing of something in relation to an ownership interest owned by the person that has the effect of increasing the value of an ownership interest (which may or may not be the same ownership interest) owned by the person.

A 'capital benefit' is defined in subsection 45B(5) of the ITAA 1936. It states that a person is provided with a capital benefit if:

· an ownership interest in a company is issued to the person;

· there is a distribution to the person of share capital or share premium; or

· something is done in relation to an ownership interest that has the effect of increasing the value of the ownership interest (which may or may not be the same interest) that is held by the person.

The provision of shares in Company B by Company A to its shareholders will for the purposes of section 45B of the ITAA 1936 constitute the provision of a demerger benefit under paragraph 45B(4)(a).

Tax benefit

The meaning of the phrase 'obtaining a tax benefit' is defined in subsection 45B(9) of the ITAA 1936 as:

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.

Company A shareholders will obtain a tax benefit within the meaning of subsection 45B(9) of the ITAA 1936 due to the dividend exemptions and CGT roll-over relief provided for under the demergers provisions. The objective of the demerger provisions is to remove the tax impediments to genuine restructures designed to achieve business efficiencies. To the extent that a demerger allocation consists of a capital component and demerger roll-over relief under subsection 125-55(1) of the ITAA 1997 is chosen, any capital gain or loss is disregarded (section 125-80 of the ITAA 1997) at the time of the demerger. Additionally, any dividend component will constitute non-assessable non-exempt income due to the operation of subsections 44(3) and 44(4) of the ITAA 1936. Consequently, Company A shareholders that are recipients of a demerger benefit as a result of the proposed demerger will derive a tax benefit as defined in subsection 45B(9) of the ITAA 1936.

A more than incidental purpose of enabling a taxpayer to obtain a tax benefit

For the purposes of paragraph 45B(2)(c) of the ITAA 1936, the Commissioner is required to consider the relevant circumstances set out under subsection 45B(8) of the ITAA 1936 to determine whether any part of the scheme would be entered into for a purpose, other than an incidental purpose, of enabling a relevant taxpayer to obtain a tax benefit.

The test of purpose is an objective one. The question is whether, objectively, it would be concluded that a person who entered into or carried out the scheme did so for the purpose of obtaining a tax benefit for the relevant taxpayer. The purpose does not have to be the most influential or prevailing, but it must be more than an incidental purpose.

Based on the available evidence, it is considered that Company A's proposed demerger of Company B is being undertaken for substantive business reasons. The proposed demerger will improve management focus and will allow Company A and Company B to better focus on their individual core competencies and strategies, and enhance the ability for Company B to pursue, and to source capital to fund, future opportunities. Further, it is considered that the capital and profit elements of the proposed demerger allocation are a reasonable reflection of the circumstances of the demerger.

Therefore, while the conditions of paragraphs 45B(2)(a) and 45B(2)(b) of the ITAA 1936 are met, having regard to the relevant circumstances set out in subsection 45B(8), it is concluded that the requisite purpose of enabling Company A shareholders to obtain a tax benefit (by way of a demerger benefit or a capital benefit) is not present. Accordingly, the Commissioner will not make a determination under paragraph 45B(3)(a) or 45B(3)(b) of the ITAA 1936 that either section 45BA or 45C of the ITAA 1995 applies to the scheme to which this Ruling relates.

Conclusion

As the Commissioner will not make a determination under section 45A or section 45B of the ITAA 1936 in respect of the scheme to which this Ruling relates, the Commissioner will not give Company A a notice pursuant to subsection 45D(1) of the ITAA 1936. Accordingly, there will be no requirement for Company A to provide a copy of the notice under subsection 45D(1A) of the ITAA 1936 to its shareholders.

Question 4

Summary

The Commissioner will not make a determination that section 45 of the ITAA 1936 applies to the whole, or part, of the demerger benefit provided to Company A shareholders.

Detailed reasoning

Section 45 of the ITAA 1936 applies where a company streams the provision of shares and the payment of minimally franked dividends to its shareholders in such a way that the shares are received by some shareholders and minimally franked dividends are received by other shareholders. Minimally franked dividends are dividends which are franked to less than 10%.

If section 45 of the ITAA 1936 applies, the value of the share when it is provided to the shareholder is deemed to be an unfranked dividend paid out of the company's profits at that time. Such unfranked dividends are assessable income of the recipient shareholder to the extent provided by subsection 44(1) of the ITAA 1936 or are subject to dividend withholding tax under section 128B of the ITAA 1936.

'Shareholder' is defined in subsection 6(1) of the ITAA 1936 to include a member or stockholder. In Patcorp Investments Ltd v. FC of T 76 ATC 4225; (1976) 6 ATR 420, the High Court held that a shareholder of a company is a person whose name is entered in the register of members as the holder of shares in it and also includes a person who is entitled as against the company to be registered and whom the company is absolutely entitled to register as a member (that is, a person to whom a transfer of shares in the company has been approved for registration by its directors but whose name has not, at the relevant time, actually been entered in the register).

Under the proposed demerger, all shareholders, being all persons whose name is entered in the register of members as the holder of shares in Company A and also all persons who are entitled as against Company A to be registered and whom Company A is absolutely entitled to register as a member, will receive identical benefits being a proportionate number of shares in Company B under the demerger. Thus, the requirement of paragraph 45(1)(a) of the ITAA 1936 that benefits be streamed to shareholders based on their capacity to benefit, is not satisfied.

Having failed the first requirement for section 45 of the ITAA 1936 to be applicable, it is not necessary to consider the second requirement contained in paragraph 45(1)(b) of the ITAA 1936.

Accordingly, the Commissioner will not make a determination that section 45 of the ITAA 1936 applies to the whole, or part, of the demerger benefit provided to Company A's shareholders.