Edited version of private advice

Authorisation Number: 1012653524797

Ruling

Subject: Proposed demerger of Entity D by Entity B

Question 1

Will capital gains tax (CGT) event G1 (section 104-135 of the Income Tax Assessment Act 1997 (ITAA 1997)) happen in relation to each share in Entity B held by Entity C at the time of the capital reduction?

Answer

Yes

Question 2

Will the Commissioner of Taxation ("the Commissioner") confirm that Entity C will be eligible to choose demerger roll-over relief under section 125-55 of the ITAA 1997 in respect of its shares in Entity B?

Answer

Yes

Question 3

Will any capital gain or capital loss that Entity B makes in respect of the disposal of its ownership interests in Entity D under the proposed demerger scheme be disregarded pursuant to section 125-155 of the ITAA 1997?

Answer

Yes

Question 4

Will the Commissioner confirm that if Entity C chooses demerger roll-over relief in respect of its Entity B shares, Entity C can disregard any capital gain made in respect of CGT event G1 happening to its shares in Entity B pursuant to subsection 125-80(1) of the ITAA 1997?

Answer

Yes

Question 5

What will be the first element of the cost base and the reduced cost base of the shares in Entity D under subsection 125-80(2) of the ITAA 1997 where Entity C chooses demerger roll-over relief pursuant to subsection 125-55(1) of the ITAA 1997?

Answer

Pursuant to subsection 125-80(2) of the ITAA 1997 Entity C's CGT cost base for its shares in Entity B will be apportioned between its original Entity B shares and its new Entity D shares.

Question 6

Will the Commissioner confirm that for the purposes of Division 115 of the ITAA 1997, if Entity C chooses demerger roll-over relief it will be taken to have acquired the Entity D shares it receives under the restructure on the same date as it acquired its corresponding shares in Entity B pursuant to item 2 of the table at subsection 115-30(1) of the ITAA 1997?

Answer

Yes

Question 7

To the extent the Commissioner determines that any portion of the demerger distribution to Entity C constitutes a dividend, will the amount that is debited to one or more accounts other than the share capital account be a demerger dividend as defined in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936)? If so, will subsections 44(3) and 44(4) of the ITAA 1936 apply such that the dividend is not included in the assessable income of Entity C under subsection 44(1) of the ITAA 1936?

Answer

Yes

Question 8

Will the Commissioner determine that section 45 or section 45A of the ITAA 1936 applies in respect of the whole or any part of the demerger benefit or capital benefit provided to Entity C in relation to the proposed demerger scheme?

Answer

No

Question 9

Will the Commissioner make a determination under paragraph 45B(3)(a) or 45(3)(b) of the ITAA 1936 that section 45BA or 45C of the ITAA 1936 applies in respect of the whole, or part, of any demerger benefit or capital benefit provided to Entity C in relation to the proposed demerger scheme?

Answer

No

This ruling applies for the following period:

1 July 2013 to 30 June 2015

The scheme commences on:

The scheme is in contemplation

Relevant facts and circumstances

Overview

The scheme that is the subject of this ruling involves the separation by Entity B of Entity D by way of a demerger.

Entity B was incorporated post-CGT and is the head company of a consolidated group for tax purposes.

The shares on issue in Entity B are held by Australian taxation residents.

All of the shares on issue in Entity B and Entity D are ordinary shares carrying the same rights and entitlements and were acquired post-CGT.

Demerger implementation steps

Under the proposed arrangement, Entity B will dispose of 100% of its shares in Entity D to Entity B shareholders in the same proportion to their shareholding in Entity B.

Under the restructure the Entity B shareholders receive only ordinary shares in Entity D with no receipt of any other form of property or cash in the arrangement.

Entity B will transfer ownership of all of the ordinary shares it holds in its wholly owned subsidiary, Entity D, to its shareholders in the same proportions to their shareholding in Entity B. Just after the demerger, the Entity B shareholders will have the same proportionate total market value of combined ownership interest in Entity B and Entity D as they had in Entity B just before the demerger.

The demerger dividend will be the excess of the market value of Entity D over the capital reduction amount.

Reasons for the demerger

Reasons for the proposed demerger include:

• Appoint independent directors with relevant industry experience to allow Entity D to focus on future development and growth;

• Attract equity investors to raise capital for expansion plans;

• Separate the distinct businesses to enable increased efficiency and overall improvements; and

• Maximise enterprise value.

Other matters

• The share capital account of Entity D is not tainted within the meaning of section 197-50 of the ITAA 1997.

• Entity B confirms that CGT assets representing at least 50% of the market value of all the CGT assets of Entity D will be used directly or indirectly in the business carried on by Entity D just after the demerger.

• Entity B confirms that no election will be made by Entity B under subsection 44(2) of the ITAA 1936 to not apply subsections 44(3) and 44(4) of the ITAA 1936.

• Shareholders of Entity B will, if entitled, choose CGT roll-over relief under section 125-55 of the ITAA 1997.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 6(1).

Income Tax Assessment Act 1936 Section 44.

Income Tax Assessment Act 1936 Section 45A.

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 Subsection 45B(3).

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

Income Tax Assessment Act 1936 Section 45BA.

Income Tax Assessment Act 1936 Section 45C.

Income Tax Assessment Act 1936 Section 177A.

Income Tax Assessment Act 1936 Section 177D.

Income Tax Assessment Act 1936 Section 177F.

Income Tax Assessment Act 1997 Section 104-135.

Income Tax Assessment Act 1997 Division 115.

Income Tax Assessment Act 1997 Division 125.

Income Tax Assessment Act 1997 Section 125-55.

Income Tax Assessment Act 1997 Section 125-60.

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

Reasons for decision

Question 1

Summary

CGT event G1 (section 104-135 of the ITAA 1997) will happen in relation to each share in Entity B held by Entity C at the time of the capital reduction.

Detailed reasoning

Section 104-135 of the ITAA 1997 provides:

1. CGT event G1 happens if:

(a) A company makes a payment to you in respect of a share you own in the company (except for CGT event A1 or C1 happening in relation to the share); and

(b) Some or all of the payment (the non-assessable part) is not a dividend, or an amount that is taken to be a dividend under section 47 of the ITAA 1936).

The payment can include giving property; see section 103-5.

2. The time of the event is when the company makes the payment.

3. You make a capital gain if the amount of the non-assessable part is more than the share's cost base. If you make a capital gain, the share's cost base and reduced cost base are reduced to nil.

4. However, if the amount of the non-assessable part is not more than the share's cost base, that cast base and it's reduced cost base are reduced by the amount of the non-assessable part.

CGT event G1 will happen in respect of the shares held by Entity C in Entity B to the extent that the distribution of Entity D shares is debited to Entity B's share capital account at the time Entity B makes the distribution of Entity D shares.

Since the return of capital is not a dividend (or taken to be a dividend under section 47 of the ITAA 1936) and does not result in the disposal or ending of the original Entity B shares, neither CGT event A1 or C2 will be triggered.

Therefore, Entity C will make a capital gain under CGT event G1 if the proportion of the capital reduction amount received by Entity C exceeds the cost base of its shares. The capital gain is equal to the amount of the excess (subsection 104-135(3) of ITAA 1997).

Question 2

Summary

Entity C will be eligible to choose demerger roll-over relief pursuant to section 125-55 of the ITAA 1997 in respect of its shares in Entity B.

Detailed reasoning

In order for the demerger 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 Entity B as the head entity and includes Entity D as a demerger subsidiary.

Entity B will be the head entity because:

• there will be no other company or trust capable of being a head entity of a demerger group of which Entity B could be a demerger subsidiary (subsection 125-65(4) of the ITAA 1997).

Entity D will be a demerger subsidiary of Entity B because Entity B will own ownership interests (ordinary shares) in Entity D 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 Entity D (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 Entity B demerger group because:

• there will be a restructure (paragraph 125-70(1)(a) of the ITAA 1997), and Entity B will dispose of at least 80% of its Entity D shares to the Entity B shareholders (subparagraph 125-70(1)(b)(i) of the ITAA 1997);

• under the restructure, CGT event G1 will happen to the Entity B shares and Entity B shareholders will acquire new shares in Entity D and nothing else (subparagraph 125-70(1)(c)(i) of the ITAA 1997);

• Entity D shares will be acquired by Entity B shareholders on the basis of their ownership of shares in Entity B (paragraph 125-70(1)(d) and subparagraph 125-70(1)(e)(i) of the ITAA 1997);  

• just before the restructuring, all of the shares in Entity B will be owned by Australian residents (paragraph 125-70(1)(f) of the ITAA 1997);

• neither Entity B nor Entity D are superannuation funds (paragraph125-70(1)(g) of the ITAA 1997);

• Entity B shareholders will acquire Entity D shares in the same proportion as they own Entity B shares just before the demerger (paragraph 125-70(2)(a) of the ITAA 1997);

• each of the Entity B shareholders will own shares in Entity B and Entity D that (just after the demerger) represent the same proportionate total market value as their Entity B shares represented (just before the demerger) (paragraph 125-70(2)(b) of the ITAA 1997);

• 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

• there will be no roll-over available under another provision for any CGT events that happen to the Entity B shares under the restructure (subsection 125-70(5) of the ITAA 1997).  

Entity D is the demerged entity 

Relevantly, 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, Entity D is the demerged entity since the Entity B shareholders receive shares in Entity D under a demerger. 

Entity B is the demerging entity

Relevantly, 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, Entity B is the demerging entity since it disposes of 100% of its shares in Entity D to the Entity B shareholders under a demerger.

Can Entity C choose demerger roll-over?

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

• a shareholder owns a share in a company - Entity C satisfies this requirement;

• 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 (Entity B shares) and a new or replacement interest is acquired in the demerged entity - this requirement will be satisfied as CGT event G1 happens to the Entity B shares when Entity C receives Entity D shares under the demerger.

Therefore Entity C will be eligible to choose roll-over under subsection 125-55(1) of the ITAA 1997.

Question 3

Summary

Any capital gain or capital loss that Entity B makes in respect of the disposal of its ownership interests in Entity D under the proposed demerger scheme will be disregarded pursuant to section 125-155 of the ITAA 1997.

Detailed reasoning

Section 125-155 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.

On the basis that all of the requirements for a demerger have been satisfied (as outlined in Question 2) Entity B will not be assessable on any gain or loss it makes from the disposal of its interest in Entity D to Entity B shareholders pursuant to section 125-155 of the ITAA 1997.

In this respect, subsection 125-70(7) of the ITAA 1997 provides that Entity B will be the demerging entity since it will dispose of 100% of its interest in Entity D to the Entity B shareholders. Under subsection 125-70(6) of the ITAA 1997 the entity which will be disposed of by Entity B (i.e. Entity D) will be the demerged entity as ownership interests in Entity D will be acquired by Entity B shareholders. CGT event A1 happens when Entity B disposes of its Entity D shares to Entity B shareholders (per section 104-10 of the ITAA 1997) under the demerger.

Accordingly, pursuant to section 125-155 of the ITAA 1997, to the extent that the market value of the shares in Entity D is greater than Entity B's cost base in the Entity D shares the capital gain otherwise arising to Entity B will be disregarded pursuant to section 125-155 of the ITAA 1997. Likewise, any loss arising from the market value being less than Entity B's reduced cost base in the Entity D shares will be similarly disregarded.

Question 4

Summary

If Entity C chooses demerger roll-over relief in respect of its Entity B shares, any capital gain made in respect of CGT event G1 happening to its shares in Entity B can be disregarded pursuant to subsection 125-80(1) of the ITAA 1997.

Detailed reasoning

Since all the requirements in section 125-55 of the ITAA 1997 will be satisfied, Entity C can choose demerger roll-over relief.

Subsection 125-80(1) of the ITAA 1997 provides that:

If you choose the roll-over, a capital gain or capital loss you make from a CGT event happening under the demerger to an original interest you own is disregarded.

If Entity C chooses demerger roll-over relief in respect of its Entity B shares any capital gain made in respect of CGT event G1 happening to its shares in Entity B under the demerger scheme can be disregarded.

Question 5

Summary

Entity C CGT cost base for its shares in Entity B will be apportioned between its original Entity B shares and its new Entity D shares.

Detailed reasoning

Since all the requirements in section 125-55 of the ITAA 1997 will be satisfied, Entity C can choose demerger roll-over relief.

Subsection 125-80(2) of the ITAA 1997 provides that:

If you choose the roll-over, the first element of the cost base and reduced cost base of

(a) Each new interest that you are not taken to have acquired before 20 September 1985; and

(b) If not all of your original interests ended under the demerger - each of your remaining original interest that you acquired on or after 20 September 1985;

is such proportion of the sum of the cost base of all your original interests that you acquired on or after 20 September 1985 (worked out just before the demerger) as is reasonable having regard to the matters specified in subsection (3).

Subsection 125-80(3) of the ITAA 1997 provides that:

The matters are:

(c) The market values of your remaining original interest just after the demerger, or an anticipated reasonable approximation of those market values; and

(d) The market values of your new interests just after the demerger, or an anticipated reasonable approximation of those market values.

Entity C acquired its interests in Entity B post 19 September 1985, thus its shares in Entity B are post-CGT.

If Entity C chooses demerger roll-over for its Entity B shares, the first element of the cost base and reduced cost base of each Entity B share and each corresponding Entity D share they acquire under the demerger, will be the sum of its original cost bases (just before the demerger) of the Entity B shares, apportioned over those Entity B and Entity D shares on a reasonable basis having regard to the market values (just after the demerger) of the Entity B shares and Entity D shares, or a reasonable approximation of those market values (subsections 125-80(2) and (3) of the ITAA 1997).

Question 6

Summary

Entity C will be taken to have acquired the new Entity D shares that it receives under the demerger on the date it acquired its corresponding Entity B shares.

Detailed reasoning

For a capital gain to be reduced by the CGT discount, one of the conditions that must be satisfied is that the capital gain relates to an asset that was owned for at least 12 months (subsection 115-25(1) of the ITAA 1997).

For the purposes of this 12 month ownership test, item 2 of the table in subsection 115-30(1) of the ITAA 1997 treats a replacement asset, acquired under a replacement asset roll-over, as having been acquired at the time the original asset was acquired. The table in section 112-115 of the ITAA 1997 confirms that demergers under Division 125 of the ITAA 1997 are a form of this roll-over (at item 14C).

Consequently, for the purposes of accessing the CGT discount, Entity C will be taken to have acquired the new Entity D shares that it receives under the demerger on the date it acquired its corresponding Entity B shares. This will be the case whether or not Entity C chooses demerger roll-over under section 125-55 of the ITAA 1997.

Question 7

Summary

The amount that is debited to one or more accounts other than the share capital account will be a demerger dividend that is neither assessable income nor exempt income pursuant to subsections 44(3) and 44(4) of the ITAA 1936. Therefore the dividend is not included in the assessable income of Entity C under subsection 44(1) of the ITAA 1936?

Detailed reasoning

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.  

Capital reduction amount

The definition of a dividend in subsection 6(1) of the ITAA 1936 excludes amounts debited against an amount standing to the credit of the share capital account of the company (paragraph (d) of the subsection 6(1) of the ITAA 1936 definition of a dividend). As the capital reduction amount will be debited against an amount standing to the credit of the share capital account (as that term is defined in section 6D of the ITAA 1936) of Entity B it will not be a dividend, as defined in subsection 6(1) of the ITAA 1936.

Therefore, the capital reduction amount will not be assessable income of Entity C for the purposes of subsection 44(1) of the ITAA 1936.

Dividend

The definition of a dividend includes any amount distributed or credited by a company to any of its shareholders. Therefore, the in specie distribution of the Entity B shares will, in part, constitute a dividend of the Entity B shareholders. The total amount of the dividend will be the market value of the Entity D shares at the time of the demerger excluding the amount debited to the share capital account of Entity B.

In general, a dividend satisfied by an in specie distribution of property (such as shares in a subsidiary) will be a dividend paid out of profits derived 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 (see paragraph 8 of Taxation Ruling TR 2003/8).

However, a demerger dividend is taken not to have been paid out of profits and is neither an assessable income nor an exempt income amount (subsections 44(3) and (4) of the ITAA 1936) 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.

In the present circumstances, each of these conditions will be satisfied. Therefore, the dividend paid to Entity C by Entity B under the proposed demerger will be neither assessable income nor exempt income as a result of the application of subsections 44(3) to (5) of the ITAA 1936. Nevertheless, to the extent that section 45BA of the ITAA 1936 applies, the demerger dividend will be assessable income of Entity C.

Question 8

Summary

Section 45 of the ITAA 1936 has no application and the Commissioner will not make a determination under subsection 45A(2) of the ITAA 1936 that section 45C of the ITAA 1936 applies in relation to the proposed demerger scheme.

Detailed reasoning

Section 45 of the ITAA 1936

Section 45 of the ITAA 1936 applies where there is a provision of shares and the payment of minimally franked dividends in such a way that:

(a) the shares are received by some shareholders but not all shareholders; and

(b) some or all of the shareholders who do not receive the shares receive or will receive minimally franked dividends.

A minimally franked dividend is defined in subsection 45(3) of the ITAA 1936 to include a dividend which is not franked, or franked to less than 10%.

The demerger will result in all shareholders of Entity B receiving a proportionate number of shares in Entity D. Accordingly, paragraph 45(1)(a) of the ITAA 1936 will not be satisfied and section 45 of the ITAA 1936 will have no application to the demerger of Entity D by Entity B.

Section 45A of the ITAA 1936

The Commissioner may make a determination under subsection 45A(2) of the ITAA 1936 that section 45C of the ITAA 1936 applies in circumstances where capital benefits are streamed to certain shareholders who derive a greater benefit from the receipt of capital (the advantaged shareholders) and it is reasonable to assume that the other shareholders (the disadvantaged shareholders) have received or would receive dividends.

For the purposes of section 45A of the ITAA 1936, under the scheme which is the subject of this ruling, Entity B will provide Entity B shareholders with a capital benefit as defined in subsection 45A(3) of the ITAA 1936. However there is nothing in the facts of the scheme which indicates that there is a streaming of capital benefits to some shareholders and dividends to other shareholders (as required by subsection 45A(1) of the ITAA 1936). In the present circumstances the demerger will result in all shareholders of Entity B receiving a proportionate number of shares in Entity D.

Therefore the Commissioner will not make a determination under subsection 45A(2) of the ITAA 1936 that section 45C of the ITAA 1936 applies in relation to the proposed demerger scheme.

Question 9

Summary

The Commissioner will not make a determination under paragraph 45B(3)(a) or 45B(3)(b) of the ITAA 1936 that section 45BA or section 45C of the ITAA 1936 applies in relation to the whole, or part, of any demerger benefit or capital benefit provided to Entity C.

Detailed reasoning

Subsection 45B(1) of the ITAA 1936 provides that the purpose of section 45B is to ensure that relevant amounts are treated as dividends for tax purposes if the capital and profit components of a demerger allocation do not reflect the circumstances of the demerger, or certain payments, allocations or distributions are made in substitution for dividends.

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:

• 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); and

• 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).

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 in relation to a demerger benefit and section 45C in relation to a capital benefit.

The effect of a determination made under paragraph 45B(3)(a) of the ITAA 1936 is that part 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 part 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 relevant scheme for the purposes of section 45B of the ITAA 1936 is the demerger of Entity D by Entity B.

Demerger benefit and capital benefit

The provision of ownership interests to a shareholder under a demerger constitutes the shareholder being provided with a demerger benefit (subsection 45B(4) of the ITAA 1936). Therefore, under the proposed scheme, the market value of the Entity D shares provided to Entity C constitutes a demerger benefit.

The provision of those Entity D shares also constitutes a capital benefit to the extent it is not a demerger dividend (paragraph 45B(5)(a) and subsection 45B(6) of the ITAA 1936). As such, the market value of the Entity D shares distributed under the demerger less the demerger dividend is a capital benefit provided to Entity C.

Tax benefit

Subsection 45B(9) of the ITAA 1936 provides, inter alia, that a relevant taxpayer 'obtains a tax benefit' if an amount of tax payable by that taxpayer would, apart from the operation of section 45B, be less than the amount that would have been payable if the 'demerger benefit' had been an assessable dividend or the capital benefit had been a dividend.

Entity B acknowledges that if the amount of the demerger benefit was received as an assessable dividend, the assessable income of Entity B shareholders (the relevant taxpayers) and their tax payable would likely be more than any tax payable under the demerger. Therefore, Entity B shareholders will receive a tax benefit as a result of the demerger.

More than incidental purpose

Section 45B of the ITAA 1936 only applies if, having regard to the relevant circumstances of the scheme, it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for a purpose (whether or not the dominant purpose but not including an incidental purpose) of enabling a taxpayer to obtain a tax benefit. In the majority of matters this will be the critical issue determining whether the provision applies or not.

As mentioned above, Entity C, as a shareholder of Entity B, will obtain a tax benefit under the proposed demerger of Entity D. However, whether it constitutes a more than incidental purpose of the scheme is determined objectively with regard to the relevant circumstances listed in subsection 45B(8) of the ITAA 1936.

Accordingly, having regard to the relevant circumstances of the scheme as set out in subsection 45B(8) of the ITAA 1936, it could not be concluded that any of the parties to the scheme entered into or carried out the scheme for a more than incidental purpose of enabling Entity C to obtain a tax benefit.

Conclusion

The Commissioner will not make a determination under paragraph 45B(3)(a) of the ITAA 1936 that section 45BA of the ITAA 1936 applies to the whole, or any part, of the demerger benefit provided to Entity C under the demerger. Nor will the Commissioner make a determination under paragraph 45B(3)(b) that section 45C of the ITAA 1936 applies to the whole, or any part, of the capital benefit provided to Entity C under the demerger.

The rulings in the register have been edited and may not contain all the factual details relevant to each decision. Do not use the register to predict ATO policy or decisions.