Edited version of your written advice

Authorisation Number: 1012786614155

Ruling

Subject: Demerger

Question 1

Does CGT Event G1 happen to the X shareholders in relation to the Capital Reduction Amount?

Answer

Yes.

Question 2

Does the Division 125 of the Income Tax Assessment 1997 (ITAA 1997) demerger roll-over relief apply so it is available for the X shareholders?

Answer

Yes.

Question 3

Is the cost base and reduced cost base of X and Y X $0.Y per share?

Answer

No.

Question 4

Will the part of the demerger allocation that is a dividend be non-assessable non-exempt by virtue of subsections 44(3) and 44(4) of the ITAA 1936?

Answer

No.

Question 5

If the scheme were to go ahead on the basis that X was carrying on a business and the requirements of subsection 44(5) of the ITAA 1936 were met, would the Commissioner make a determination under section 45B of the ITAA 1936 that sections 45BA or 45C of the ITAA 1936 would apply?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 2015

The scheme commences on:

1 July 2014

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

A person and their sibling, another person are Australian resident individuals.

A person owns a number ordinary shares in X, an Australian resident company and another person owns the remaining shares. Together they are referred to as X' shareholders.

They both acquired their shares in X after 19 September 1985.

XX Consolidated Group

X is the head company of an income tax consolidated group of companies.

It has two wholly owned subsidiaries, XX Pty Ltd (XX) and XX Capital Pty Ltd (X).

X, XX and X are collectively referred to as the X Consolidated Group (XCG).

X was incorporated after 1985.

X currently owns some ordinary shares and a few Class shares in XX, and a few ordinary shares in X.

XCG is in the business of buying and selling listed securities and investing in managed funds, hybrid investments and fixed interest deposits. It is advised that it regularly seeks advice and reports from brokers and financial research institutions.

During a previous year, XCG derived an operating profit before tax. Its taxable income was a lesser amount.

The directors/secretaries of XCG (pre demerger) are:

• Another person (director/secretary)

• A person

• Person 3

• Person 4 (secretary)

• Person 5

The directors/secretaries of XCG (post demerger) will be:

• Another person (director/secretary)

• A person

• Person 3

• Person 4 (secretary)

X has paid dividends to its shareholders over the last few years.

The dividends were paid to shareholders in proportion to their shareholdings and there have been no returns of capital or share premium, or bonus shares issued in the last five years.

XX

XX was incorporated prior to 1985 and is a wholly owned subsidiary of X and a member of the XCG.

The income of XCG is derived by XX, which is currently the operating entity. The core business activities of XX involve the buying and selling of securities and investing in fixed interest deposits to earn income.

During previous financial years, XX purchased and disposed of securities

Various other types of acquisitions and disposals occurred in one of the previous financial years.

The directors/secretaries of XX (pre demerger) are:

• Another person (director/secretary)

• A person

• Person 3

• Person 4 (secretary)

• Person 5

The directors/secretaries of XX (post demerger) will be:

• Another person (director/secretary)

• A person

• Person 3

• Person 4 (secretary)

The day to day management of XX (both pre and post demerger) is undertaken by a person and Person 3 who are both XX's staff. The applicant has advised that the day to day management of XX involves the decision making of which securities to buy and sell, as well as the administrative and bookkeeping functions of the business.

The applicant has advised that XX operates its business from a shared office with a third party. It uses one of the businesses' personnel as a secretary.

X

X was incorporated after 1985 and is a wholly owned subsidiary of X and a member of the XCG.

The applicant has advised that:

• X is in the early stages of its new business venture. The applicant is seeking a ruling from the Commissioner first, before developing X's business.

• X currently has minimal assets, being cash of a small amount and requires working capital to fund any new investments.

• X has not fully undertaken its business plan and cannot demonstrate a pattern of regular business activity since it was incorporated.

• X has not paid any dividends.

The directors/secretary of X (pre demerger) are:

• Another person (director/secretary)

• A person

• Person 3

• Person 6

• Person 5

The directors/secretaries of XCG (post demerger) will be:

• A person

• Person 6

• Person 5

The day to day management of X (both pre and post demerger) is undertaken by a person. It is advised that Person 6 will soon develop the knowledge and skills to assist a person in the day to day management of X once the new business venture gets underway.

Proposed demerger of X from X

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

Demerger implementation steps

It is proposed that the restructure will be undertaken by implementing the following steps (the proposed demerger):

• XX will transfer business assets to the value of $X,XXX,XXX to X.

• X currently holds in X. X will issue additional ordinary shares to X.

• X will undertake a share capital reduction.

• X will satisfy its obligation to pay the capital reduction amount by transferring all of its X shares (which includes the newly issued shares) in specie to a person and another person in proportion to their shareholding in X.

• X will account for the transfer of the X shares to XX shareholders by debiting its share capital.

As a consequence of the proposed demerger, a person will be entitled to shares in X and another smaller number of shares.

Demerger Calculations

The steps undertaken to effect the proposed demerger will be recorded in the financial accounts of X and X as follows (post transfer of assets from XX to X):

The issue of ordinary shares to X in X is accounted for in the accounts of X as follows: 

X will revalue upwards its investment in X by $ to the market value at the time of the demerger.  The revaluation will be recorded by X in its accounts as follows:

X will undertake a share capital reduction.

X will make an in-specie distribution of its X shares to the X shareholders.

Post demerger, a person and another person will acquire direct ownership interests in X (in addition to their existing interest in X/XX).

Reasons for the demerger

A person (the applicant) has provided the following reasons for the proposed demerger:

• Succession planning purposes

The applicant is currently close to retirement. His/her spouse is also of retirement age. The applicant's child is now an adult and wishes to have an interest in the speculative side of the business.

The applicant wishes to be in a position to deal directly with the X shares, particularly for succession planning purposes. A demerger would allow the shareholders of X to have separate equity interests for both XX and X and to deal with these interests separately. This is not possible under the current structure where X is a wholly owned subsidiary of X.

The restructuring of the business of X into the two separate companies would facilitate a 'cleaner' corporate structure once the applicant passes away. Upon his/her death, the applicant is in a position to bequeath the shares in XX to their spouse and bequeath the shares in X to his/her child. The applicant considers this restructure would be the best approach to avoid family disputes. As such, by splitting the business into two companies this would mitigate family conflict and preserve and allow each business to flourish.

• Restructuring the business assets for enhanced business efficiency

X, through its wholly owned subsidiary, XX, carries on business activities which involve the buying and selling of securities and investing in fixed interest deposits to earn income.

While the business has performed well over the years, the accounting profits and taxable income are low on the assets employed, normally a return of about a small % which is not much greater than inflation. The existing management is concerned with the risk of inflation and accept that they have a lot of experience in the present type of low risk low return investments but no experience in the higher risk investments.

The management believes that a new business model is necessary to drive profits and the return higher. Accordingly, it is in the process of dividing the existing business into what it describes is two separate and distinct enterprises which have different business plans. To this end, the business of XCG is being divided into XX, the existing low risk low return business and X, the new high risk high return business venture.

The assets of X will comprise approximately half of the group assets and X will comprise the other half. The assets to be transferred by XX to X are not necessarily high risk assets per se, but will provide the working capital to adopt higher risk business activities. The four largest assets, whilst classed in the ASX Top 20, would be split between XX and X.

Neither XX nor X require much infrastructure or overheads to operate because of the nature of the business. They will share the same office space and secretary, whom they hire part time from a third party, located in the same building.

By separating the business into two distinct and separate parts, the applicant anticipates that this would create efficiencies in XX and X and would allow better development and management of the business assets. Further, the applicant is of the view that the proposed demerger is an integral aspect of separating the two types of business assets and enabling efficiencies to flow from developing each core business separately.

• Asset protection

For asset protection reasons, the applicant considers that it is clearly preferable to have X owned separately to X/XX itself.

This is because the new business venture of X will be established on a higher risk higher return strategy as it will involve gearing and leveraging against existing assets. The new business venture also intends to diversify into a range of higher risk property projects, initial public offerings, and investments in start-up companies. The demerger of the new X business venture will provide X with the flexibility to undertake debt funding of its riskier financial decisions without exposing the lower risk business of XX and the assets of the remainder of the Group to its associated risks.

To develop the new X business venture, Person 5 has been appointed to the Board of X. Given their expertise and knowledge, he/she will drive the management and strategic direction of the new business venture.

Other relevant matters

At the time of the proposed demerger, X will only have one class of shares on issue being ordinary shares.

X will hold 100% of the issued shares in X before the proposed demerger and X will hold no shares in X after the proposed demerger.

X' shareholders will receive ordinary shares in X in proportion to their shareholding in X.

The shareholders do not currently intend on disposing of their shares in X after the proposed demerger. However, management understands that a prospective purchaser of X may prefer that X were not part of the XCG.

X will not make an election under subsection 44(2) of the ITAA 1936 that subsections 44(3) and 44(4) will not apply to the total of any demerger dividend arising under the restructure.

The share capital account of X is not tainted as defined under Division 197 of ITAA 1997.  

There are no employee share plans in respect of the X shares.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 6(1).

Income Tax Assessment Act 1936 section 44.

Income Tax Assessment Act 1936 section 45B.

Income Tax Assessment Act 1936 section 45BA.

Income Tax Assessment Act 1936 subsection 45C.

Income Tax Assessment Act 1936 subsection 177A(1).

Income Tax Assessment Act 1936 section 177D

Income Tax Assessment Act 1936 section 318

Income Tax Assessment Act 1997 section 104-230.

Income Tax Assessment Act 1997 subsection 104-135(5).

Income Tax Assessment Act 1997 Division 125.

Income Tax Assessment Act 1997 section 125-80.

Income Tax Assessment Act 1997 section 125-80

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

Reasons for decision

Capital gains tax (CGT)

CGT event G1

CGT event G1 happens in relation to each X share owned by the X shareholders at the time X makes the payment of the capital reduction amount satisfied by the in specie distribution of X shares (section 104-135 of the ITAA 1997).

X shareholders make a capital gain from CGT event G1 happening if the capital reduction amount exceeded the cost base of the X share. The capital gain is equal to the amount of the excess. No capital loss can be made from CGT event G1 (subsection 104-135(3) of the ITAA 1997).

Demerger roll-over relief

A demerger, as defined under section 125-70 of the ITAA 1997, happens to the X demerger group under the scheme.

Conditions for demerger roll-over relief

The demerger roll-over provisions in Division 125 of the ITAA 1997 contain a number of conditions for eligibility to choose demerger roll-over relief.

Immediately prior to the demerger X will have a 100% shareholding interest in X. Therefore X and X constitute a demerger group pursuant to subsection 125-65(1) of the ITAA 1997.

X is a demerger subsidiary pursuant to 125-65(6) of the ITAA 1997 as X has a right to exercise or control the exercise of more than 20% of the voting power of X. X is the head entity of a demerger group under subsection 125-65(3) of the ITAA 1997 as no member of the group owns ownership interests in X.

Section 125-70 of the ITAA 1997 specifies the conditions that must be met for a shareholder to be eligible to choose roll-over. Under the current scheme, these conditions will be satisfied:

• Paragraph 125-70(1)(a) of the ITAA 1997 - there will be a restructure of the X demerger group.

• Paragraph 125-70(1)(b)(i) of the ITAA 1997- X will dispose of 100% (that is at least 80%) of its ownership interest in X to X shareholders (owners of the original interest in the head entity of the demerger group).

• Paragraph 125-70(1)(c)(i) of the ITAA 1997 - CGT event G1 will happen to an original interest (X share) owned by an entity (the X shareholder) in the head entity of the demerger group (X) and the X shareholder will acquire a new interest (X share) and nothing else.

• Paragraph 125-70(1)(d) - The acquisition of X shares by X shareholders will happen only because they own shares in X.

• Paragraph 125-70(1)(e)(i) of the ITAA 1997 - the new interests acquired are ownership interests in a company (X) as the head entity (X) is a company.

• Paragraph 125-70(1)(f) of the ITAA 1997 - repealed.

• Paragraph 125-70(1)(g) of the ITAA 1997 - neither of the original interests nor the new interests are in a trust that is a superannuation fund.

• Paragraph 125-70(1)(h) of the ITAA 1997- the proportion test -the requirements of this paragraph are met.

• Paragraph 125-70(2)(a) of the ITAA 1997- as confirmed by the applicant, each owner (an original owner) of original interests in the head entity of the demerger group will acquire, under the demerger, the same proportion, or as nearly as practicable the same proportion, of new interests in the demerged entity as the original owner owns in the head entity just before the demerger.

• Paragraph 125-70(2)(b) of the ITAA 1997- just after the demerger, as confirmed by the applicant, each owner (an original owner) of original interests in the head entity of the demerger group will have the same proportionate total market value of ownership interests in the head entity and the demerged entity as the original owner owns in the head entity just before the demerger.

As all the relevant conditions are satisfied, the X shareholders can choose demerger roll-over under subsection 125-55(1) of the ITAA 1997 for their X shares.

CGT consequences of choosing roll-over

A X shareholder who chooses demerger roll-over will disregard any capital gain made when CGT event G1 happens in relation to each of their X shares under the demerger (subsection 125-80(1) of the ITAA 1997).

Other CGT consequences of choosing roll-over - cost base

If X shareholders choose demerger roll-over, they must also recalculate the cost base and reduced cost base of their X shares and calculate the cost base and reduced cost base of their new X shares.

The first element of the cost base and reduced cost base of each X share and corresponding X share received under the demerger is worked out as follows:

• total the cost bases of the X shares (just before the demerger) and

• apportion that sum over the X shares and corresponding new X shares received under the demerger.

The apportionment of this sum is done on a reasonable basis having regard to the market values (just after the demerger) of the X and X shares, or a reasonable approximation of those market values (subsections 125-80(2) and 125-80(3) of the ITAA 1997).

According to Taxation Determination TD 2006/73 Income tax: demergers: in reallocating the cost bases of ownership interests under a demerger, as required by subsection 125-80(2) of the Income Tax Assessment Act 1997, is there more than one method that produces a reasonable apportionment? There may be more than one method that produces a reasonable apportionment. In all cases though, the Commissioner considers that the apportionment will be reasonable if a taxpayer calculates the new cost base of each post demerger interest in accordance with the market value of that interest relative to the total market value of all of their post-demerger interests (this is referred to as the relative market value method).

The Commissioner does not accept an arbitrary split of cost bases not established on the relative market values of the shares.

Definition of demerger allocation

A demerger allocation is defined in subsection 6(1) of the ITAA 1936 to mean:

The total market value of the allocation represented by the ownership interests issued by the demerged entity in itself under a demerger to the owners of the ownership interests in the head entity of the demerger group;

The issue of shares in X to the shareholders of X under the proposed demerger will satisfy the definition of a demerger allocation. The shares in X issued to the X' shareholders will have a total market value which is representative of the market value of the assets transferred by XX to X. The applicant has advised that currently, that market value would be $. For the purposes of this advice, it is assumed that this market value is correct and it will be used as a basis for our subsequent conclusions.

Definition of dividend and demerger dividend

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.

A demerger dividend, as defined in subsection 6(1) of the ITAA 1936, means that part of a demerger allocation that is assessable as a dividend under subsection 44(1) of the ITAA 1936 or that would be so assessable apart from subsections 44(3) and (4) of the ITAA 1936.

Capital reduction amount

Paragraph (d) of subsection 6(1) of the ITAA 1936 provides that the definition of dividend excludes amounts debited against an amount standing to the credit of the share capital account of the company.

In the circumstances of this proposed demerger, X accounts for the transfer of X shares to X' shareholders by debiting its share capital by $. This amount will therefore not be a dividend for the purposes of subsection 6(1) of the ITAA 1936 and will not be assessable as a dividend under subsection 44(1) of the ITAA 1936.

Dividend

The definition of dividend includes any amount distributed or credited by a company to any of its shareholders. Therefore, the in specie distribution by X of its X shares to its shareholders will constitute a dividend to the extent that it is paid out of company profits.

The total amount of the dividend will be the market value of the X shares at the time of the demerger excluding the amount debited to the share capital account of X. Therefore, prima facie, the dividend will be equal to $ (being the market value of the X shares at the time of the proposed demerger) less $ (being the amount debited to the share capital account of X), which is $.

In general, a dividend satisfied by an in specie distribution of property (being Holding's shares in its subsidiary, X) 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.

Subsection 44(5) of the ITAA 1936

In the present circumstances, the dividend paid to X' shareholders under the proposed demerger would satisfy the first two of these three conditions. However, it must also satisfy the requirements of the integrity rule in subsection 44(5) of the ITAA 1936 which states that:

However, subsections (3) and (4) do not apply to a demerger dividend unless, just after the demerger, CGT assets owned by the demerged entity or a demerger subsidiary representing at least 50% by market value of all the CGT assets (or a reasonable approximation of market value) owned by the demerged entity and its demerger subsidiaries are used, directly or indirectly, in one or more businesses carried on by one or more of those entities.

The Revised Explanatory Memorandum to the New Business Tax System (Consolidation, Value Shifting, Demergers and Other Measures) Bill 2002 (the Revised EM) provides in respect of subsection 44(5) of the ITAA 1936 that:

15.72 A demerger dividend is taken not to be paid out of profits and is not assessable income or exempt income if, just after the demerger, at least 50% of the market value of CGT assets owned by the demerged entity or its demerger subsidiaries are used in the carrying on of a business by those entities. This rule ensures that the demerged entity is a viable, independent entity, capable of conducting business in its own right.

As such, subsection 44(5) of the ITAA 1936 requires that just after the demerger, 50% of the market value of all CGT assets owned by X be used, directly or indirectly, in one or more businesses carried on by X. Under the proposed demerger, XX will transfer business assets to the value of $ to X. The business assets will be a mixture of securities comprising shares, managed funds, and fixed interest deposits and as such will comprise CGT assets.

To satisfy the test in subsection 44(5) of the ITAA 1936, 50% of the market value of those CGT assets must be used either directly or indirectly in the carrying on of a business by X. In the present circumstances, the applicant has advised that:

X is in the early stages of its new business venture. The applicant is first seeking a ruling from the Commissioner that the dividend is a demerger dividend that is neither assessable income nor exempt income, before developing X's business.

X currently has minimal assets and requires working capital to fund any new investments.

X has not fully undertaken its business plan and cannot demonstrate a pattern of regular business activity since it was incorporated.

X has not paid any dividends.

Having regard to the facts provided by the applicant, it is considered that X is not carrying on a business, as required by subsection 44(5) of the ITAA 1936. While the Revised EM provides that the rule in subsection 44(5) ensures that the demerged entity is 'capable' of conducting a business in its own right, it does not mean that subsection 44(5) applies where the demerged entity is not yet carrying on a business. Subsection 44(5) specifically requires that the CGT assets be used in 'one or more businesses carried on' by the demerged entity and the subsection is there to ensure that the demerged entity is indeed carrying on a business in order to be entitled to the demerger dividend concessions.

Conclusion

As a consequence, subsection 44(5) of the ITAA 1936 will apply so that subsections 44(3) and (4) of the ITAA 1936 do not apply to the demerger dividend. As such, the demerger dividend will be paid out of profits and the applicant would be required to include the value of the dividend in their assessable income under subsection 44(1) of the ITAA 1936.

The Commissioner's reasoning in applying section 45B to the demerger benefit is outlined below.

Section 45B

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, the 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).

The requirements of subsection 45B(2) of the ITAA 1936 are 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 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.

A distribution of capital and profits by a company that is satisfied by way of the issue of shares in a subsidiary is a scheme under which a person, the shareholder, is provided with a demerger benefit and/or capital benefit. In the present circumstances, the scheme will be the proposed statutory demerger under section 125-70 of the ITAA 1997 and will include the following steps:

• Business assets comprising listed securities, investments in managed funds, hybrid investments and fixed interest deposits will be transferred from XX to X for its market value of $;

• X will issue ordinary shares to X;

• X will reduce its share capital by half;

• X will transfer X shares in specie to its shareholders. The shareholders will hold shares in X in proportion to their shareholding in X such that a person holds some shares in X and another person holds a lesser number of shares;

• X will account for the transfer of X shares to the shareholders by debiting its share capital account.

Demerger benefit and capital benefit

Under subsection 45B(4) of the ITAA 1936, a person is provided with a demerger benefit if, in relation to the demerger, a company provides the person with ownership interests in that or another company, or something is done 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.

Under a demerger, it is expected that a person will always be provided with a demerger benefit. The definition of a demerger under section 125-70 of the ITAA 1997 requires there to be a disposal of ownership interests or an issue of ownership interests to the owners of the head entity. This means that owners of the head entity will invariably be provided with a demerger benefit.

In this case, X provides its shareholders with ownership interests (shares) in X. As such, X' shareholders are provided with a demerger benefit.

Under subsection 45B(5) of the ITAA 1936, a reference to a person being provided with a capital benefit includes a reference to, the provision of ownership interests in a company to the person, or the distribution to the person of share capital or share premium.

In this case, X provision of shares in X to the shareholders will constitute the provision of ownership interests in a company to a person. As such, X' shareholders are also provided with a capital benefit.

However, subsection 45B(6) of the ITAA 1936 provides that a person is not provided with a capital benefit to the extent that the provision of interests or the distribution of the thing referred to in subsection 45B(5) involves the person receiving a demerger dividend.

In this case, the scheme involves X' shareholders receiving a demerger allocation (being the market value of the X shares). Of this amount, the shareholders will receive a demerger dividend. As such, the shareholders will be provided with a demerger benefit of $ and a capital benefit of $.

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.

As a result of the proposed demerger, X' shareholders (the relevant taxpayer) would, apart from the operation of section 45B of the ITAA 1936, receive a demerger dividend equal to the market value of the X shares at the time of the demerger less the amount debited to the share capital account that is neither assessable income nor exempt income. The tax payable by X' shareholders on the demerger would be higher if the demerger benefit was an assessable dividend. Accordingly, X' shareholders will obtain a tax benefit for the purposes of section 45B.

More than an incidental purpose to obtain a tax benefit

Given that the proposed demerger is a scheme that provides a tax benefit to X' shareholders, the operation of section 45B of the ITAA 1936 turns on the objective purpose test in paragraph 45B(2)(c) which provides that the section will apply if enabling the shareholder to obtain a tax benefit is a more than incidental purpose of the demerger scheme. In other words, the application of section 45B will normally be triggered when the shareholders obtaining a tax benefit is more than merely the natural incident of the demerger scheme.

A demerger is simply a mechanism for transferring ownership interests, or the value thereof, from the head entity of a corporate group to its shareholders whereupon they are received as a tax free gain in the form of a demerger dividend or a capital benefit. Therefore, unless the demerger occurs in the context of a scheme, the essential purpose of which is to enhance business performance, the demerger is simply a group restructure whereby capital and profit of the head entity is transformed into its shareholders is a tax effective way. In which case, it would have to be concluded that enabling the shareholder to obtain a tax benefit would be a substantial purpose of the persons involved in the scheme.

In other words, section 45B of the ITAA 1936 would normally apply where the scheme of demerger merely effects a group restructure without the essential object of enhancing the efficiency of the businesses run by the group, which, after all, is the stated policy object of demerger tax relief. In her Press Release of 6 May 2002 in regard to demerger tax relief, Senator Helen Coonan, the Minister for Revenue discussed section 45B and genuine demergers in the following terms:

An exemption from the dividend rules in the tax law will be provided for genuine demergers of a business or business assets. Integrity rules will support this exemption. A key rule will be modelled on section 45B of the ITAA 1936 and will be designed to deny the dividend exemption if the demerger was only entered into to convert what would be normally an assessable dividend into an exempt demerger dividend. In considering the possible application of this integrity rule, certain factors will be taken into account in determining whether the dividend exemption should be available … As a general principle, this integrity rule is unlikely to apply to a demerger of an active business where there is a reasonable proportionate allocation of the shareholder funds (including the share capital accounts) of the demerging entity, unless the particular circumstances of the demerger suggest otherwise.

Senator Coonan's remarks accord with those made by Mr Slipper, Secretary to the Minster for Finance and Administration in the second reading speech introducing the measure into Parliament. Mr Slipper explained tax relief for demergers in the following terms:

The tax relief will apply to only genuine demergers and is achieved by requiring underlying ownership to be maintained pre and post a demerger and requiring the head entity to demerge at least 80 per cent of its ownership in the demerging entity. Providing tax relief for demergers will increase business efficiency by allowing greater flexibility in restructuring a business and ensuring that tax considerations are not an impediment to such restructures. This will provide an overall benefit to the economy and enhance the competitiveness of Australia's business sector through greater opportunities to increase shareholder value by creating more efficient business structures.

The object of the demerger tax concession is also explained at paragraph 15.74 of the Revised Explanatory Memorandum as follows:

15.74 The demerger dividend exemption is supported by an integrity rule that is aimed at limiting the exemption to genuine demergers, rather than demergers that are directed at obtaining the dividend exemption. The effect of the integrity rule applying to a demerger is to exclude part or all of the demerger dividend from the demerger dividend exemption. So much of that excluded amount would then be considered within section 44 of the ITAA 1936 as an assessable dividend.

In addition to the policy behind section 45B of the ITAA 1936 and demerger tax relief, the requisite purpose is to be inferred after having regard to the 'relevant circumstances' of the scheme which are listed inclusively in subsection 45B(8) of the ITAA 1936. The circumstances listed would be unlikely to all apply in any given case. The purpose test is therefore a matter of identifying and weighing those of the listed circumstances relevant to the scheme at hand. In this way, an objective conclusion is reached as to whether the delivery of a tax benefit is a substantial purpose of the scheme or merely a natural incident of it.

The relevant circumstances contained in subsection 45B(8) of the ITAA 1936 are considered below.

Paragraph 45B(8)(a) Appropriate capital and profit allocation

Paragraph 45B(8)(a) of the ITAA 1936 concerns the extent to which the demerger benefit or capital benefit is attributable to capital and profits (realised or unrealised) of the company providing the benefit, or of an associate (within the meaning in section 318) of the company.

It directs attention to the composition, as between share capital and profits (realised and unrealised), of the demerger benefit and capital benefit provided to the head entity's owners. If the composition of the benefit is inconsistent with the substance (that is, the capital and profit it is attributable to) this would tend to a conclusion that the requisite purpose exists.

Under the proposed demerger, X will make a demerger allocation of $ to its shareholders. Of this amount, $ is debited against X' share capital account and represents the capital benefit. The balance of $ is the demerger dividend which is debited to the asset revaluation reserve and represents the demerger benefit. There is no indication that the components of the demerger benefit and capital benefit have not been properly attributed to capital and profit.

The relevant circumstance in paragraph 45B(8)(a) of the ITAA 1936 is neutral. As such, this factor does not incline for, or against, a conclusion as to the requisite purpose.

Paragraph 45B(8)(b) Pattern of distributions

Paragraph 45B(8)(b) of the ITAA 1936 directs attention to the pattern of distributions of dividends, bonus shares and returns of capital or share premium by the company or by an associate (within the meaning in section 318) of the company. The inference here is that an interruption to the normal pattern of profit distribution and its replacement with a distribution under a demerger would suggest dividend substitution. Regard is to be had to the general pattern of distributions of the company in order to determine, for example, whether its previously regular dividend distribution policy has been affected by the demerger, or the head entity has a pattern of making capital distributions (with that capital thus performing the function of dividends).

In this case, X, was newly incorporated and therefore has no dividend distribution history.

The pattern of dividend distribution for X/XX in the last five years is set out in the facts. It is noted that all dividends were paid to shareholders in proportion to their shareholding and in respect of both entities, there have been no returns of capital or share premium, or bonus shares issued in the last five years.

Further, there is no evidence to suggest that there has been an interruption to the normal pattern of profit distribution and its replacement with a distribution under the demerger. X has a regular pattern of dividend distributions and has not adopted a pattern of making capital distributions. It is considered that the occasion for the distribution under the demerger is an extraordinary event, being the demerger of part of the group and should be additional to normal distribution policy.

The relevant circumstance in paragraph 45B(8)(b) of the ITAA 1936 is neutral. As such, this factor does not incline for, or against, a conclusion as to the requisite purpose.

Paragraph 45B(8)(c) Capital losses

Paragraph 45B(8)(c) of the ITAA 1936 concerns whether X' shareholders have capital losses that, apart from the scheme, would be carried forward to a later year of income.

In this case, the applicant has advised that X' shareholders do not have any capital losses.

The relevant circumstance in paragraph 45B(8)(c) of the ITAA 1936 is neutral. As such, this factor does not incline for, or against, a conclusion as to the requisite purpose.

Paragraph 45B(8)(d) Pre CGT ownership interests

Paragraph 45B(8)(d) of the ITAA 1936 directs attention to whether some or all of the ownership interests held by X' shareholders in X or an associate were acquired, or are taken to have been acquired, by the relevant taxpayer before 20 September 1985.

The applicant has advised that X' shareholders hold post-CGT shares and therefore paragraph 45B(8)(d) would not apply.

The relevant circumstance in paragraph 45B(8)(d) of the ITAA 1936 is not considered to be relevant to the current situation.

Paragraph 45B(8)(e) Residence

Paragraph 45B(8)(e) of the ITAA 1936 requires consideration of whether X' shareholders are non-residents.

The applicant has advised that none of X' shareholders is a non-resident.

The relevant circumstance in paragraph 45B(8)(e) of the ITAA 1936 is not considered to be relevant to the current situation.

Paragraph 45B(8)(f) Cost base of ownership interests

Paragraph 45B(8)(f) of the ITAA 1936 directs attention to whether the cost base (for the purposes of the ITAA 1997) of the relevant ownership interest provided to X' shareholders is not substantially less than the value of the applicable capital component of the demerger benefit or capital benefit.

The cost base of the post-CGT shares in X provided to X' shareholders will be equal to the amount they paid to acquire the shares plus incidental costs.

This amount will be equivalent to the capital benefit. This is because the capital reduction amount gives the best approximation of X paid up capital that is represented by the assets to be held by X.

This amount will not be substantially less than the capital component of the demerger benefit which is zero.

The relevant circumstance in paragraph 45B(8)(f) of the ITAA 1936 is neutral. As such, this factor does not incline for, or against, a conclusion as to the requisite purpose.

Paragraph 45B(8)(g) repealed

Paragraph 45B(8)(g) of the ITAA 1936 has been repealed.

Paragraph 45B(8)(h) Nature of interest after the demerger

Paragraph 45B(8)(h) of the ITAA 1936 requires, where the demerger involves a distribution of share capital or share premium, that regard be had to whether the interest held by X' shareholders after the distribution is the same as the interest would have been if an equivalent dividend had been paid instead of the distribution of share capital or share premium.

As the capital return under the scheme is an equal reduction and therefore, will apply to all of X' shareholders equally the comparative rights and interests held by X' shareholders after the distribution will remain the same as those that would have been held had an equivalent dividend been paid instead of the capital benefit. The proposed demerger will also satisfy the requirements of the proportion test in subsection 125-70(2) of the ITAA 1997.

The relevant circumstance in paragraph 45B(8)(h) of the ITAA 1936 is neutral. As such, this factor does not incline for, or against, a conclusion as to the requisite purpose.

Paragraph 45B(8)(i) Provision of ownership interests and later disposal

Paragraph 45B(8)(i) of the ITAA 1936 directs attention to those cases where the scheme of demerger involves the provision of ownership interests and the later disposal of those interests, or an increase in the value of ownership interests and the later disposal of those interests; recognizing that the proceeds on disposal of such ownership interests provide the equivalent of a cash dividend in a more tax-effective form.

The applicant has stated that the proposed scheme of demerger does not currently involve X' shareholders disposing of their shares in X after the demerger.

The relevant circumstance in paragraph 45B(8)(i) of the ITAA 1936 is neutral. As such, this factor does not incline for, or against, a conclusion as to the requisite purpose.

Paragraph 45B(8)(j) Transactions between entity and associate

Paragraph 45B(8)(j) of the ITAA 1936 is stated to apply only to demergers and requires that regard be had to whether the profits and assets of the demerging entity, X, are attributable to or acquired under transactions with associated entities.

This relevant circumstance looks at whether there has been a concentration of assets and profit in the demerging entity (X) or the demerged entity (X) that is attributable to transactions with associates.

There is nothing in the applicant's facts to suggest that there has been such a concentration of profits or assets in X or X in readiness for the demerger.

The relevant circumstance in paragraph 45B(8)(j) of the ITAA 1936 is neutral. As such, this factor does not incline for, or against, a conclusion as to the requisite purpose.

Paragraph 45B(8)(k) Part IVA matters

This circumstance requires regard to be had to the Part IVA factors in paragraphs 177D(2)(a)-(h) of the ITAA 1936. The Part IVA factors are to be given equal attention in determining purpose under subsection 45B(8) of the ITAA 1936.

The incorporation of the Part IVA factors into section 45B of the ITAA 1936 does not introduce a different (dominant) purpose test into section 45B. The matters are applied in the context of the 'more than incidental purpose test' in section 45B.

Paragraph 177D(2)(a) Manner

Paragraph 177D(2)(a) of the ITAA 1936 refers to the manner in which the scheme was entered into or carried out. This is a reference to consideration of the method or procedure by which the particular scheme in question was established. In other words, consideration of the decisions, steps and events that combine to make up the scheme.

As stated in paragraph 86 of PSLA 2005/21, an inquiry into the manner of a scheme is an objective inquiry into the reasons a taxpayer has for entering into it. In the context of the policy intent behind the demergers measure, 'manner' is examinable from the perspective of the scheme being a business restructure. In considering section 45B of the ITAA 1936, it will be more likely to apply to a demerger where the decision to execute such a restructure cannot be explained by reasons other than the tax-free distribution to shareholders.

In the ruling application, the applicant put forward a number of reasons for undertaking the proposed demerger, each of these are considered in detail below.

Succession planning purposes

As discussed above, paragraph 15.74 of the Revised EM refers to 'genuine demergers' in contradistinction to 'demergers directed at obtaining the dividend exemption' and Mr Slipper's second reading speech makes plain that genuine demergers are those directed at restructuring a business in the interests of business efficiency. In other words, to the extent that a demerger is not undertaken for substantive business reasons, there is a strong likelihood that pursuant to section 45B it would be viewed as a scheme whereby the provision of tax benefits to the head entity's shareholders is not a mere incident of the scheme but rather a significant purpose of it.

The Commissioner is of the view that the applicant's stated reason of succession planning is more accurately described as estate planning. This is because the applicant describes the process as:

A person will leave under his/her will the shares in XX Capital to his/her child so that on his/her death, his/her child can fully take over the speculative trading business in respect of a certain portfolio of shares. The bequeathing of the shares in XX Capital is independent of the demerger as it is contingent on a person's passing.

It is considered that estate planning is not a factor which would support the business efficiency merits of a demerger of X from X. Whilst the restructure removes complexity from the XCG and facilitates a cleaner corporate structure for the applicant when he/she passes away, this is not a substantive business reason for undertaking the proposed demerger and results in the applicant, as one of X' shareholders, receiving a demerger benefit.

Enhanced business efficiency

The applicant considers that dividing the business of XCG into XX, the existing low risk low return business and X, the new high risk high return business venture, will result in business functions that are separate and distinct in nature with different commercial drivers and risk profiles.

As such, a demerger would allow the two discrete and different businesses to further develop in their own right, having regard to their business objectives and with the aim of being independent of the other.

However, the applicant has not demonstrated how the proposed demerger will facilitate the development of the companies in their own right post demerger. Ordinarily, it is considered that when a demerger is being undertaken for business efficiency reasons, this would be reflected in the structural, financial and personnel changes that would be expected to be made to the entities post demerger as a means of improving profitability. However, in this case, the applicant has not provided sufficient evidence to suggest that the proposed demerger will bring about any such changes to XX or X.

From a structural perspective, it is difficult to see how the demerger would result in two businesses that are separate and distinct in nature existing following the demerger. X is in the very early stages of a new business venture and it has been advised that it cannot demonstrate a pattern of regular business activity since it was incorporated and has not fully undertaken its business plan.

The applicant has not disclosed sufficient facts from which an inference may be drawn that having the X shares held directly by the applicant will create any greater efficiency in the conduct of the activities of X. It is also not apparent how operating under the same corporate structure limits XX's and X's flexibility and freedom with regards to the investments they undertake.

Financially, X has minimal assets and requires working capital to fund any new investments. The proposed split of the business assets between XX and X does not demonstrate two distinct types of investment. As noted in the facts, the four largest asset groups will be split between XX and X. There is also a split of investments held by other top ASX companies as well as a number of term deposits. The value attributed to these stocks forms a significant percentage of the value of the demerger benefit that is being transferred to X. The applicant has also advised that the majority of the assets to be transferred from XX to X are not high risk assets per se. Rather; the assets to be transferred will provide the working capital for X to adopt these higher risk business activities.

Also, based on the facts provided, it cannot be demonstrated that the demerger will bring about a separation of control in the decision making activities of either XX or X. In terms of personnel, XX and X will continue to be linked with one another post demerger through common directorship with the applicant being a director of both XX and X. Other than the appointment of Person 5 to the Board of X and the existing appointment of Person 6, the applicant has not provided any assertions to indicate that there will be any alterations to the day to day management structure of XX and/or X post demerger. The applicant and his/her spouse are the staff of XX and will continue to run the day to day management of the business both pre and post demerger. Similarly, while there are future plans, the applicant will still run the day to day management of X both pre and post demerger.

The activities of XX and X will also not be physically separated. From an economic perspective, the applicant has stated that there would be efficiencies and cost savings to both XX and X by sharing the same office space and use of secretary that they hire from a third party accounting firm for certain administrative duties.

As such, it is considered that the proposed demerger would not sufficiently bring about a separation of control in the decision making activities of either XX or X that would aid in their development post demerger.

Asset protection

The applicant's explanation for the demerger appears to rely significantly on the insulation of financial risk so that the assets of one business are not secured in relation to the debts of another.

The proposed demerger would not resolve the asset protection issues raised by the applicant. Rather it would seem to be more so the case that limiting liability for debts within a company is essentially an issue of negotiation that brings into play concepts of business performance, the separate legal personality of each entity involved and the limited liability of shareholders.

For instance, by virtue of the Corporations Act 2001, one of the main benefits of creating a company limited by shares is that the liability of the shareholders will be limited, meaning that, in the case of financial disaster, the shareholders only have to provide funds to the company to the extent of the fully paid-up value of their shares in that company.

Further, it is only in exceptional circumstances that the corporate veil will be pierced, in particular cases involving insolvency and even then, a number of requirements must be satisfied.

Conclusion

Given the absence of substantive business efficiency or commercial considerations for the demerger, the very significant tax benefit that X' shareholders would receive (in the form of a non-assessable demerger dividend) would point towards their being a more than incidental purpose of obtaining a tax benefit.

Paragraph 177D(2)(b) Form and substance

Paragraph 177D(2)(b) of the ITAA 1936 refers to the form and substance of the scheme. The form of the scheme is the way it presents and the substance of the scheme is a reference to its essential nature which normally would be determined from the effects of the scheme on the commercial and economic circumstances of the parties involved in the scheme.

The proposed scheme takes the form of a demerger in that it would accord with the steps that satisfy the definition of demerger in section 125-70 of the ITAA 1997. The substance of the scheme, however, does not conform to a business restructure which creates discrete, independent businesses capable of enhancing their purported efficiency.

As noted above, following the proposed demerger, the transformation of X into a discrete independent business is still in the very early stages. The commercial effects of the scheme post demerger on XX and X, if any, is minimal. After the proposed demerger, the management structure of both entities will be similar with the applicant being both a director and also responsible for the day to day management of XX and X. Additionally, the asset mix of XX and X post demerger is quite similar, with the four largest assets (stocks in BHP, NAB, Westpac and Westfield Corporation) split between XX and X. As a result, the demerger will not sufficiently bring about a separation of control in the decision making activities of either XX or X.

As a consequence of the proposed scheme, the applicant, as a X' shareholders, will acquire direct ownership in X and have the ability to deal with that interest separately. More importantly, the substance of the proposed scheme is no more than the transfer of assets in specie by X/XX to its shareholders by way of a reduction of capital and tax free distribution of profits in the form a demerger benefit.

This factor would point towards a more than incidental purpose of enabling X' shareholders to obtain a tax benefit.

Paragraph 177D(2)(c) Timing

Paragraph 177D(2)(c) of the ITAA 1936 directs attention to the time at which the scheme was entered into and the length of the period during which the scheme was carried out.

The applicant has advised that succession planning is a reason for the proposed demerger.

However, there is no indication that the timing of the scheme has any particular relevance.

This factor does not incline for, or against, the requisite purpose.

Paragraph 177D(2)(d) Result in relation to the act but for this Part

Paragraph 177D(2)(d) of the ITAA 1936 requires that consideration be given to the result in relation to the operation of this Act that, but for 'this Part', would be achieved by the scheme.

But for the operation of section 45B of the ITAA 1936, the proposed scheme would result in the applicant, as a X' shareholder, receiving a demerger dividend tax free. This is an immediate consequence, which prima facie, would point objectively to the requisite purpose of enabling the applicant to obtain a tax benefit.

This factor would incline towards the requisite purpose.

Paragraph 177D(2)(e) Change in financial position of relevant taxpayers

Paragraph 177D(2)(e) of the ITAA 1936 directs attention to any change in financial position of the head entity's owners that results, will result, or may reasonably be expected to result, from the scheme.

The demerger of itself will provide X' shareholders with an ownership interest in X which, prior to the demerger, was owned by the corporate group and which they had only the economic interest of an underlying owner. In financial terms, the demerger will deliver to X' shareholders an asset (being shares in X and its underlying business assets) which they can liquidate, exchange or use as financial security.

The essential benefit to the applicant's financial position from the proposed scheme is that he will obtain direct ownership of the X shares, having received them free of tax via a demerger dividend that is neither assessable income nor exempt income. Given the substantial market value of the X shares, their acquisition by way of direct ownership free of tax represents a significant advantage to the applicant's financial position.

This factor would incline towards the requisite purpose.

Paragraph 177D(2)(f) Any change in financial position of any person other than the relevant taxpayers

Paragraph 177D(2)(f) of the ITAA 1936 requires that consideration be given to any change in the financial position of any person who has, or has had, any connection with the head entity's owners, being a change that results, will result or may reasonably be expected to result from the demerger scheme.

Relevantly, this matter would cover consideration of the financial changes for the corporate entities involved in the scheme that ordinarily would pertain to, or are consistent with a business restructure.

For example, establishing the business independence of X would involve the severing of a key financial asset (i.e. X) within the XCG, however the management structure of both entities pre and post demerger will be similar with the applicant being both a director and also responsible for the day to day financial management of XX and X.

There is also insufficient evidence to suggest that the business operations of XX and X will be altered. Upon the demerger happening, the activities of both entities will, without evidence supporting otherwise, remain as they are pre demerger. Given the lack of change in the business operations of XX and X post demerger, this factor would point towards a more than incidental purpose of obtaining a tax benefit.

Paragraph 177D(2)(g) Any other consequence for the relevant taxpayers or any other person

Paragraph 177D(2)(g) of the ITAA 1936 directs attention to any other consequence of the demerger scheme for the head entity's owners or for any person connected with the head entity's owners.

Ordinarily, the features of a business restructure consistent with the commercial requirements of disparate or independent businesses would be expected to include changes to the decision making structure.

However, the management structure of XX and X will be similar post demerger and the entities will continue to be linked through common directors (the applicant common to both XX and X) and thus, effectively under the same control.

Further, there insufficient evidence to suggest that there will be any changes to the business operations of either XX or X post demerger.

The absence of such changes would point objectively towards the tax purpose for the demerger being more than incidental.

Paragraph 177D(2)(h) Connection between the relevant taxpayers and any person referred to in (f) above

Paragraph 177D(2)(h) of the ITAA 1936 requires consideration of the nature of any connection (whether of a business, family or other nature) between the head entity's owners and any person referred to in paragraph (f) - ordinarily that would be the members of the demerging group of companies.

The pertinent connection for the purposes of the scheme between the owners of X and the companies, X and X is that of company and shareholder, the significance of which is the assessability of dividends, but for the demerger concession.

XX and X are effectively owned and controlled by one of X' shareholders, namely the applicant, whose control over both entities and its current management remains the same both pre and post demerger.

The payment of profits by X/XX to the applicant, which but for the demerger concession would be assessable, together with the limited apparent commercial reasons for the demerger indicate this factor would have inclined towards the requisite purpose.

Determination under paragraph 45B(3)(a) of the ITAA 1936

Having regard to the 'relevant circumstances' of the proposed scheme, as set out in subsection 45B(8) of the ITAA 1936, it is considered that the proposed demerger would be undertaken for the more than incidental purpose of obtaining a tax benefit.

Accordingly, if the scheme were to go ahead as proposed and had the shareholders of X received a non-assessable non-exempt demerger dividend, the Commissioner would have made a determination under paragraph 45B(3)(a) of the ITAA 1936 that section 45BA of the ITAA 1936 would have applied to the 'demerger benefit' provided under the proposed scheme. The effect of such a determination would be that the whole or a part of the demerger benefit would be taken to not be a demerger dividend.

The Commissioner would not make a determination under paragraph 45B(3)(b) of the ITAA 1936

If the scheme were to go ahead as proposed and had the shareholders of X received a non-assessable non-exempt demerger dividend, the Commissioner would not have made a determination under paragraph 45B(3)(b) of the ITAA 1936 that section 45C of the ITAA 1936 would have applied. The capital reduction amount is not considered to disclose a purpose of making a distribution of share capital in substitution for a dividend. No part of the capital benefit amount could, objectively, be considered to represent a distribution made in substitution for a dividend.

Conclusion

In the view of the Commissioner it would be concluded objectively, having regard to the 'relevant circumstances' of the proposed scheme, as set out in subsection 45B(8), that the participants in the proposed scheme would not have entered into and carried out the proposed scheme for a more than incidental purpose of obtaining a tax benefit on the occasion of the return of capital.

Accordingly, the Commissioner would not make a determination under paragraph 45B(3)(a) that section 45C applies in your case.