Edited version of your written advice

Authorisation Number: 1012859868989

Date of advice: 20 August 2015

Ruling

Subject: Income Tax - Proposed Demerger

Question 1

Will the Commissioner confirm that the proposed restructure is a 'demerger' within the meaning of section 125-70 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Will the Commissioner confirm that the Head Co shareholders will be entitled to choose demerger roll-over relief pursuant to section 125-55 of the ITAA 1997 in relation to the demerger?

Answer

No.

Question 3

Will the Commissioner confirm that all or any part of the in-specie distribution of shares in the Subsidiary Companies to the Head Co shareholders that constitutes a 'dividend' for the purposes of subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936) will be a 'demerger dividend' as defined in subsection 6(1) of the ITAA 1936, and that it will be neither assessable income nor exempt income pursuant to subsections 44(3) and 44(4) of the ITAA 1936?

Answer

No.

Question 4

Whether the Commissioner will make a determination under subsection 45B(3) of the ITAA 1936 that section 45BA of the ITAA 1936 applies to the whole, or a part of, any demerger dividend arising out of the proposed restructure?

Answer

No.

Question 5

Whether the Commissioner will make a determination under subsection 45B(3) of the ITAA 1936 that section 45C of the ITAA 1936 applies to the whole, or a part of any capital benefit arising out of the proposed restructure?

Answer

No.

This ruling applies for the following period

Income year ended 30 June 2016

The scheme commences on

The scheme is contemplation during the income year ended 30 June 2016

Relevant facts and circumstances

It is proposed that a group comprising of Head Co and its wholly owned Subsidiary Companies be restructured to separate ownership and control of property investments held within the group due to disputes between the Head Co shareholders.

The scheme involves the transfer by Head Co of several Subsidiary Companies to the Head Co shareholders.

The Head Co shares are pre-CGT.

The shares in the Subsidiary Companies are post-CGT. Neither Head Co nor the Subsidiary Companies have ever paid a dividend or returned any capital.

The restructure involves the following steps:

All assets of Head Co, apart from the shares in the Subsidiary Companies, will be transferred to the Subsidiary Companies. The Subsidiary Companies will therefore own or come to own the property investments.

Each of the Subsidiary Companies will create and issue a new classes of shares to Head Co, that Head Co will own in addition the single ordinary share it originally acquired in each Subsidiary Company upon their incorporation.

Each of the Subsidiary Companies will cancel the single ordinary share held in the respective company by Head Co and return the amount paid up on the shares to Head Co.

Upon cancellation of these shares, Head Co will use the capital returned from the Subsidiary Companies to make a payment to its shareholders. Head Co will debit the amount of this payment against certain liabilities it owes its shareholders.

Each of the Subsidiary Companies will then exit the group as a result of Head Co being voluntarily wound up and the liquidator distributing the shares in the Subsidiary Companies to the Head Co shareholders. The market value of the shares in the Subsidiary Companies will exceed the amount at which Head Co has recorded its investment in those companies in its accounts. Additionally, the market value of the assets of Head Co (primarily its shares in the Subsidiary Companies) will exceed the total amount of its liabilities and share capital. The share capital account of Head Co will not be debited in order to make the in-specie distributions of the shares in the Subsidiary Companies.

Following the distributions Head Co will hold no assets. At the completion of the liquidation, Head Co will be deregistered.

Post restructure it is proposed that each Head Co shareholder will transfer between them, shares in the various Subsidiary Companies, for no consideration to ensure control of the property investments is obtained by the Head Co shareholders in the desired proportions.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 6

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 section 45C

Income Tax Assessment Act 1997 Division 125

Income Tax Assessment Act 1997 section 125-55

Income Tax Assessment Act 1997 section 125-70

Reasons for decision

Question 1

Summary

The proposed restructure is not a 'demerger' within the meaning of section 125-70 of the ITAA 1997 as the requirement in paragraph 125-70(1)(c) will not be satisfied.

Detailed reasoning

Head Co will be the head entity of a demerger group comprised of it and the Subsidiary Companies. The Head Co shares are the original interests, and the Head Co shareholders are the owners of the original interests. The shares in the Subsidiary Companies to be distributed in-specie are new interests that will be acquired by the Head Co shareholders. A restructuring is not in all cases limited to the distribution which results in owners of original interests in a head entity receiving at least 80% of the ownership interests in a demerged entity. What comprises a restructuring is to be determined with reference to the facts of each case. On the facts of the ruling scheme the restructuring includes the in-specie distribution. It also includes the preceding step of the Subsidiary Companies returning capital to Head Co, who in turn will use the capital returned to reduce debts it owes to its shareholders. In order for demerger relief to apply, a demerger must happen under a restructuring, and the requirements of subsection 125-70(1) of the ITAA 1997 must be met. One of the requirements is in paragraph 125-70(1)(c), which provides that under the restructuring:

(i) a *CGT event happens to an original interest owned by an entity in the head entity of the group and the entity acquires a new interest and nothing else; or


(ii) no CGT event happens to an original interest owned by an entity in the head entity of the group and the entity acquires a new interest and nothing else; …

On the facts of this case, in addition to the shares in the Subsidiary Companies, under the restructuring, the Head Co shareholders will receive something else, in particular, a loan repayment from Head Co. Accordingly, the requirement in paragraph 125-70(1)(c) of the ITAA 1997, and therefore, the conditions of subsection 125-70(1) are not met. Consequently a 'demerger' within the meaning of subsection 125-70(1) does not happen to the demerger group.

Question 2

Summary

As the proposed restructuring is not a demerger under section 125-70 of the ITAA 1997, there is no CGT roll-over relief available for Head Co shareholders pursuant to section 125-55 of the ITAA 1997.

Detailed reasoning

Demerger roll-over is available where the requirements of section 125-55 of the ITAA 1997 are met. One of the requirements, in paragraph 125-55(1)(c), is that a demerger happens to the demerger group. As explained above, a demerger does not happen to the demerger group comprised of Head Co and the Subsidiary Companies on the facts of the ruling scheme. Therefore Head Co shareholders cannot choose roll-over to disregard any capital gains arising from CGT events happening under the restructuring.

Question 3

Summary

As the proposed restructuring is not a demerger under section 125-70 of the ITAA 1997, the in-specie distribution of shares in the Subsidiary Companies to the Head Co shareholders will not happen under a demerger, and will therefore not be demerger dividends as defined in subsection 6(1) of the ITAA 1936. The in-specie distributions will be assessable dividends, paid out of profits or taken to be paid out of profits, to the Head Co shareholders, to the extent they are not debited to the share capital account of Head Co.

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. Subsection 44(1A) of the ITAA 1936 deems a dividend paid out of an amount other than profits to be paid out of profits.

The definition of a dividend relevantly includes any distribution made by a company to its shareholders in money or property. However the definition of a dividend, specifically excludes amounts debited against an amount standing to the credit of the distributing company's share capital account (paragraph (d) of the subsection 6(1) of the ITAA 1936 definition of a dividend).

The market value of the shares in the Subsidiary Companies will exceed the amount at which Head Co has recorded its investment in those companies in its accounts. Additionally, the market value of the assets of Head Co (primarily its shares in the Subsidiary Companies) will exceed the total amount of its liabilities and share capital. Consequently Head Co's distribution of the shares in the Subsidiary Companies to its shareholders will be dividends paid, or taken to be paid to its shareholders, out of profits, to the extent the distribution is not debited to Head Co's share capital account.

Is the dividend a demerger dividend?

Under subsections 44(3) and 44(4) of the ITAA 1936 A demerger dividend is non-assessable non- exempt income 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 44(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.

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

• 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.

In the present case, the in-specie distributions of shares in the Subsidiary Companies will be dividends paid by Head Co out of profits to its shareholders. Those dividends must form part of a 'demerger allocation' in order to be a demerger dividend. A 'demerger allocation' is defined in subsection 6(1) of the ITAA 1936 to relevantly mean:

• the total market value of the allocation represented by the ownership interests disposed of by a member of the demerger group under a 'demerger' to the owners of the ownership interests in the head entity.

The word 'demerger' when it appears in this definition has the meaning given by section 125-70 of the ITAA 1997. As, on the facts of the ruling scheme, the in-specie distribution will not happen under a demerger within the meaning of section 125-70, no part of the total market value of the shares in the Subsidiary Companies that are to be distributed, will be a demerger dividend.

Therefore, the dividends Head Co will pay by distributing the shares will be assessable income for its shareholders under subsection 44(1) of the ITAA 1936.

Question 4

Paragraph 45B(3)(a) of the ITAA 1936 allows the Commissioner to make a determination that section 45BA of the ITAA 1936 applies in relation to the whole, or a part, of the demerger benefit.

Subsection 45B(4) of the ITAA 1936 makes it clear that a demerger benefit can only be received in relation to a demerger. A demerger is defined in subsection 6(1) of the ITAA 1936 as having the meaning given by section 125-70 of the ITAA 1997.

Since, in the present circumstances, a demerger for the purposes of section 125-70 of the ITAA 1997 does not happen, no demerger benefit arises. Therefore 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 any demerger benefit provided under the scheme, as no such benefit arises under the current scheme.

Question 5

Summary and reasoning

The Commissioner will not make a determination under paragraph 45B(3)(b) of the ITAA 1936 that section 45C of the ITAA 1936 will apply to any capital benefit arising from the restructure, to the extent the in-specie distributions are a return of share capital. This is because, on the facts of the ruling scheme, Head Co will not debit its share capital account to account for any part of the in-specie distributions.