Edited version of your written advice

Authorisation Number: 1012896719765

Date of advice: 27 October 2015

Ruling

Subject: The proposed demerger of Company Y by Company X

Question 1

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

Answer

Yes

Question 2

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

Answer

Yes

Question 3

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

Answer

No

Question 4

Will section 45 of the ITAA 1936 apply to the whole or any part of the demerger scheme?

Answer

No

This ruling applies for the following period:

Income year ending XX XXX XXXX

The scheme commences on:

XX XXX XXXX

Relevant facts and circumstances

Background

The subject of this Ruling is the demerger transaction involving the distribution of Company Y shares by Company X that is proposed to occur on the demerger date.

Relevant entities

Company X

Company X is an Australian Securities Exchange listed public company.

Company X has on issue fully paid listed ordinary shares and unlisted options. There are no other ownership interests in Company X on issue.

The unlisted options constitute less than 10% of the total ownership interests in Company X.

Company Y

Just before the proposed demerger:

• Company Y will be a wholly-owned subsidiary of Company X

• Company X will hold all the Company Y shares on issue

• Company X will own shares in Company Y that carry between them the right to:

• receive 100% of any distribution of income or capital by Company Y , and

• exercise, or control the exercise of, 100% of the voting power of Company Y

• Company X will hold those Company Y shares as a CGT asset on capital account, and

• There will be no other ownership interests in Company Y, as defined in subsection 125-60(1).

Proposed transactions

Company X will undertake internal restructure that will result in Company X owning ownership interest in Company Y that carry the right to receive 100% of any distribution of income or capital by Company Y and exercise, or control the exercise of, 100% of the voting power of Company Y.

Company X will undertake a capital reduction, returning to its shareholders a percentage of the original capital contributed.

Company X will adopt a tracing approach to determine the amount of capital attributable to Company Y.

Company X will not declare nor pay a dividend under section 254T of the Corporations Act 2001 as part of the proposed demerger.

Company X will make an in specie distribution of all the shares in Company Y to the shareholders of Company X in satisfaction of the capital reduction. The total shares in Company Y on issue will be distributed by Company X to shares holders on a XX-for-XX basis.

The full capital reduction will be debited to Company X's share capital account as it does not have positive retained earnings.

Company X has not previously transferred any amounts to its share capital account so as to cause its share capital account to become tainted.

Company Y options

Concurrently with the above, Company Y will issue new options in itself to the existing option holders of Company X. Company Y will issue Company Y options for Company X options held on the same XX-for-XX basis.

Accounting for the proposed demerger

No other accounting entries are anticipated except an entry to reduce the share capital account and remove the net assets of Company Y from the consolidated accounts of Company X.

Other matters

Company X is not a demerger subsidiary of another company or trust in another demerger group as defined in subsection 125-65(4).

No Company X shareholder acquired their Company X shares before 20 September 1985.

No Company X shares will be bought-back under the proposed demerger.

Company X's share capital account is not tainted as defined in Division 197.

Participating Company X shareholders will not be able to obtain a roll-over outside Division 125.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 6(1)

Income Tax Assessment Act 1936 subsection 44(1)

Income Tax Assessment Act 1936 section 45

Income Tax Assessment Act 1936 paragraph 45(1)(a)

Income Tax Assessment Act 1936 subsection 45(3)

Income Tax Assessment Act 1936 section 45A

Income Tax Assessment Act 1936 subsection 45A(1)

Income Tax Assessment Act 1936 subsection 45A(2)

Income Tax Assessment Act 1936 subsection 45A(3)

Income Tax Assessment Act 1936 section 45B

Income Tax Assessment Act 1936 subsection 45B(1)

Income Tax Assessment Act 1936 subsection 45B(2)

Income Tax Assessment Act 1936 paragraph 45B(2)(a)

Income Tax Assessment Act 1936 paragraph 45B(2)(b)

Income Tax Assessment Act 1936 paragraph 45B(2)(c)

Income Tax Assessment Act 1936 paragraph 45B(3)(a)

Income Tax Assessment Act 1936 paragraph 45B(3)(b)

Income Tax Assessment Act 1936 subsection 45B(4)

Income Tax Assessment Act 1936 paragraph 45B(4)(a)

Income Tax Assessment Act 1936 paragraph 45B(5)(a)

Income Tax Assessment Act 1936 subsection 45B(8)

Income Tax Assessment Act 1936 subsection 45B(9)

Income Tax Assessment Act 1936 subsection 45BA(1)

Income Tax Assessment Act 1936 section 45C

Income Tax Assessment Act 1936 subsection 45C(1)

Income Tax Assessment Act 1936 subsection 45C(2)

Income Tax Assessment Act 1936 section 45D

Income Tax Assessment Act 1936 subsection 45D(1)

Income Tax Assessment Act 1936 subsection 45D(1A)

Income Tax Assessment Act 1936 section 318

Income Tax Assessment Act 1936 subsection 45D(1A)

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 subsection 104-175(1)

Income Tax Assessment Act 1997 Division 125

Income Tax Assessment Act 1997 section 125-55

Income Tax Assessment Act 1997 paragraph 125-55(1)(a)

Income Tax Assessment Act 1997 paragraph 125-55(1)(b)

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

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

Income Tax Assessment Act 1997 subsection 125-65(4)

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

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

Income Tax Assessment Act 1997 section 125-70

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

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

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

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

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

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

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

Income Tax Assessment Act 1997 subsection 125-70(3)

Income Tax Assessment Act 1997 subsection 125-70(4)

Income Tax Assessment Act 1997 subsection 125-70(5)

Income Tax Assessment Act 1997 subsection 125-70(6)

Income Tax Assessment Act 1997 section 125-155

Income Tax Assessment Act 1997 section 125-160

Income Tax Assessment Act 1997 Subdivision 126-B

Income Tax Assessment Act 1997 Division 197

Income Tax Assessment Act 1997 subsection 960-130(1), and

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

Reasons for decision

Question 1

Summary

Company X will disregard any capital gain under capital gains tax (CGT) event A1, C2, C3 or K6 upon the proposed distribution of its shares in Company Y to Company X shareholders.

Detailed reasoning

Section 125-155 - certain capital gains or losses disregarded for demerging entity

Any capital gain or capital loss that a demerging entities makes from CGT event A1, C2, C3 or K6 happening to its ownership interests in a demerged entity under a demerger is disregarded (section 125-155).

Under the proposed demerger, CGT event A1 will happen when Company X disposes of its Company Y shares to Company X shareholders (section 104-10).

In order for Company X to disregard any capital gain or capital loss made from CGT event A1 happening on the disposal of its shares in Company Y, this disposal must occur under a demerger within the meaning of Division 125.

Disposal occurs under a demerger by a demerging entity

For the purposes of Division 125, for a demerger to happen there must be a demerger group (section 125-70).

Subsection 125-65 (1) - demerger group

A demerger group comprises of one head entity and at least one demerger subsidiary (subsection 125-65(1)).

Under the proposed demerger, the demerger group includes Company X as the head entity and Company Y as a demerger subsidiary.

Subsection 125-65(3) - head entity

A company (or trust) is the head entity of a demerger group if:

• no other members of the group owns ownership interests in the company (or trust) (subsection 125-65(3)), and

• no other company or trust was capable of being the head entity of a demerger group of which the company could be a demerger subsidiary (subsection 125-65(4)).

Just before the proposed demerger, no other member of the demerger group owns ownership interests in Company X and Company X is not a demerger subsidiary of another company or trust in another demerger group.

Subsection 125-65(6) - demerger subsidiary

Company Y will be a demerger subsidiary of Company X just before the proposed demerger because at that time Company X will own ownership interests that carry the right to:

• receive 100% of any distribution of income or capital by Company Y, and

• exercise, or control the exercise of, 100% of the voting power of Company Y.

Conclusion: demerger group

Just before the proposed demerger, Company X will be the head entity of the demerger group on the basis that no other member of the demerger group will own ownership interests in Company X and Company X is not a demerger subsidiary of another company or trust in another demerger group.

Furthermore, Company Y will be a demerger subsidiary of Company X because Company X will own ownership interests in Company Y that carry the rights outlined in subsection 125-65(5).

Therefore, Company X will be the head entity of the demerger group and Company Y will be a demerger subsidiary in that demerger group.

Subsection 125-75(4) - ownership interests that are disregarded

When working out whether the subsection 125-70(2) requirements are met, that you may disregard ownership interests that are adjusting instruments (subsection 125-75(4)).

Adjusting instruments are those ownership interests that, just before the proposed demerger, represent not more than 10% of the ownership interests in the entity, or such greater percentage (not exceeding 17%) (subsection 125-75(5)).

Accordingly, the provisions in subsections 125-75(4) and (5) effectively ensures that an ownership interest that is an option, right or similar interest issued by a company under terms that satisfy the requirements above will be disregarded for the purposes of applying the test in subsection 125-70(2) (provided those interests do not represent more than 10%, or such greater percentage (not exceeding 17%) as is prescribed).

The Company X options represent less than 10% of the ownership interests in Company X and should therefore satisfy the requirement that the disregarded interests represent not more than 10% of the ownership interests in the entity. The exercise price of the existing options will be adjusted to take into account the capital reduction.

Based on the facts, subsection 125-70(2) will be satisfied as the Company X shareholders will:

• acquire the same proportion, as nearly as practicable, of Company Y shares as they owned in Company X just before the proposed demerger, and

• have the same proportionate total market value in Company X and Company Y as they owned in Company X just before the proposed demerger.

Accordingly, paragraph 125-70(1)(h) will also be satisfied.

Paragraph 125-55(1)(c) - demerger happens to the demerger group

A demerger (within the meaning of section 125-70(1)) will happen to the Company X demerger group under the scheme because:

• there will be a restructuring (paragraph 125-70(1)(a)), under which at least 80% of the shares that Company X owns in Company Y will be transferred to Company X shareholders (subparagraph 125-70(1)(b)(i))

• under the restructuring, CGT event G1 will happen to ordinary shares owned by Company X shareholders who will receive nothing other than new shares in Company Y (subparagraph 125-70(1)(c)(i))

• Company X shareholders will acquire new shares in Company Y under the restructure only because they are shareholders of Company X (paragraph 125-70(1)(d) and subparagraph 125-70(1)(e)(i))

• at the time of the restructure, neither the shares in Company X nor the new shares in Company Y will be interests in a trust that is a superannuation fund (paragraph 125-70(1)(g))

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

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

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

Conclusion

For the reasons outlined above, the conditions for demerger roll-over under Division 125 will be satisfied in respect of the proposed demerger.

As the proposed arrangement will qualify as a demerger, section 125-155 will operate to disregard any capital gain or capital loss that Company X as the demerging entity, makes from CGT event A1, C2, C3 or K6 happening to its ownership interests in Company Y as the Demerged Entity under that arrangement.

Question 2

Summary

As a consequence of section 125-160, CGT event J1 will not happen to any member of the Company X demerger group upon the proposed distribution of shares in Company Y to Company X shareholders.

Detailed reasoning

CGT event J1

CGT event J1 does not happen to a demerged entity or a member of a demerger group under a demerger (section 125-160).

The proposed distribution of shares and issue of new options in Company Y to Company X shareholders will qualify as a demerger for the purposes of Division 125 (see Detailed Reasoning of Question 1 above).

CGT event J1 occurs when, broadly speaking, a company ceases to be a member of a wholly-owned group and there is a roll-over under Subdivision 126-B (subsection 104-175(1)).

Demerger group entities

As established in the Detailed Reasoning of Question 1 above, under the proposed demerger:

• the demerger group (the Company X demerger group) includes:

• Company X as the head entity, and

• Company Y as a demerger subsidiary

• Company Y will be the Demerged Entity (as defined in subsection 125-70(6)) at the time of the restructure, and

• A demerger, as defined in section 125-70, will happen to the Company X demerger group.

Conclusion

As the proposed scheme qualifies as a demerger, CGT event J1 will not happen for Company Y or any member of the Company X demerger group upon the distribution of Company X's shares in Company Y under the proposed demerger.

Question 3

Summary

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

Detailed reasoning

Notice of determination under subsection 45D(1A)

If the Commissioner makes a determination under section 45A, 45B or 45C of the ITAA 1936, the Commissioner must give a copy of the determination to the company concerned (which in the case of a 45B demerger benefit, is the head entity of the demerger group) (subsection 45D(1) of the ITAA 1936).

Subsection 45D(1A) of the ITAA 1936 states that in the case where the Commissioner makes a determination under section 45A or 45B of the ITAA 1936 and gives notice to the company concerned, the company must give a copy of the notice to:

• the advantaged shareholder referred to in section 45A, or

• the relevant taxpayer referred to in section 45B.

The 'company concerned' for the purposes of section 45D(1) of the ITAA 1936 (and therefore the 'company' in section 45D(1A) of the ITAA 1936) will be Company X:

• in relation to section 45A, as it is the company providing the capital benefit, and

• in relation to section 45B, as it is the company providing the demerger benefit.

Company X shareholders would be the 'advantaged shareholder' or 'relevant taxpayer' for the purpose of sections 45A and 45B of the ITAA 1936 as referred to in subsection 45D(1) of the ITAA 1936 to the extent that those sections applied to the arrangement.

Therefore, in order for Company X to be required to give a copy of a notice issued by the Commissioner under subsection 45D(1) of the ITAA 1936 to Company X shareholders, it is a pre-condition that the Commissioner makes a determination under either section 45A or 45B of the ITAA 1936 in relation to the proposed demerger.

The following sections consider whether the Commissioner would be entitled to make a determination under section 45A or 45B of the ITAA 1936 in relation to the proposed demerger.

Determination under section 45A

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

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

Subsection 45A(3) of the ITAA 1936 states that a capital benefit includes the:

• provision to shareholders of shares in the company

• distribution of share capital or share premium, or

• doing of something to increase the value of a share held by the person.

Under subsection 45A(1) of the ITAA 1936, section 45A of the ITAA 1936 applies in respect of a company that streams the provision of capital benefits and the payment of dividends to its shareholders in such a way that:

• the capital benefits are received by shareholders (the advantaged shareholders) who would derive a greater benefit from the capital benefits than other shareholders, and

• it is reasonable to assume that the other shareholders (the disadvantaged shareholders) have received dividends.

The distribution provided by Company X to its shareholders, under the proposed demerger, will be sourced from its share capital account and will therefore constitute the provision of a capital benefit. No dividends will be declared and paid as part of the proposed demerger. The capital benefit will be provided to all Company X shareholders in the same proportion as their shareholdings.

Under the proposed demerger, Company X will not discriminate between Company X shareholders in the implementation of the proposed demerger and the transaction will take one form for all Company X shareholders. On XX XXX XXXX, Company X shareholders will receive XX Company Y shares for every XX Company X share in satisfaction of the capital reduction amount.

Non-resident shareholders will be required to participate in the proposed demerger. However, under the proposed demerger, the shares in Company Y to which non-residents, in a jurisdiction where it is unlawful or unduly onerous to transfer Company Y shares, would otherwise be entitled, will have their Company Y shares transferred to a sale agent for inclusion in a sale facility to be disposed of by the sale agent.

On the facts of the case, there is no evidence indicating the "streaming" of capital benefits to some shareholders and dividends to other Company X shareholders.

Therefore, section 45A of the ITAA 1936 does not have any application to the proposed demerger of Company Y by Company X. Accordingly, the Commissioner will not make a determination under subsection 45A(2) of the ITAA 1936.

Determination under section 45B

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

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

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

Where the requirements of subsection 45B(2) of the ITAA 1936 are met, the Commissioner may, where applicable, make a determination that the amount of the demerger benefit, or part, of the demerger benefit is taken not to be a demerger dividend (subsection 45BA(1) of the ITAA 1936) or the amount of the capital benefit, or part of the capital benefit, is to be treated as an unfranked dividend (subsection 45C(1) of the ITAA 1936).

The effect of a determination made under paragraph 45B(3)(a) of the ITAA 1936 is that the whole or part of a demerger benefit will be treated as not being a demerger dividend (subsection 45BA(1) of the ITAA 1936).

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

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

Paragraph 45B(2)(a) - scheme

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

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

Paragraph 45B(2)(b) - demerger benefit or capital benefit

A 'demerger benefit' is defined in subsection 45B(4) of the ITAA 1936 to include:

• the provision by a company to a person of an ownership interest in that or another company, and

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

The provision of shares in Company Y by Company X to Company X shareholders, for the purposes of section 45B, constitutes the provision of a demerger benefit under paragraph 45B(4)(a) of the ITAA n1936.

Paragraph 45B(2)(b) - tax benefit

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

• an amount of tax payable, or

• any other amount payable under the ITAA 1936 or ITAA 1997

would apart from the operation of section 45B of the ITAA 1936:

• be less than the amount that would have been payable, or

• would be payable at a later time than it would have been payable

if the demerger benefit had been an assessable dividend.

Under the proposed demerger, Company X shareholders will obtain a tax benefit within the meaning of subsection 45B(9) of the ITAA 1936 due to the dividend exemption and CGT roll-over relief provided under the demerger provisions.

Consequently, Company X shareholders that are recipients of a demerger benefit as a result of the proposed demerger will derive a tax benefit as defined in subsection 45B(9) of the ITAA 1936.

Paragraph 45B(2)(c) - purpose: relevant circumstances

Once a tax benefit has been identified 45B(2)(c) of the ITAA 1936 requires the Commissioner to consider the 'relevant circumstances' set out under subsection 45B(8) of the ITAA 1936 to determine whether any part of the scheme would be entered into for a purpose, other than an incidental purpose, of enabling a relevant taxpayer to obtain a tax benefit. However, the list of relevant circumstances in subsection 45B(8) of the ITAA 1936 is not exhaustive and regard may be had to other circumstances on the basis of their relevance.

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

The relevant circumstances under subsection 45B(8) of the ITAA 1936 consider both the circumstances of the company as well as the tax profile of the shareholders in receipt of the distribution.

Based on the above, it is considered that the factors in subparagraphs 177D(2)(a) to (h) would not support the conclusion that the proposed demerger will be undertaken for a purpose of obtaining a tax benefit.

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

Accordingly, the Commissioner will not make a determination under section 45B(3)(a) that section 45BA should apply to this transaction.

Determination under section 45C

As discussed above, the distribution of Company Y shares by Company X is a 'demerger benefit' and as such section 45B of the ITAA 1936 should be considered. Paragraph 45B(2)(a) of the ITAA 1936 provides that the section can apply on the same basis to the provision of a 'capital benefit'.

Paragraph 45B(5)(a) of the ITAA 1936 states that a person is provided with a capital benefit if the person is provided with ownership interests in a company. Importantly, the company providing the benefit need not be the same company of which the relevant person is a shareholder.

By Company X distributing the shares and options in Company Y to Company X shareholders, Company X shareholders will receive a capital benefit as well as a demerger benefit.

The relevant circumstances listed in subsection 45B(8) of the ITAA 1936 for ascertaining the purpose for the provision of a capital benefit are the same as for the purpose of the provision of a demerger benefit.

Hence, the Commissioner will not make a determination under section 45B(3)(b) of the ITAA 1936 that section 45C of the ITAA 1936 should apply to this transaction.

Conclusion

As the Commissioner will not make a determination under section 45A or 45B of the ITAA 1936 in relation to the proposed demerger of Company Y, the Commissioner will not be required to give a copy of that determination to Company X under subsection 45D(1) of the ITAA 1936 .

No requirement would arise under subsection 45D(1A) of the ITAA 1936 for Company X to give a copy of any such notice to its shareholders.

Question 4

Summary

Section 45 of the ITAA 1936 will not apply to the whole or any part of the proposed demerger benefit provided to Company X shareholders.

Detailed reasoning

Section 45

Section 45 of the ITAA 1936 applies where a company streams the provision of shares and the payment of minimally franked dividends to its shareholders in such a way that the shares are received by some shareholders and minimally franked dividends are received by other shareholders. Minimally franked dividends are dividends that are franked to less than 10% (subsection 45(3) of the ITAA 1936).

If section 45 of the ITAA 1936 applies, the value of the share when it is provided to the shareholder is deemed to be a dividend that is unfrankable. Such dividends are assessable income of the recipient shareholder to the extent provided by subsection 44(1) of the ITAA 1936 or are subject to dividend withholding tax under section 128B of the ITAA 1936.

The proposed demerger will result in all holders of Company X shares receiving a proportionate number of shares in Company Y.

Under the proposed demerger, no dividends will be declared or paid.

Therefore, neither paragraph 45(1)(a) of the ITAA 1936 nor paragraph 45(1)(b) of the ITAA 1936 will apply to the proposed demerger.

Meaning of shareholder

The term 'shareholder' is defined under section 6(1) of the ITAA 1936 to mean member or stockholder. A 'member' is defined under item 1 of the table in subsection 960-130(1) to mean 'a member of the company or a stockholder in the company'. Therefore, both the terms 'member' and 'stockholder' are not relevantly defined in the ITAA 1936 and 1997.

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

Accordingly, Company X option holders are not shareholders of the company under subsection 6(1) of the ITAA 1936 as they are not members or stockholders of the company as outlined in Patcorp Investment Ltd v FC of T.

Option holders

Section 45 of the ITAA 1936 applies to 'shareholders' not option holders or rights holders. Therefore, the unlisted options would fall outside the ambit of section 45.

Application of section 45A

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

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

The distribution provided by Company X to its shareholders, under the proposed demerger, will be sourced from its share capital account and will therefore constitute the provision of a capital benefit. No dividends will be declared and paid as part of the proposed demerger. The capital benefit will be provided to all Company X shareholders in the same proportion as their shareholdings.

Under the proposed demerger, Company X will not discriminate between Company X shareholders in the implementation of the proposed demerger and the transaction will take one form for all Company X shareholders. Company X shareholders will receive XX Company Y shares for every XX Company X shares on the Implementation Date in satisfaction of the capital reduction amount.

On the facts of the case, there is no evidence indicating the "streaming" of capital benefits to some shareholders and dividends to other Company X shareholders.

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

Conclusion

Neither paragraph 45A(1)(a) of the ITAA 1936 nor paragraph 45A(1)(b) of the ITAA 1936 will apply to the proposed demerger and the Commissioner will not make a determination under subsection 45A(2) of the ITAA 1936 that section 45C of the ITAA 1936 will apply to the proposed demerger.