Edited version of your written advice

Authorisation Number: 1012898280281

Date of advice: 20 October 2015

Ruling

Subject: Dividends

Question and answer

Is any of the value of the shares being issued to you by Company A as a result of a demerger included as assessable income?

No.

Does the issue of the shares change the cost base of your original shareholding?

Yes

This ruling applies for the following periods:

Year ending 30 June 2016

The scheme commenced on:

1 July 2015

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.

You are an Australian resident for taxation purposes.

You currently hold shares in Company A.

The current market price for Company A shares is approximately $X.

The company is going through a separation and will split into separate companies known as Company A and Company B.

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

If you maintain your shares in Company A until the record date you will be automatically issued with Y shares in Company B.

To obtain these shares in Company B you do not need to pay any consideration or surrender your existing shares in Company A.

To accomplish the separation Company A will distribute all of the outstanding shares of Company B to Company A stockholders on a pro rata basis.

This distribution is generally intended to be free of income tax and capital gains tax in the company's home country.

Company A will not issue fractional shares in the distribution and these will be aggregated and sold in the public market.

The cash received in lieu of a fractional share will be recognised as a gain or a loss under the foreign country's income tax legislation.

You own the shares on capital account as an individual shareholder.

The arrangement for the scheme is going to be conducted under the public documents lodged with the foreign country's Authority.

Relevant legislative provisions:

Income Tax Assessment Act 1997 section 125-55

Income Tax Assessment Act 1997 section 125-70

Income Tax Assessment Act 1997 section 125-85

Income Tax Assessment Act 1997 section 125-90

Income Tax Assessment Act 1997 section 127-70

Income Tax Assessment Act 1936 section 44

Reasons for decision

The assessable income of an Australian resident includes ordinary income and statutory income from all sources, whether inside or outside of Australia (section 6-5 and section 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997).

Ordinary income is income according to ordinary concepts.

Statutory income is an amount that a provision of the ITAA 1997 or Income Tax Assessment Act 1936 (ITAA 1936) specifically provides for as assessable income.

The assessable income of an Australian resident shareholder in a company (whether the company is a resident or a non-resident) includes:

• dividends (other than non-share dividends) that are paid to the shareholder by the company out of profits derived by it from any source, and

• all non-share dividends paid to the shareholder by the company under section 44(1) of the ITAA 1936.

A demerger dividend is not assessable income or exempt income under section 44(4) of the ITAA 1936.

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

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

• certain payments, allocations and distributions are made in substitution for dividends.

The commissioner accepts that section 45B does not apply to your circumstance.

Division 125 of the ITAA 1997 lists the conditions required to obtain a demerger relief from Capital Gains Tax (CGT). Section 125-55 of the ITAA 1997 states that you can obtain a rollover if:

• you own an ownership interest in a company,

• the company is the head entity of a demerger group,

• a demerger happens to the demerger group, and

• under the demerger a CGT event happens to your original interest and you acquire a new or replacement interest in the demerged entity

In your case the demerger applies to Company A and the new interest in the demerged entity represents the transformation of Company B.

Section 127-70 of the ITAA 1997 states that a demerger happens to a group if:

• there is a restructuring of the demerger group,

• and under that restructuring -

• members of the demerger group dispose of at least 80% of their total ownership interests in another member of the demerger group to owners of original interests in the head entity of the demerger group, or

• at least 80% of the total ownership interests of members of the demerger group in another member of the demerger group end and new interests are issued to owners of original interests in the head entity, or

• the demerged entity issues sufficient new ownership interests in itself with the result that owners of original interests in the head entity own at least 80% of the total ownership interests in the demerged entity.

In your case there is a demerger of Company A by Company B.

Section 125-70(2) states that each owner of the original interests in the head entity of the demerger group must:

• acquire under the demerger, the same proportion or as nearly as practical as the same proportion of new interests in the demerged entity as the original owner had in the head entity before the demerger occurred, and

• just after the demerger, have the same proportionate total market value of ownership interests in the head entity and demerged entity as the original owner had in the head entity just before the demerger.

In your case if you accept the shares from Company B you will need to adjust your cost base of Company A and Company B shares to take into account the demerger. This can be done by taking the sum of the cost base of the Company A shares just before the demerger, and apportioning that sum over the remaining Company A shares and new Company B 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 Company A shares and Company B, or a reasonable approximation of those market values (subsections 125-80(2) and 125-80(3) of the ITAA 1997).

Regardless of whether a CGT event did not happen (Section 125-90 ITAA 1997) or a CGT event did happen and no rollover was chosen (Section 125-85) you must still make an adjustment to your cost base and reduced cost base of an ownership interest you have in a company if a demerger occurs and you acquire a new interest under the demerger.