Edited version of your written advice

Authorisation Number: 1012907854546

Date of advice: 20 November 2015

Ruling

Subject: Demerger

Question

Will any capital gain or loss made from the disposal by ABC Limited of its shares in XYZ Limited by an in specie distribution to the ABC Limited shareholders (demerger distribution) be disregarded pursuant to Division 125 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following period(s)

1 July 2015 to 30 June 2016

The scheme commences on

1 July 2015

Relevant facts and circumstances

Relevant entities

ABC

1. ABC is an Australian resident unlisted public company.

2. ABC established XYZ, a new wholly owned company and provided initial funding and services to XYZ which were later converted into issued shares. ABC held 100% of XYZ.

3. Prior to 30 June 20XX, all expenses were incurred by ABC on behalf of XYZ and were reflected in a non-interest bearing intercompany loan account. At the time ABC owned 100% of XYZ.

4. In 20XX, XYZ issued shares to ABC to convert the balance in the intercompany loan account to equity.

5. In 20XX, XYZ raised external funds by issuing shares. Since then XYZ has raised further funds which has diluted ABC's shareholding in XYZ.

6. At 30 June 20YY ABC held shares in XYZ which equated to approximately X% of the issued capital of XYZ. The remaining Y% is owned by unrelated shareholders.

7. Since 1 July 20YY, XYZ's employees are employed directly by XYZ.

Demerger

8. The demerger of XYZ from ABC will be effected by a reduction in the share capital of ABC and by a demerger dividend that will be satisfied by an in specie distribution of Z% of the shares in XYZ held by ABC to ABC shareholders.

9. ABC will account for the demerger by debiting its share capital account by the capital reduction amount.

10. Immediately following the demerger, ABC shareholders will hold shares in XYZ in proportion to their interest in ABC prior to the demerger.

11. ABC shareholders will not be required to pay any consideration for the XYZ shares received by them under the demerger.

Reason for demerger

12. The proposed demerger will provide the opportunity for ABC to focus on its core activities and competencies and not be overshadowed by the activities undertaken by XYZ.

13. Both ABC and XYZ will be able to independently undertake strategic, financial, operational and investment decisions which are relevant to the different natures of each of the businesses, the respective priorities and objects of each business and each of their growth strategies.

14. The proposed demerger will eliminate the potential for competing strategies between the businesses.

15. Both ABC and XYZ will be better able to develop financial policies that are appropriate to their own particular operational and strategic objectives.

16. Both ABC and XYZ will be able to soundly establish their different profiles.

Other relevant matters

17. ABC's share capital account is not 'tainted' within the meaning of Division 197 of the ITAA 1997.

18. Just after the demerger, at least 50% of the CGT assets of XYZ will be used directly, or indirectly, in one or more business that it carries on.

19. ABC will not make an election in writing under subsection 44(2) of the ITAA 1936 for subsection 44(3) and subsection 44(4) not to apply to the ABC shareholders.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 Division 125

Income Tax Assessment Act 1997 subsection 125-60(1)

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

Income Tax Assessment Act 1997 subsection 125-65(2)

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(6)

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 paragraph 125-70(1)(d)

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 paragraph 125-70(2)(a)

Income Tax Assessment Act 1997 paragraph 125-70(2)(b)

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

Reasons for decision

Summary

Any capital gain or loss made from the disposal by ABC of its shares in XYZ by an in-specie distribution to ABC shareholders can be disregarded.

Detailed reasoning

All legislative references in this section are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise stated.

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

Under the scheme to which this Ruling applies, CGT event A1 will happen when ABC disposes of its XYZ shares to ABC shareholders (section 104-10).

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

For a demerger to happen for the purposes of Division 125 there must be a demerger group.

'Demerger group' comprises the 'head entity' of a group and one or more 'demerger subsidiaries' (subsection 125-65(1)). For the purposes of this scheme, the demerger group includes ABC as the head entity and XYZ as demerger subsidiary.

ABC is the head entity of a demerger group because at the time of the restructure:

• no member of the demerger group owned any ownership interests in ABC (subsection 125-65(3)), and

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

XYZ would be a demerger subsidiary of ABC at the time of the scheme, because at that time ABC would own 65% of ownership interests that carries the right to:

• receive more than 20 per cent of any distribution of income or capital by XYZ, and

• exercise more than 20 per cent of the voting power in XYZ (subsection 125-65(6)).

A demerger will happen (within the meaning of subsections 125-70(1)-(5)) to the ABC demerger group under the scheme because: 

• there will be a restructuring (paragraph 125-70(1)(a)), under which at least Z% of the ownership interests that ABC own in XYZ will be transferred to ABC ownership interest holders (subparagraph 125-70(1)(b)(i))

• under the restructuring, CGT Event G1 (section 104-135 of the ITAA 1997) will happen to ABC shares, and ABC shareholders will receive nothing other than new shares in XYZ (subparagraph 125-70(1)(c)(i))

• ABC shareholders will receive shares in XYZ under the demerger on the basis that they are shareholders of ABC (paragraph 125-70(1)(d) and subparagraph 125-70(1)(e)(i))

• at the time of the demerger, neither ABC nor XYZ would be superannuation funds within the meaning of that term in section 10 of the Superannuation Industry (Supervision) Act 1993 (paragraph 125-70(1)(g))

• the demerger does 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))

• no other roll-over is available under another provision of the ITAA 1936 or ITAA 1997 (subsection 125-70(5)), and

• under the demerger, each ABC shareholder will acquire the same proportion of ownership interests in XYZ as the ownership interests they owned in ABC just before the demerger, and just after the demerger each ABC shareholder will own the same proportionate total market value of ABC shares and XYZ shares as they own in ABC just before the demerger (paragraphs 125-70(2)(a) and (b) and subsection 125-70(3)).

ABC is a demerging entity because it will dispose of at least Z% of its ownership interests in XYZ to ABC shareholders (subparagraph 125-70(7)(a)).

XYZ will be a 'demerged entity' as the ownership interests in it will be acquired by shareholders in ABC, the head entity of the group (subsection 125-70(6)).

Since any capital gain or capital loss ABC will make from CGT event A1 happening on the disposal of XYZ shares will occur under a demerger, the capital gain or capital loss can be disregarded as a result of section 125-155.