Edited version of your written advice

Authorisation Number: 1013036755273

Date of advice: 8 July 2016

Ruling

Subject: Demerger

Question 1

As a consequence of section 125-155 of the Income Tax Assessment Act 1997 (ITAA 1997), will A Co disregard any capital gain or capital loss under CGT event A1 upon the distribution of its shares in B Co to its shareholders?

Answer

Yes.

Question 2

As a consequence of the distribution of A Co's shares in B Co to its shareholders, will A Co 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.

This ruling applies for the following periods:

1 July 20XX to 30 June 20XX

The scheme commenced in:

Income year ended 30 June 20XX

Relevant facts and circumstances

Relevant Entities

A Co

1. A Co is an Australian resident company. A Co's ordinary shares are listed on the Australian Securities Exchange (ASX).

2. Immediately before the demerger, A Co had ordinary shares and unlisted options on issue.

3. There were no other ownership interests (as defined in subsection 125-60(1) of the ITAA 1997) in A Co immediately before the demerger.

4. A Co has not paid any dividends, issued bonus shares, or returned share capital to its shareholders within the last ten years.

5. As at date XX, A Co had no realised or unrealised profits.

B Co

6. B Co is an Australian resident company. Immediately before the demerger, B Co was a wholly owned subsidiary of A Co and only had ordinary shares on issue.

7. There were no other ownership interests (as defined in subsection 125-60(1) of the ITAA 1997) in B Co immediately before the demerger.

The demerger of B Co ordinary shares

8. To effect the demerger by A Co of B Co ordinary shares, the shareholders of A Co voted at a meeting to approve an ordinary resolution under section 256C of the Corporations Act 2001 to reduce the share capital of A Co by $XX (the Capital Reduction Amount). This amount was debited to the share capital account of A Co.

9. The payment of the capital reduction amount was satisfied by an in specie distribution to the shareholders of A Co of at least 80% of the ordinary shares in B Co held by A Co. The shares in B Co were transferred to the shareholders of A Co on a pro rata basis on the Demerger Date. As a result of the demerger, the shareholders of A Co own shares in both A Co and B Co.

Accounting for the distribution to effect the demerger

10. A Co, on a stand-alone basis, accounted for the capital reduction and the distribution of B Co ordinary shares that effected the demerger with the following journal entry:

DR Share Capital $ Capital Reduction Amount

CR Investment in B Co $ Capital Reduction Amount

Other matters

11. No amounts have been transferred to the share capital account (as defined in section 975-300 of the ITAA 1997) of A Co from any of its other accounts. Accordingly, A Co's share capital account is not tainted (within the meaning of Division 197 of the ITAA 1997).

12. Just after the demerger, at least 50% of the market value of the CGT assets owned by B Co and its demerger subsidiaries were used in carrying on a business by those entities.

13. A Co is not a demerger subsidiary (within the meaning given by section 125-65 of the ITAA 1997) of any of its shareholders.

14. Subsection 125-65(4) of the ITAA 1997 does not apply to A Co.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 45A,

Income Tax Assessment Act 1936 Subsection 45A(2),

Income Tax Assessment Act 1936 Section 45B,

Income Tax Assessment Act 1936 Paragraph 45B(3)(a),

Income Tax Assessment Act 1936 Paragraph 45B(3)(b),

Income Tax Assessment Act 1936 Section 45BA,

Income Tax Assessment Act 1936 Section 45C,

Income Tax Assessment Act 1936 Subsection 45D(1A),

Income Tax Assessment Act 1997 Section 104-10, and

Income Tax Assessment Act 1997 Section 125-155.

Reasons for decision

Question 1

CGT event A1 happened as a result of A Co transferring its shares in B Co to its shareholders (section 104-10 of the ITAA 1997).

Pursuant to section 125-155 of the ITAA 1997, A Co will disregard a capital gain or capital loss arising from CGT event A1 happening if:

(i) A Co is a demerging entity,

(ii) the B Co shares are ownership interests in a demerged entity, and

(iii) the CGT event happened under a demerger.

Based on the particular facts and circumstances of this case, the requirements of section 125-155 of the ITAA 1997 are met and A Co will disregard any capital gain or capital loss made from CGT event A1 happening as a result of disposing of its B Co shares to its shareholders.

Question 2

Subsection 45D(1A) of the ITAA 1936 provides that a company must, where the Commissioner has made a determination under section 45A or section 45B of the ITAA 1936, give a copy of the Commissioner's notice to:

(a) the advantaged shareholder referred to in section 45A of the ITAA 1936, or

(b) the relevant taxpayer referred to in section 45B of the ITAA 1936.

Based on the particular facts and circumstances of this case, 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 whole, or any part, of the capital benefits provided to A Co shareholders under the demerger of B Co. As a result, no part of the capital benefits will be taken to be an unfranked dividend;

• will not make a determination under paragraph 45B(3)(a) or 45(3)(b) of the ITAA 1936 that either section 45BA or 45C of the ITAA 1936 applies to the demerger benefit or the capital benefit obtained by A Co shareholders.

As the Commissioner will not make a determination under either section 45A or section 45B of the ITAA 1936, subsection 45D(1A) of the ITAA 1936 will not apply to A Co as a consequence of the distribution of its shares in B Co to its shareholders. Accordingly, A Co is not required to give a copy of a notice to its shareholders.