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Edited version of your written advice
Authorisation Number: 1013140862663
Date of advice: 21 December 2016
Ruling
Subject: Company restructure and demerger
Question 1
Will the Commissioner confirm that the disposal of shares in Company B will not give rise to a capital gain for Company A due to the demerger relief provided in sub-division 125 of the Income Tax Assessment Act 1997?
Answer
The disposal of share will not give rise to a capital gain for Company A.
This ruling applies for the following periods:
1 July 201X to 30 June 201X
The scheme commences on:
1 July 201X
Relevant facts and circumstances
Company A is an Australian resident company.
Company A holds 100% of the shares in Company C which is an Australian resident private company.
Company A holds XX% of the shares in Company B which is an Australian resident private company.
The remaining XX% shares in Company B are held by various external shareholders.
Company B holds 100% of the shares in Company D.
Company A is the parent company for the group and was founded by X in 200X.
Proposed restructure
It is proposed that Company A will undertake an in-specie distribution of its shares in Company B to its shareholders.
The in-specie distribution of Company B shares to the shareholders of Company A is proposed to be effected by way of capital reduction in specie under section 256B of the Corporations Act.
Reasons for the proposed demerger
1. Conflict between the Company C and Company D Systems Businesses
(a) Conflict of interest
The current ownership structure with Company A having ownership in both the Company D and Company C businesses creates the perception of a conflict of interest between the two businesses and is resulting in the loss of business for both Company C and Company D.
To overcome these conflicts, there is a real need to separate the two businesses. The current efforts made to separate the two businesses is not sufficient to overcome these client concerns and presents an impediment to the growth of both businesses.
2. Facilitate capital raising by the Company B Group
The Company D business is in the start-up phase and therefore being able to raise further capital through further investment from high net wealth investors is a means of funding business operations in order to expand the Company B business.
The ultimate goal is to list Company B and raise capital through an initial public offering and then enter foreign markets.
However, the current structure of Company B is an obstacle and impediment to raising further capital from high net wealth investors. Potential investors view the current shareholding of XX% by Company A as a voting bloc because Company A XX% shareholding gives it the controlling vote in Company B. Potential shareholders are therefore reluctant to invest in Company B because of the control that Company A has under the current structure.
By demerging Company B, Company B will be more attractive for potential investors and will therefore facilitate further capital raising by investors and an eventual IPO of Company B.
3. Achieve Management Efficiencies
Separating the Company B and Company C businesses will also achieve management efficiencies.
Following the proposed demerger, X will remain as the XYZ of Company B and will resign as XYZ of Company D, retaining only an advisory role.
Company C and Company B will have their own management teams.
Relevant legislative provisions
Income Tax Assessment Act 1997 s125-55,
Income Tax Assessment Act 1997 s125-65 and
Income Tax Assessment Act 1997 s125-70.
Reasons for decision
Section 125-1, which is the guide to Division 125 ITAA 1997, states that an entity can obtain CGT relief for a demerger. It provides that owners of ownership interests in the head entity of a demerger group can obtain a roll-over to defer CGT consequences for the CGT events that happen to their interests under the demerger.
This provision further states that capital gains and capital losses made by members of the demerger group from certain CGT events that happen under the demerger are disregarded.
Company A as the head entity and Company B form part of a demerger group under subsection 125-65(1) ITAA 1997.
A demerger will take place under section 125-70, as:
● more than 80% of the total membership in Company B are disposed of to the shareholders of Company A (the head entity) (s127-70(1)(b)(i) ITAA 1997)
● under the restructuring, CGT event G1 will happen in respect of the shares in Company A, satisfying paragraph 125-70(1)(c) ITAA 1997
● the shareholders of Company A only acquire the shares in Company B because they were shareholders in Company A (s127-70(1)(d) ITAA 1997)
● the shares acquired by the shareholders in Company A are shares in Company B which is a company (s127-70(e)(i)
● the shareholders in Company A (the head entity) acquire the same proportion of shares that Company A held in Company B and just after demerger will have the same proportionate total market value of ownership interests in Company A and Company B as the shareholder owned in Company A just before the demerger (s125-70(2) ITAA 1997)
The requirements of section 125-55 ITAA 1997 have been satisfied, meaning a CGT roll-over is available in respect of the demerger.