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Edited version of your written advice
Authorisation Number: 1051208300844
Date of advice: 28 April 2017
Ruling
Subject: Capital Gains Tax (CGT) event J1
Question
Will CGT Event J1 happen to Subsidiary A as a result of a demerger?
Answer
No
This ruling applies for the following periods:
The 201X income year.
The scheme commences in:
The 201X income year.
Relevant facts and circumstances
Subsidiary B transferred a CGT asset to Subsidiary A in circumstances where CGT rollover relief under Subdivision 126B of the ITAA 1997 was applied. At the time of the roll-over, Subsidiary A was a wholly owned subsidiary of HC, the ultimate holding company of both Subsidiary A and Subsidiary B.
Subsequent to the transfer, there is a group restructure resulting in Subsidiary A ceasing to be a wholly owned subsidiary of HC.
Relevant legislative provisions
Income Tax Assessment Act 1997 (ITAA 1997):
Section 104-175
Section 125-160
Reasons for decision
CGT event J1 happens under section 104-175 of the ITAA 1997 if:
● There is a roll-over under Subdivision 126-B of the ITAA 1997 in relation to an earlier transfer of a CGT asset and
● The recipient company (while it still owns the CGT asset) subsequently ceases to be a wholly-owned subsidiary of the ultimate holding company of the group at the time of the roll-over.
However, section 125-160 of the ITAA 1997 provides that CGT event J1 does not happen to a 'demerged entity or a member of a demerger group under a demerger'.
Meaning of demerger group
A demerger group comprises of the head entity and at least one demerger subsidiary (subsection 125-65(1) of the ITAA 1997). Under the proposed arrangement, the demerger group includes (but is not limited to) HC as the head entity and Subsidiary A and Subsidiary B as demerger subsidiaries.
A company is the head entity of a demerger group if no other member of the group owns ownership interests in the company (subsection 125-65(3) of the ITAA 1997) and no other company or trust is capable of being the head entity of a demerger group of which the company is a demerger subsidiary (subsection 125-65(4) of the ITAA 1997).
Did a demerger happen to the HC demerger group?
A demerger happened to the HC demerger group because all the requirements in subsection 125-70(1) of the ITAA 1997 were met:
1. Paragraph 125-70(1)(a) was met because there was a restructuring of the demerger group.
2. Subparagraph 125-70(1)(b)(i) was met because at least 80% of the total ownership interests in the demerger subsidiary was disposed of to owners of the original interests in the head entity of the demerger group.
3. Paragraph 125-70(1)(c) was met because HC shareholders acquired a new interest and nothing else under the restructuring.
4. Paragraph 125-70(1)(d) was met because the acquisition by HC shareholders of new interests happened only because they owned original interests as at the record date.
5. Paragraph 125-70(1)(e) was met because the new interests acquired was ownership interests in a company.
6. Paragraph 125-70(1)(g) was met because neither the original interests nor the new interests are interests in a trust that is a non-complying superannuation fund.
7. Paragraph 125-70(1)(h) was met because the proportionate ownership tests under subsection 125-70(2) were met.
Other requirements
Despite meeting the above criteria, a demerger will not occur if the proposed arrangement involves:
● A buy-back of shares that is an off-market purchase for the purposes of Division 16K of Part III of the ITAA 1936 (subsection 125-70(4) of the ITAA 1997).
● Circumstances where an owner of original interest can obtain a roll-over under a provision of the ITAA 1997 outside Division 125 for all of the CGT events that happened to the owner's original interests under the circumstances (subsection 125-70(6) of the ITAA 1997).
Neither of these exceptions are relevant to this case and do not apply.
Conclusion
Subsidiary A is a member of a demerger group under a demerger. Section 125-160 of the ITAA 1997 applies such that CGT Event J1 cannot happen to Subsidiary A as a result of the demerger.