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Edited version of private advice
Authorisation Number: 1051639185457
Date of advice: 25 February 2020
Ruling
Subject: Demerger
Question 1
Will any capital gain or capital loss that Company X makes from CGT event A1 happening to its shareholding in Company Y be disregarded pursuant to section 125-155 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Answer
Yes
Question 2
Will Company X have an obligation to withhold tax under section 12-210 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953) on the Demerger Distribution?
Answer
No
Question 3
As a consequence of the transfer of its shares in Company Y to its shareholders, will Company X Limited 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 period:
Income year ending 30 June 2020
The scheme commences on:
1 July 2019
Relevant facts and circumstances
Company X and Company Y are both companies incorporated in Australia.
Company X owned more than 20% of the ordinary shares in Company Y.
Company X transferred more than 80% of the ordinary shares it owned in Company Y to the shareholders of Company X.
Company X was the head entity of a demerger group. Company Y was a demerger subsidiary of Company X.
Immediately before the demerger, Company Y had on issue fully paid ordinary shares.
Immediately before the demerger, Company X's share capital account was not tainted (within the meaning of Division 197 of the ITAA 1997).
Company X did not elect under subsection 44(2) of the ITAA 1936 that subsections 44(3) and (4) of the ITAA 1936 will not apply to the demerger dividend for all Company X shareholders.
Just after the demerger, CGT assets owned by Company Y and its demerger subsidiaries representing at least 50% by market value of all the CGT assets owned by those entities were used in carrying on a business by those entities (subsection 44(5) of the ITAA 1936).
The Demerger Distribution that effected the demerger consisted of an amount debited to the share capital account of Company X and a Demerger Dividend debited to the retained profits of Company X.
Reasons for Decision
Question 1
Company X will be able to disregard any capital gain from CGT event A1 happening as a result of the transfer of its shares in Company Y to the shareholders of Company X in accordance with section 125-155 of the ITAA 1997, because the transfer of shareswill be a demerger under section 125-70 of the ITAA 1997.
Question 2
Company X will not have an obligation to withhold tax on the Demerger Distribution under section 12-210 of Schedule 1 to the TAA 1953 as the amount debited to the share capital account of Company X is not a 'dividend' as defined in subsection 6(1) of the ITAA 1936, and there is no withholding tax payable in respect of the Demerger Dividend as subsection 128B(3D) of the ITAA 1936 applies.
Question 3
As the Commissioner will not make a determination under section 45A or section 45B of the ITAA 1936 in respect the transfer of shares in Company Y to Company X shareholders, the Commissioner will not give a copy of a determination to Company X, and therefore Company X is not required under subsection 45D(1A) of the ITAA 1936 to give a copy of the Commissioner's notice of a determination to its shareholders.