Edited version of private advice

Authorisation Number: 1051774900665

Date of advice: 30 October 2020

Ruling

Subject: Demerger

Question 1

Will a capital gain or capital loss made by Hold Co from CGT event A1 happening to its ownership interests in Sub Co under the demerger, namely the disposal as a distribution in-specie of Sub Co shares to Hold Co shareholders, be disregarded pursuant to section 125-155 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Does Hold Co have an obligation to withhold tax on the demerger dividend received by a non-resident shareholder under section 12-210 of Schedule 1 to the Taxation Administration Act 1953 (TAA)?

Answer

No

Question 3

Does Hold Co have an obligation to withhold an amount pursuant to section 12-140 of Schedule 1 to the TAA where a shareholder in receipt of a demerger dividend has not quoted their Tax File Number or Australian Business Number before the distribution of Sub Co shares is made?

Answer

No

This ruling applies for the following period:

1 July 2020 to 30 June 2021

The scheme commences on:

1 April 2020

Relevant facts and circumstances

Hold Co is an Australian resident company whose shares are listed on the Australian Securities Exchange (ASX). Hold Co is the head company of an income tax consolidated group for the purposes of Part 3-90 of the ITAA 1997.

Immediately before the demerger, Hold Co had on issue fully paid ordinary shares and certain ESS interests. The ESS interest represented not more than 3% of the total ownership interests in Hold Co for the purposes of subsection 125-75(1) of the ITAA 1997.

Sub Co is an Australian resident company. Prior to the Implementation Date, Sub Co was a wholly owned subsidiary of Hold Co and a member of its income tax consolidated group.

Hold Co shareholders approved the resolution for Hold Co to undertake a reduction of share capital of Hold Co under sections 256B and 256C of the Corporations Act 2001 in order to effect the demerger.

Hold Co satisfied the capital reduction by transferring all of the ordinary shares in Sub Co to the shareholders of Hold Co in proportion to their shareholdings. Hold Co shareholders received a certain number of Sub Co shares for every X number of shares they held in Hold Co on the Record Date and nothing else.

After the demerger, Hold Co no longer held shares in Sub Co. Hold Co shareholders owned shares in both Hold Co and Sub Co.

Sub Co was admitted to the ASX and normal trading of Sub Co shares commenced.

Hold Co accounted for the demerger by debiting its share capital account by $X.

Hold Co had commercial reasons for the demerger.

There were no M&A activities or similar proposals contemplated or anticipated by Hold Co, prior to the demerger. Nor had Hold Co received any proposals to acquire Hold Co or any of its assets (including Sub Co).

Under a sale facility for Ineligible Foreign shareholders, the Sub Co shares they would have otherwise received were transferred to a Sale Agent, who sold these Sub Co shares on market. The net sale proceeds were remitted to those Ineligible Foreign Shareholders in accordance with their respective entitlements.

Hold Co, being a listed entity, made a choice pursuant to subsection 125-65(5) of the ITAA 1997.

Immediately before the Implementation Date, Hold Co's share capital account was not tainted (within the meaning of Division 197 of the ITAA 1997).

Hold Co did not elect under subsection 44(2) of the Income Tax Assessment Act 1936 (ITAA 1936) that subsections 44(3) and (4) of the ITAA 1936 will not apply to the demerger dividend for all Hold Co shareholders.

Just after the demerger, CGT assets owned by Sub Co 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.

ESS interests in Hold Co have been issued in accordance with Division 83A of the ITAA 1997 and are interests to which Subdivision 83A-C of the ITAA 1997 applies.

For the purposes of the cost base and reduced cost base apportionment under subsections 125-80(2) and (3) of the ITAA 1997, a reasonable approximation of the market values of a Hold Co share and a Sub Co share just after the demerger was calculated by using the volume weighted average prices of Hold Co and Sub Co shares as traded on the ASX over the first five trading days from (and including) the specified date.

Relevant legislative provisions

ITAA 1997 section 125-155

ITAA 1936 128B

TAA Schedule 1, section 12-210

TAA Schedule 1, section 12-140

Reasons for decision

Question 1

Summary

A capital gain or capital loss that is made by Hold Co from CGT event A1 happening to its ownership interests in Sub Co under the demerger will be disregarded under section 125-155 of the ITAA 1997.

Detailed reasoning

CGT event A1 (section 104-10 of the ITAA 1997) happened when Hold Co transferred the shares it owned in Sub Co to the shareholders of Hold Co under the demerger.

Section 125-155 of the ITAA 1997 provides that any capital gain or capital loss a 'demerging entity' makes from CGT event A1 happening to its ownership interests in a 'demerged entity' under a 'demerger' is disregarded.

A demerger, as defined in section 125-70 of the ITAA 1997, happened as:

·   there was a restructuring of the 'demerger group' (defined in section 125-65 of the ITAA 1997) consisting of, at least, Hold Co (as the head entity) and Sub Co (as a demerger subsidiary);

·   under the restructuring, Hold Co disposed of at least 80% of their total ownership interests (shares) in Sub Co to owners of original interests in Hold Co (the shareholders of Hold Co);

·   under the restructuring, CGT event G1 happened to shareholders of Hold Co in respect of their Hold Co shares, and the shareholders of Hold Co acquired a new interest (shares in Sub Co) and nothing else;

·   the shareholders of Hold Co acquired shares in Sub Co only because they owned shares in Hold Co;

·   Hold Co is a company and Hold Co shareholders acquired shares in another company (Sub Co);

·   the proportionality requirements of subsection 125-70(2) of the ITAA 1997 are satisfied.

Hold Co was the 'demerging entity' as it disposed of at least 80% of its total ownership interests in Sub Co to the shareholders of Hold Co (paragraph 125-70(7)(a) of the ITAA 1997).

Sub Co was the 'demerged entity' because under the demerger, ownership interests in it were acquired by the shareholders of Hold Co, which was the head entity of the group (subsection 125-70(6) of the ITAA 1997).

Therefore, section 125-155 of the ITAA 1997 is satisfied. The capital gain (or capital loss) that Hold Co makes from CGT event A1 happening to its ownership interests in Sub Co will be disregarded.

Question 2

Summary

Hold Co does not have an obligation to withhold tax on the demerger dividend received by a non-resident shareholder under section 12-210 of Schedule 1 to the TAA.

Detailed reasoning

Section 12-210 of Schedule 1 to the TAA states that an Australian resident company must withhold an amount from a dividend it pays to a shareholder with an address outside Australia. However, section 12-300 of Schedule 1 to the TAA provides that an entity does not need to withhold an amount from a dividend if no withholding tax is payable in respect of the dividend.

Dividends for tax purposes paid by an Australian resident company to non-resident shareholders are generally subject to withholding tax under section 128B of the ITAA 1936 unless particular exclusions apply.

Subsection 128B(3D) of the ITAA 1936 states that section 128B of the ITAA 1936 does not apply to a demerger dividend to which section 45B of the ITAA 1936 does not apply.

A 'demerger dividend' is defined in subsection 6(1) of the ITAA 1936 to mean "that part of a demerger allocation that is assessable as a dividend under subsection 44(1) or that would be so assessable apart from subsections 44(3) and (4)".

In the current case, there is a demerger dividend as defined under subsection 6(1) of the ITAA 1936 to the extent that the value of the Sub Co shares distributed under the demerger is more than the amount that is debited to the share capital of Hold Co.

Section 45B of the ITAA 1936 does not apply to the demerger dividend.

Accordingly, subsection 128B(3D) of the ITAA 1936 applies such that the demerger dividend is not subject to dividend withholding tax under section 128B of the ITAA 1936.

Therefore, Hold Co will not have an obligation to withhold tax on any part of the demerger dividend received by a non-resident shareholder under section 12-210 of Schedule 1 to the TAA.

Question 3

Summary

Hold Co does not have an obligation to withhold an amount pursuant to section 12-140 of Schedule 1 to the TAA where a shareholder in receipt of a demerger dividend has not quoted their Tax File Number or Australian Business Number before the distribution of Sub Co shares is made.

Detailed reasoning

Division 12 of Schedule 1 to the Tax Administration Act 1953 (TAA) relates to PAYG withholding. Subdivision 12-E relates to payments where a Tax File Number or Australian Business Number is not quoted. Subsection 12-140(1) provides that an 'investment body' must withhold an amount from a payment it makes to another entity in respect of a 'Part VA investment' if:

(a) all or some of the payment is *ordinary income or *statutory income of the other entity; and

(b) if the investment is non-transferable - the other entity did not *quote its *tax file number in connection with the investment before the time when the payment became payable; and

(c) if the investment is transferable - the other entity did not quote its tax file number in connection with the investment before the time when the other entity had to be registered with the investment body as the *investor to be entitled to the payment.

'Investment body' in respect of a 'Part VA investment'

An expression has the same meaning in Schedule 1 to the TAA as in the ITAA 1997 (subsection 3AA(2) of the TAA). Under subsection 995-1(1) of the ITAA 1997, 'Part VA investment' means an investment of a kind mentioned in section 202D of the ITAA 1936, which includes shares in a public company, for which the 'investor' is the shareholder and the 'investment body' is the company (Item 6 of the table under subsection 202D(1)).

In the current case, Hold Co is listed on the ASX and a public company as defined under section 103A of the ITAA 1936. Therefore, Hold Co would be an 'investment body' and shares in Hold Co are 'Part VA investments' as defined.

'Non-cash benefit'

Section 12-10 of Schedule 1 to the TAA provides that Division 12 does not apply to a payment in so far as it consists of providing a 'non-cash benefit'.

A 'non-cash benefit' is defined under subsection 995-1(1) of the ITAA 1997 as: property or services in any form except money. If a non-cash benefit is dealt with on behalf of an entity, or is provided or dealt with as an entity directs, the benefit is taken to be provided to the entity.'

In the case of Hold Co, the Sub Co shares are distributed to shareholders as an in-specie return of capital and there is no payment made to shareholders in the form of money, nor is there a declaration of a cash dividend which has been applied to their acquisition of the Sub Co shares.

Therefore, in relation to section 12-140 of Schedule 1 to the TAA, the 'payment' provided by Hold Co as the investment body is a non-cash benefit and that provision does not apply due to section 12-10 of Schedule 1 to the TAA.

Conclusion

Hold Co does not have an obligation under section 12-140 of Schedule 1 to the TAA to withhold an amount where a shareholder in receipt of the demerger dividend did not quote their Tax File Number or Australian Business Number.