Edited version of private advice

Authorisation Number: 1051850241090

Date of advice: 10 June 2021

Ruling

Subject: Demerger

Question 1

Will any capital gain or capital loss arising from the disposal by Head Co of the shares it holds in SubCo1 in the proposed demerger of SubCo1 be disregarded under section 125-155 of the ITAA 1997?

Answer

Yes

Question 2

Will the Commissioner confirm that all or any part of the in specie distribution of the SubCo1 shares to the Head Co shareholders that isa dividend will constitute a demerger dividend, and therefore be neitherassessable income nor exempt income pursuant to subsections 44(3) and 44(4) of the ITAA 1936?

Answer

Yes

Question 3

Will the Commissioner make a determination under subsection 45B(3) of the ITAA 1936 in respect of the in specie distribution occurring as part of the SubCo1 Demerger?

Answer

No

This ruling applies for the following period:

The income year in which the demerger occurs

The scheme commences on:

The income year in which the demerger occurs.

Relevant facts and circumstances

The demerger group comprises the following entities:

•        Head Co;

•        SubCo1, a 100% subsidiary of Head Co;

•        other subsidiary companies.

The Head Co business

Head Co operates business A.

The SubCo1 Business

SubCo1 is an Australian resident private company. It carries on the business B.

Dividends

Dividends were paid by Head Co to Head Co shareholders between the 2016 and 2021 income years.

Head Co and SubCo1 will continue to pay dividends in the future, subject to available profits following the SubCo1 demerger.

Ownership interests

Head Co's share capital is held by shareholders which are Australian residents and who acquired their shares after 19 September 1985.

These shareholders will remain the same, and their shareholding will be in the same proportions, until the completion of the proposed SubCo1 demerger.

The proposed SubCo1 demerger

It is proposed that:

•        Head Co will make an in specie distribution to its shareholders of all its shares in SubCo1.

•        Each Head Co shareholder will receive the same proportion of SubCo1 shares as it had in Head Co just before the demerger.

•        Each Head Co shareholder will have the same proportionate total market value of shareholding in Head Co and SubCo1 as it owned in Head Co just before the demerger.

•        The Head Co shareholders will receive nothing else.

The demerger will be accounted for in accordance with International Financial Reporting Standards (IFRS). It will be undertaken by way of a reduction of share capital and a dividend payment, which will be reflected in accounting entries in Head Co's books of account as follows:

•        The amount of the distribution will be based on the fair value of SubCo1 (applying IFRIC 17 - Distributions of Non-cash Assets to Owners).

•        The share capital account will be debited by an apportionment based on the relative market value (MV) of SubCo1 to Head Co; that is, the issued capital of Head Co multiplied by (MV of SubCo1 divided by MV of the group).

•        The balance of the distribution (ie. the amount of the demerger dividend) will be debited to a newly created Demerger Reserve;

•        The investment in SubCo1 will be credited with an amount which is based on the historical cost of the investment; and

•        Any difference between the distribution and the investment in SubCo1 will be credited/debited to Head Co's profit or loss (applying IFRIC 17).

The demerger dividend and capital reduction amount will be made in compliance with Head Co's constitution.

The demerger would not be legally or economically conditional on any other event or transaction occurring.

Reasons for the demerger

There are various commercial reasons for the SubCo1 demerger, as provided by the taxpayer in its submissions.

Future objectives and plans

There is no current proposal of the shareholders of Head Co to dispose of interests in Head Co or SubCo1 following the SubCo1 demerger.

Other facts

•        Head Co, together with SubCo1 and the other subsidiaries, are not also demerger subsidiaries of another company or trust in another demerger group for the purposes of subsection 125-65(4) of the ITAA 1997.

•        There has been no transfer of any amount to Head Co's share capital account that resulted in it becoming tainted under section 197-50 of the ITAA 1997.

•        There is no arrangement to which subsection 6(4) of the ITAA 1936 applies.

•        No member of the demerger group has ownership interests in a listed public company or listed widely-held trust that chooses that the member not be a member of the demerger group.

•        The largest Head Co shareholder has negligible capital losses that would be unutilised at the end of the 2021 income year.

Assumptions

•        Head Co will not elect in writing that subsection 44(3) and subsection 44(4) do not apply to the total demerger dividend for all shareholders.

•        The total cost base of the largest shareholder's interests in the Head Co shares will be lower than the Demerger Distribution it will receive.

•        Just after the SubCo1 demerger, CGT assets owned by SubCo1 representing at least 50% by market value of all the CGT assets owned by that entity were used in carrying on a business by that entity.

•        Immediately after the in-specie distribution, the market value of the assets of Head Co will exceed the total amount (as shown in its books of account) of its liabilities and share capital.

Relevant legislative provisions

Section 125-155 of the ITAA 1997

Subsection 44(3) of the ITAA 1936

Subsection 44(4) of the ITAA 1936

Subsection 45B(3) of the ITAA 1936

Reasons for decision

Question 1

Will any capital gain or capital loss arising from the disposal by Head Co of the shares it holds in SubCo1 in the proposed demerger of SubCo1 be disregarded under section 125-155 of the ITAA 1997?

Answer

Yes

Summary

Any capital gain or capital loss arising from the disposal by Head Co of the shares it holds in SubCo1 in the proposed SubCo1 Demerger will be disregarded under section 125-155 of the ITAA 1997.

Detailed reasoning

Section 125-155 of the ITAA 1997 provides as follows:

Any capital gain or capital loss a demerging entity makes from CGT event A1, CGT event C2, CGT event C3 or CGT event K6 happening to its ownership interests in a demerged entity under a demerger is disregarded.

The various elements of this provision will be satisfied in this case, as discussed below.

CGT event A1 happens to the taxpayer

CGT event A1 will happen to the taxpayer when it makes an in specie distribution to its shareholders of its shares in SubCo1, for the following reasons:

•        Subsection 104-10(1) provides that CGT event A1 happens if you dispose of a CGT asset.

•        The shares held in SubCo1 are a 'CGT asset' given that they are a 'kind of property' (paragraph 108-5(1)(a)).

•        There will be a 'disposal' given that there is change of ownership from the taxpayer to its shareholders by the in specie distribution of shares whereby both legal and beneficial ownership of the shares are transferred to the taxpayer's shareholders.

In this case, the capital gain or loss under CGT event A1:

•        is made by the taxpayer as a 'demerging entity' (as defined under subsection 125-70(7)); and

•        is made by the taxpayer from the event happening to its ownership interests in SubCo1, being the 'demerged entity' (as defined in subsection 125-70(6).

There is a demerger

In this case, there will be a 'demerger' under the terms of section 125-70 given that the conditions specified in the provision will be met. In this respect:

•        There is a restructuring of the demerger group under which a member of the group (the taxpayer) will dispose of 100% of its ownership interests in another member of the demerger group (SubCo1) to owners of the original interests in the head entity of the group (the taxpayer's shareholders): paragraph 125-70(1)(a) and subparagraph 125-70(1)(b)(i).

Taxation Determination TD 2020/6 considers the term 'restructuring' for the purposes of subsection 125-70(1) of the ITAA 1997 and contains the Commissioner's view of its scope in various scenarios. In particular, it considers transactions that would, in certain circumstances, constitute part of the 'restructuring' of a group.

In light of the approach adopted in TD 2020/6, the Commissioner considers that the restructuring in this case would be comprised primarily of the demerger. More specifically, it is considered that:

•        Any capital raising that may be undertaken further to the demerger does not constitute part of the restructuring, given that there is no precisely-planned arrangement involving the acquisition of shares by a third party that would be certain to alter existing ownership interests in the same manner as that contemplated under Example 2 of the TD.

•        No specific disposal of shares is currently in contemplation by existing shareholders.

o   Under the restructuring, a CGT event will happen to the shareholders' interest in the taxpayer, and the shareholders will acquire a new interest (and nothing else) in SubCo1: subparagraph 125-70(1)(c)(i).

o   The relevant CGT event in this case would be CGT event G1, which concerns capital payments for shares.

CGT event G1 applies in this case for the following reasons:

o   Paragraph 104-135(1)(a) is satisfied.

The taxpayer will make a payment to the shareholders in respect of the shares they own in the taxpayer: paragraph 104-135(1)(a). This payment is comprised of the shareholders' portion of the in specie distribution of 100% of the taxpayer's shares in SubCo1. Under section 104-135, the payment can include giving property.

CGT event A1 does not apply in the manner contemplated under paragraph 104-135(1)(a) since there is no disposal of any share owned by the shareholder in the taxpayer.

CGT event C2 does not apply in the manner contemplated under paragraph 104-135(1)(a) since the proposal does not involve an end to the shareholders' ownership of their shares in the taxpayer under any of the circumstances prescribed under subsection 104-25(1).

o   Paragraph 104-135(1)(b) is satisfied.

There is at least some part of the payment that is not a dividend. 'Dividend' in this regard is defined in subsection 6(1) of the ITAA 1936 to include distributions made by a company to any of its shareholders, but excludes 'property distributed by a company to shareholders.... where the amount of the moneys paid or credited, or the amount of the value of the property, is debited against an amount standing to the credit of the share capital account of the company'. It is proposed that the value of the SubCo1 shares distributed will be partly debited against the taxpayer's share capital account.

The portion of the distribution debited against the share capital account is not a 'dividend' and consequently paragraph 104-135(1)(b) will be satisfied.

It is also noted that there is no arrangement to which subsection 6(4) of the ITAA 1936 applies.

o   Paragraph 104-135(1)(c) is satisfied.

The payment will not be included in the shareholders' assessable income. Part of the payment that is debited to the share capital account is a return of capital; the remaining part will be a 'demerger dividend' which is not assessable income or exempt income: subsection 44(4) of the ITAA 1936.

•        The acquisition of new interests by the shareholders under the proposal will happen only because they own shares in the taxpayer. The in specie distribution of the taxpayer's shares in SubCo1 is made only to its shareholders. Consequently paragraph 125-70(1)(d) will be satisfied.

•        The new interests acquired will be the 'ownership interests in a company' (paragraph 125-70(1)(e)(i)), being shares in SubCo1.

•        Neither the original interests (being the shares in the taxpayer) nor the new interests (the shares the shareholders will acquire in SubCo1) 'are in a trust that is a non-complying superannuation fund': paragraph 125-70(1)(g).

•        The requirements of subsection 125-70(2) will be met, thereby satisfying the requirement in paragraph 125-70(1)(h). This is because:

o   each shareholder in the taxpayer will acquire the same proportion of shares in SubCo1 as it had in the taxpayer just before the proposed demerger; and

o   just after the demerger, each shareholder will have the same proportionate total market value of shareholding in the taxpayer and SubCo1 as it had in the taxpayer just before the demerger.

For the above reasons, the conditions in section 125-155 will be satisfied upon the SubCo1 demerger, and therefore the provision will apply to the Taxpayer.

Question 2

Will the Commissioner confirm that all or any part of the in specie distribution of the SubCo1 shares to the Head Co shareholder that is a dividend will constitute a demerger dividend, and therefore be neither assessable income nor exempt income pursuant to subsections 44(3) and 44(4) of the ITAA 1936?

Answer

Yes

Summary

The Commissioner confirms that all or any part of the in specie distribution of the SubCo1 shares to the Head Co shareholder that is a dividend will constitute a demerger dividend, and will therefore be neither assessable income nor exempt income pursuant to subsections 44(3) and 44(4) of the ITAA 1936.

Detailed Reasoning

'Demerger dividend' is defined in subsection 6(1) of the ITAA 1936 as:

'....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)...'

Paragraph 44(1)(a) provides:

The assessable income of a shareholder in a company (whether the company is a resident or a non-resident) includes:

(a) if the shareholder is a resident:

(i)               dividends (other than non-share dividends) that are paid to the shareholder by the company out of profits derived by it from any source; and

(ii)              all non-share dividends paid to the shareholder by the company;

In this case the in-specie distribution to the shareholders is categorised as follows:

• The part of the payment that is debited to Head Co's share capital account is not a dividend.

This is because the definition of a 'dividend' does not include 'moneys paid or credited by a company to a shareholder or any other property distributed by a company to shareholders....where the amount of the moneys paid or credited, or the amount of the value of the property, is debited against an amount standing to the credit of the share capital account of the company': subsection 6(1).

Therefore it cannot be a demerger dividend.

• The remaining part is a dividend because it is a 'distribution made by a company' to its shareholders: see definition of 'dividend' under subsection 6(1).

Prima facie the dividends are, pursuant to subsection 44(1)(a)(i), taken to be paid out of profits. In this regard we refer to TR 2003/8, which in paragraph 13 states:

In most cases a company which distributes property to its shareholders and debits part of the value of that property to its share capital account would debit the remaining part to another account or reserve. Where that account or reserve does not represent share capital, it would, for subsection 44(1) purposes, represent profits derived by the company so that the amount debited to it would be included in the shareholder's assessable income under that subsection.

The ruling provides that:

6. In the case of a resident shareholder the amount by which the money value of the property exceeds the amount debited to the share capital account will be included in the shareholder's assessable income to the extent that the dividend is paid (or taken to be paid) out of profits derived by the company.......

8. For the purposes of paragraphs 6 and 7, the dividend is paid out of profits derived by the company if, immediately after the distribution of property, the market value of the assets of the company exceeds the total amount (as shown in the company's books of account) of its liabilities and share capital. In addition, if the dividend described in paragraphs 6 and 7 is a repayment by a company of an amount paid-up on the share, the dividend is taken to be paid out of profits derived by the company.

It is taken as an assumption under this Ruling that the market value of the assets of Head Co exceeds the total amount (as shown in its books of account) of its liabilities and share capital.

Based on the considerations above, the amount debited to the demerger reserve account:

• is considered a dividend paid out of Head Co's profits, and therefore falls within the scope of section 44(1);
• in turn also falls within the definition of 'demerger dividend' under subsection 6(1) since it is the part of the demerger allocation that would (but forsubsections 44(3) and (4)) be assessable under subsection 44(1); and
• as a demerger dividend, falls within the scope of both subsection 44(3) and subsection 44(4), and will thereby neither be assessable income nor exempt income.

In this regard, it is assumed for the purposes of this ruling that:

o   Head Co as head entity will not elect in writing that subsection 44(3) and subsection 44(4) do not apply to the total demerger dividend for all shareholders (thereby satisfying the condition in subsection 44(2)); and

o   just after the Demerger, CGT assets owned by SubCo1 representing at least 50% by market value of all the CGT assets it owned were used in carrying on its business, thereby satisfying the condition in subsection 44(5).

Question 3

Will the Commissioner make a determination under subsection 45B(3) of the ITAA 1936 in respect of the in specie distribution occurring as part of the SubCo1 Demerger?

Answer

No

Summary

The Commissioner will not make a determination under subsection 45B(3) of the ITAA 1936 in respect of the in specie distribution occurring as part of the SubCo1 Demerger.

Detailed reasoning

Subsection 45B(3) of the ITAA 1936 allows the Commissioner to make a determination in relation to a demerger benefit and a capital benefit. However for this provision to apply, the relevant scheme must fall within the scope of section 45B.

Subsection 45B(2), which details various conditions for the application of section 45B, provides as follows:

45B(2)

This section applies if:

(a) there is a scheme under which a person is provided with a demerger benefit or a capital benefit by a company; and

(b) under the scheme, a taxpayer (the relevant taxpayer), who may or may not be the person provided with the demerger benefit or the capital benefit, obtains a tax benefit; and

(c) having regard to the relevant circumstances of the scheme, it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for a purpose (whether or not the dominant purpose but not including an incidental purpose) of enabling a taxpayer (the relevant taxpayer) to obtain a tax benefit.

The application of the conditions in each of the above paragraphs is considered below.

Paragraph 45B(2)(a)

'Scheme' is defined in section 995-1 of the ITAA 1997 as 'any arrangement' or 'any scheme, plan, proposal, action, course of action, or course of conduct, whether unilateral or otherwise'. Being a proposed plan or course of action contemplated by the Head Co group, the demerger will be considered a 'scheme' under the terms of the prescribed definition.

The relevant scheme in this case to which section 45B applies is the business restructure that comprises principally of the demerger.

The distribution of the SubCo1 shares to the shareholders will be considered a 'demerger benefit' and a 'capital benefit' for the following reasons:

• A person is 'provided with a demerger benefit' if 'a company provides the person with ownership interests in that or another company': paragraph 45B(4)(a).

Under the terms of the demerger, Head Co will provide the shareholders with shares in SubCo1, and the shareholders will thereby be considered to be provided with a demerger benefit as defined in paragraph 45B(4)(a).

• A person is also 'provided with a capital benefit' if a company provides 'ownership interests in a company to a person': paragraph 45B(5)(a).

Subsection 45B(6) provides that 'a person is not provided with a capital benefit to the extent that the provision of interests, the distribution or the thing done referred to in subsection (5) involves the person receiving a demerger dividend'.

'Demerger dividend' is defined as '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)'. Section 44 applies in respect of 'dividends' paid to the shareholder, which in turn is defined in subsection 6(1) to exclude property distributed by a company to shareholders where the amount of the value of the property is debited against an amount standing to the credit of the share capital account of the company.

In this case, not all of the SubCo1 share distribution will be debited against an amount standing to the credit of Head Co's share capital account. In short:

o   The portion of the distribution that is not debited to the share capital account is a 'demerger dividend". This amount cannot be regarded as a 'capital benefit' pursuant to subsection 45B(6).

o   The remaining amount - being the amount of the distribution debited against the Share capital account - will be a 'capital benefit' under the terms of paragraph 45B(5)(a), being ownership interests in SubCo1 that are not demerger dividends.

Paragraph 45B(2)(b)

The meaning of 'obtains a tax benefit' is prescribed in subsection 45B(9) as follows:

A relevant taxpayer obtains a tax benefit if an amount of tax payable, or any other amount payable under this Act, by the relevant taxpayer would, apart from this section, be less than the amount that would have been payable, or would be payable at a later time than it would have been payable, if the demerger benefit had been an assessable dividend or the capital benefit had been an assessable dividend.

On the basis of reasons considered separately, the shareholders will be entitled to choose the demerger rollover relief pursuant to section 125-55 of the ITAA 1997 as a result of the demerger of SubCo1.

This means that, when the rollover choice is exercised under subsection 125-55(1), the shareholders will obtain a 'tax benefit', since no CGT event will be triggered at the time of the distribution - specifically any capital gains and the cost base adjustments in CGT event G1 under section 104-135 will be ignored on the exercise of the rollover choice. This is compared to the situation in which the distribution is treated as an assessable dividend and brought into account in the year of the distribution.

Paragraph 45B(2)(c)

The relevant circumstances which must be considered in the assessment of whether there exists a more-than-incidental purpose of enabling a taxpayer to obtain a tax benefit are outlined in subsection 45B(8).

They are considered in turn below.

Paragraph 45B(8)(a)

This paragraph prescribes the following 'relevant circumstance':

'the extent to which the demerger benefit or capital benefit is attributable to capital or the extent to which the demerger benefit or capital benefit is attributable to profits (realised and unrealised) of the company or of an associate (within the meaning in section 318) of the company;..'

On the facts of this case:

• The in-specie distribution of SubCo1 shares is a distribution of a capital asset of Head Co which will result in a debit both to Head Co's share capital account as well as to a demerger reserve.
• In this regard, paragraph 57 in Practice Statement Law Administration PS LA 2005/21 Application of section 45B of the Income Tax Assessment Act 1936 to demergers(PS LA 2005/21)states as follows:

'...it is apparent from the Explanatory Memorandum to the original section 45B of the ITAA 193613 that the exercise envisaged by paragraph 45B(8)(a) [formerly paragraph 45B(5)(a)] involves an economic notion of share capital (the nominal value of which is immutable) being apportioned across the assets of the business. Thus, the amount of share capital invested in the demerged entity should be determined in accordance with the relative market value of the demerged entity to the corporate group.'

The apportionment of the distribution as between the share capital account and the demerger reserve is determined in accordance with the relative market value of SubCo1 to Head Co and is, in this regard, consistent with the manner of apportionment considered to be reasonable.

Paragraph 45B(8)(b)

This paragraph provides:

'the pattern of distributions of dividends, bonus shares and returns of capital or share premium by the company or by an associate (within the meaning in section 318) of the company;'

It is acknowledged that Head Co has a history of dividend distributions, and that the present case does not concern one in which a company accumulates all its profits in the manner envisaged in paragraph 59 of PS LA 2005/21. It is also accepted that the demerger represents an extraordinary corporate event that is not used in this case to replace standard profit distributions, being a transaction to be implemented for broader commercial objectives.

Paragraphs 45B(8)(c) to (f)

These paragraphs require an examination of the tax characteristics of the particular shareholder in question in determining the relevant circumstances of the scheme.

In general, the following characteristics of the Head Co shareholders, and the provisions to which they relate, have been noted as follows:

• the largest shareholder has negligible capital losses that would be unutilised at the end of the 2021 income year: paragraph 45B(8)(c);

• all shareholders acquired their interests in the company after 20 September 1985: paragraph 45B(8)(d);
• all shareholders are Australian residents: paragraph 45B(8)(e); and
• the total cost base of the largest shareholder's interests in the Head Co shares will be lower than the Demerger Distribution it will receive: paragraph 45B(8)(f).

Paragraph 45B(8)(h)

This paragraph requires that regard be had to whether the interest held by the owners of the head entity after the distribution is the same as the interest would have been if an equivalent dividend had been paid instead of the distribution of the share capital.

In this case the shareholders' ownership interests in Head Co will not be altered as a result of the distribution. In this regard, reference is made to the ATO view as set out in paragraph 70 of PS LA 2005/21:

In the context of demerger, this circumstance would be limited to demergers where the transfer of ownership interests involves 'distributions' (that is, returns) of share capital or share premium. Ordinarily however, a demerger should not disturb the head entity shareholder's existing ownership interest in the way described, owing to the requirements of the proportion test in subsection 125-70(2) of the ITAA 1997. As a consequence, it is unlikely that this circumstance will have significant relevance for demergers.

Paragraph 45B(8)(i)

Under this provision, if the scheme involves the provision and subsequent disposal of ownership interests, the period for which the ownership interests are held and the time at which the arrangement for the disposal of those shares is entered into are taken into account as relevant considerations.

It is noted in this regard that there is no current proposal of the shareholders of Head Co to dispose of interests in Head Co or SubCo1 following the demerger.

Paragraph 45B(8)(j)

This provision requires consideration of any profits or assets of the demerging entity that might be attributable to, or acquired under transactions with, associated entities. In PS LA 2005/21, it is stated at paragraph 82 that:

'..this relevant circumstance exposes whether the demerger relief is being used as a device for distributing corporate earnings to owners of the head entity. If it is established that part of the profits or assets of the demerging entity are referable to those of an associate and are not explainable by the demerging entity's need to be a viable, stand-alone entity, this is suggestive of a purpose of enabling a taxpayer to obtain a tax benefit by way of non-assessable dividend...'

It is accepted that in this case the distribution is explainable by Head Co's need to be a viable, stand-alone entity on account of the commercial advantages that would be obtained by the demerger, as explained further below.

Paragraph 45B(8)(k)

This paragraph requires that regard be had to 'any of the matters referred to in subsection 177D(2)', which are matters prescribed for the purposes of determining the 'dominant purpose' test in Part IVA. In the context of section 45B, however, they are to be applied in determining the 'more than incidental' test specific to the provision.

The factors prescribed in subsection 177D(2) focus on indicia that may reveal the true objectives of the relevant scheme. It is recognised that many of the considerations taken into account under this provision may overlap with those already mentioned above.

The circumstances which the Commissioner considers relevant to the assessment of the scheme in this case, and the corresponding paragraphs in subsection 177D(2) to which they relate, are as follows:

• The manner in which the scheme is carried out (paragraph 177D(2)(a)) is the restructure which consists primarily of the demerger.

An inquiry into the manner of the scheme is an objective inquiry into the reasons a taxpayer had for entering into it (see paragraph 86 in PS LA 2005/21).

In this regard, it is submitted and accepted that there are legitimate commercial reasons for the demerger.

These considerations have a significant bearing on the determination of the purpose for which the demerger is proposed.

• The substance of the scheme (paragraph 177D(2)(b)) can be discerned from its effects: paragraph 88 in PS LA 2005/21. In this respect, this consideration overlaps to some extent with that in paragraph 177D(2)(d), under which regard must be had to the result in relation to the operation of the tax acts that, but for this Part (or section 45B, in this context), would be achieved by the scheme.

While the effects of the scheme on the parties to the demerger include the capital benefit or demerger benefit afforded to Head Co and its shareholders, the taxpayer's submissions as to the desired effect of the scheme have been taken into account: that the separation of SubCo1 from Head Co is pursued wholly or primarily for commercial objectives; and that the effect sought by the proposal is the position of the entities post-demerger as it relates to these objectives.

• The time at which the scheme was entered into is also a relevant consideration under paragraph 177D(2)(c). In respect of the timing of the scheme, it is accepted that it is based on commercial considerations submitted by the taxpayer.
• Paragraph 177D(2)(d) requires that regard be had to 'the result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme'.

In considering the tax results of the scheme as if section 45B were not to apply, regard is had to the 'tax benefit' obtained, as specified earlier, which comprises the demerger rollover relief under section 125-55 of the ITAA 1997. The relief arises as a result of the demerger of SubCo1, pursuant to which no CGT event will be triggered at the time of the distribution.

While the existence of a tax benefit is evident in this case, it is accepted as one of the broader range of considerations that are ultimately taken into account in the determination of the matter.

• Paragraphs 177D(2)(e) to (h) require a consideration of the change in the financial position of, or other consequences to, the shareholders or any person who has a connection with them, as a result of the scheme. They also require a consideration of the nature of the relationship between the relevant shareholder and such a person.

In the present case, the demerger results in the acquisition by the Head Co shareholders of shares in SubCo1; that is, an asset owned previously by Head Co is now directly owned by the shareholders, which as stated in PS LA 2005/21 'delivers to the head entity's shareholders an asset which they can liquidate, exchange or use as financial security'.

Upon taking into account the abovementioned circumstances, it is the Commissioner's view that the scheme was not carried out for a more than incidental purpose of enabling a taxpayer to obtain a tax benefit under paragraph 45B(2)(c).

The matters which the Commissioner has considered persuasive in reaching this conclusion are as follows:

• The scheme is driven largely by the various commercial objectives as expressed in the taxpayers' submissions and contained in the facts above.
• The various reasons provided for the demerger and for the timing of the demerger are accepted as business objectives that form the essential purpose of the scheme.
• The tax benefit obtained by a shareholders is, on the basis of the submissions provided, merely incidental to the primary purposes of the demerger.

For these reasons, the Commissioner will not make a determination under subsection 45B(3) in respect of this scheme.