Edited version of private advice

Authorisation Number: 1051901963109

Date of advice: 24 November 2021

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 (the transfer 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

Is Hold Co required under subsection 45D(1A) of the Income Tax Assessment Act 1936 (ITAA 1936) to give a copy of the Commissioner's determination to its shareholders?

Answer

No.

Question 3

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 1953)?

Answer

No.

This ruling applies for the following period:

1 July 2021 to 30 June 2022

Relevant facts and circumstances

Hold Co is a company incorporated in Australia, and 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 a company incorporated in Australia. 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 a resolution to reduce the share capital of Hold Co under sections 256B and 256C of the Corporations Act 2001 in order to implement the demerger.

Hold Co satisfied the reduction of share capital 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 Sub Co shares and nothing else.

Hold Co accounted for the demerger by debiting its share capital account and a reserve account.

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 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.

Relevant legislative provisions

ITAA 1997 section 125-155

ITAA 1936 section 45A

ITAA 1936 section 45B

ITAA 1936 subsection 45D(1A)

ITAA 1936 section 128B

TAA 1953 Schedule 1, section 12-210

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.

Reasons

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); and

•                    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 demerger 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

Subsection 45D(1A) of the ITAA 1936 does not apply as the Commissioner will not make a determination under section 45A or section 45B of the ITAA 1936.

Reasons

Subsection 45D(1) of the ITAA 1936 provides that if the Commissioner makes a determination under section 45A, 45B or 45C of the ITAA 1936, the Commissioner must give a copy of the determination to the company concerned (which, in the case of a demerger benefit referred to in section 45B of the ITAA 1936, is the head entity of the demerger group).

Subsection 45D(1A) of the ITAA 1936 provides that where the Commissioner gives notice of a determination to a company in accordance with subsection 45D(1) of the ITAA 1936 that company must, in the case of a determination under section 45A or 45B of the ITAA 1936, give a copy of the notice to:

a)            the advantaged shareholder referred to in section 45A; or

b)            the relevant taxpayer referred to in section 45B.

Subsection 45D(1A) of the ITAA 1936 only applies in the event that the Commissioner gives notice of a determination to Hold Co in accordance with subsection 45D(1) of the ITAA 1936.

In this case, the Commissioner will not make a determination under section 45A or section 45B of the ITAA 1936. This means that there is no determination given by the Commissioner under subsection 45D(1) of the ITAA 1936. Therefore, subsection 45D(1A) of the ITAA 1936 does not apply.

Question 3

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 1953.

Reasons

Section 12-210 of Schedule 1 to the TAA 1953 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 1953 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 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 was debited to the share capital account 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 so 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 1953.