Edited version of private advice

Authorisation Number: 1051908407602

Date of advice: 14 October 2021

Ruling

Subject: Demergers

Question 1

Will any capital gain or capital loss made by ABC Ltd from CGT event A1 happening on the transfer of its shares in DEF Pty Ltd under the demerger be disregarded under section 125-155 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Will ABC Ltd have an obligation to withhold tax under section 12-210 of Schedule 1 to the Taxation Administration Act (TAA 1953) on the demerger dividend?

Answer

No

Question 3

As a consequence of the transfer of shares in DEF Pty Ltd to the shareholders of ABC Ltd, will ABC Ltd be required under subsection 45D(1A) of the Income Tax Assessment Act 1936 (ITAA 1936) to give a copy of a determination under sections 45A or 45B of the ITAA 1936 to the shareholders of ABC Ltd?

Answer

No

Question 4

Will a franking debit to the franking account of ABC Ltd arise under subsection 45C(3) of the ITAA 1936 in relation to any part of the transfer of its shares in DEF Pty Ltd that constitutes a capital benefit as defined in subsections 45B(5) and (6) of the ITAA 1936?

Answer

No

This ruling applies for the following period periods:

Income year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Background

ABC Ltd is an Australian resident company and the head company of an income tax consolidated group for the purposes of Part 3-90 of the ITAA 1997.

ABC Ltd and its subsidiaries operated two distinct business divisions. The directors of ABC Ltd formed a view that the demerger would provide an improved ability for the two distinct business divisions to conduct their business operations and engage in distinct business plans and capital structures appropriate for their business operations.

Immediately before the demerger, ABC Ltd had ordinary shares on issue. There were no other ownership interests (as defined in subsection 125-60(1) of the ITAA 1997) in ABC Ltd.

Immediately before the demerger, DEF Pty Ltd a wholly owned subsidiary of ABC Ltd and owned the companies that made up one of the business divisions.

The demerger of DEF Pty Ltd was undertaken by a reduction of share capital under section 256B of the Corporations Act 2001.

On the Implementation Date, the aggregate of the amount of the reduction of share capital was applied by ABC Ltd on behalf of ABC Ltd shareholders as payment to acquire the DEF Pty Ltd shares from ABC Ltd. Shares in DEF Pty Ltd were transferred by ABC Ltd to ABC Ltd shareholders.

ABC Ltd shareholders received one DEF Pty Ltd share for a specified number of ABC Ltd shares they held at the record date and nothing else. As a result of the demerger, ABC Ltd shareholders owned shares in both ABC Ltd and DEF Pty Ltd. After the demerger, ABC Ltd will not hold any shares in DEF Pty Ltd.

ABC Ltd accounted for the demerger by debiting its share capital account and a demerger reserve account.

ABC Ltd's shareholders comprised both Australian residents and foreign residents.

Just before the Implementation Date, ABC Ltd's share capital account was not tainted (within the meaning of Division 197 of the ITAA 1997).

ABC Ltd 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 ABC Ltd shareholders.

Just after the demerger, CGT assets owned by DEF Pty Ltd 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).

Relevant legislative provisions

ITAA 1997 section 125-155

ITAA 1936 section 45A

ITAA 1936 section 45B

ITAA 1936 section 45C

ITAA 1936 subsection 45D(1A)

ITAA 1936 section 128B

TAA 1953 Schedule 1, section 12-210

Reasons for decision

Question 1

Summary

Any capital gain or loss made by ABC Ltd from CGT event A1 happening on the transfer of its shares in DEF Pty Ltd 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 ABC Ltd transferred the shares it owned in DEF Pty Ltd to the shareholders of ABC Ltd.

Section 125-155 of the ITAA 1997 provides that any capital gain or capital loss a 'demerging entity' makes from CGT events A1, C2, C3 and K6 happening to its ownership interests in a 'demerged entity' under a 'demerger' is disregarded.

Subsection 125-70(1) of the ITAA 1997 is satisfied because:

•                    There was a restructuring of the 'demerger group' (defined in section 125-65 of the ITAA 1997) consisting of, at least, ABC Ltd (as the 'head entity') and DEF Pty Ltd (as a 'demerger subsidiary') (paragraph 125-70(1)(a) of the ITAA 1997).

•                    Under the restructuring, ABC Ltd (a member of the demerger group) will dispose of at least 80% of its total ownership interests (shares) in DEF Pty Ltd (another member of the demerger group) to owners of original interests in the head entity of the demerger group, ABC Ltd (paragraph 125-70(1)(b) of the ITAA 1997).

•                    Under the restructuring, CGT event G1 happened to the shares in ABC Ltd (an original interest in the head entity of the group), and the shareholders of ABC Ltd acquired a new interest (shares in DEF Pty Ltd) and nothing else (paragraph 125-70(1)(c) of the ITAA 1997).

•                    The shareholders of ABC Ltd acquired new interests (shares in DEF Pty Ltd) only because they owned original interests (shares in ABC Ltd) (paragraph 125-70(1)(d) of the ITAA 1997).

•                    The head entity (ABC Ltd) is a company and the new interests acquired are ownership interests in a company (DEF Pty Ltd) (paragraph 125-70(1)(e) of the ITAA 1997).

•                    Neither the shares in ABC Ltd nor the shares in DEF Pty Ltd are interests in a trust that is a 'non-complying superannuation fund' as defined in subsection 995-1(1) (paragraph 125-70(1)(g) of the ITAA 1997).

•                    The proportionality requirements of paragraph 125-70(1)(h) and subsection 125-70(2) of the ITAA 1997 are met.

ABC Ltd was the 'demerging entity' as it was a member of a demerger group just before the CGT event referred to in section 125-155 of the ITAA 1997 (relevantly CGT event A1), and under a demerger that happened to the group, ABC Ltd disposed of at least 80% of its total ownership interests in DEF Pty Ltd (another member of the demerger group) to the shareholders of ABC Ltd (the owners of original interests in the head entity of the demerger group) (paragraph 125-70(7)(a) of the ITAA 1997).

DEF Pty Ltd was the 'demerged entity' because, under a demerger that happens to the demerger group, ownership interests in DEF Pty Ltd were acquired by shareholders in ABC Ltd, the head entity of the group (subsection 125-70(6) of the ITAA 1997).

Therefore, section 125-155 of the ITAA 1997 is satisfied. Any capital gain or capital loss that ABC Ltd makes from CGT event A1 happening as a result of the transfer of its shares in DEF Pty Ltd to the shareholders of ABC Ltd will be disregarded under section 125-155 of the ITAA 1997.

Question 2

Summary

ABC Ltd will not have an obligation to withhold tax on the demerger dividend under section 12-210 of Schedule 1 to the TAA 1953 as there is no withholding tax payable in respect of the demerger dividend.

Detailed reasoning

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 states 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 does not apply to a demerger dividend to which section 45B 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 DEF Pty Ltd shares distributed under the demerger is more than the amount that is debited to the share capital of ABC Ltd.

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

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

Therefore, ABC Ltd will not have an obligation to withhold tax on the demerger dividend under section 12-210 of Schedule 1 to the TAA 1953.

Question 3

Summary

As the Commissioner will not make a determination under section 45A or section 45B of the ITAA 1936, ABC Ltd will not be required to give a copy of a notice of such a determination to the shareholders of ABC Ltd under subsection 45D(1A) of the ITAA 1936.

Detailed reasoning

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 ABC Ltd in accordance with subsection 45D(1) of the ITAA 1936.

In this case, the Commissioner will not make a determination under sections 45A or 45B of the ITAA 1936 that section 45BA or section 45C of the ITAA 1936 will apply to the whole, or any part, of any benefit provided to the shareholders of ABC Ltd under the demerger. Accordingly, there is no determination under subsection 45D(1) of the ITAA 1936 and therefore subsection 45D(1A) of the ITAA 1936 does not apply.

Question 4

Summary

As the Commissioner has not made a determination under section 45B of the ITAA 1936, a franking debit against the franking account of ABC Ltd will not arise under subsection 45C(3) of the ITAA 1936.

Detailed reasoning

Subsection 45C(3) of the ITAA 1936 states:

If the Commissioner has made a determination under section 45B in respect of the whole or a part of a capital benefit and the Commissioner makes a further written determination that the capital benefit, or the part of the capital benefit, was paid under a scheme for which a purpose, other than an incidental purpose, was to avoid franking debits arising in relation to the distribution from the company:

(a) on the day on which notice of the determination is served in writing on the company, a franking debit of the company arises in respect of the capital benefit; and

(b) the amount of the franking debit is the amount that, if the company had:

(i) paid a dividend of an amount equal to the amount of the capital benefit, or the part of the capital benefit, at the time when it was provided; and

(ii) fully franked the dividend;

would have been the amount of the franking credit of the company that would have arisen as a result of the dividend.

This means that before subsection 45C(3) of the ITAA 1936 can apply, the Commissioner must make a determination under section 45B of the ITAA 1936 in respect of at least part of a capital benefit.

As the Commissioner has not made such a determination under section 45B of the ITAA 1936, a franking debit of ABC Ltd will not arise under subsection 45C(3) of the ITAA 1936.