Edited version of private advice

Authorisation Number: 1051975901939

Date of advice: 4 May 2022

Ruling

Subject: Demerger

Question 1

Will any capital gain arising from the disposal of Hold Co's shares in Sub Co under the proposed demerger arrangement be disregarded under section 125-155 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Will the Commissioner make a determination under subsection 45B(3) of the Income Tax Assessment Act 1936 (ITAA 1936) that section 45BA or section 45C of the ITAA 1936 applies to the whole, or any part, of the demerger benefit or capital benefit provided to the shareholders of Hold Co under the demerger?

Answer

No

This ruling applies for the following period:

Year ended 30 June xxxx

The scheme commences on:

1 July xxxx

Relevant facts and circumstances

Hold Co is a company incorporated in Australia. It owns all the shares in another company incorporated in Australia, Sub Co.

All the shares on issue in Hold Co and Sub Co are ordinary shares and post-CGT assets.

The shareholders are both Australian residents and non-residents for tax purposes.

Hold Co proposes to demerge Sub Co.

The demerger of Sub Co will be undertaken by a reduction of share capital.

At the time of the demerger Hold Co will transfer all its shares in Sub Co to the shareholders of Hold Co.

Market valuations in accordance with the principles stated in the ATO market valuation guidelines will be carried out immediately before the demerger.

Hold Co will account for the demerger by debiting its share capital account by the capital reduction amount. The demerger dividend, being the difference between the market value of Sub Co and the capital reduction amount, is to be debited against its retained profit account.

Each Hold Co shareholder will acquire the same proportion of shares in Sub Co as the proportion of shares they own in Hold Co just before the demerger.

Each Hold Co shareholder will have the same proportionate total market value of shares in Hold Co and Sub Co as they own in Hold Co just before the demerger.

Hold Co's share capital account is not tainted within the meaning of Division 197 of the ITAA 1997

There is no transaction that has occurred or will occur that is connected with the demerger in anyway. The shareholders of Holdco have no current plans in place to dispose of either business following the demerger or otherwise realise their interests in either business.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 125-65

Income Tax Assessment Act 1997 section 125-70

Income Tax Assessment Act 1997 section 125-155

Income Tax Assessment Act 1936 section 45A

Income Tax Assessment Act 1936 section 45B

Income Tax Assessment Act 1936 section 45C

Reasons for decision

Question 1

All legislative references are to the Income Tax Assessment Act 1997 unless otherwise indicated.

Summary

Any capital gain or capital loss arising from the disposal of Hold Co's shares in Sub Co under the proposed demerger is disregarded under section 125-155

Detail reasoning

CGT event A1 (section 104-10) will happen when Hold Co transfers the shares it owns in Sub Co to the shareholders of Hold Co.

Section 125-155 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 subsection 125-70(1), happens as:

•           there is a restructuring of a 'demerger group' (defined in subsection 125-65(1)) consisting of Hold Co (as the head entity as defined in subsection 125-65(3)) and Sub Co (as a demerger subsidiary as defined in subsection 125-65(6)),

•           under the restructuring, Hold Co disposes of 100% of its total ownership interests (defined in paragraph 125-60(1)(a) to include shares) in Sub Co to owners of original interests in Hold Co (the shareholders of Hold Co),

•           under the restructuring, a CGT event happens to the Hold Co shares owned by the shareholders, and the shareholders of Hold Co acquire a new interest (shares in Sub Co) and nothing else,

•           the shareholders of Hold Co acquire shares in Sub Co only because they own shares in Hold Co,

•           Hold Co is a company and the shareholders of Hold Co acquire shares in another company (Sub Co),

•           neither Hold Co nor Sub Co is a trust that is a non-complying superannuation fund, and

•           the proportionality requirements of subsection 125-70(2) are met because each Hold Co shareholder will acquire the same proportion of new shares in Sub Co as they own in Hold Co just before the demerger. Each Sub Co shareholder will also have the same proportionate total market value of shares in Hold Co and Sub Co as they own in Hold Co just before the demerger.

For the purpose of paragraph 125-70(7)(a), Hold Co is a member of the demerger group just before CGT A1 happens. Hold Co will dispose of 100% of its ownership interests in Sub Co to the shareholders, being the owners of the original interests in the head entity of the demerger group. Therefore, Hold Co is a 'demerging entity' for the purpose of paragraph 125-70(7)(a).

For the purpose of paragraph 125-70(6)(a), Sub Co will be a former member of the demerger group consisting of Hold Co and Sub Co as ownership interests in Sub Co will be acquired by the shareholders of Hold Co as the head entity of the group. Therefore, Sub Co will be a 'demerged entity'.

Therefore, section 125-155 is satisfied and any capital gain or capital loss Hold Co makes from CGT event A1 happening to its shares in Sub Co under the demerger is disregarded.

Question 2

All legislative references are to the Income Tax Assessment Act 1936 unless otherwise indicated.

Summary

The Commissioner will not make a determination under subsection 45B(3) that section 45BA or section 45C applies to the proposed demerger.

Detailed reasoning

Under subsection 45B(3) the Commissioner may make a determination that section 45BA applies to all or part of the demerger benefit, or that section 45C applies to all or part of the capital benefit.

Section 45BA concerns the effect of determination under section 45B for demerger benefits.

Section 45C concerns the effect of determination under section 45A and 45B for capital benefits.

Section 45A

Section 45A applies when a company streams the provision of capital benefits and the payment of dividends to its shareholders in such a way that the capital benefits are received by shareholders who would derive a greater benefit from the capital benefits than other shareholders and it is reasonable to assume that the other shareholders have received, or will receive, dividends (subsection 45A(1)).

The 'provision of a capital benefit' to a shareholder includes the distribution to the shareholder of share capital (subsection 45A(3)). The reduction of share capital by Hold Co for the benefit of its shareholders means that there is the provision of a capital benefit to the shareholders of Hold Co.

There is the provision of a capital benefit to all of the shareholders in direct proportion to their shareholdings, such that there is no streaming of the provision of capital benefits.

Accordingly, the Commissioner will not make a determination under subsection 45A(2) that section 45C applies in relation to the capital benefits provided to the shareholders of Hold Co.

Section 45B

The purpose of section 45B is to ensure that relevant amounts are treated as dividends for taxation purposes if components of a demerger allocation as between capital and profit do not reflect the circumstances of a demerger, or certain payments, allocations and distributions are made in substitution for dividends.

Section 45B only applies if, 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 to obtain a tax benefit.

The relevant circumstances of the scheme which the Commissioner is required to have regard to in determining whether or not the requisite purpose exists are set out in subsection 45B(8).

Having regard to these relevant circumstances in this case, the Commissioner considers that the requisite purpose of enabling the shareholders of Hold Co, or other taxpayers, to obtain a tax benefit does not exist.

Accordingly, the Commissioner will not make a determination under subsection 45B(3) in relation to the demerger benefit or capital benefit provided to the shareholders of Hold Co.