Generally the head entity undertaking the demerger will advise owners whether the CGT relief is available, but you should seek our advice if in any doubt. We may have provided advice in the form of a class ruling confirming that CGT relief is available.
CGT rollover is available to a demerger if it:
- involves a demerger group
- satisfies the demerger tests
- is undertaken for commercial reasons.
The following transactions are not eligible for demerger relief:
- share buy-backs (that is, off-market purchases under Division 16K of Part III of the Income Tax Assessment Act 1936)
- situations where any owner of the head entity can get rollover relief from other provisions of the tax law for all capital gains tax (CGT) events that happen to their ownership interests under the demerger.
Demerger group
A demerger group consists of a head entity and one or more entities known as demerger subsidiaries. These entities can be companies or fixed trusts. A discretionary trust can't be a member of a demerger group, but it may be one of the owners of the head entity.
The head entity of a demerger group is a company or fixed trust at the top of the group structure. No other entity in the group can have ownership interests in the head entity. However, where the head entity owns more than 20% and less than 80% of a listed company or widely held trust, the listed company or widely held trust can choose for the head entity not to be a member of the demerger group. In this case, the listed company or widely held trust would usually become the head entity.
A demerger subsidiary is a company or fixed trust in which members of the demerger group, either alone or with other members of the demerger group, own or have the right to acquire ownership interests of more than 20% of that entity (generally measured by rights to income or capital and voting rights).
Example: Demerger group
In the example above the demerger group consists of:
- Head Company
- Company A
- Fixed Trust, and
- Company B.
Where:
- Head Company is the head entity
- Company A, Fixed Trust and Company B are demerger subsidiaries.
Company C is not a member of the demerger group because the group members have less than 20% interest in it.
Although Fixed Trust from the example above is a member of the demerger group, it can't be demerged (see Same entity type test). Head Company can demerge either Company A or Company B.
Demerger tests
For a demerger to qualify for tax relief there are a number of basic tests that need to be satisfied; including the:
Other eligibility requirements may apply to certain demergers.
80% test
This test requires that the demerger group must effectively cease to own at least 80% of the interests it holds in the demerged entity. This can occur by disposal of interests, interests ending, swamping or a combination of methods.
Example: Before demerger
Example: After demerger
Head Company demerges 80% of its interests in Company A and retains 20%.
End of exampleNothing else test
This test requires that the owners of the head entity must acquire a new interest in the demerged entity and nothing else (for example, they cannot also receive cash). The mere existence of a sale facility for new or original interests will not normally breach this rule.
Same entity type test
This test requires that the new interests must be in the same kind of entity as the original interests. This means that if the head entity is:
- a company, the demerged entity must be a company
- a trust, the demerged entity must be a trust.
For example, demerging a fixed trust to unit-holders of a fixed trust would satisfy the test. Demerging shares in a company to unit-holders of a fixed trust would not satisfy the test.
Maintenance of ownership test
This test requires that after the demerger:
- each owner of the head entity must own the same proportion of new interests in the demerged entity as they previously owned in the head entity (ignoring any other direct interests they hold in the demerged entity)
- each owner must have the same proportionate total market value of ownership interest in the head entity and in the demerged entity as they owned in the head entity before the demerger. Market value can be a reasonable approximation and can be anticipated by the head entity before the demerger.
In working out whether the proportional ownership tests have been satisfied, the following types of interests may be ignored:
- certain qualifying partly paid shares or rights acquired under an employee share scheme if they total no more than 3% of the ownership interests in the head entity
- certain adjusting instruments in listed entities (for example, reset preference shares or convertible notes) if they total no more than 10% of the ownership interests in the head entity.
Commercial reasons
Detailed examples of how the ATO would assess whether a demerger is undertaken for commercial reasons are provided in Examples of how section 45B of the ITAA 1936 applies to demergers.