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Demergers

Information to provide with your private or class ruling request about a demerger.

Last updated 23 June 2024

How to lodge

To apply for a private ruling about a demerger:

To lodge a class ruling about a demerger:

Check first whether your question is answered in Demergers.

Supporting information

Providing this information up front will reduce delays.

If you've previously given us any of the information listed below, you don't need to resend it.

The information we need for a private or class ruling about a demerger is as listed below. The sections to which you refer depends on who your ruling request applies to. If it applies to:

Ruling application

In a ruling application for shareholders, applicants commonly ask these questions:

  • Is the entity (or entities) entitled to ignore a capital gain or capital loss made on the CGT event that happens to their head company shares under the demerger?
  • If the entity's shares in the head company are pre-CGT, will the entity's new shares in the demerged company be pre-CGT?
  • For the purposes of the CGT discount is the entity taken to have acquired their demerged company shares at the same time as they acquired their corresponding head company shares?
  • Is any dividend paid under the demerger assessable income under subsection 44(1) of the Income Tax Assessment Act 1936 (ITAA 1936)?
  • Will the Commissioner make a determination under subsection 45B(3) of the ITAA 1936 that section 45BA or section 45C will apply?

In a ruling application for members of the demerger group, applicants commonly ask these questions:

  • Is a capital gain or capital loss under CGT events A1, C2, C3 and K6 that happens under the demerger disregarded for the entity [the member of the demerger group]?
  • Does CGT event J1 happen to the entity [the member of the demerger group] under the demerger?

Demerger requirements

To ensure a Division 125 demerger has happened we need information to:

  • identify the demerger group
  • ensure that the demerger requirements are met.

Demerger group

You need to provide the following information so we can identify the demerger group. We recognise that for widely held entities some of this information may not be known.

  • The identity of the head entity (see subsection 125-65(3) of the ITAA 1997), demerger subsidiaries (see subsections 125-65(6) and (7) of the ITAA 1997) and the demerged entity (see subsection 125-70(6) of the ITAA 1997).
  • Details of all ownership interests (see subsection 125-60(1) of the ITAA 1997) in the head entity, including:  
    • a description of each class of ownership interest (if there is more than one class)
    • the number of ownership interests in each class
    • a description of the rights that ownership interests carry (provide a copy of the head entity's constitution if appropriate)
    • for each head entity owner, provide the percentage of ownership interests held; what type of entity (company, trust, or individual); and whether their ownership interests are pre-CGT or post-CGT.
  • The percentage and type of ownership interests that the head entity holds in the demerged entity just before and just after the demerger.
  • Details of the ownership interests that owners of the head entity receive in the demerged entity, including:  
    • the number and type of demerged entity interests that are acquired by head entity shareholders for each ownership interest held in the head entity
    • a description of the rights that ownership interests in the demerged entity carry (provide a copy of the demerged entity's constitution if appropriate).

Demerger requirements

You need to provide the following information so we can ensure the demerger requirements are met:

  • The date that demerger occurred or is expected to occur.
  • The method by which the head entity will cease to own (see paragraph 125-70(1)(b) of the ITAA 1997) at least 80% of its ownership interests in the demerged entity (that is, disposal/transfer, cancellation and reissue, or issue of new shares). Include  
    • a description of the steps undertaken to effect the transfer of ownership interests in the demerged entity, and how these steps will be recorded in the financial accounts of the head entity and the demerged entity (that is, specific journal entries)
    • copies of the most recent financial accounts for both the head entity and the demerged entity at the time of the demerger. Also provide an estimated balance sheet at the time of the demerger if materially different.
  • What the head entity shareholders receive under the demerger - to show that the nothing else test (see paragraph 125-70(1)(c) of the ITAA 1997) is satisfied.
  • The type of entity the demerged entity is - to show that the same entity test (see paragraph 125-70(1)(e) of the ITAA 1997) is satisfied.
  • An explanation of how the maintenance of ownership test (see subsection 125-70(2) of the ITAA 1997) is satisfied, including  
    • where the head entity and/or demerged entity has a number of different types of ownership interests on issue, how the proportion and market value tests are satisfied
    • if some ownership interests are ignored (see subsection 125-70(2) and section 125-75 of the ITAA 1997) (as employee share scheme shares or rights or adjusting instruments), how these interests satisfy the exemption provision.
  • Confirm that  
    • neither the head entity nor demerged entity is a superannuation trust fund
    • the off-market share buyback (see subsection 125-70(4) of the ITAA 1997) and other CGT rollover relief (see subsection 125-70 (5) of the ITAA 1997) exceptions do not apply.

Shareholders of the head entity – CGT consequences

You need to provide the following information so we can determine the CGT consequences for the shareholders of the head entity.

  • Whether a CGT event happened in respect of shares in the head entity and, if so, the relevant CGT event and the ownership interests affected.
  • Whether head entity shareholders will choose CGT rollover relief (see sections 125-80 and 125-85 of the ITAA 1997).
  • Where a private ruling is sought  
    • the residency (see subsection 125-55(2) of the ITAA 1997) of each shareholder
    • if the shareholder is a non-resident, whether the ownership interests they receive in the demerged entity is taxable Australian property.

For many demergers, the demergers calculator may be able to assist shareholders of a head entity to work out the CGT consequences resulting from the demerger.

Shareholders of the head entity – dividend relief

You need to provide the following information so we can determine if dividend relief is available for shareholders of the head entity.

Shareholders of the head entity – dividend integrity provision

You need to address all the circumstances in sub-section 45B(8) of the Income Tax Assessment Act 1936 (ITAA 1936) to enable us to consider the application of section 45B of the ITAA 1936 to the demerger benefit and/or capital benefit. These circumstances include, but are not limited to, the following.

We recognise that all shareholder information may not be known for widely held entities.

  • The reason for undertaking a restructure in the form of a demerger.
  • The effect the demerger will have on the business operations of the head entity and the demerged entity, and a description of those business operations.
  • The method used by the head entity to determine the amount of capital and profit distributed under the demerger, and an explanation as to why this method was used.
  • The capital return amount for each demerged entity share.
  • The market value (or estimates) of the demerged entity and of the entire demerger group (including the demerged entity).
  • Whether the head entity's share capital account is tainted withing the meaning of the term in section 197-50 of the ITAA 1997 (and if so, the details).
  • Whether any payment or distribution made before the demerger by the head entity was taken to be a dividend or was treated as a deemed dividend under section 45B, Division 7A or section 108 of the ITAA 1936.
  • Details of entries made to the equity accounts of the head entity and the demerged entity, including share capital contributions and dividend distributions (over the last 5 or 10 years).
  • Details of relevant tax attributes of the shareholder, including  
    • capital losses available to the shareholder
    • the residency of the shareholders
    • the cost base of the head entity shares.
  • Details of any transaction prior to or after the demerger that is in any way connected with the demerger, including  
    • what the transaction achieved
    • why it was undertaken
    • how it was recorded in the financial accounts of the head entity and the demerged entity
    • the date it occurred.
  • Whether the head entity is a member of a consolidated group at the time of the demerger and, if so, state the date of consolidation and identify all members of the consolidated group just before and after the demerger.

Demerger group members – CGT consequences

You need to provide the following information so we can determine the CGT consequences for demerger group members.

  • The CGT event that happened to the demerging entity's ownership interests in the demerged entity (for example: CGT event A1, C2, C3 or K6), and state whether a capital gain or capital loss would have arisen, but for the operation of the demerger rules.

 

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