Demergers

How to lodge

To apply for a private ruling about a demerger:

• complete and submit a private ruling application form
• provide the supporting information listed below.

To lodge a class ruling about a demerger:

• complete and submit a class ruling application
• provide the supporting information listed below.

Check first whether your question is answered in Demergers.

Supporting information

A request for a private or class ruling about a demerger must:

• be in writing
• include the information listed below – depending on who the ruling request applies to.

If it applies to:

• shareholders of the head entity – refer to
  • Ruling application
  • Demerger requirements
  • Shareholders of the head entity – CGT consequences
  • Shareholders of the head entity – dividend relief
  • Shareholders of the head entity – dividend integrity provision
• members of the demerger group – refer to
  • Ruling application
  • Demerger requirements
  • Demerger group members – CGT consequences.

Demerger group

So we can identify the demerger group, we require (see note):

• 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).

Note: We recognise that for widely held entities some of this information may not be known.

Demerger requirements

In determining the information required to be provided, you should have regard to Taxation Determination TD 2020/6 Income tax: what is a ‘restructuring’ for the purposes of subsection 125-70(1) of the Income Tax Assessment Act 1997?

In addition, to ensure the demerger requirements are met we require:

• the date that the 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 or transfer, cancellation and reissue, or issue of new shares), including
  • a description and a diagrammatic representation 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 (including an estimated balance sheet at the time of the demerger if materially different)
• what the head entity shareholders or unit holders 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
• confirmation 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 or unit holders of the head entity – CGT consequences

So we can determine the CGT consequences for the shareholders or unit holders of the head entity, we require:

• whether a CGT event happened in respect of shares or units in the head entity and, if so, the relevant CGT event and the ownership interests affected
• whether head entity shareholders or unit holders 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 or unit holder
  • if the shareholder or unit holder is a non-resident, whether the ownership interests they receive in the demerged entity is taxable Australian property (see section 855-15 of the ITAA 1997).

For many demergers, shareholders or unit holders of a head entity may be able to work out the CGT consequences resulting from the demerger by using the demergers calculator.

Shareholders or unit holders of the head entity – dividend relief

So we can determine if dividend relief is available for shareholders or unit holders of the head entity, we require:

• the amount of any dividend paid to shareholders or unit holders under the demerger – refer to Taxation Ruling TR 2003/8 Income tax: distributions of property by companies to shareholders – amount to be included as an assessable dividend
• how the CGT assets of the demerged entity and its subsidiaries are used – to show whether the test in subsection 44(5) of the Income Tax Assessment Act 1936 (ITAA 1936) is satisfied
• whether the head entity will make an election under subsection 44(2) of the ITAA 1936.

Shareholders or unit holders of the head entity – dividend integrity provision

You need to address all the circumstances in subsection 45B(8) of the ITAA 1936 to enable us to consider the application of section 45B of the ITAA 1936 to the demerger benefit or capital benefit.

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

The circumstances in subsection 45B(8) of the ITAA 1936 include, but are not limited to:

• 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 or unit holder, including
  • capital losses available to the shareholder or unit holder
  • the residency of the shareholders or unit holders
  • the cost base of the head entity shares or units
• details of any transaction, including any capital raising, 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, the date of consolidation and identify all members of the consolidated group just before and after the demerger.

Demerger group members – CGT consequences

So we can determine the CGT consequences for demerger group members, you need to provide:

• 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
• whether a capital gain or capital loss would have arisen, but for the operation of the demerger rules.