ATO Interpretative Decision
ATO ID 2002/1101
Income Tax
Capital Gains Tax consequences of a demerger for a demerging entityFOI status: may be released
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This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Will the capital gain or capital loss made by a taxpayer on the disposal of shares in a wholly-owned subsidiary to original interest holders, as a result of a proposed demerger arrangement, be disregarded under section 125-155 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
Yes, the capital gain or capital loss made by the taxpayer on the disposal of shares in the wholly-owned subsidiary to original interest holders, as a result of a proposed demerger arrangement, will be disregarded under section 125-155 of the ITAA 1997.
Facts
The taxpayer is the ultimate holding company of a large Group and proposes to restructure its Group via a demerger arrangement. Under the proposed arrangement, the taxpayer will dispose of its shares in a wholly-owned subsidiary (the 'Demerged Company') to its shareholders. As a preliminary step to the disposal, certain subsidiaries of the taxpayer will be transferred to the Demerged Company. The taxpayer will then undertake a notional 'cash' distribution to the shareholders equal to the purchase price of the Demerged Company. This distribution will partly be a return of capital and partly a dividend. The shareholders will agree to purchase the shares in the Demerged Company and will be obliged to apply the notional 'cash' amount to acquire those shares.
Reasons for Decision
Division 125 of the ITAA 1997 allows a CGT roll-over when a CGT event happens to original interests in a company or trust under a 'demerger' and new or replacement interests are received in the 'demerged entity'. The roll-over allows a capital gain or loss made from a CGT event happening to original interests to be deferred. Also, certain capital gains or capital losses made by members of a 'demerger group', because of a 'demerger', are disregarded (Subdivision 125-C of the ITAA 1997).
One of the consequences of a 'demerger' for members of a 'demerger group' is that any capital gain or capital loss that a 'demerging entity' makes from a CGT event A1, CGT event C2, CGT event C3 or CGT event K6 happening to its ownership interests in a 'demerged entity' under a 'demerger' is disregarded (section 125-155 of the ITAA 1997).
Demerger Group
A 'demerger group' comprises of one 'head entity' and at least one 'demerger subsidiary' (subsection 125-65(1) of the ITAA 1997). The taxpayer qualifies as a 'head entity' because:
- 1.
- the Demerged Company doesn't have ownership interests in the taxpayer (subsection 125-65(3) of the ITAA 1997); and
- 2.
- there is no other company that is capable of being a 'head entity' having the Demerged Company as a 'demerger subsidiary' (subsection 125-65(4) of the ITAA 1997).
The Demerged Company qualifies as a 'demerger subsidiary' of the taxpayer because the taxpayer owns ownership interests that carry more than 20% of the rights to income and capital (subsection 125-65(6) of the ITAA 1997).
Demerger
The requirements for a demerger to happen are contained in section 125-70 of the ITAA 1997 and are satisfied by the proposed demerger arrangement.
Demerging entity
In accordance with subsection 125-70(7) of the ITAA 1997, the taxpayer will qualify as a 'demerging entity' as it is disposing of 100% of its ownership interests in another member of the 'demerger group' (Demerged Company) to owners of original interests in the 'head entity' of the 'demerger group' (the shareholders of the taxpayer).
Demerged entity
The Demerged Company will be the 'demerged entity' as the taxpayer's shareholders will acquire ownership interests in the Demerged Company under the 'demerger' (subsection 125-70(6) of the ITAA 1997).
Accordingly, when the taxpayer (a 'demerging entity') disposes of it's ownership interests in the Demerged Company (the 'demerged entity') to the taxpayer's shareholders under the proposed demerger arrangement, any capital gain or capital loss that it would make will be disregarded under section 125-155 of the ITAA 1997.
Date of decision: 13 November 2002Year of income: Other/Substituted Accounting Period 2002
Legislative References:
Income Tax Assessment Act 1997
subsection 125-65(1)
subsection 125-65(3)
subsection 125-65(4)
subsection 125-65(6)
section 125-70
subsection 125-70(6)
subsection 125-70(7)
section 125-155
Keywords
CGT roll-over relief
Capital reductions
ISSN: 1445-2782
| Date: | Version: | |
| You are here | 13 November 2002 | Original statement |
| 12 March 2010 | Archived |