Issue
If shareholders can sell their new shares in a demerged entity through a sale facility established by the head entity, is the requirement in paragraph 125-70(1)(c) of the Income Tax Assessment Act 1997 (ITAA 1997) that shareholders only receive ownership interests in the demerged entity under the demerger, satisfied?
Decision
Yes. The requirements of paragraph 125-70(1)(c) of ITAA 1997 will still be satisfied if shareholders are offered the opportunity to sell shares via a sale facility.
Facts
A company (the head entity) undertook a demerger of a subsidiary (the demerged entity) and the shareholders in the head entity were entitled to receive only shares in the demerged entity.
For the convenience of shareholders who intended to sell their new shares in the demerged entity, the head entity established a sale facility. A shareholder in the head entity could, if they chose, have their new shares in the demerged entity sold on their behalf by the trustee of a sale facility trust, who would remit the proceeds of the sale to the shareholder.
Reasons for Decision
In order to be a demerger for the purposes of Division 125 of the ITAA 1997 the conditions of paragraph 125-70(1)(c) of the ITAA 1997 must be satisfied. Paragraph 125-70(1)(c) requires that, under a restructuring: (i) a CGT event happens to an original interest owned by an entity in the head entity of the group and the entity acquires a new interest and nothing else; or (ii) no CGT event happens to an original interest owned by an entity in the head entity of the group and the entity acquires a new interest and nothing else.
In this case, the establishment of the sale facility was not an integral part of the demerger. Rather, it was ancillary to the demerger, and therefore did not occur under the demerger for the purposes of Division 125 of the ITAA 1997.
Consequently, the opportunity for shareholders to use the sale facility still allowed the requirements in paragraph 125-70(1)(c) of the ITAA 1997 to be satisfied.