Issue
Is there a 'demerger' under subsection 125-70(1) of the Income Tax Assessment Act 1997 (ITAA 1997) if the owners of original interests in the head entity receive new interests in the demerged entity that are not in the same proportion as their original interests in the head entity?
Decision
No. A restructure where the owners of original interests in the head entity receive new interests in the demerged entity that are not in the same proportion as their original interests in the head entity is not a 'demerger' for the purposes of subsection 125-70(1) of the ITAA 1997.
Facts
Headco is owned by two brothers Peter and Tom. Each owns 50% of the shares in Headco. Subco is a 100% subsidiary of Headco. Headco proposes to restructure the group via a demerger arrangement. Under the arrangement Headco disposes of all of its shares in Subco to Tom and Tom disposes of his shares in Headco to Peter. Just after the arrangement Peter will own 100% of the shares in Headco and Tom will own 100% of the shares in Subco.
Reasons for Decision
Division 125 of the ITAA 1997 allows capital gains tax (CGT) relief for certain CGT events happening under a 'demerger'.
A 'demerger' is defined in subsection 125-70(1) of the ITAA 1997. The definition requires that paragraphs 125-70(1)(a) to (h) of the ITAA 1997 be satisfied. Paragraph 125-70(1)(h) of the ITAA 1997 states that the requirements in subsection 125-70(2) of the ITAA 1997 must also be met.
Subsection 125-70(2) of the ITAA 1997 requires maintenance of proportionate ownership interests as follows: • All of the owners must receive the same proportion of new interests in the demerged entity as they held in the head entity just before the demerger; • The proportionate market values of the interests in the demerger group as a whole must be maintained before and after the demerger; and • The new interests are of a similar kind as the original interests.
Accordingly, if Headco (a 'head entity') disposes of its ownership interests in Subco (the 'demerged entity') to only one of its shareholders under the proposed demerger arrangement, the maintenance of ownership test is not met. The proposed arrangement is therefore not a 'demerger' for the purposes of Division 125 of the ITAA 1997.