Issue
Will a demerger under Division 125 of the Income Tax Assessment Act 1997 (ITAA 1997) cause subsection 149-30(1) of the ITAA 1997 to apply to the pre-CGT asset held by the entity, a wholly-owned subsidiary company, at the time it becomes a demerged entity under subsection 125-70(6) of the ITAA 1997?
Decision
No. The demerger under Division 125 of the ITAA 1997 will not cause subsection 149-30(1) of the ITAA 1997 to apply to the pre-CGT asset owned by the entity at the time it becomes a demerged entity.
Facts
An individual owns all the shares in the holding company which fully owns the entity. The entity had acquired the CGT asset prior to 20 September 1985 (the pre-CGT asset). Subsection 149-30(1) of the ITAA 1997 and section 160ZZS of the Income Tax Assessment Act 1936 had never applied to the CGT asset before the time of the demerger.
When the demerger occurs, the holding company will transfer the issued shares in the entity to the individual shareholder of the holding company. The demerger will meet the requirements for relief provided by Division 125 of the ITAA 1997.
After the demerger, the individual will own all of the shares in both the former holding company and the demerged entity.
Reasons for Decision
Under subsection 149-30(1) of the ITAA 1997, an asset stops being a pre-CGT asset when the majority underlying interests in the asset are not held by the same ultimate owners who held the majority underlying interests immediately before 20 September 1985. The asset is deemed to have been acquired by an entity at the time that the majority underlying interests ceased to be held.
An underlying interest in a CGT asset is a beneficial interest that an ultimate owner has (whether directly or indirectly) in the asset or in any ordinary income that may be derived from the asset (subsection 149-15(2) of the ITAA 1997).
Before the demerger, the individual had 100% of the underlying interests in the pre-CGT asset, indirectly, through the ownership of all the shares in the holding company which itself owned all the shares in the entity.
After the demerger the individual will still have 100% of the underlying interests in the pre-CGT asset, indirectly, by virtue of owning all the shares in the demerged entity. As there will be no change in the underlying interests as a result of the demerger, the CGT asset will retain its pre-CGT status.