Rox Resources Limited - demerger of Cannon Resources Limited

This Ruling sets out the income tax consequences of the demerger of Cannon Resources Limited (Cannon) by Rox Resources Limited (Rox) which was implemented on 28 July 2021 (Implementation Date).

Full details of this demerger are set out in paragraphs 22 to 40 of this Ruling.

All legislative references in this Ruling are to provisions of the Income Tax Assessment Act 1936 or the Income Tax Assessment Act 1997 (as detailed in the table in the Appendix of this Ruling), unless otherwise indicated.

This Ruling applies to you if you held shares in Rox and you: • were registered on the Rox share register on 22 July 2021 (Record Date) • held your Rox shares on capital account; that is, you did not hold your shares in Rox as revenue assets (as defined in section 977-50) or as trading stock (as defined in subsection 995-1(1)) on the Record Date, and • were a resident of Australia, as defined in subsection 6(1), on the Implementation Date.

This Ruling does not apply to anyone who is subject to the taxation of financial arrangements rules in Division 230 in relation to the scheme outlined in paragraphs 22 to 40 of this Ruling. Note: Division 230 will not apply to individuals, unless they have made an election for it to apply.

This Ruling applies from 1 July 2021 to 30 June 2022.

A demerger, as defined in section 125-70, happened to the Rox demerger group, which included Rox and Cannon.

CGT event G1 happened when you received, or were taken to have received, the Cannon shares (section 104-135).

You will make a capital gain from CGT event G1 happening if the cost base of your Rox share is less than the amount you received for your Cannon share of 6.19 cents. If so, the capital gain is equal to the amount of the difference (subsection 104-135(3)).

No capital loss can be made from CGT event G1 (Note 1 to subsection 104-135(3)).

You can choose to obtain demerger roll-over for your Rox shares (subsection 125-55(1)).

If you choose demerger roll-over for your Rox shares: • any capital gain you made when CGT event G1 happened is disregarded (subsection 125-80(1)), and • you must recalculate the first element of the Cost base / reduced cost base of your Rox shares, and calculate the first element of the Cost base / reduced cost base of the corresponding Cannon shares you acquired under the demerger (subsection 125-80(2)).

If you did not choose demerger roll-over for your Rox shares: • you cannot disregard a capital gain you made when CGT event G1 happened, and • you must recalculate the first element of the Cost base / reduced cost base of your Rox shares, and calculate the first element of the Cost base / reduced cost base of the corresponding Cannon shares you acquired under the demerger (section 125-85).

The first element of the Cost base / reduced cost base of each Rox share and corresponding Cannon share is worked out by: • taking the total of the cost bases of your Rox shares just before the demerger, and • apportioning that total between your Rox shares and your Cannon shares acquired under the demerger.

The apportionment is done on a reasonable basis having regard to the market values of your Rox shares and Cannon shares just after the demerger, or an anticipated reasonable approximation of those market values (subsections 125-80(2) and (3)).

The Commissioner accepts that a reasonable apportionment is to attribute: • 86.18% of the total of the cost bases of your Rox shares just before the demerger to the Rox shares, and • 13.82% of the total of the cost bases of your Rox shares just before the demerger to the corresponding Cannon shares.

Peter held 5,000 Rox shares that had an aggregate cost base of $2,500, just before the demerger. He received 1,156 Cannon shares under the demerger (one Cannon share for every 4.324 Rox shares).

Peter works out the first element of the cost bases of his Rox shares and Cannon shares just after the demerger as follows: Step 1: Peter adds up the cost bases of his Rox shares as they were just before the demerger: Aggregate cost base = $2,500 Step 2: Peter attributes 86.1797% × $2,500 = $2,154.49 to his Rox shares Step 3: Peter attributes 13.8203% × $2,500 = $345.51 to his Cannon shares Step 4: The first element of the Cost base / reduced cost base of Peter's Rox shares just after the demerger is $2,154.49 ÷ 5,000 = 43.0898 cents Step 5: The first element of the Cost base / reduced cost base of Peter's Cannon shares just after the demerger is $345.51 ÷ 1,156 = 29.8884 cents (This shows that the total of the cost bases of the Rox shares originally acquired is spread across the cost bases of the Rox and Cannon shares.)

For the purpose of determining whether you can make a discount capital gain from a future CGT event that happens to a Cannon share you acquired under the demerger, you will be taken to have acquired the Cannon share on the date you acquired, for capital gains tax (CGT) purposes, the corresponding Rox share (table item 2 in subsection 115-30(1)). This will be the case whether or not you choose demerger roll-over.

The value of the Cannon shares you received, or were taken to have received, under the demerger is not included in your assessable income under subsection 44(1). Although the part of the value of a Cannon share that is not debited to the share capital account of Rox is a dividend under subsection 6(1), it will be a demerger dividend under subsections 44(3) to (5). A demerger dividend is non-assessable non-exempt income for you.

As the purpose test in paragraph 45B(2)(c) is not satisfied, the Commissioner will not make a determination under either: • paragraph 45B(3)(a) that section 45BA applies to the whole, or any part, of the demerger benefit provided to you under the demerger, or • paragraph 45B(3)(b) that section 45C applies to the whole, or any part, of the capital benefit provided to you under the demerger.

The following description of the scheme is based on information provided by the applicant. If the scheme is not carried out as described, this Ruling cannot be relied upon.

Rox is an Australian-resident public company which is listed on the Australian Securities Exchange (ASX). It undertakes mineral exploration and holds assets at various levels of development that includes both gold and nickel projects that are all located in Western Australia.

As at 30 June 2021, Rox had: • $70,595,754 contributed equity • $4,827,536 reserves, and • $50,614,755 accumulated losses.

As at the Record Date, Rox had 157,607,614 shares on issue including an additional 21,136,190 unquoted options which give the holder the right to acquire shares in Rox.

Approximately 3.85% of Rox shares are held by foreign-resident shareholders.

Rox's share capital account is not tainted within the meaning of Division 197.

Rox has not paid any dividends to its shareholders since its date of incorporation.

Cannon was incorporated in Australia on 25 November 2010 as a mineral exploration company. Prior to the demerger, Rox held 100% of the Cannon shares (or one Cannon share) on issue.

Rox transferred all of its nickel assets (the Fisher East Nickel Project and the Collurabbie Nickel Project) to Cannon prior to the demerger.

On 28 June 2021, Rox shareholders approved a reduction of Rox's share capital under sections 256B and 256C of the Corporations Act 2001. The share capital reduction was effected by way of an in specie distribution of Cannon shares to Rox shareholders.

On the Implementation Date, each Rox shareholder (other than Ineligible Rox shareholders noted in paragraph 34 of this Ruling) received one Cannon share for every 4.324 Rox shares held on the Record Date.

Rox accounted for the demerger by debiting its: • share capital account by $9,756,156, and • retained earnings by $773,345.

Ineligible Rox shareholders on the Record Date had their Cannon shares sold and the net proceeds paid to them, with the timing of the sale to coincide with Cannon being admitted to ASX and a market for Cannon shares being established on ASX.

The directors of Rox formed the view that the demerger would achieve the following objectives: • secure sufficient funding to allow the exploration warranted by the high prospectivity of Cannon's nickel assets • allow Rox to dedicate its efforts to its Youanmi and Mt Fisher Gold Projects, and in doing so will remove the internal competition for valuable capital • provide Rox shareholders with the opportunity to participate in the exploration and possible development of the nickel assets, while maintaining their investment exposure to the Youanmi and Mt Fisher Gold Projects • drive superior value for shareholders in both entities • enable both Cannon and Rox to undertake more targeted marketing to investors as both companies have a clear and more easily understood investment proposition, and • allow for Rox and Cannon to have independent management.

Rox did not elect under subsection 44(2) that subsections 44(3) and (4) will not apply to the demerger dividend for all Rox shareholders.

Cannon was listed on the ASX on 10 August 2021 and raised share capital of $6 million (before costs) through a pro rata priority offer of 30 million Cannon shares at an issue price of 20 cents per Cannon share, together with one Attaching Option for every three Cannon shares issued.

Just after the demerger, CGT assets owned by Cannon representing at least 50% by market value of all the CGT assets owned by Cannon were used in carrying on a business by Cannon (subsection 44(5)).

All shares in Rox and Cannon were issued after 20 September 1985.

For the purposes of the Cost base / reduced cost base apportionment under subsections 125-80(2) and (3), a reasonable approximation of the market values of a Rox share and a Cannon share just after the demerger was calculated as follows: • 41.66 cents for each Rox share, being the volume weighted average price of Rox shares as traded on the ASX over the first five trading days from (and including) 28 July 2021, and • 28.89 cents for each Cannon share, being the volume-weighted average price for Cannon shares as traded on the ASX over the five trading days from (and including) 12 August 2021.

This paragraph sets out the details of the provisions ruled upon or referenced in this Ruling. Income Tax Assessment Act 1936 subsection 6(1) Income Tax Assessment Act 1936 subsection 44(1) Income Tax Assessment Act 1936 subsection 44(2) Income Tax Assessment Act 1936 subsection 44(3) Income Tax Assessment Act 1936 subsection 44(4) Income Tax Assessment Act 1936 subsection 44(5) Income Tax Assessment Act 1936 paragraph 45B(2)(c) Income Tax Assessment Act 1936 paragraph 45B(3)(a) Income Tax Assessment Act 1936 paragraph 45B(3)(b) Income Tax Assessment Act 1936 section 45BA Income Tax Assessment Act 1936 section 45C Income Tax Assessment Act 1997 section 104-135 Income Tax Assessment Act 1997 subsection 104-135(3) Income Tax Assessment Act 1997 subsection 115-30(1) Income Tax Assessment Act 1997 subsection 125-55(1) Income Tax Assessment Act 1997 section 125-70 Income Tax Assessment Act 1997 subsection 125-80(1) Income Tax Assessment Act 1997 subsection 125-80(2) Income Tax Assessment Act 1997 subsection 125-80(3) Income Tax Assessment Act 1997 section 125-85 Income Tax Assessment Act 1997 Division 197 Income Tax Assessment Act 1997 Division 230 Income Tax Assessment Act 1997 section 977-50 Income Tax Assessment Act 1997 subsection 995-1(1)