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11.1.2. Demergers

Requirements

For an event to qualify as a demerger for purposes of the tax relief, it must involve a restructuring of a demerger group (i.e. comprising the head entity of the group and one or more demerger subsidiaries) in connection with which any of the following conditions are met, that is:

  • The disposal by members of the group of at least 80% of their total ownership interests in another member of the demerger group to owners of original interests in the head entity of the demerger group;
  • The ending of at least 80% of the total ownership interests of members of the demerger group in another member of the demerger group and the issue of new interests to owners of original interests in the head entity;
  • The issue by the demerged entity of sufficient new ownership interests in itself resulting in the ownership of at least 80% of the total ownership interests in the demerged entity by the owners of original interests in the head entity; or
  • A combination of any of the above, which effectively results in the members of the demerger group ceasing to own at least 80% of the total ownership interests owned by members of the demerger group in another member of the group.

The Australian Tax Office’s (‘ATO’) publication ‘Taxation Determination (TD 2020/6)’ further clarified the meaning of a ‘restructuring’ of the demerger group for eligibility of demerger tax relief. The key clarifications include the following:

  • The restructuring of a demerger group is not necessarily confined to the steps or transactions that deliver the ownership interests in an entity to the owners of the head entity of the demerger group, but may include previous and/or subsequent transactions in a sequence of transactions;
  • Transactions which are to occur under a plan for the reorganization of the demerger group may constitute parts of the restructuring of the demerger group even though those transactions are legally independent of each other, contingent on different events, or may not occur;
  • The fact that transactions or steps are separated by several months does not automatically mean that they cannot form part of the same restructuring; and
  • Preparatory steps that do not change the economic position of original interest holders should not affect the availability of demerger relief, but steps or transactions that effect such a change may cause the failure of certain conditions necessary for demerger relief to be available.

Persons who may claim the rollover relief are those who, subject to certain conditions and exceptions, meet all of the following conditions:

  • Possess an (original) ownership interest in a company (i.e. a share in the company or an option, right or similar interest issued by the company that entitles the owner to acquire a share in the company);
  • The company or trust is the head entity of a demerger group;
  • The demerger group undergoes a demerger; and
  • Under the demerger, a CGT event occurs in relation to the person’s original interest and the person acquires a new or replacement interest in the demerged entity.

Direct Tax Consequences

For the members/shareholders of the demerging group, the following reliefs are available:

  • Capital gains and capital losses made by them from certain CGT events that occur under the demerger (including the disposal or cancellation of a share or an option to acquire a share) will be disregarded;
  • Dividend tax relief is granted for dividends received under the demerger, subject to certain conditions;
  • Appropriate adjustments of the cost base of their remaining interests and new interests are to be made to account for any loss in the market value of such interests as a consequence of value shifts out of the interests because of the demerger.

For owners of interests in the head entity of the demerger group, the following reliefs are available:

  • Capital gains and capital losses made by them from certain CGT events that occur in relation to their original interests under the demerger will be disregarded. The rollover relief is not available to non-residents unless the new interest acquired under the demerger in exchange for their original interest involves taxable Australian property;
  • Dividend tax relief is granted for dividends received under the demerger, subject to certain conditions;
  • The subsequent disposal of their interests is subject to a CGT discount;

As in the case of shareholders of the demerger group, the owners of interests in the head entity are also required to make appropriate adjustments to the cost base of their interests in both the head entity and the demerged entity following the demerger.

Indirect Tax Consequences

Because the provision, acquisition, or disposal of securities in connection with a demerger is treated as a financial supply for GST purposes, no input tax credits may be claimed in respect of such provision, acquisition, or disposal. However, there remains the possibility of obtaining a reduced input tax credit on certain acquisitions identified under the GST regulations as reduced credit acquisitions.