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Demergers and corporate restructuring

While recent class rulings have highlighted the value of demergers for corporate restructuring, groups should ensure that any demerger complies fully with the demerger provisions, according to chartered accounting and advisory firm BDO Kendalls.

BDO Kendalls national tax counsel, Nick Gangemi, says that given the existence of the anti-avoidance rules related to dividends and capital distributions, groups considering a demerger as a mechanism for corporate restructuring should also consider whether it should seek to obtain a private or class ruling.

'Such a ruling will give the group greater comfort, but, in order to obtain a favourable ruling, the group would need to demonstrate the commercial and business reasons behind the demerger,' Mr Gangemi says.

'However, the majority of the demerger rulings that are issued are where there has been a restructure of a public company.

'The Commissioner is loath to provide comfort to private company demergers, particularly where it is considered that, following the demerger, the demerged entity will be disposed of.'

Mr Gangemi says that up until a few years ago, it was not possible to demerge a subsidiary without significant capital gains tax and income tax consequences for shareholders, the demerging company and in some cases, the demerged entity.

'However, with the introduction of special demerger provisions, where the demerger fulfils the conditions of those rules, roll-over relief is available for shareholders,' Mr Gangemi says.

'Additionally, the demerging and demerged entities are usually free from tax.'

Mr Gangemi says that the reasons for a demerger are varied, including that it enables management to focus their strategy.

'A demerger also allows investors to choose which business lines to invest in and generally allows business lines to be priced independently by the markets,' Mr Gangemi says.

The recent class rulings dealt with the demerger of Tower Australia Group Limited by Tower Limited and the demerger of Pacific Mines Limited by Summit Resources Limited.

For more information on this release, please contact: Nick Gangemi
Phone: +61 2 9286 5555
Date: 29/04/2007

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