• Takeovers and mergers

    Attention

    Warning:

    This information may not apply to the current year. Check the content carefully to ensure it is applicable to your circumstances.

    End of attention

    If a company in which you hold shares is taken over or merges with another company, you may have a capital gains tax liability if you are required to dispose of your existing shares. In certain circumstances if you acquire new shares in the takeover or merged company you may be able to defer paying capital gains tax until a later CGT event happens. For further details refer to Scrip for scrip roll-over.

    In a takeover or merger arrangement that involves an exchange of shares, the market value of the shares received in the takeover or merged company will represent the capital proceeds when calculating the capital gain or loss on the shares that have been disposed of in the target company.

    If the arrangement involves a combination of money and shares in the takeover or merged company, the capital proceeds are equal to the total of the money and the market value of the shares received at the time of the disposal of the shares.

    The cost of acquiring the shares in the takeover or merged company is equal to the market value of the shares you give up in the target company at the time you acquire the other shares reduced by any cash proceeds.

    To correctly calculate the capital gain or loss for the target company shares, you will need to keep records - in addition to the usual records - showing the parties to the arrangement, the conditions of the arrangement and the capital proceeds.

    If you dispose of the shares after 11.45 am on 21 September 1999, you may be eligible for the 50 per cent CGT discount.

    As each takeover or merger arrangement will vary according to its own particular circumstances, you need to obtain full details of the arrangement from the parties involved.

    Example

    Takeover arrangement

    (Assume that scrip for scrip roll-over does not apply to this arrangement)

    Desiree owns 500 shares in ABC Ltd. These shares are currently worth $2 each. Their cost base, with indexation, is $1.50.

    XYZ Ltd offers to acquire each share in ABC Ltd for one share in XYZ Ltd and 75 cents cash. The shares in XYZ Ltd are valued at $1.25 each. Accepting the offer, Desiree receives 500 shares in XYZ Ltd and $375 cash.

    The capital proceeds received for each share in ABC Ltd is $2 ($1.25 market value of each XYZ Ltd share plus 75 cents cash). Therefore, as the cost base of each ABC Ltd share is $1.50, Desiree will make a capital gain of 50 cents ($2 - $1.50) on each share, a total of $250.

    The cost base of the newly acquired XYZ Ltd shares is the market value of the shares in ABC Ltd ($2) less the cash amount received ($0.75). That is, $1.25 each or a total of $625 (500 x $1.25).

    Last modified: 18 Sep 2009QC 18323