• Demergers

    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

    A demerger involves the restructuring of a corporate or fixed trust group by splitting its operations into two or more entities or groups. Under a demerger, the owners of the head entity of the group (that is, the shareholders of the company or unit holders of the trust) acquire a direct interest (shares or units) in an entity that was formerly part of the group (the demerged entity).

    Example: Demerger

    Peter owns shares (his original interest) in Company A. Company B is a wholly owned subsidiary of Company A. Company A undertakes a demerger by transferring all of its shares in Company B to its shareholders. Following the demerger, all of the shareholders in Company A, including Peter, will own all of the shares in Company B (their new interests) in the same proportion that they hold their shares in Company A.

    Demergers on or after 1 July 2002

    Certain rules apply to eligible demergers that happened on or after 1 July 2002. The following are major demergers which are subject to these new rules - you will find specific details in appendix 4:

    • BHP Billiton Ltd demerger of BHP Steel Ltd (now known as BlueScope), and
    • CSR Ltd demerger of Rinker Group Ltd.

    Demerger rollover

    If you received new interests in a demerged entity under an eligible demerger that happened on or after 1 July 2002, you need to be aware of the following CGT consequences:

    • you may be entitled to choose rollover for any capital gain or capital loss you make under the demerger, and
    • you must calculate the cost base and reduced cost base of your interests in the head entity and your new interests in the demerged entity immediately after the demerger.
    Attention

    Note

    The head entity will normally advise you whether it has undertaken an eligible demerger. We may have provided advice to the head entity in the form of a class ruling.

    End of attention

    Rollover available

    To choose a rollover, the demerger must be an eligible demerger.

    If you choose a rollover:

    • you disregard any capital gain or capital loss made under the demerger, and
    • your new interests in the demerged entity are acquired on the date of the demerger. However, if a proportion of your original interests was acquired before 20 September 1985 (pre-CGT), the same proportion of your new interests in the demerged entity is treated as pre-CGT assets.

    If you do not choose a rollover:

    • you cannot disregard any capital gain or capital loss made under the demerger, and
    • all your new interests in the demerged entity are acquired on the date of the demerger.

    Cost base calculations

    You must recalculate the first element of the cost base and reduced cost base of your remaining original interests in the head entity and of your new interests in the demerged entity. You must make these calculations whether you choose a rollover or not, or if no CGT event happens to your original interests under the demerger.

    The calculation will depend on whether you have pre-CGT original interests in the head entity.

    Cost base calculations where you do not have pre-CGT interests

    You work out the cost base and reduced cost base of your remaining post-CGT original interests and your post-CGT new interests immediately after the demerger. You do this by spreading the total cost base of your post-CGT original interests (immediately before the demerger) over both your remaining post-CGT original interests and your post-CGT new interests. The following steps explain how to do this.

    The steps and example below work out new cost bases using a method referred to as the 'relative market value method', which is sometimes also referred to as the 'averaging method'. You may be able to use other methods if they are reasonable. For more information, visit ato.gov.au/demergers

    Step 1

    Add the cost bases of your post-CGT original interests immediately before the demerger. (Do not reduce your total cost base by any capital amounts returned to you under the demerger and do not include indexation.)

    Step 2

    Use the relevant percentages to apportion the step 1 amount between:

    • your post-CGT original interests in the head entity, and
    • your post-CGT new interests in the demerged entity.

    The head entity should advise you of the relevant percentages to use.

    Step 3

    Divide the cost base apportioned to the head entity interests (from step 2) by the number of remaining post-CGT original interests you own.

    Step 4

    Divide the cost base apportioned to the demerged entity interests (from step 2) by the number of post-CGT new interests you own.

    These amounts will form the first element of the cost base and reduced cost base of your post-CGT original interests and post-CGT new interests.

    Example: No pre-CGT interests

    Under the BHP Billiton Ltd demerger of BHP Steel Ltd, shareholders received one BHP Steel share for every five BHP Billiton shares they owned at the date of the demerger.

    Anita owned 280 BHP Billiton shares (all post-CGT) with a cost base of $2,500 immediately before the demerger. Under the demerger, Anita received 56 BHP Steel shares. Anita works out the cost base and reduced cost base of her BHP Billiton shares and BHP Steel shares as follows:

    Step 1

    The total cost base of the BHP Billiton shares immediately before the demerger was $2,500.

    Step 2

    BHP Billiton advised shareholders to apportion 94.937% of the total cost base from step 1 to BHP Billiton shares and 5.063% to BHP Steel shares:

    (a)     BHP Billiton

    (b)     94.937% x $2,500= $2,373.43

    Step 3

    Divide the step 2(a) amount by the 280 BHP Billiton shares:

     

    $2,373.43
    280

    = $8.48 per share

    Step 4

    Divide the step 2(b) amount by the 56 BHP Steel shares

     

    $126.58
    56

    = $2.26 per share

    Cost base calculations where you have pre-CGT interests

    If you choose a rollover

    If you choose rollover and a proportion of your original interests are pre-CGT, the same proportion of your new interests will be treated as pre-CGT interests. It is not necessary to calculate the cost base and reduced cost base for your pre-CGT interests.

    You calculate the cost base and reduced cost base of your remaining post-CGT original interests and your post-CGT new interests in the same way as shown in the example above.

    There is no change to the acquisition date of your original interests.

    If you do not or cannot choose a rollover

    If you do not or you cannot choose a rollover (for example, because a CGT event did not happen to your original interests), the new interests that you receive for your pre-CGT original interests are treated as post-CGT interests. You work out the cost base of these new interests under the ordinary cost base rules (this will generally be equal to the capital return and dividend distributed from the head entity that is applied to acquire those new interests).

    Attention

    Note

    It may be to your advantage not to choose a rollover for new interests you receive for your pre-CGT original interests - for example, where the reduced cost bases of those new interests calculated under the ordinary cost base rules mean you will make a capital loss when you dispose of them.

    End of attention

    You calculate the cost base and reduced cost base of your remaining post-CGT original interests and your post-CGT new interests (other than those received for pre-CGT original interests) in the same way as shown in the example above - except that you ignore the new interests received for pre-CGT original interests in the calculation.

    There is no change to the acquisition date of your original interests.

    Example: With pre-CGT interests

    Anita owned 400 BHP Billiton shares immediately before the demerger:

    • 120 pre-CGT shares, and
    • 280 post-CGT shares (the cost base of which, immediately before the demerger, was $2,500).
     

    i

    If Anita chose a rollover, the 24 BHP Steel shares she received for the 120 pre-CGT BHP Billiton shares will also be pre-CGT. It is not necessary to work out the cost base and reduced cost base for your pre-CGT interests. Immediately after the demerger, she calculates the cost base and reduced cost base of her 280 post-CGT BHP Billiton shares and the 56 BHP Steel shares she received for those BHP Billiton shares in the same way as shown in the example above.

    ii

    If Anita did not choose a rollover, the 24 BHP Steel shares she received for the 120 pre-CGT BHP shares are post-CGT shares acquired on the date of the demerger. Immediately after the demerger, the cost base and reduced cost base of the 24 BHP Steel shares are $3.45 per share (the capital return of $0.69 per share x 5).

    Immediately after the demerger, she calculates the cost base and reduced cost base of her 280 post-CGT BHP Billiton shares and the 56 BHP Steel shares she received for those BHP Billiton shares in the same way as shown in the example above.

    In either case, there is no change to the pre-CGT status of Anita's 120 BHP Billiton shares.

    Using the discount method if you sell your shares after the demerger

    If you sell your new interests in the demerged entity after the demerger, you must have owned those interests for at least 12 months from the date you acquired the corresponding original interests in the head entity in order to use the discount method.

    Example

    You received BHP Steel Ltd shares under the demerger on 22 July 2002. They related to shares you acquired in BHP Billiton Ltd on 15August 2001. You can only use the discount method to work out your capital gain on these shares if you dispose of them after 15 August 2002 - that is, more than 12 months after the date you acquired the BHP Billiton shares.

    However, you calculate the 12 months from the date of demerger if you:

    • did not choose the rollover and you received new interests in the demerged entity which relate to pre-CGT interests in the head entity, or
    • acquired your new interests without a CGT event happening to your original interests.
     

    Example

    You received BHP Steel Ltd shares under the demerger where you calculated the cost base as $3.45 per share (because they related to pre-CGT shares you owned in BHP Billiton Ltd and you did not choose rollover). You can only use the discount method to work out your capital gain on these shares if you disposed of them after 22 July 2003 - that is, more than 12 months after the demerger.

    Further Information

    Demergers calculator and other products and information

    We have a demergers calculator on our website to help you make these calculations.

    We also have other products to assist you, such as question-and-answer sheets for some demergers undertaken by major listed entities.

    See our website at ato.gov.au/demergers

    End of further information
    Last modified: 06 Oct 2009QC 27893