For owners of the head entity
Under a demerger, the owners of interests in the head entity may be able to:
- choose CGT rollover
- access dividend relief for dividends received under the demerger
- access the CGT discount (for subsequent disposals of their interests).
In addition, owners of interests in the head entity must adjust the cost base of all their post-CGT interests in both the head entity and the demerged entity following the demerger.
An owner of interests in the head entity may choose rollover relief for CGT events that happen to their interests under the demerger (for example, the company makes a capital payment in respect of their shares - CGT event G1).
This choice is available to a resident, or to a non-resident whose new interests in the demerged entity 'is taxable Australian property' (or if the CGT event happened before 12 December 2006, the new interests must 'have the necessary connection with Australia').
If an owner of interests in the head entity chooses rollover relief:
- they disregard any capital gain or capital loss made on any CGT event happening to their original interest in the head entity
- and they owned any pre-CGT interests in the head entity, a corresponding number of new interests in the demerged entity are treated as pre-CGT interests
- and any of their interests in the head entity are cancelled, their pre-CGT interests and post-CGT interests will be cancelled proportionately.
Example: proportion of pre-CGT interests
Before the demerger you had 200 shares in 'Head Company' and 60 of those shares are pre-CGT. The proportion of your shares that are pre-CGT shares is 30% (60/200). Under the demerger you receive 40 shares in 'Company A' - 12 of those shares will be taken to be pre-CGT (30% of 40).
Example: original interests cancelled
Before the demerger you had 200 shares in 'Head Company' and 60 of those shares are pre-CGT. Under the demerger, 80 of your shares in Head Company are cancelled. The proportion of your shares being cancelled is 40% (80/200).
Under the demerger, 56 of your post-CGT shares (40% of 140) and 24 of your pre-CGT shares (40% of 60) will be taken to have been cancelled.
If an owner of interests in the head entity does not choose rollover they have to take into account any capital gain or capital loss when working out their net capital gain or net capital loss for the year. None of their new interests in the demerged entity will have pre-CGT status.
End of attention
A dividend paid under the demerger is generally not subject to tax if at least 50% of the CGT assets (by market value) owned by the demerged entity or its demerger subsidiaries are used by the demerged entity or its demerger subsidiaries in carrying on a business. This concession is automatic unless the head entity elects that the dividend concession does not apply.
Dividend relief subject to an integrity provision
The dividend relief is subject to an integrity provision that broadly limits the relief to genuine demergers.
The purpose of the integrity provision is to ensure that relevant amounts are treated as dividends for tax purpose if either:
- components of a demerger allocation as between capital and profit do not reflect the circumstances of a demerger
- certain payments, allocations and distributions are made in substitution for dividends.
The ATO may determine that the whole or part of a distribution under the demerger is an assessable dividend.
The head entity may seek advice from us on how to apply these provisions.
Cost base adjustments
After receiving new interests in the demerged entity under a demerger, the owners must make cost base adjustments to both their interests in the head entity and their new interests in the demerged entity. This applies irrespective of whether they choose rollover.
Broadly, this involves apportioning the total unindexed cost bases of their interests in the head entity over the remaining original interests in the head entity and the new interests in the demerged entity. Only post-CGT interests are taken into account. The apportionment must be reasonable by reference to the relative market values of the new and original interests. Generally, the head entity or the demerging entity will advise owners of interests of these proportions.
If the cost bases have been adjusted under the demerger provisions, no other adjustments are to be made as a result of the demerger (for example, under the general value shifting rules).
Owners use the adjusted cost bases for any later CGT event that happens to those interests (for example, on a later sale of the shares).
Example: cost base adjustments
Immediately before the demerger you had 100 post-CGT shares in 'Head Company'. The total cost base (ignoring indexation) is $700.
Under the demerger you receive 20 shares in 'Company A' and retain your Head Company shares. Just after the demerger the market value of all of Company A shares is $165 and the market value of all of Head Company shares is $935.
You apportion 85% (935/1100) of the total cost base of $700 to Head Company shares and 15% (165/1100) to Company A shares.
The new cost base for each of your Head Company shares is:
$5.95 (85% of $700 100)
The new cost base for each of your Company A shares is:
$5.25 (15% of $700 20)
The CGT discount can be applied to capital gains made on the sale of shares if those shares were acquired at least twelve months before the date of sale. For the purposes of this twelve-month ownership test, if a CGT event happened under the demerger, the owner of the new interests in the demerged entity is taken to have acquired the new interests received in relation to post-CGT original interests when they acquired the corresponding post-CGT original interests in the head entity.
Example: CGT discount
You bought shares in 'Head Company' on 1 October 1997. Under a demerger, there is a return of capital and you receive new shares in 'Company A' on 1 May 2003. For CGT discount purposes, you are taken to have acquired your new shares in Company A on 1 October 1997. If you subsequently sell your shares in Company A on 1 September 2003, you may be entitled to claim the CGT discount as you satisfy the twelve-month ownership test.