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  • Demergers and CGT

    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).

    While a demerger may give rise to a capital gain or loss, you:

    • can choose a rollover for any capital gain or loss you make under the demerger
    • 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.

    Foreign residents can only choose a rollover if the new interest acquired under the demerger in exchange for the original interest is taxable Australian property just after the foreign resident acquired it.

    If you choose a rollover:

    • you disregard any capital gain or loss made under the demerger
    • 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 don't choose a rollover:

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

    Whether or not you choose a rollover, you must recalculate the cost base of your remaining original interests in the head entity and your new interests in the demerged entity.

    In addition, 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 it not apply.

    Generally the head entity undertaking the demerger will advise shareholders or unit holders that CGT relief is available. Or the ATO may have provided advice in the form of a class ruling confirming that CGT relief is available.

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    Last modified: 29 Jun 2018QC 52227