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  • Cost base calculations

    If you receive new interests in a demerged entity, you must recalculate the first element of the cost base and reduced cost base of any remaining original interests in the head entity you continue to hold and of your new interests in the demerged entity. This applies whether or not you choose a CGT rollover.

    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).

    The calculation varies depending on whether or not you have pre-CGT original interests in the head entity.

    On this page:

    Cost base calculations where you don't 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 original interests (immediately before the demerger) over both your remaining original interests and your new interests. The following steps explain how to do this.

    The steps and example use the relative market value method (also known as the averaging method). You may be able to use other methods if they are reasonable.

    Step 1

    Add the cost bases of your original interests immediately before the demerger. (Don't reduce your total cost base by any capital amounts returned to you under the demerger and don't include indexation.)

    Step 2

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

    • your original interests in the head entity, and
    • your 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.

    While capital gains and capital losses on the sale of pre-CGT shares are generally ignored, a capital gain may be made under CGT event K6 on the sale of pre-CGT shares if the market value of the post-CGT property in the company equals or exceeds 75% of the entity's net assets.

    See also:

    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 on 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: 94.937%  $2,500= $2,373.43

    (b) BHP Steel: 5.063%  $2,500= $126.58

    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 

     

    End of example

    Cost base calculations where you do have pre-CGT interests

    If you choose a rollover

    If you choose a 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's 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 below.

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

    If you don't choose a rollover

    If you don't or can't 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 the 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 the new interests).

    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.

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

    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's not necessary to work out the cost base and reduced cost base for 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 previous example.

    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  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 previous example.

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

    End of example

    See also:

    Last modified: 15 Feb 2018QC 52228