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Demergers: 2002 BHP Billiton group demerger

Answers to questions about the impact on resident individual shareholders of the 2002 BHP Billiton group demerger of BHP Steel Ltd.

Last updated 19 July 2005

Impact on resident individual shareholders

These questions and answers apply to BHP Billiton Ltd shareholders who are Australian residents and who held their shares at the time of the demerger - that is on 22 July 2002. They do not apply if the shares were held as trading stock, held for resale at a profit, or acquired under an employee share scheme.

A reference in this material to a pre-capital gains tax (pre-CGT) share is to one that was acquired before 20 September 1985, one to a post-capital gains tax (post-CGT) share is to one acquired on or after that date.

Note: BHP Steel Ltd has now changed its name to Bluescope Steel Ltd.

Background

Under the demerger, BHP Steel Ltd and its subsidiaries were demerged from the BHP Billiton Group. The demerger involved a return of capital of $0.69 per share in BHP Billiton Ltd. This amount was compulsorily applied as consideration for the acquisition of shares in BHP Steel Ltd. BHP Billiton Ltd shareholders were entitled to one share in BHP Steel Ltd for every five of their BHP Billiton Ltd shares.

BHP Billiton Ltd shareholders who did not want to keep their BHP Steel Ltd shares could sell them through a Sale Facility for $2.80 each. Alternatively, shareholders wishing to acquire more BHP Steel Ltd shares could buy them through the facility for this amount.

1. What do I have to do if I was a shareholder in BHP Billiton Ltd when BHP Steel Ltd was demerged?

The return of capital resulted in a capital gains tax (CGT) event happening to each of your BHP Billiton Ltd shares.

There are three things you must do:

  1. consider whether you want to choose rollover relief
  2. recalculate the cost base and reduced cost base of your post-CGT BHP Billiton Ltd and post-CGT BHP Steel Ltd shares, and
  3. work out your capital gain or capital loss from any of the BHP Steel Ltd shares you sold through the sale facility.

2. What are the consequences of choosing rollover?

If some or all of your shares in BHP Billiton Ltd are pre-CGT, rollover will allow you to treat some or all of your BHP Steel Ltd shares as pre-CGT.

Example
If all of your 2,000 BHP Billiton Ltd shares are pre-CGT, then one quarter of the 400 BHP Steel Ltd shares (100 shares) you received will also be pre-CGT shares if you choose rollover.

If all of your 2,000 BHP Billiton Ltd shares are pre-CGT, then the 400 BHP Steel Ltd shares you received will be pre-CGT if you choose rollover.

End of example

If some or all of your shares in BHP Billiton Ltd are post-CGT, rollover will let you disregard any capital gain resulting from the $0.69 return of capital. A capital gain would arise only if the cost base of your BHP Billiton Ltd share was less than $0.69, which is unlikely. You cannot make a capital loss on the return of capital.

3. What are the consequences of not choosing rollover?

If you do not choose rollover and you made a capital gain on the return of capital (which is unlikely) you must take the capital gain into account in calculating your net capital gain or net capital loss in your 2002-03 tax return.

Also, if you do not choose rollover, none of your BHP Steel Ltd shares will be treated as pre-CGT shares.

If you owned pre-CGT BHP Billiton Ltd shares, then the first element of the cost base (and reduced cost base) of each BHP Steel Ltd share you received in relation to those shares was $3.45 just after the demerger. This is the return of capital of $0.69 per share (that was compulsorily applied towards the acquisition of the BHP Steel Ltd shares) multiplied by five to reflect that you were entitled to one BHP Steel Ltd share for every five BHP Billiton Ltd shares you owned.

Example
You had 1,000 pre-CGT BHP Billiton Ltd shares just before the demerger. Under the demerger you received 200 shares in BHP Steel Ltd in relation to your BHP Billiton Ltd shares. You did not choose rollover relief.

You acquired 200 BHP Steel Ltd shares on 22 July 2002 and the first element of the cost base (and reduced cost base) is $3.45 per share (total of $690).

Your 1,000 pre-CGT BHP Billiton shares retain their pre-CGT status.

End of example

4. How do I calculate the cost base and reduced cost base of my post-CGT BHP Billiton Ltd and the post-CGT BHP Steel Ltd shares I received in relation to those shares?

Even if you do not choose rollover, you must recalculate the cost base and reduced cost base of each of your post-CGT BHP Billiton Ltd and each of the post-CGT BHP Steel Ltd shares you received for those shares. The cost base of these BHP Steel Ltd shares is not $3.45.

The Scheme Booklet sent to you at the time of the demerger advised that the first element of the cost base of your BHP Steel Ltd shares would be $3.45 under the rules that existed at that time. It also explained that new cost base rules would apply when the CGT demergers legislation was enacted. As the legislation has now been passed, you work out your cost base according to the new rules. (The Scheme Booklet has been updated by BHP Billiton Ltd to reflect this and you also received notification from BHP Billiton Ltd and BHP Steel Ltd about the new cost base rules)

The cost base of your post-CGT BHP Billiton Ltd shares just before the demerger (not including indexation) is spread across those shares and the post-CGT BHP Steel Ltd shares you received for the post-CGT BHP Billiton Ltd shares. The spreading is based on the value that BHP Steel Ltd represented of BHP Billiton Ltd at that time - 5.063%. The remaining 94.937% is spread across your BHP Billiton Ltd shares.

Example
You acquired a parcel of 1,000 post-CGT BHP Billiton Ltd shares that had a cost base of $8,000 just before the demerger. You later acquired another parcel of 500 post-CGT BHP Billiton Ltd shares that had a cost base of $4,500 just before the demerger.

Under the demerger you received 300 shares in BHP Steel Ltd for these 1,500 BHP Billiton shares.

The cost base of your shares after the demerger is calculated as follows:

BHP Billiton Ltd
$12,500 × 94,937% = $11,867

The first element of the cost base (and reduced cost base) of each of your 1,500 post-CGT shares in BHP Billiton Ltd is $7.91 ($11,867 ÷ 1,500)

BHP Steel Ltd
$12,500 × 5.063% = $633

The first element of the cost base (and reduced cost base) of each of your 300 post-CGT shares in BHP Steel Ltd is $2.11 ($633 ÷ 300).

This example illustrates the cost base calculations using the averaging method. Taxation Determination TD 2006/73 explains that you can use other methods if they are reasonable. For example, in the circumstances of this demerger, it would also be reasonable to use the parcel by parcel method outlined in TD 2006/73. For more information read Demergers: Cost base rules tax determination.

End of example

Remember that in working out the cost base (and reduced cost base) just after the demerger you:

  • need to know the cost base of each of your BHP Billiton Ltd shares just before the demerger. (This means you take into account any other CGT events that happened after you acquired the share but before the demerger if they affected the cost base - for example, reducing the cost base of a share you owned in October 2000 by $0.66 to reflect the return of capital made under the OneSteel demerger and, if you owned the share in June 2001, the adjustment made to the cost base when bonus shares were issued to you at the time BHP Ltd and Billiton Plc merged)
  • do not reduce the cost base of your BHP Billiton Ltd shares by the $0.69 per share return of capital associated with the demerger of BHP Steel Ltd
  • ignore any pre-CGT shares you have - the calculations are only done for your post-CGT shares
  • ignore any additional shares in BHP Steel Ltd you purchased through the sale facility. (The first element of the cost base and reduced cost base of these shares just after the demerger is $2.80 per share), and
  • retain these details so that you can work out your capital gains and losses when you dispose of these shares.

5. How do I work out my capital gain or capital loss from the BHP Steel Ltd shares I sold through the sale facility?

You received $2.80 for each of the BHP Steel Ltd shares that you sold through the sale facility. The sale happened on 22 July 2002.

Your capital gain or capital loss is the difference between $2.80 and the cost base (or reduced cost base) you worked out above for each share. The cost base (or reduced cost base) is either the cost base you worked out under 3 or 4 above for your BHP Billiton Ltd shares.

If you choose rollover under the demerger, you disregard any capital gain or capital loss from a BHP Steel Ltd share that is taken to have been acquired pre-CGT.

6. What happens if I have disposed of some or all of my BHP Billiton or BHP Steel shares after the demerger (other than under the sale facility)?

If you have sold any BHP Billiton Ltd or BHP Steel Ltd shares other than under the sale facility, you calculate any capital gain or capital loss using the normal rules. You include the capital gain or capital loss in the calculation of your net capital gain or net capital loss for the year in which they were disposed of.

7. Can I use the CGT Discount Method for working out my capital gain on BHP Steel shares?

If you have BHP Steel Ltd shares where you calculated the cost base as $3.45 under 3 above, 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.

For all your other BHP Steel Ltd shares, you calculate the 12 months from when you acquired the BHP Billiton Ltd shares that relate to those BHP Steel Ltd shares.

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