Fairfax Media (FXJ) separated Domain Holdings Australia Ltd (DHG) on 22 November 2017 under a scheme of arrangement. The record date for the scheme of arrangement is 7.00pm on 17 November 2017. FXJ shareholders will need to account for a capital gains tax event on 22 November 2017.
A participating FXJ shareholder will receive one DHG share for every 10 FXJ shares they held at the scheme record date.
Fred bought 12,000 FXJ shares in September 2011 for a total cost of $14,400 including brokerage.
The cost of each FXJ shares is $1.20 (14,400 ÷ 12,000).
He is entitled to receive 1,200 DHG shares (12,000 ÷ 10) on 22 November 2017.
The cost base of each FXJ shares would be reduced to $0.97 (1.20 − 0.23) on 22 November 2017.
The cost base of each DHG share is $2.33 (0.233 × 12,000 ÷ 1200).
If Fred sold 2,000 FXJ shares on 20 November 2017, he will have cancelled his right to the capital reduction entitlement on his sold shares. Hence, Fred will receive 1,000 DHG shares ((12,000 - 2,000 FXJ shares sold) ÷ 10) on 22 November 2017.
Fred's remaining FXJ shares will have a cost base of $0.97 ($1.20 − $0.233)
Fred will have made a gross capital gain of $466 on the cancellation of the right to capital reduction entitlement calculated as follows:
- capital reduction entitlement per FXJ share is $0.233
- cost base of the right to entitlement is $0.00
- capital gain per FXJ share is $0.233
- gross capital gain is $466 (2000 × $0.233).
- Fred is eligible for a 50% discount on the gross capital gain as he has owned the FXJ shares for more than 12 months.
- Fred's net capital gain is $233.
Note: For the purposes of this example, the capital gain or loss on the actual sale of the 2,000 FXJ shares has not been considered.
End of example