This document contains tax information for Wesfarmers Limited (Wesfarmers) shareholders who received shares in Coles Group Limited (Coles) because of the demerger of Coles from the Wesfarmers Group on 28 November 2018.
Wesfarmers shareholders can also use the Wesfarmers demerger of Coles – 2019 calculator and accompanying instructions to work out their income tax consequences of the demerger.
When this applies to you
This information applies to you, and may assist you in preparing your 2019 income tax return, if all the following apply:
- you were listed on the share register of Wesfarmers as at 4:00pm Western Standard Time on 22 November 2018 (the Record Date)
- you held your shares on capital account: that is, you did not hold your shares in Wesfarmers as revenue assets (as defined in section 977-50 of the Income Tax Assessment Act 1997) nor as trading stock (as defined in subsection 995-1(1) of that Act) on the Record Date.
However, this information does not apply to you if the taxation of financial arrangements (TOFA) rules in Division 230 of the Income Tax Assessment Act 1997 apply to you. If you are an individual, the TOFA rules will generally not apply to you unless you have made an election for them to apply.
Background
The Wesfarmers group conducted a demerger of Coles which was a wholly-owned subsidiary of the Wesfarmers Group. The demerger was undertaken by a reduction of share capital and a court approved scheme of arrangement. Under the demerger, 85% of the shares in Coles were distributed to Wesfarmers shareholders on the basis of one Coles share for each Wesfarmers share held at the Record Date. The Wesfarmers Group retained the remaining 15% shareholding in Coles.
Income tax implications
Capital return and capital gain
When you received your Coles shares under the demerger, part of the value of those shares was a return of capital to you of $5.68 for each Wesfarmers share you held at the Record Date.
If the cost base (just before the demerger) of any of your Wesfarmers shares was less than this amount, you will have a capital gain for each of those shares equal to the difference. However, you disregard the capital gain if:
- you acquired the share before 20 September 1985, that is, the share is a pre-CGT asset
- you choose to obtain CGT roll-over – see under the heading below ‘Choosing the CGT roll-over?’
- just before the demerger, you were a foreign resident or the trustee of a foreign trust for CGT purposes, unless the share was taxable Australian property.
Your Wesfarmers share was taxable Australian property if one of the following applies:
- you have used the share at any time in carrying on a business through a permanent establishment in Australia
- you are an individual to whom all of the following applies:
- you stopped being an Australian resident
- you made a choice to disregard making a capital gain or capital loss on CGT assets you owned (including your Wesfarmers share) just before that time
- between that time and the demerger, you had not again become an Australian resident nor ceased to own the share because of a CGT event that happened to it (for example, you disposed of it).
Working out your net capital gain or net capital loss for the 2019 year
If you have a capital gain and cannot disregard it, you must take it into account in working out your net capital gain or net capital loss (if any) for the 2019 income year.
You must also take into account:
- any other capital gains or capital losses you make in the 2019 income year from other transactions
- any net capital losses carried forwards from earlier income years
- whether you can apply the CGT discount to any part of your net capital gain.
Choosing the CGT roll-over
If you are an Australian resident, you may choose to obtain the roll-over.
If you are a foreign resident, you cannot choose to obtain the roll-over unless the Coles shares you acquired under the demerger were taxable Australian property just after you acquired them. This would only be the case if you began using them immediately in carrying on a business through a permanent establishment in Australia.
When your Coles shares are taken to be pre-CGT
If some or all of the Wesfarmers shares you held at the Record Date were pre-CGT and you choose to obtain the roll-over, an equal number of the Coles shares you acquired under the demerger are taken to be pre-CGT. If you do not choose to obtain the roll-over, none of your Coles shares are taken to be pre-CGT.
Cost base adjustments you must make to your post-CGT Wesfarmers shares and Coles shares
You must adjust the cost bases of your post-CGT Wesfarmers shares and establish the cost bases of the post-CGT Coles shares you acquired under the demerger. You make the same adjustments whether or not you choose to obtain the roll-over.
Method for working out the cost base adjustments
Step 1
Add up the cost bases of all your post-CGT Wesfarmers shares as they were just before the demerger.
Step 2
Multiply the result of step 1 by 0.7109.
Step 3
Divide the result of step 2 by the number of your post-CGT Wesfarmers shares. This gives you the first element of the cost base and reduced cost base of each of your post-CGT Wesfarmers shares just after the demerger.
Step 4
Multiply the result of step 1 by 0.2891.
Step 5
Divide the result of step 4 by the number of Coles shares corresponding to your post-CGT Wesfarmers shares (which is equal to the number of your post-CGT Wesfarmers shares). This gives you the first element of the cost base and reduced cost base of each of those Coles shares.
This method apportions the total of the pre-demerger cost bases of your post-CGT Wesfarmers shares across those same shares and the corresponding Coles shares you received under the demerger.
Coles shares corresponding to pre-CGT Wesfarmers shares where roll-over not chosen
If you have pre-CGT Wesfarmers shares and do not choose the roll-over, the corresponding Coles shares do not have their cost bases set by this method. The first element of the cost base and reduced cost base of these shares (which are post-CGT shares) is $12.8459.
Record keeping
You will need to keep a record of the adjusted and new cost bases to work out if you make a capital gain or capital loss from a subsequent CGT event that happens to your Wesfarmers or Coles shares (for example, you dispose of them).
CGT discount on capital gain from subsequent CGT event happening to your Coles share
Where a Coles share you acquired under the demerger corresponds with a post-CGT Wesfarmers share, you are taken to have acquired the Coles share on the date you acquired that Wesfarmers share for the purpose of determining your entitlement to the CGT discount. This is the case whether or not you choose to obtain the roll-over.
By contrast, where the Coles share corresponds with a pre-CGT Wesfarmers share and you do not choose to obtain the roll-over, the date you are taken to have acquired the Coles share for the purpose of determining your entitlement to the CGT discount is 28 November 2018. If you do choose the roll-over, the Coles share is taken to be pre-CGT and you disregard any capital gain or capital loss from a CGT event that subsequently happens to it.
Example – Deemed date of acquisition for CGT discount purposes
On 24 May 2019, you dispose of a Coles share you acquired under the demerger. The amount of your capital proceeds from the disposal exceeds the cost base for the share, and so you have a capital gain. You acquired the corresponding Wesfarmers share on 23 May 2018. The Wesfarmers share is post-CGT, so irrespective of whether or not you chose the roll-over, you are taken to have acquired the Coles share on 23 May 2018 for the purposes of determining your entitlement to the CGT discount.
End of exampleDividend component of distribution not taxed
As mentioned above under the heading ‘Capital return and capital gain’, part of the value of the Coles shares distributed to you under the demerger was a return of capital. The remainder of that value is a dividend, amounting to $7.1659 ($12.8459 - $5.68) for each Wesfarmers share you held at the Record Date. Under the demerger rules, the dividend is not included in your assessable income or your exempt income, so you do not have to pay tax on it.
If you are a foreign shareholder, the dividend is not subject to withholding tax.
Capital gains consequences from sale of Coles shares through the Sale Facility
If your shares were sold through the Sale Facility, you would have received $11.9921 per share from the Sale Agent, being the average proceeds per share. This would have happened if:
- you were an Ineligible Overseas Shareholder (as described in the Wesfarmers demerger of Coles scheme bookletExternal Link), or
- you were a Small Shareholder (as described in that booklet) and you chose to have your shares sold through the Sale Facility.
If the cost base of the Coles share (as worked out under the heading ‘Cost base adjustments you must make to your post-CGT Wesfarmers shares and Coles shares’) is less than $11.9921, you have a capital gain on the disposal of that share equal to the difference. If the reduced cost base of the share is more than $11.9921, you have a capital loss on the disposal of the share equal to the difference. You made the capital gain or capital loss (if any) when the shares were transferred to the Sale Agent; that is, on the date of the demerger.
However, you disregard the capital gain or capital loss (if any):
- in relation to any of your Coles shares that are taken to be pre-CGT because your corresponding Wesfarmers shares were pre-CGT and you choose to obtain the roll-over (see under the heading 'When your Coles shares are taken to be pre-CGT')
- in relation to all of your Coles shares if you are a foreign resident.
Deduction for donation of proceeds of sale of Coles shares to ShareGift
If you were a Small Shareholder who chose to have your Coles shares sold through the Sale Facility, you would also have had the option of donating the proceeds from the sale to ShareGift. If you chose to do this, you deduct the amount of the proceeds, subject to section 26-55 of the Income Tax Assessment Act 1997.
Worked examples
Example 1 – CGT consequences of capital return:
Tom is an Australian resident. At the Record Date for the demerger, he owns three parcels of Wesfarmers shares, as follows:
- 1,000 pre-CGT shares with a cost base of $2.00 per share.
- 2,000 post-CGT Wesfarmers shares with a cost base of $4.00 per share
- 1,000 post-CGT Wesfarmers shares with a cost base of $15.00 per share.
Because the return of capital under the demerger is $5.68 per share (totalling $22,720), Tom has a capital gain of $1.68 per share for each share in the second parcel, or $3,360 for the whole parcel. If he chooses the roll-over, he disregards the capital gain. If he does not choose the roll-over he must take the capital gain into account when working out his net capital gain or net capital loss (if any) for the 2019 income year.
Tom does not have a capital gain for any of the shares in the third parcel because the cost base for each share exceeds the capital return per share. Tom cannot make a capital loss from those shares.
Regardless of whether or not he chose the roll-over, Tom would have disregarded the capital gain of $3.68 for each share in the first parcel, as those shares were pre-CGT.
End of example
Example 2 – Cost base adjustments, etc.:
Continuing from Example 1, Tom must adjust the cost bases of his 3,000 post-CGT Wesfarmers shares in the same way whether or not he chooses the roll-over, as follows.
Step 1:
The total of the pre-demerger cost bases of Tom’s post-CGT Wesfarmers shares is $23,000 ((2,000 × $4.00) + (1,000 × $15.00)).
Step 2:
$23,000 × 0.7109 = $16,350.70
Step 3:
$16,350.70 ÷ 3,000 = $5.4502, which is the first element of the cost base and reduced cost base of each of Tom’s post-CGT Wesfarmers shares just after the demerger.
Tom works out the cost bases of the 3,000 Coles shares that correspond with his post-CGT Wesfarmers shares as follows:
Step 4:
$23,000 × 0.2891 = $6,649.30
Step 5:
$6,649.30 ÷ 3,000 = $2.2164, which is the first element of the cost base and reduced cost base of each of Tom’s Coles shares corresponding to his post-CGT Wesfarmers shares just after the demerger.
If Tom chooses the roll-over, the 1,000 Coles shares corresponding to his 1,000 pre-CGT Wesfarmers shares are taken to be pre-CGT.
If he does not choose the roll-over, those Coles shares are post-CGT and the first element of the cost base and reduced cost base of each of those shares is $12.8459.
The dividend component of the distribution of Coles shares to Tom is $28,663.60 (4,000 × $7.1659), but this is neither assessable income nor exempt income. This is the case whether or not Tom chooses the roll-over.
End of example
Example 3 – CGT treatment of Coles shares sold through sale facility:
Sarah is an Australian resident. She held a parcel of 150 post-CGT Wesfarmers shares at the Record Date which she acquired during 2016 for $6,450.00 ($43.00 per share), including incidental costs. As she is a Small Shareholder, she decided to have the 150 Coles shares she was entitled to under the demerger sold through the Sale Facility. She then received $1,798.82 (150 × $11.9921) from the Sale Agent for her portion of all the shares sold through the Sale Facility.
Each Wesfarmers share in the parcel had a cost base just before the demerger of $43.00 (which had not changed since Sarah acquired them). Going through the same steps as in Example 2, Sarah works out the first element of the cost base and reduced cost base of her Wesfarmers shares and Coles shares just after the demerger to be as follows:
- Wesfarmers shares: $30.5687 = (150 × $43.00) × 0.7109 ÷ 150
- Coles shares:$12.4313 = (150 × $43.00) × 0.2891 ÷ 150
Sarah makes a capital loss of $65.88 from the sale (150 × ($12.4313 − $11.9921)).
The other consequences for Sarah are that she has no capital gain on the $852.00 (150 × $5.68) capital component of the distribution of the Coles shares to her, while the dividend component of that distribution, $1,074.89 (150 × $7.1659), is neither assessable income nor exempt income.
In this particular case, all these consequences are the same whether or not Sarah chooses to obtain the roll-over.
If Sarah had chosen to donate the proceeds of the sale of her shares to ShareGift, she would have a deduction of $1,798.82 (150 × $11.9921), subject to the limit in section 26-55 of the Income Tax Assessment Act 1997.
End of example
Example 4 – Foreign resident shareholder:
Denise is a foreign resident. At the Record Date for the demerger, she holds a parcel of 200 post-CGT Wesfarmers shares each of which has a cost base just before the demerger of $5.00, and a parcel of 150 post-CGT Wesfarmers shares each of which has a cost base just before the demerger of $30.00. None of the Wesfarmers shares are taxable Australian property. The 350 Coles shares Denise receives under the demerger are not taxable Australian property just after she acquires them. Therefore, Denise cannot choose to obtain the roll-over.
Nevertheless, Denise disregards her capital gain of $136.00 (200 × ($5.68 − $5.00)), as she is a foreign resident and her Wesfarmers shares are not taxable Australian property.
The capital component of the distribution of the Coles shares to Denise is $1,988.00 (350 × $5.68), while the dividend component of the distribution is $2,508.07 (350 × $7.1659).The dividend component is neither assessable income nor exempt income of Denise, nor is she subject to dividend withholding tax on the distribution under the demerger rules.
Going through the same steps as in Example 2, Denise works out the first element of the cost base and reduced cost base of her Wesfarmers shares and Coles shares just after the demerger to be as follows:
Wesfarmers shares: $11.1713 = ((200 × $5.00) + (150 × $30.00)) × 0.7109 ÷ 350
Coles shares: $ 4.5430 = ((200 × $5.00) + (150 × $30.00)) × 0.2891 ÷ 350
For the purpose of working out whether she is entitled to a discount on a capital gain from a subsequent CGT event happening to her Coles shares, she is taken to have acquired 200 of her Coles shares at the time she acquired the parcel of 200 Wesfarmers shares, and is taken to have acquired the other 150 Coles shares at the time she acquired the parcel of 150 Wesfarmers shares. However, any entitlement to a discount will not be relevant if just before the subsequent CGT event, Denise is still a foreign resident and her Coles shares are not taxable Australian property. In that case, she would disregard any capital gain that arises from the event.
End of exampleOur commitment to you
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If correcting the mistake means we owe you money, we will pay it to you. We will also pay you any interest you are entitled to.
- Class Ruling CR 2018/59 outlines income tax consequences in relation to the Wesfarmers demerger of Coles.
- The Wesfarmers demerger of Coles scheme bookletExternal Link (dated 5 October 2018) describes the scheme of arrangement under which the demerger was proposed to occur and on which Wesfarmers shareholders voted on 15 November 2018.