These questions and answers apply to Arrow Energy Limited (Arrow) shareholders who are Australian residents and who held their shares at the time of the demerger - that is, on 28 July 2010. 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.
Under the demerger, Dart Energy Limited (Dart) and its subsidiaries were demerged from the Arrow Group. The demerger involved a return of capital of $0.09 per share held in Arrow. This amount was compulsorily applied as consideration for the acquisition of shares in Dart. Arrow shareholders were entitled to one share in Dart for every two of their Arrow shares.
1. What do I have to do if I was a shareholder in Arrow when Dart was demerged?
The return of capital resulted in a capital gains tax (CGT) event happening to each of your Arrow shares.
There are two things you must do:
- consider whether you want to choose the rollover
- recalculate the cost base and reduced cost base of your Arrow and Dart shares.
2. What are the capital gains tax consequences of the demerger?
A CGT event happened in relation to each Arrow share owned by you at the time Arrow made the payment of the capital reduction amount.
You may have made a capital gain on your Arrow shares, depending on their cost base (or reduced cost base) and the capital reduction amount you received for them.
Work out if you have made a capital gain using the value of the capital reduction amount you received for each Arrow share.
The capital reduction amount for each Arrow share was $0.09 per Arrow share.
For information on how to work out the cost base and reduced cost base for shares, see Guide to capital gains tax (NAT 4151).End of further information
Rollover relief is available for this demerger if you made a capital gain.
3. What are the consequences of choosing the rollover?
The rollover will let you disregard any capital gain resulting from the $0.09 return of capital. A capital gain would arise only if the cost base of your Arrow share was less than $0.09. You cannot make a capital loss on the return of capital.
4. What are the consequences of not choosing the rollover?
If you do not choose the rollover and you made a capital gain on the return of capital you must take the capital gain into account in calculating your net capital gain or net capital loss in your 2010-11 tax return.
5. How do I calculate the cost base and reduced cost base of my Arrow shares and the Dart shares I received in relation to those shares?
Even if you do not choose the rollover, you must recalculate the cost base and reduced cost base of each of your Arrow shares and the Dart shares you received for those shares. The cost base of these Dart shares is not $0.79.
The cost base for your Arrow shares just before the demerger (not including indexation) is spread across those shares and the Dart shares you received for the Arrow shares. The spreading is based on the value that Dart represented of Arrow at that time [using the five day volume weighted average price (VWAP) post-demerger] which is 7.83%. The remaining 92.17% is spread across your Arrow shares.
You acquired a parcel of 1,000 Arrow shares that had a cost base of $3,000 just before the demerger. Under the demerger you received 500 shares in Dart for these 1,000 Arrow shares.
The cost base of your shares after the demerger is calculated as follows:
$3,000 x 92.17% = $2,765.10
The first element of the cost base (and reduced cost base) of each of your 1,000 shares in Arrow is $2.77 ($2,765.10 / 1,000).
$3,000 x 7.83% = $234.90
The first element of the cost base (and reduced cost base) of each of your 500 shares in Dart is $0.47 ($234.90 / 500).
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 more information read Demergers: Cost base rules tax determination.End of further information
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 Arrow shares just before the demerger *
- do not reduce the cost base of your Arrow shares by the $0.09 per share return of capital associated with the demerger of Dart
- retain these details so that you can work out your capital gains or losses when you dispose of these shares.
This means you take into account any other CGT events that happened after you acquired the share but before the demerger if they affect the cost base.End of attention
6. What happens if I have disposed of some or all of my Arrow or Dart shares after the demerger?
If you have sold any Arrow or Dart shares, 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 Dart shares?
Even if you do not choose the rollover, for the purposes of determining your eligibility for the CGT discount on the disposal of Dart shares, you are taken to have acquired the Dart shares on the date that you acquired, for CGT purposes, your corresponding Arrow shares. Therefore, you calculate the 12 months from when you acquired the Arrow shares that relate to those Dart shares disposed of.