• Demergers: Cost base rules tax determination

    Cost bases of your shares after a demerger

    If you own shares in a company that undertakes a demerger (within the meaning of Division 125 of the Income Tax Assessment Act 1997), you are required to re-calculate the capital gains tax (CGT) cost base of all your post-CGT shares, including the ones you received as a result of the demerger.

    This process is designed to adjust your cost bases to reflect the reduction in the value of your interest in the head entity, and the new value of your direct interest in the demerged entity.

    You have to do the adjustment regardless of whether or not you choose demerger rollover relief.

    What does the adjustment involve?

    Broadly, the demerger rules require you to reallocate the total cost base of your original shares (before the demerger) across your remaining original shares and any new shares you received under the demerger.

    The rules also require that this calculation has to be done using a method that produces a reasonable result.

    What methods are accepted as producing a reasonable result?

    The Tax Office has recently released Taxation Determination TD 2006/73, which deals with the methods by which this cost base calculation can be done, depending on the circumstances of each demerger.

    For every demerger, TD 2006/73 accepts that you can use a method known as the 'relative market value' method to recalculate your cost bases. Using this method, your total cost base is allocated by reference to the market value of each original and new share you own, relative to the total market value of your shareholding.

    Example: working out your cost base using the relative market value method

    Global Growth Co (Growth Co), a publicly listed company, demerged all its shares in the wholly-owned subsidiary Australian Cash Co (Cash Co).

    At the time of the demerger, Mat owned 400 post-CGT shares in Growth Co, which he purchased in two separate 'parcels' that had the following cost bases.

    Parcel A

    200 shares with a cost base of $4 each.

    Parcel B

    200 shares with a cost base of $6 each.

    Under the demerger, Mat received one share in Cash Co for every share he owned in Growth Co.

    Growth Co advised its shareholders that the relative market value of shares in Growth Co and Cash Co, expressed as percentages for the purposes of allocating cost base, were 70% and 30% respectively.

    Mat would calculate his cost bases as follows:

    1. Add up the total cost base of shares before the demerger

    200 x $4 = $800

    200 x $6 = $1,200

    Total cost base = $2,000

    2. Allocate the total cost base in accordance with the relative market value percentages

    Growth Co
    $2,000 x 70% = $1,400

    Cash Co
    $2,000 x 30% = $600

    3. Calculate the cost base for each share

    Growth Co
    $1,400 divided by 400 shares = $3.50 cost base per share

    Cash Co
    $600 divided by 400 shares = $1.50 cost base per share

    Alternative methods for working out your cost bases

    Although the relative market value method is used by shareholders because it generally involves relatively straightforward calculations, TD 2006/73 recognises that depending on the circumstances of the demerger, shareholders may be able to use other methods that will produce a reasonable result.

    In particular, the Tax Office accepts that in most cases, a method known as the 'parcel by parcel method' can be used to produce a reasonable allocation of your cost base.

    Using the parcel by parcel method, your cost base calculations take into account the original differences in the cost base of each 'parcel' of shares you owned before the demerger.

    Example: working out your cost base using the parcel by parcel method

    Using the parcel by parcel method, Mat would calculate his cost bases as follows:

    1. Add up the total cost base of shares before the demerger

    200 x $4.00 = $800

    200 x $6.00 = $1,200

    Total cost base = $2,000

    2. Allocate the total cost base in accordance with the relative market value percentages

    Growth Co
    $2,000 x 70% = $1,400

    Cash Co
    $2,000 x 30% = $600

    3. Work out the amount of cost base allocated to each parcel of shares and then the cost base of each share. This is done by spreading the relative cost base amounts between each 'parcel' of shares by taking into account their original cost bases (before the demerger)

    Growth Co
    Mat calculates the total cost base amount to be attributed to the Growth Co shares.

    $1,400 to be divided between each original parcel of post-CGT Growth Co shares.

    Parcel 1

    Cost base amount
    $1,400 x ($800 divided by $2,000) = $560

    Cost base per share
    $560 divided by 200 shares = $2.80 per share for the original Parcel 1 shares in Growth Co.

    Parcel 2

    Cost base amount
    $1,400 x ($1,200 divided by $2,000) = $840

    Cost base per share
    $840 divided by 200 shares = $4.20 per share for the original Parcel 2 shares in Growth Co.

    Cash Co
    Mat calculates the total cost base amount to be attributed to the Cash Co shares.

    $600 to be divided between the shares corresponding to each original parcel of post-CGT Growth Co shares.

    Parcel 1

    Cost base amount
    $600 x ($800 divided by $2,000) = $240

    Cost base per share
    $240 divided by 200 shares = $1.20 per share for the Cash Co shares that correspond to the Growth Co shares in Parcel 1.

    Parcel 2

    Cost base amount
    $600 x (1,200 divided by $2,000) = $360

    Cost base per share
    $360 divided by 200 shares = $1.80 per share for the Cash Co shares that correspond to the Growth Co shares in Parcel 2.

    Alternative methods not always available

    Whilst the relative market value method will always be considered to produce a reasonable result, TD 2006/73 notes that that there are some circumstances in which taxpayers cannot use alternative methods as they will not produce a reasonable outcome. To determine whether this is the case for a particular demerger, you should consult the relevant fact sheet or class ruling relating to the demerger in question.

    What to read/do next

    Use the online demergers calculator
    This calculator will work out your cost base recalculations for you using the relative market value method. As the calculator uses the relative market value method, it can be used for all demergers, regardless of the circumstances.

    Visit the 'Demergers' homepage
    There are a number of shareholder assistance products on the homepage, including fact sheets, worksheets and relevant class rulings (under the heading 'Shareholder information').

      Last modified: 03 Feb 2016QC 18803