ATO Interpretative Decision
ATO ID 2003/1050
Income Tax
Capital gains tax: demergers - cost base of the new interest in demerged entity where rollover is not chosenFOI status: may be released
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Do the cost base rules in subsection 125-80(2) of the Income Tax Assessment Act 1997 (ITAA 1997) apply to a new interest, received in respect of an original interest that was acquired before 20 September 1985, if rollover is not chosen for the CGT event that happened to that original interest under a demerger?
Decision
No. The cost base rules in subsection 125-80(2) of the ITAA 1997 do not apply to a new interest received in respect of an original interest that was acquired before 20 September 1985 if rollover is not chosen for the CGT event that happened to that original interest under a demerger.
Facts
The taxpayer acquired shares in the head entity of a demerger group before 20 September 1985 (pre CGT).
The taxpayer acquired shares in a demerged entity as a result of a demerger, for the purposes of Division 125 of the ITAA 1997, undertaken by the group.
The taxpayer did not choose rollover in section 125-80 of the ITAA 1997 for the capital gain made from the CGT event happening under the demerger to their original shares.
The capital gain was disregarded as the original shares were acquired pre CGT.
Reasons for Decision
Section 125-85 of the ITAA 1997 provides specific rules for the calculation of the cost base and reduced cost base of a new interest in the demerged entity and a remaining original interest in the head entity, where rollover is not chosen.
Section 125-85 applies where the original interest in the head entity was acquired on or after 20 September 1985 (post CGT), and overrides the general cost base rules in Subdivision 110-A of the ITAA 1997 and the cost base general modification rules in Subdivision 112-A of the ITAA 1997.
However, section 125-85 does not apply to a pre-CGT original interest in the head entity. The cost base spreading rule under subsection 125-80(2) of the ITAA 1997 applies to a new interest, if that interest was acquired because the taxpayer owned a post-CGT original interest. The demerger cost base spreading rule does not apply to a new interest acquired because the taxpayer owned a pre-CGT original interest.
Consequently, where a CGT event happens to a pre-CGT original interest and rollover is not chosen, the cost base and reduced cost base of a new interest in a demerged entity is calculated under the general cost base rules in Subdivision 110-A of the ITAA 1997 and the cost base general modification rules in Subdivision 112-A of the ITAA 1997.
Date of decision: 14 November 2003Year of income: Year ended 30 June 2003
Legislative References:
Income Tax Assessment Act 1997
Subdivision 110-A
Subdivision 112-A
Division 125
section 125-55
section 125-80
subsection 125-80(2)
section 125-85
ATO ID 2003/875
Keywords
Capital gains
CGT cost base
CGT cost base modification rules
Cost base adjustments
Demerger roll-over
Pre-CGT shares
Proportionate test
ISSN: 1445-2782