ATO Interpretative Decision
ATO ID 2003/875
Income Tax
Capital gains tax: Demerger - CGT status of new interests where CGT rollover 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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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
Does section 125-85 of the Income Tax Assessment Act 1997 (ITAA 1997) deem the new interests of a shareholder to have been acquired before 20 September 1985 if their original interests were acquired before 20 September 1985?
Decision
No. Section 125-85 of the ITAA 1997 does not deem the new interests of a shareholder to have been acquired before 20 September 1985 if their original interests were acquired before 20 September 1985.
Facts
The taxpayer acquired shares (original interests) in the head company both before 20 September 1985 and after 19 September 1985.
A demerger happened after 1 July 2002 which qualified for relief under Division 125 of the ITAA 1997. Shareholders of the head company (demerging entity) received new shares (new interests) in the demerged company, under the demerger. The taxpayer did not chose rollover under section 125-80 of the ITAA 1997 for the CGT event that happened to their original interests under the demerger.
Reasons for Decision
Section 125-80 of the ITAA 1997 allows capital gains tax (CGT) rollover relief when a CGT event happens to original interests in a company under a 'demerger' and new interests are received in the demerged company.
However, where a CGT event happens to the shareholder's original interests and rollover is not chosen, the cost base and reduced cost base of those interests must still be adjusted to reflect the change in values caused by the demerger (subsection 125-85(1) of the ITAA 1997).
Subsection 125-85(2) of the ITAA 1997 requires that the cost base and reduced cost base of the original interest is apportioned between the original interest and the new interest, based on the relative market values of those interests as per subsection 125-80(2) of the ITAA 1997.
Subsection 125-85(2) does not provide for the provisions in subsections 125-80(4) to (7) of the ITAA 1997 to apply to deem any of the new interests to have a pre-CGT status (acquired before 20 September 1985).
Date of decision: 22 September 2003Year of income: Year ended 30 June 2004
Legislative References:
Income Tax Assessment Act 1997
Division 125
section 125-80
subsection 125-80(2)
subsection 125-80(4)
subsection 125-80(5)
subsection 125-80(6)
subsection 125-80(7)
section 125-85
subsection 125-85(1)
subsection 125-85(2)
Keywords
Capital gains tax
CGT choice
CGT cost base
CGT events
CGT original assets
Cost base adjustments
Demerger roll-over
Demerger subsidiary
Demerging entity
Pre-CGT assets
ISSN: 1445-2782