ATO Interpretative Decision
ATO ID 2004/636
Income Tax
Demerger: original post-CGT interests - consequences for shareholders under Division 725 if new interests in demerged entity are issued at a discountFOI 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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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
If a direct value shift happens under a demerger because new interests in a demerged entity are issued at a discount, can the cost bases and reduced cost bases of those interests be increased under section 725-250 of the Income Tax Assessment Act 1997 (ITAA 1997) if they were issued in respect of post-CGT original interests?
Decision
No. The cost bases and reduced cost bases of the new interests in the demerged entity are not increased under section 725-250 of the ITAA 1997. As the original interests are post-CGT interests, adjustments are made to the cost base and reduced cost base of both the new interests and the original interests under Division 125 of the ITAA 1997.
Facts
There are three Australian resident shareholders (original interest holders) in Company A, an Australian resident company. Each shareholder is an associate of the other shareholders. All of the shares were acquired after 19 September 1985.
Company A is the owner of the only share (a post-CGT share) on issue in subsidiary Company B. Company A has not made a choice to form a consolidated group.
Under an arrangement, Company B (the demerged entity) issues shares to the shareholders in Company A, in the same proportions as their Company A shareholdings. No consideration is to be provided to Company B for the shares. The arrangement satisfies the definition of a demerger in section 125-70 of the ITAA 1997.
As a result of the issue of shares at a discount by Company B, there is a reduction in the market value of the share that Company A holds in Company B, resulting in a direct value shift. The conditions set out in section 725-50 of the ITAA 1997 for there to be consequences under Division 725 of the ITAA 1997 as a result of the direct value shift are satisfied.
Reasons for Decision
Division 725 of the ITAA 1997 does not apply to the original interest holders because of the more specific application of section 125-95 of the ITAA 1997. That section provides that where cost base and reduced cost base adjustments are required under sections 125-80, 125-85 or 125-90 of the ITAA 1997, no further cost base and reduced cost base adjustments are required to be made under the Act as a result of something that happens under the demerger. Cost base and reduced cost base adjustments are required under sections 125-80, 125-85 or 125-90 of the ITAA 1997 where the original interests were acquired on or after 20 September 1985.
Accordingly, as the new interests are issued in respect of the three shareholders' original post-CGT interests, no further cost base and reduced cost base increases are made under Division 725 of the ITAA 1997 as a result of the direct value shift.
Date of decision: 16 July 2004Year of income: Year ended 30 June 2005
Legislative References:
Income Tax Assessment Act 1997
Division 125
section 125-70
section 125-80
section 125-85
section 125-90
section 125-95
Division 725
section 725-50
section 725-250
ATO ID 2004/635
ATO ID 2004/637
Keywords
CGT demerger exemption
Cost base adjustments for value shift
ISSN: 1445-2782