ATO Interpretative Decision
ATO ID 2003/642
Income Tax
Capital gains tax: demerger relief - cost base of new shares - indexationFOI status: may be released
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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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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
Can a taxpayer include frozen indexation in the cost base of shares in a demerged company calculated in accordance with section 125-80 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
No. The cost base of shares calculated in accordance with section 125-80 of the ITAA 1997 cannot include frozen indexation as indexation is only applicable to the cost base of assets acquired before 11.45am on 21 September 1999.
Facts
The taxpayer acquired shares (the original shares) in the head company of a group in October 1994.
In November 2002 the group underwent a demerger which qualified for relief under Division 125 of the ITAA 1997. Under the demerger the taxpayer received shares in the demerged company (the new shares).
The taxpayer subsequently sold the new shares and realised a capital gain.
Reasons for Decision
Subsection 125-80(2) of the ITAA 1997 requires that the first element of the cost base of both the original and the new shares be determined by apportioning the total of the cost bases of the original post-CGT shares. Subsection 995-1(1) of the ITAA 1997 defines cost base as having the same meaning as that given in Subdivision 110-A of the ITAA 1997. Subsection 110-25(7) of the ITAA 1997 only allows indexation to be included in the cost base of assets acquired before 11.45am on 21 September 1999.
Demerger relief under Division 125 of the ITAA 1997 is only available for CGT events happening on or after 1 July 2002. Any shares acquired under a demerger to which demerger relief can apply, by definition, must have been acquired after 21 September 1999. Therefore, no amount of indexation can be included in the cost base of the taxpayer's new shares when calculating the capital gain on their sale.
[Note: the taxpayer can reduce the capital gain by the 50% CGT discount.]
Date of decision: 8 July 2003Year of income: Year ended 30 June 2003
Legislative References:
Income Tax Assessment Act 1997
Subdivision 110-A
subsection 110-25(7)
Division 125
section 125-80
subsection 125-80(2)
subsection 995-1(1)
ATO ID 2003/83
Keywords
Capital gains tax
CGT cost base
CGT discount
CGT frozen indexed cost base
CGT indexation
CGT indexed cost base
Cost base adjustments
Demerger
Frozen indexation
Shares
ISSN: 1445-2782
| Date: | Version: | |
| You are here | 8 July 2003 | Original statement |
| 12 August 2012 | Archived |