ATO Interpretative Decision
ATO ID 2003/83 (Withdrawn)
Capital Gains Tax and demergers
Capital gains tax consequences of a demerger on the cost base of a share acquired by a shareholder in a demerged companyFOI status: may be released
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This ATOID is withdrawn as it is a simple restatement of the law and does not contain an interpretative decision.This document incorporates revisions made since original publication. View its history and amending notices, if applicable.
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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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
Is the cost base of shares in a demerged company acquired by a taxpayer under a demerger calculated under section 125-80 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
Yes. The cost base rules in section 125-80 of the ITAA 1997 apply to the shares in the demerged company whether or not the taxpayer chooses roll-over relief.
Facts
The demerger happened after 1 July 2002 and was undertaken by the following steps:
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- Shareholders in the head company of the group received a return of capital in respect of each share they owned.
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- This return of capital was applied as payment for the transfer of shares in the demerged company.
On the demerger date the taxpayer owned shares in the head company that were acquired after 19 September 1985 (post-CGT shares). As a result of the demerger the taxpayer received shares in the demerged company.
The head company determined the percentage of the market value of the group as a whole that the demerged company represented.
Reasons for Decision
Division 125 of the ITAA 1997 allows a CGT roll-over when a CGT event happens to original interests in a company under a 'demerger' and new or replacement interests are received in the demerged company.
A shareholder can choose whether to apply the CGT roll-over relief. Irrespective of whether CGT roll-over relief is chosen a shareholder is required to make adjustments to the cost bases of their shares in the head company and the demerged company.
Section 125-80 of the ITAA 1997 sets out what the roll-over is and the cost base rules. It specifies the cost base adjustments that have to be made to a shareholder's head company and demerged company shares if roll-over relief is chosen. Section 125-85 of the ITAA 1997 states that even if roll-over is not chosen, the cost base allocation rules in section 125-80 still apply.
Subsection 125-80(2) of the ITAA 1997 explains how a shareholder must calculate the cost base of their post-CGT new interests (demerged company shares) and their remaining original interests (head company shares).
As all the head company shares that the taxpayer owned on the demerger date are post-CGT shares, all the shares received in demerged company are also post-CGT.
Subsection 125-80(2) of the ITAA 1997 states that the sum of the cost bases of the taxpayer's post-CGT shares in the head company just before the demerger must be apportioned between their post-CGT new interests (demerged company shares) and their remaining original interests (head company shares).
The apportionment between these head company shares and demerged company shares must be on a basis that is reasonable having regard to the market values of the head company and the demerged company just after the demerger. The head company determined the percentage of the market value of the group as a whole that the demerged company represented.
The cost bases of the taxpayer's shares in the head company may be spread across their shares in the head company and the demerged company based on this determination by the head company.
Date of decision: 20 December 2002Year of income: Year ended 30 June 2003
Legislative References:
Income Tax Assessment Act 1997
Section 125-70.
Section 125-80.
Subsection 125-80(2)
Section 125-85
Keywords
Capital gains tax
CGT cost base
CGT reduced cost base
CGT roll-over relief
Capital reductions
Shares
ISSN: 1445-2782
| Date: | Version: | |
| 20 December 2002 | Original statement | |
| You are here | 12 March 2010 | Archived |