ATO Interpretative Decision
ATO ID 2003/915
Income Tax
Capital gains tax: Demergers - option holdersFOI 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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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 a CGT event happen when, as part of a demerger involving a return of share capital, option holders in the head entity give up their right to a reduction in the exercise price of the original option, in return for options in the demerged entity?
Decision
No. No CGT event happens when, as part of a demerger involving a return of share capital, option holders in the head entity give up their right to a reduction in the exercise price of the original option, and receive options in the demerged entity.
Facts
A demerger after 30 June 2002 included a return of share capital by a company (the head entity) to its shareholders, to be satisfied by the issue of shares in the demerged entity.
Persons (the option holders) also owned options, issued by the head entity, to acquire shares in the head entity. One of the terms of the options was that, if any share capital was returned to the shareholders before exercise or termination of the options, the exercise price of each of the options was to be reduced by the amount of share capital returned for each share.
Under the demerger, the option holders were issued by the demerged entity with options to acquire shares in the demerged entity. In return, the option holders surrendered their rights to have the exercise price of their original options to be reduced by the amount of any share capital return to shareholders. The option holders continued to own their original options.
Reasons for Decision
Given the particular circumstances, the only possible CGT events which need to be considered are CGT events C2 and H2. For the reasons explained below, neither of these CGT events happen.
CGT event C2
Section 104-25 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that CGT event C2 happens if, inter alia, a person's ownership of an intangible CGT asset ends by the asset being cancelled.
Section 108-5 of ITAA 1997 provides that part of a CGT asset is itself a CGT asset. The right to the reduction in exercise price of the option was a part of the bundle of rights of which the option consisted. If the operation of section 108-5 has the result that the right to the reduction in exercise is a separate CGT event, then there is clearly a CGT event C2, and conversely, if the operation of section 108-5 does not have the result that the right to a reduction in exercise price is a CGT asset, then there is clearly no CGT event C2.
Taxation Ruling TR 94/30 states that a right attaching to a share is not a separate asset to the share, and a variation of a right attaching to a share is not a disposal of the share. Because the principles involved are identical, TR 94/30 is equally applicable to options issued by a company to acquire shares in the company, that is, a right attaching to an option issued by a company to acquire shares in the company is not a separate CGT asset.
Consequently, for the purposes of section 104-25, there is no ending of any asset of the option holder, and so no CGT event C2 happens.
CGT event H2
Section 104-155 of ITAA 1997 provides that, subject to the exceptions specified in subsection 104-155(5), CGT event H2 happens if an act, transaction or event occurs in relation to a CGT asset, and that act, transaction or event does not result in an adjustment to that asset's cost base or reduced cost base.
The grant of the options in the demerged entity by the demerged entity is an act, transaction or event in relation to the shares in the head entity, and no cost base adjustment results. Therefore, there would be a CGT event H2 if no exception applied.
Paragraph 104-155(5)(g) of ITAA 1997 provides that CGT event H2 does not happen where a company that is a member of a demerger group issues new ownership interests under the demerger. This exception applies in the circumstances under consideration, and so excludes CGT event H2.
Date of decision: 17 July 2003Year of income: Year ended 30 June 2003
Legislative References:
Income Tax Assessment Act 1997
section 104-25
section 104-155
subsection 104-155(5)
paragraph 104-155(5)(g)
section 108-5
section 125-55
Related Public Rulings (including Determinations)
Taxation Ruling TR 93/30
Keywords
CGT asset
CGT event
Capital gains tax
CGT events G1-G3 - shares
CGT events H1-H2 - special capital receipts
Demerger
ISSN: 1445-2782