ATO Interpretative Decision
ATO ID 2003/914
Income Tax
Capital gains tax: Demergers - cost base allocation rules in the demerger provisionsFOI 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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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
Do the cost base allocation rules in the demerger provisions in Division 125 of the Income Tax Assessment Act 1997 (ITAA 1997) apply if there is no capital gain or capital loss made for the CGT event that happened to the original interests?
Decision
Yes. The cost base allocation rules in the demerger provisions in Division 125 of ITAA 1997 apply, even if there is no capital gain or capital loss made for the CGT event that happened to the original interests.
Facts
Mr A acquired shares in B Ltd, the head entity of a demerger group, in 1992.
B Ltd demerged its subsidiary, C Ltd. This was done by B Ltd declaring a dividend and approving a return of capital to its shareholders, with both being compulsorily applied as full consideration for the acquisition of shares in C Ltd. The demerger satisfied all the conditions of the demerger provisions in Division 125 of ITAA 1997.
The return of share capital caused CGT event G1 (section 104-135 of ITAA 1997) to happen. However, in respect of every share in B Ltd owned by Mr A, the amount of the return of capital per share was less than the cost base of the share. Consequently, there was no capital gain or capital loss from the CGT event.
Reasons for Decision
Section 125-55 of ITAA 1997 allows an owner of original interests who satisfies the conditions of that section to choose the rollover described in section 125-80 of ITAA 1997. Section 125-55 requires that a CGT event happens to the original interests, but does not require that there be a capital gain or capital loss from the CGT event.
CGT event G1 happened to Mr A's shares in B Ltd (original interests) under the demerger. Even though there was no capital gain or capital loss, section 125-55 allows Mr A to choose a rollover, as he has satisfied the conditions for rollover. If Mr A makes this choice then, as a result of the operation of section 125-80, the cost base of his shares in B Ltd are spread over those shares and his new shares in C Ltd. Even if Mr A does not make this choice, section 125-85 operates to require him to make the same cost base allocations he would have done, had he chosen rollover.
Date of decision: 17 July 2003Year of income: Year ended 30 June 2003
Legislative References:
Income Tax Assessment Act 1997
section 104-135
Division 125
section 125-55
section 125-80
section 125-85
Keywords
Capital gains tax
CGT assets
CGT cost base
CGT replacement asset roll-over
Cost base adjustments
Demerged entity
Demerger
Demerger roll-over
ISSN: 1445-2782
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