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Subject: Capital Gains Tax - Shares - Disposal - Demerger
Question:
Is there more than one method that produces a reasonable apportionment when reallocating the cost base of shares held in a demerged company?
Answer:
Yes.
This ruling applies for the following period
Year ended 30 June 2011
The scheme commenced on
1 July 2010
Relevant facts
You and your spouse owned a number shares in X Holdings Limited prior to the company's demerger of Y Group which occurred on 10 June 2011
The shares were made up of a number of parcels.
You have participated in a dividend reinvestment plan and have also purchased additional shares.
You have sold a number of shares on since the demerger.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 125-80
Income Tax Assessment Act 1997 Subsection 125-80(2)
Reasons for decision
Subsection 125-80(2) of the Income Tax Assessment Act 1997 (ITAA 1997) requires only that the reallocation of cost base to new ownership interests and remaining original ownership interests (together referred to as 'post-demerger interests') produces a reasonable apportionment.
Depending on the facts and circumstances of each case, there may be more than one method of allocating the cost base over a taxpayer's post-demerger interests that results in a reasonable apportionment.
In all cases, the Commissioner considers that the apportionment will be reasonable if a taxpayer calculates the new cost base of each post-demerger interest in accordance with the market value of that interest relative to the total market value of all of their post-demerger interests. This method is referred to as the relative market value method.
Other methods, including those based on the approach referred to as the parcel by parcel method, can produce reasonable apportionments, but this may not always be the case. For example, the particular circumstances surrounding a demerger may be such that the apportionment delivered by a method other than relative market value is distorted. Such distortion would be unacceptable if it involved an exaggeration of cost base differentials between post demerger interests. A demerger undertaken by way of the cancellation of ownership interests can produce such unreasonable apportionments.
The rules in section 125-80 of the ITAA 1997 apply only to work out the 'first element of the cost base and reduced cost base' of ownership interests. Generally there are other elements which may be included to work out the cost base of ownership interests. However, immediately after a demerger the first element of the cost base and reduced cost base will be the same as the cost base.
It is a matter for individuals to calculate the cost base of shares that are held in a company which has undergone a demerger based on their individual circumstances