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: • Shareholders in the head company of the group received a return of capital in respect of each share they owned. • 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.