Issue
Does section 125-85 of the Income Tax Assessment Act 1997 (ITAA 1997) deem the new interests of a shareholder to have been acquired before 20 September 1985 if their original interests were acquired before 20 September 1985?
Decision
No. Section 125-85 of the ITAA 1997 does not deem the new interests of a shareholder to have been acquired before 20 September 1985 if their original interests were acquired before 20 September 1985.
Facts
The taxpayer acquired shares (original interests) in the head company both before 20 September 1985 and after 19 September 1985.
A demerger happened after 1 July 2002 which qualified for relief under Division 125 of the ITAA 1997. Shareholders of the head company (demerging entity) received new shares (new interests) in the demerged company, under the demerger. The taxpayer did not chose rollover under section 125-80 of the ITAA 1997 for the CGT event that happened to their original interests under the demerger.
Reasons for Decision
Section 125-80 of the ITAA 1997 allows capital gains tax (CGT) rollover relief when a CGT event happens to original interests in a company under a 'demerger' and new interests are received in the demerged company.
However, where a CGT event happens to the shareholder's original interests and rollover is not chosen, the cost base and reduced cost base of those interests must still be adjusted to reflect the change in values caused by the demerger (subsection 125-85(1) of the ITAA 1997).
Subsection 125-85(2) of the ITAA 1997 requires that the cost base and reduced cost base of the original interest is apportioned between the original interest and the new interest, based on the relative market values of those interests as per subsection 125-80(2) of the ITAA 1997.
Subsection 125-85(2) does not provide for the provisions in subsections 125-80(4) to (7) of the ITAA 1997 to apply to deem any of the new interests to have a pre-CGT status (acquired before 20 September 1985).