Issue
Do the cost base adjustments rules in subsection 125-90(2) of the Income Tax Assessment Act 1997 (ITAA 1997) apply to a new interest, received in respect of an original interest that was acquired before 20 September 1985, if no CGT event happens to that original interest under a demerger?
Decision
No. The cost base adjustments rules in subsection 125-90(2) of the ITAA 1997 do not apply to a new interest, received in respect of an original interest that was acquired before 20 September 1985, if no CGT event happens to that original interest under a demerger.
Facts
The taxpayer acquired shares in the head entity of a demerger group before 20 September 1985 (pre-CGT).
The taxpayer acquired new shares in a demerged entity under a demerger which satisfied the conditions of the definition of a demerger in section 125-70 of the ITAA 1997.
The circumstances of the demerger were such that no CGT event happened to the taxpayer's original interests under the demerger.
Reasons for Decision
Section 125-90 of the ITAA 1997 applies where the original interest in the head entity was acquired on or after 20 September 1985 (post-CGT), and overrides the general cost base rules in Subdivision 110-A of the ITAA 1997 and the cost base general modification rules in Subdivision 112-A of the ITAA 1997.
Subsection 125-90(2) of the ITAA 1997 provides specific rules for the calculation of the cost base of a new interest in the demerged entity and a remaining original interest in the head entity, where no CGT event happened to the original interest.
The cost base spreading rule under subsection 125-80(2) of the ITAA 1997 applies to a new interest and remaining original interest, if the original interest was acquired post-CGT. However, section 125-90(2) of the ITAA 1997 does not apply to a pre-CGT original interest in the head entity.
Consequently, the cost base of a new interest in a demerged entity is calculated under the general cost base rules in Subdivision 110-A of the ITAA 1997 and the cost base general modification rules in Subdivision 112-A of the ITAA 1997,where no CGT event happens to a pre-CGT original interest under the demerger. Note: These rules also apply in calculating the reduced cost base of a new interest.