Capital gains tax: Sale of shares in demerged non-resident company by resident shareholder - reduction of capital gain by amount of assessable dividend

Will the capital gain made by the taxpayer, a resident shareholder, who sold shares in the demerged Danish company, Novozymes A/S, be reduced under section 118-20 of the Income Tax Assessment Act 1997 (ITAA 1997) by the amount of the dividend included in the taxpayer's assessable income at the time of issue of these shares by the Danish company, Novo Nordisk A/S?

No. The capital gain made by the resident taxpayer from the sale of the Novozymes A/S shares, will not be reduced under section 118-20 of the ITAA 1997 by the amount of the dividend included in the taxpayer's assessable income.

The taxpayer owns shares in Novo Nordisk A/S. On 13 November 2000, Novo Nordisk A/S demerged by transferring some of its business activities to a new Danish public company, Novozymes A/S. There were no amounts debited to the share capital accounts of Novo Nordisk A/S in respect of the demerger.

The taxpayer received one share in Novozymes A/S for each share owned in Novo Nordisk A/S. The Novozymes A/S share had similar rights, proportion of issued capital, and par value in Novozymes A/S as the equivalent share in Novo Nordisk A/S.

There was no change to the taxpayer's Novo Nordisk A/S shares as a result of the demerger.

The taxpayer sold the shares in Novozymes A/S during the year ended 30 June 2004 and made a capital gain.

Subsection 118-20(1) of the ITAA 1997 allows a reduction of a capital gain where, as a result of a CGT event , an amount will be included in assessable income or be exempt income by virtue of a provision of the ITAA 1936 or the ITAA 1997, outside of the capital gains and losses provisions at Part 3-1 of the ITAA 1997.

The Novozymes A/S shares received by the taxpayer were a dividend. This dividend was included in the taxpayer's assessable income under paragraph 44(1)(a) of the Income Tax Assessment Act 1936 (ITAA 1936) for the year ended 30 June 2001.

When the taxpayer sold the Novozymes A/S shares during the year ended 30 June 2004, this sale was a disposal of a CGT asset. CGT event A1, section 104-10 of the ITAA 1997, happened at this time.

The amount of the dividend from Novo Nordisk A/S, being the issue of the Novozymes A/S shares during the year ended 30 June 2001, did not arise from the CGT event A1 which happened to the Novozymes A/S shares during the year ended 30 June 2004.

Therefore, the capital gain made from the disposal of Novozymes A/S shares will not be reduced by the value of dividend of Novo Nordisk A/S under subsection 118-20(1) of the ITAA 1997.