ATO ID 2003/1031: Capital Gains Tax: Demerger - CGT discount in relation to new interests if rollover not chosen
Date of decision: 7 November 2003
Year of income: Year ended 30 June 2003
Business line: Public Groups and International

Issue
Does subsection 115-30(1) of the Income Tax Assessment Act 1997 (ITAA 1997) apply to change the date of acquisition of a new interest in a demerged entity for the purposes of accessing the CGT discount, if the rollover provided by section 125-80 of the ITAA 1997 is not chosen in respect of the CGT event that happened to an original interest under a demerger?

Decision
Yes. Subsection 115-30(1) of the ITAA 1997 applies to change the date of acquisition of a new interest in a demerged entity for the purposes of accessing the CGT discount, if the rollover provided by section 125-80 of the ITAA 1997 is not chosen in respect of the CGT event that happened to an original interest under a demerger.

Facts
The taxpayer acquired shares (the original shares) in Company A in September 1995. Company A demerged its wholly owned subsidiary, Company B, in November 2002. The demerger satisfied the conditions in Division 125 of the ITAA 1997. Under the demerger, CGT event G1 (section 104-135 of the ITAA 1997) happened to the taxpayer's original shares. As a result, the taxpayer acquired new shares in Company B. The taxpayer did not choose rollover under section 125-80 for the CGT event G1. The taxpayer sold their shares in Company B in June 2003 and made a capital gain.

Reasons for decision
Summary: Division 115 of the ITAA 1997 requires the CGT asset, in relation to which a capital gain has arisen, to be acquired 12 months before the CGT event. However, subsection 115-30(1) of the ITAA 1997 allows owners of certain CGT assets to adopt an earlier acquisition time for the purpose of determining whether the 12 month ownership test in section 115-25 of the ITAA 1997 has been satisfied. One situation covered by subsection 115-30(1) is where a CGT asset is a replacement asset for the purposes of a replacement asset rollover. The replacement asset is treated as having been acquired at the time the original asset was acquired. The rollover provided under a demerger is contained in section 125-80 of the ITAA 1997. There are three components: The cost base adjustments calculated in subsections 125-80(2) and (3) apply whether or not rollover is chosen (section 125-85 of the ITAA 1997). Although the taxpayer has not chosen rollover in respect of the CGT event G1 that happened to their original shares, a component of the rollover (apportionment of cost base) has been applied. The new shares are taken to be replacement shares for the purposes of applying section 115-30. The taxpayer then satisfies the 12 month ownership test in subsection 115-30(1), and is able to claim the CGT discount in calculating the capital gain on the sale of the shares in Company B.

Legislative references: Income Tax Assessment Act 1997 section 104-135 Division 115 section 115-25 subsection 115-30(1) Division 125 section 125-55 section 125-80 subsection 125-80(1) subsection 125-80(2) subsection 125-80(3) subsection 125-80(4) subsection 125-80(5) subsection 125-80(6) subsection 125-80(7) section 125-85
Related ATO interpretative decisions: ATO ID 2003/916
Subject references: Capital gains Capital losses CGT discount Cost base adjustments Demerger Demerger roll-over Ownership test period