ATO ID 2003/1050: Capital gains tax: demergers - cost base of the new interest in demerged entity where rollover is not chosen
Date of decision: 14 November 2003
Year of income: Year ended 30 June 2003
Business line: Public Groups and International

Issue
Do the cost base rules in subsection 125-80(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 rollover is not chosen for the CGT event that happened to that original interest under a demerger?

Decision
No. The cost base rules in subsection 125-80(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 rollover is not chosen for the CGT event that happened 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 shares in a demerged entity as a result of a demerger, for the purposes of Division 125 of the ITAA 1997, undertaken by the group. The taxpayer did not choose rollover in section 125-80 of the ITAA 1997 for the capital gain made from the CGT event happening under the demerger to their original shares. The capital gain was disregarded as the original shares were acquired pre CGT.

Reasons for decision
Summary: Section 125-85 of the ITAA 1997 provides specific rules for the calculation of the cost base and reduced cost base of a new interest in the demerged entity and a remaining original interest in the head entity, where rollover is not chosen. Section 125-85 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. However, section 125-85 does not apply to a pre-CGT original interest in the head entity. The cost base spreading rule under subsection 125-80(2) of the ITAA 1997 applies to a new interest, if that interest was acquired because the taxpayer owned a post-CGT original interest. The demerger cost base spreading rule does not apply to a new interest acquired because the taxpayer owned a pre-CGT original interest. Consequently, where a CGT event happens to a pre-CGT original interest and rollover is not chosen, the cost base and reduced 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.

Legislative references: Income Tax Assessment Act 1997 Subdivision 110-A Subdivision 112-A Division 125 section 125-55 section 125-80 subsection 125-80(2) section 125-85
Related ATO interpretative decisions: ATO ID 2003/875
Subject references: Capital gains CGT cost base CGT cost base modification rules Cost base adjustments Demerger roll-over Pre-CGT shares Proportionate test