ATO ID 2003/914: Capital gains tax: Demergers - cost base allocation rules in the demerger provisions
Date of decision: 17 July 2003
Year of income: Year ended 30 June 2003
Business line: Public Groups and International

Issue
Do the cost base allocation rules in the demerger provisions in Division 125 of the Income Tax Assessment Act 1997 (ITAA 1997) apply if there is no capital gain or capital loss made for the CGT event that happened to the original interests?

Decision
Yes. The cost base allocation rules in the demerger provisions in Division 125 of ITAA 1997 apply, even if there is no capital gain or capital loss made for the CGT event that happened to the original interests.

Facts
Mr A acquired shares in B Ltd, the head entity of a demerger group, in 1992. B Ltd demerged its subsidiary, C Ltd. This was done by B Ltd declaring a dividend and approving a return of capital to its shareholders, with both being compulsorily applied as full consideration for the acquisition of shares in C Ltd. The demerger satisfied all the conditions of the demerger provisions in Division 125 of ITAA 1997. The return of share capital caused CGT event G1 (section 104-135 of ITAA 1997) to happen. However, in respect of every share in B Ltd owned by Mr A, the amount of the return of capital per share was less than the cost base of the share. Consequently, there was no capital gain or capital loss from the CGT event.

Reasons for decision
Summary: Section 125-55 of ITAA 1997 allows an owner of original interests who satisfies the conditions of that section to choose the rollover described in section 125-80 of ITAA 1997. Section 125-55 requires that a CGT event happens to the original interests, but does not require that there be a capital gain or capital loss from the CGT event. CGT event G1 happened to Mr A's shares in B Ltd (original interests) under the demerger. Even though there was no capital gain or capital loss, section 125-55 allows Mr A to choose a rollover, as he has satisfied the conditions for rollover. If Mr A makes this choice then, as a result of the operation of section 125-80, the cost base of his shares in B Ltd are spread over those shares and his new shares in C Ltd. Even if Mr A does not make this choice, section 125-85 operates to require him to make the same cost base allocations he would have done, had he chosen rollover.

Legislative references: Income Tax Assessment Act 1997 section 104-135 Division 125 section 125-55 section 125-80 section 125-85
Subject references: Capital gains tax CGT assets CGT cost base CGT replacement asset roll-over Cost base adjustments Demerged entity Demerger Demerger roll-over