Private ruling: capital gains tax - shares - demerger - dividend reinvestment plan - cost base - disposal - capital gain - capital loss
Published: March 2012
Ruling period: Income year ended 30 June 2011.
Date scheme commenced: 1 July 2010.

Ruling: You made the roll-over choice in relation to your Orica shares when the demerger occurred. Therefore, you disregarded any capital gain or capital loss that occurred in relation to your Orica shares. As a result of making the roll-over choice, the cost base of your Orica and DuluxGroup shares must be recalculated. | Cost base calculations of original Orica shares and new DuluxGroup Limited shares | You must recalculate the first element of the cost base and reduced cost base of your remaining original interests in the head entity and of your new interests in the demerged entity. You must make these calculations whether you choose a rollover or not, or if no CGT event happens to your original interests under the demerger. | You work out the cost base and reduced cost base of your remaining post-CGT original interests and your post-CGT new interests immediately after the demerger. You do this by spreading the total cost base of your post-CGT original interests (immediately before the demerger) over both your remaining post-CGT original interests and your post-CGT new interests. | We have recalculated the first elements of your Orica and DuluxGroup cost bases using the information you have provided by applying the following steps: | Step 1: | Add the cost base of your post-CGT original Orica shares and the share allotted under the DRP immediately before the demerger. | Note: Any brokerage fees incurred in relation to the acquisition of your Orica shares would also be included in their cost base. | Step 2: | Use the relevant percentages to apportion the step 1 amount between: | · your post-CGT original interests in the head entity, and | · your post-CGT new interests in the demerged entity. | Step 3: | Divide the cost base apportioned to your Orica shares by the number of remaining post-CGT original interests you own. | Step 4: | Divide the cost base apportioned to the demerged entity interests (from step 2) by the number of post-CGT new interests you own. | Note: The amounts calculated at Steps 3 and Step 4 will form the first element of the cost base and reduced cost base of your post-CGT Orica shares and your post-CGT DuluxGroup shares when calculating any capital gain or capital loss that you have made on their future disposal. | The DuluxGroup shares you acquired as a result of the demerger will be viewed as having been acquired on the same date as the corresponding Orica shares for the purposes of determining your eligibility for a discount capital gain on the disposal of your DuluxGroup shares, being the date you originally acquired your Orica shares. | IAG shares | Demutualisation of insurance companies | If you hold a policy in a life insurance company or a general insurance company that demutualises, you may be subject to capital gains tax (CGT) either at the time of the demutualisation or when you sell your shares (or another CGT event happens). | A company demutualises when it changes its membership interests to shares, such as NRMA. The insurance company may give you an option either to keep your share entitlement or to take cash by selling the shares under contract through an entity set up by the company. | If it is an Australian insurance company and you choose to keep the shares, you will not be subject to CGT until you eventually sell them or another CGT event happens. | However, if you elect to sell your share entitlement to the company and take cash, you need to include any capital gain on your tax return in the income year in which you entered into the contract to sell the shares, even though you may not receive the cash until a later income year. | In your case, you and your spouse were allotted a number of ordinary IAG shares as a result of the NRMA demutualisation. | Generally, the cost base of an asset is the amount that you paid to acquire the asset. However, in you situation you and your spouse acquired your IAG shares when NRMA was demutualised. When a company demutualises and distributes shares to shareholders, the allotted shares are viewed as having a deemed cost base even though you did not physically pay any money to acquire the shares. In your case, the first element of the cost base of your each of your IAG shares is the value of the IAG shares when NRMA demutualised. | IAG Share Purchase Plan | You and your spouse acquired IAG shares under a Share Purchase Plan offered by IAG. | The first element of the cost base of your IAG Share Purchase Plan shares is the issue price of the shares, plus any brokerage and transaction costs that you incurred when you acquired the shares. | Shares acquired under the IAG dividend reinvestment plan (DRP) | Taxpayers participating in DRPs offered by companies are viewed as having made the choice to use their dividend to acquire additional shares in the company instead of receiving a cash payment. | For CGT purposes, if you participate in a DRP you are treated as if you had received a cash dividend and then used the cash to buy additional shares. Each share, or parcel of shares, acquired by a taxpayer in this way after 20 September 1985 is subject to CGT. | The cost base of the shares acquired under the DRP is the dividend amount you are viewed to have received and then used to buy the additional shares in the company. | In your case you participated in the IAG DRP under which you were allotted dividends which you used to acquire a number of shares on various dates. The dividends you were allotted will be the first element of the cost base of the shares you acquired from using the allotted dividends. | Disposal of IAG shares | You and your spouse disposed of all of your IAG shares, incurring brokerage costs in relation to their disposal. | In order to calculate any capital gain or capital loss arising from the disposal of your IAG shares, the total capital proceeds received for the disposal of your IAG shares must be apportioned over your shares in order to determine the amount of capital proceeds which are attributable to each share. | The brokerage costs incurred in relation to the disposal of the shares must also be apportioned over the shares to determine the brokerage costs attributable to each share. | The capital gain or capital loss made on the disposal of your IAG shares will then be calculated using the following formula: | Capital proceeds | Less | Cost base | Brokerage cost | Capital gain/ capital loss | Note: As you owned 50% of these shares, you will be liable for half of any capital gain or capital loss made on their disposal. | Company X shares | You and your spouse disposed of your Company X shares after 20 September 1985, incurring brokerage costs in relation to their disposal. | Disposal of your original Company X shares | Based on the information you have provided, we have calculated that you have made a capital loss in relation to the disposal of your 50% ownership interest in your original Company X shares. | As you had a 50% ownership interest in these Company X shares, half of the capital loss made on their disposal is attributable to you. | Disposal of Company X DRP shares | You and your spouse received annual dividend allocations which you reinvested in Company X's DRP dividend reinvestment plan, resulting in you being allotted additional Company X shares. | As we do not have the dividend amounts in order to determine the first element of the cost base of those shares, we cannot calculate the capital gain or capital loss you have made on their disposal. | You can make those calculations using the same method used above when calculating the CGT implications of the disposal of your IAG DRP shares. | Conclusion | As outlined above, any capital loss you made in relation to the disposal of your shares can be offset against any capital gain made from the disposal of your shares. Any unapplied capital losses carried forward from previous income years can be applied to the capital gains, and if any capital losses remain, they can be carried forward. | If you calculate that you have made a capital gain in the 2010-11 income year in relation to the disposal of all of your shares, and you meet the above listed conditions for the 50% discount to apply, you can apply the 50% discount to any capital gain amount after they have been reduce by any capital losses you may have. The resulting amount is your net capital gain, which must be included in your 2010-11 income tax return.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling . Orica Limited (Orica) and DuluxGroup Limited (DuluxGroup) demerger You and your spouse acquired a number of shares in Orica after 20 September 1985 and an additional share under the Orica DRP. The demerger by Orica of DuluxGroup occurred a number of months later. As a result of the demerger, Orica shareholders received one DuluxGroup share for each Orica share they owned. As a result of the demerger, Orica shareholders held ownership interests in both Orica and DuluxGroup. You and your spouse were allotted DuluxGroup Limited ordinary shares as a result of the demerger from Orica Ltd. You and your spouse made the rollover choice in relation to your Orica shares. Insurance Australia Group Limited (IAG) shares You and your spouse were allotted a number of IAG shares as a result of the NRMA's demutualisation after 20 September 1985. You and your spouse participated in the IAG Share Purchase Plan (SPP) and received a number of ordinary IAG shares. You and your spouse participated in the IAG dividend investment plan (DRP) under which you received a number of IAG shares. You and your spouse disposed of your IAG shares and incurred brokerage costs in relation to their disposal. Company X shares You and your spouse acquired a number of Company X shares after 20 September 1985. You incurred brokerage costs in relation to the acquisition of your Company X shares. You and your spouse received annual dividend allocations which you reinvested in Company X, resulting in you being allotted a number of Company X shares. You and your spouse disposed of all of your Company X ,incurring brokerage costs on their disposal. You have provided copies of a number of documents which form part of, and should be read in conjunction with this private ruling:

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 102-20 | Income Tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 Section 115-10 | Income Tax Assessment Act 1997 Section 115-15 | Income Tax Assessment Act 1997 Section 115-20 | Income Tax Assessment Act 1997 Section 115-25 | Income Tax Assessment Act 1997 Section 115-30 | Income Tax Assessment Act 1997 Section 115-100 | Income Tax Assessment Act 1997 Section 125-55 | Income Tax Assessment Act 1997 Section 125-80

Reasons for decision: Detailed Reasoning - Capital gains tax: You may make a capital gain when a CGT event happens to a CGT asset. The most common CGT event is CGT event A1 which occurs when you dispose of your ownership interest in a CGT asset to another party. The disposal of your shares would be a CGT event A1. You make a capital gain when the capital proceeds you receive for the disposal of the CGT asset are greater than the asset's cost base. You make a capital loss if the capital proceeds received for the disposal of the CGT asset are less than the asset's cost base. Capital losses can be used to reduce the amount of capital gains made during the same income year. Any unapplied capital losses carried forward from previous income years can be applied to the capital gains, and if any capital losses remain, they can be carried forward. Individuals can apply a 50% discount to any capital gain made during an income year, after any capital losses have been applied, when the following conditions have been met: · a CGT event occurs to an asset you own after 11.45am on 21 September 1999; · you acquired the asset at least 12 months before the CGT event occurred; and · you did not choose to use the indexation method. Orica and DuluxGroup shares Demerger of DuluxGroup by Orica A demerger involves the restructuring of a corporate or fixed trust group by splitting its operations into two or more entities or groups. Under a demerger, the owners of the head entity of the group (that is, the shareholders of the company or unit holders of the trust) acquire a direct interest (shares or units) in an entity that was formerly part of the group (the demerged entity). If you received new interests in a demerged entity under an eligible demerger that happened on or after 1 July 2002, you need to be aware of the following capital gains tax (CGT) consequences: · you may be entitled to choose a roll-over for any capital gain or capital loss you make under the demerger, and · you must calculate the cost base and reduced cost base of your interests in the head entity and your new interests in the demerged entity immediately after the demerger. If a taxpayer makes the roll-over choice, any capital gain or capital loss you make under demerger will be disregarded until a CGT event occurs in relation to their shares in the future, such as their disposal. For the rollover to apply, the demerger must be an eligible demerger. The Australian Taxation Office may provide advice in the form of a class ruling specific to the demerger, confirming that the demerger is an eligible demerger. In your case, you and your spouse jointly acquired a number of Orica shares and an additional share under the Orica DRP. Under the demerger, you and your spouse were allotted DuluxGroup shares. Class Ruling CR 2010/34 Income tax: demerger of DuluxGroup Limited by Orica Limited (CR 2010/34) outlines that Orica shareholders were eligible to make the rollover choice in relation to their shares. You made the roll-over choice in relation to your Orica shares when the demerger occurred. Therefore, you disregarded any capital gain or capital loss that occurred in relation to your Orica shares. As a result of making the roll-over choice, the cost base of your Orica and DuluxGroup shares must be recalculated. Cost base calculations of original Orica shares and new DuluxGroup Limited shares You must recalculate the first element of the cost base and reduced cost base of your remaining original interests in the head entity and of your new interests in the demerged entity. You must make these calculations whether you choose a rollover or not, or if no CGT event happens to your original interests under the demerger. You work out the cost base and reduced cost base of your remaining post-CGT original interests and your post-CGT new interests immediately after the demerger. You do this by spreading the total cost base of your post-CGT original interests (immediately before the demerger) over both your remaining post-CGT original interests and your post-CGT new interests. We have recalculated the first elements of your Orica and DuluxGroup cost bases using the information you have provided by applying the following steps: | Detailed Reasoning - Step 1:: Add the cost base of your post-CGT original Orica shares and the share allotted under the DRP immediately before the demerger. Note: Any brokerage fees incurred in relation to the acquisition of your Orica shares would also be included in their cost base. | Detailed Reasoning - Step 2:: Use the relevant percentages to apportion the step 1 amount between: · your post-CGT original interests in the head entity, and · your post-CGT new interests in the demerged entity. | Detailed Reasoning - Step 3:: Divide the cost base apportioned to your Orica shares by the number of remaining post-CGT original interests you own. | Detailed Reasoning - Step 4:: Divide the cost base apportioned to the demerged entity interests (from step 2) by the number of post-CGT new interests you own. Note: The amounts calculated at Steps 3 and Step 4 will form the first element of the cost base and reduced cost base of your post-CGT Orica shares and your post-CGT DuluxGroup shares when calculating any capital gain or capital loss that you have made on their future disposal. The DuluxGroup shares you acquired as a result of the demerger will be viewed as having been acquired on the same date as the corresponding Orica shares for the purposes of determining your eligibility for a discount capital gain on the disposal of your DuluxGroup shares, being the date you originally acquired your Orica shares. | Detailed Reasoning - Demutualisation of insurance companies: If you hold a policy in a life insurance company or a general insurance company that demutualises, you may be subject to capital gains tax (CGT) either at the time of the demutualisation or when you sell your shares (or another CGT event happens). A company demutualises when it changes its membership interests to shares, such as NRMA. The insurance company may give you an option either to keep your share entitlement or to take cash by selling the shares under contract through an entity set up by the company. If it is an Australian insurance company and you choose to keep the shares, you will not be subject to CGT until you eventually sell them or another CGT event happens. However, if you elect to sell your share entitlement to the company and take cash, you need to include any capital gain on your tax return in the income year in which you entered into the contract to sell the shares, even though you may not receive the cash until a later income year. In your case, you and your spouse were allotted a number of ordinary IAG shares as a result of the NRMA demutualisation. Generally, the cost base of an asset is the amount that you paid to acquire the asset. However, in you situation you and your spouse acquired your IAG shares when NRMA was demutualised. When a company demutualises and distributes shares to shareholders, the allotted shares are viewed as having a deemed cost base even though you did not physically pay any money to acquire the shares. In your case, the first element of the cost base of your each of your IAG shares is the value of the IAG shares when NRMA demutualised. | Detailed Reasoning - IAG Share Purchase Plan: You and your spouse acquired IAG shares under a Share Purchase Plan offered by IAG. The first element of the cost base of your IAG Share Purchase Plan shares is the issue price of the shares, plus any brokerage and transaction costs that you incurred when you acquired the shares. Shares acquired under the IAG dividend reinvestment plan (DRP) Taxpayers participating in DRPs offered by companies are viewed as having made the choice to use their dividend to acquire additional shares in the company instead of receiving a cash payment. For CGT purposes, if you participate in a DRP you are treated as if you had received a cash dividend and then used the cash to buy additional shares. Each share, or parcel of shares, acquired by a taxpayer in this way after 20 September 1985 is subject to CGT. The cost base of the shares acquired under the DRP is the dividend amount you are viewed to have received and then used to buy the additional shares in the company. In your case you participated in the IAG DRP under which you were allotted dividends which you used to acquire a number of shares on various dates. The dividends you were allotted will be the first element of the cost base of the shares you acquired from using the allotted dividends. | Detailed Reasoning - Disposal of IAG shares: You and your spouse disposed of all of your IAG shares, incurring brokerage costs in relation to their disposal. In order to calculate any capital gain or capital loss arising from the disposal of your IAG shares, the total capital proceeds received for the disposal of your IAG shares must be apportioned over your shares in order to determine the amount of capital proceeds which are attributable to each share. The brokerage costs incurred in relation to the disposal of the shares must also be apportioned over the shares to determine the brokerage costs attributable to each share. The capital gain or capital loss made on the disposal of your IAG shares will then be calculated using the following formula: Capital proceeds Less Cost base Brokerage cost Capital gain/ capital loss Note: As you owned 50% of these shares, you will be liable for half of any capital gain or capital loss made on their disposal. | Detailed Reasoning - Company X shares: You and your spouse disposed of your Company X shares after 20 September 1985, incurring brokerage costs in relation to their disposal. | Detailed Reasoning - Disposal of your original Company X shares: Based on the information you have provided, we have calculated that you have made a capital loss in relation to the disposal of your 50% ownership interest in your original Company X shares. As you had a 50% ownership interest in these Company X shares, half of the capital loss made on their disposal is attributable to you. | Detailed Reasoning - Disposal of Company X DRP shares: You and your spouse received annual dividend allocations which you reinvested in Company X's DRP dividend reinvestment plan, resulting in you being allotted additional Company X shares. As we do not have the dividend amounts in order to determine the first element of the cost base of those shares, we cannot calculate the capital gain or capital loss you have made on their disposal. You can make those calculations using the same method used above when calculating the CGT implications of the disposal of your IAG DRP shares. | Detailed Reasoning - Conclusion: As outlined above, any capital loss you made in relation to the disposal of your shares can be offset against any capital gain made from the disposal of your shares. Any unapplied capital losses carried forward from previous income years can be applied to the capital gains, and if any capital losses remain, they can be carried forward. If you calculate that you have made a capital gain in the 2010-11 income year in relation to the disposal of all of your shares, and you meet the above listed conditions for the 50% discount to apply, you can apply the 50% discount to any capital gain amount after they have been reduce by any capital losses you may have. The resulting amount is your net capital gain, which must be included in your 2010-11 income tax return.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Subject: capital gains tax - shares - demerger - dividend reinvestment plan - cost base - disposal - capital gain - capital loss: Question 1 : Will the cost base of the original Orica Limited shares be apportioned to the remaining Orica Limited and the DuluxGroup Limited shares? | Question 2: Did you make a capital gain on the disposal of your ownership interest in the Insurance Australia Group Limited shares? | Question 3: Did you make a capital loss on the disposal of your ownership interest in the original Company X shares?