Private ruling: Capital Gains Tax - Shares - Disposal - Demerger
Published: March 2012
Ruling period: Year ended 30 June 2011
Date scheme commenced: 1 July 2010

Ruling: Q1: Is there more than one method that produces a reasonable apportionment when reallocating the cost base of shares held in a demerged company? | A1: Yes.


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 125-80 | Income Tax Assessment Act 1997 Subsection 125-80(2)

Reasons for decision: Summary: Subsection 125-80(2) of the Income Tax Assessment Act 1997 (ITAA 1997) requires only that the reallocation of cost base to new ownership interests and remaining original ownership interests (together referred to as 'post-demerger interests') produces a reasonable apportionment. Depending on the facts and circumstances of each case, there may be more than one method of allocating the cost base over a taxpayer's post-demerger interests that results in a reasonable apportionment. In all cases, the Commissioner considers that the apportionment will be reasonable if a taxpayer calculates the new cost base of each post-demerger interest in accordance with the market value of that interest relative to the total market value of all of their post-demerger interests. This method is referred to as the relative market value method. Other methods, including those based on the approach referred to as the parcel by parcel method , can produce reasonable apportionments, but this may not always be the case. For example, the particular circumstances surrounding a demerger may be such that the apportionment delivered by a method other than relative market value is distorted. Such distortion would be unacceptable if it involved an exaggeration of cost base differentials between post demerger interests. A demerger undertaken by way of the cancellation of ownership interests can produce such unreasonable apportionments. The rules in section 125-80 of the ITAA 1997 apply only to work out the 'first element of the cost base and reduced cost base' of ownership interests. Generally there are other elements which may be included to work out the cost base of ownership interests. However, immediately after a demerger the first element of the cost base and reduced cost base will be the same as the cost base. It is a matter for individuals to calculate the cost base of shares that are held in a company which has undergone a demerger based on their individual circumstances.

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. | Relevant facts: You and your wife jointly owned a number of shares in X Holdings Limited prior to the company's demerger of Echo Entertainment Group which occurred on 10 June 2011 | The shares were made up of a number of parcels. | You participated in a dividend reinvestment plan and have also purchased additional shares. | You sold a number of shares since the demerger.