Demergers

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).

Demergers on or after 1 July 2002

Certain rules apply to eligible demergers that happened on or after 1 July 2002.

Demerger rollover

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 CGT consequences:

• you may be entitled to choose a rollover 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.

The head entity will normally advise you whether it has undertaken an eligible demerger. We may have provided advice to the head entity in the form of a class ruling.

Rollover available

To choose a rollover, the demerger must be an eligible demerger.

If you choose a rollover:

• you disregard any capital gain or capital loss made under the demerger, and
• your new interests in the demerged entity are acquired on the date of the demerger. However, if a proportion of your original interests was acquired before 20 September 1985 (pre-CGT), the same proportion of your new interests in the demerged entity is treated as pre-CGT assets.

If you do not choose a rollover:

• you cannot disregard any capital gain or capital loss made under the demerger, and
• all your new interests in the demerged entity are acquired on the date of the demerger.

Demerger exemption

This exemption applies to disregard certain capital gains or capital losses made by a demerging entity in a demerger group. A demerger group comprises the head entity of a group of companies or trusts and at least one demerger subsidiary. Discretionary trusts and superannuation funds cannot be members of a demerger group.

Cost base calculations

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.

The calculation will depend on whether you have pre-CGT original interests in the head entity.

Cost base calculations where you do not have pre-CGT interests

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. The following steps explain how to do this.

The steps and example 30 work out new cost bases using a method referred to as the ‘relative market value method’, which is sometimes also referred to as the ‘averaging method’. You may be able to use other methods if they are reasonable. For more information, go to ato.gov.au/demergers

Step 1

Add the cost bases of your post-CGT original interests immediately before the demerger. (Do not reduce your total cost base by any capital amounts returned to you under the demerger and do not include indexation.)

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.

The head entity should advise you of the relevant percentages to use.

Step 3

Divide the cost base apportioned to the head entity interests (from step 2) 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.

These amounts will form the first element of the cost base and reduced cost base of your post-CGT original interests and post-CGT new interests.

Cost base calculations where you have pre-CGT interests

If you choose a rollover

If you choose a rollover and a proportion of your original interests are pre-CGT, the same proportion of your new interests will be treated as pre-CGT interests. It is not necessary to calculate the cost base and reduced cost base for your pre-CGT interests.

You calculate the cost base and reduced cost base of your remaining post-CGT original interests and your post-CGT new interests in the same way as shown in the example above.

There is no change to the acquisition date of your original interests.

If you do not or cannot choose a rollover

If you do not or you cannot choose a rollover (for example, because a CGT event did not happen to your original interests), the new interests that you receive for your pre-CGT original interests are treated as post-CGT interests. You work out the cost base of these new interests under the ordinary cost base rules (this will generally be equal to the capital return and dividend distributed from the head entity that is applied to acquire those new interests).

It may be to your advantage not to choose a rollover for the new interests you receive for your pre-CGT original interests (for example, where the reduced cost bases of those new interests calculated under the ordinary cost base rules mean you will make a capital loss when you dispose of them).

You calculate the cost base and reduced cost base of your remaining post-CGT original interests and your post-CGT new interests (other than those received for pre-CGT original interests) in the same way as shown in example 30,except that you ignore the new interests received for pre-CGT original interests in the calculation.

There is no change to the acquisition date of your original interests.

Using the discount method if you sell your shares after the demerger

If you sell your new interests in the demerged entity after the demerger, you must have owned those interests for at least 12 months from the date you acquired the corresponding original interests in the head entity in order to use the discount method.

However, you calculate the 12 months from the date of demerger if you:

• did not choose the rollover and you received new interests in the demerged entity which relate to pre-CGT interests in the head entity, or
• acquired your new interests without a CGT event happening to your original interests.

Demergers calculator and other products and information

We have a demergers calculator to help you make these calculations.

We also have other products to assist you, such as question-and-answer sheets for some demergers undertaken by major listed entities, see ato.gov.au/demergers