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A demerger occurs when a company splits its operations into two or more entities or groups and distributes to its shareholders a direct interest in one or more of the parts. New tax rules apply to demergers from 1 July 2002. Broadly the tax consequences are:
- relief from capital gains tax (CGT) that would otherwise be payable as a result of the demerger transaction;
- the cost base in the original interest is spread between the original interest and the interest in the demerged entity (based on the relative split in market values); and
- an exemption from the provisions that would otherwise treat the shareholder as having received a taxable dividend from the transaction, subject to specific anti-avoidance rules.
- any pre-CGT interests retain their pre-CGT
status.
A
selection of recent demergers and their key features is detailed below. As
a general rule this applies to individual taxpayers (unless they acquired
their shares under an employee share scheme) who are Australian residents
for tax purposes and who hold shares as an investment asset rather than as
trading stock.
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DEMERGERS 1996-2007
Last updated: 15 November 2007
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| Date |
Head (or Demerging) Entity |
Demerged Entity |
IPO or distribution to existing shareholders |
Do the new rules apply? |
(Note 1)
Reduce cost base etc |
|
(Note 2)
Acquisition cost per share |
(Note 3)
% of market value |
Click on ATO for further info
|
| Apr-00 |
Amcor Limited |
Paperlinx Limited |
One for three |
No
|
$1.22
|
14-Apr-00
|
$3.66
|
|
ATO |
| Dec-03 |
AMP Limited |
HHG plc |
Rights to acquire |
No
|
Shareholders should click on the ATO link for the AMP Ltd demerger calculator
|
ATO |
| Jun-00 |
AGL Limited |
Australian Pipeline Trust |
IPO priority alloc. |
No
|
Unitholders paid $2.00 a unit on 13 June 2000
|
|
| Feb-07 |
Arafura Resources NL |
NuPower Rersources Limited |
One for three |
Yes
|
|
|
|
34.01
|
ATO
Arafura |
| Sep-04 |
Aviva Corporation Ltd |
NGM Resources Ltd |
One for thirty seven |
Yes
|
|
|
|
11.70
|
ATO |
| Jul-02 |
BHP Billiton Limited |
BHP Steel Limited (now BlueScope) |
One for five |
Yes
|
|
|
|
5.063
|
ATO |
| Oct-00 |
BHP Limited |
OneSteel Limited |
One for four |
No
|
$0.66
|
31-Oct-00
|
$2.64
|
|
|
| Oct-97 |
Boral Limited |
Envestra Limited |
IPO |
No
|
|
|
|
|
|
| Mar-00 |
Boral Limited |
Origin Energy Limited |
One for two |
No
|
$1.58
|
1-Mar-00
|
$3.16
|
|
ATO
|
| Oct-04 |
Centro Properties Group |
Prime Retail Group |
Shareholders and unitholders are advised to click on the ATO link for the appropriate Class Ruling |
ATO |
| Jun-98 |
Coca Cola Amatil Ltd |
Coca Cola Beverage |
One for one |
No
|
$3.86
|
23-Jun-98
|
$3.86
|
|
ATO
|
| Apr-03 |
CSR Limited |
Rinker Group Limited |
One for one |
Yes
|
|
|
|
75.00
|
ATO |
| Jun-04 |
Dairy Farmers Milk Co-operative Ltd |
Australian Co-operative Foods Limited |
Shareholders are advised to click on the ATO link for the appropriate Class Ruling or on ATO2 for answers to questions about the restructure of Australian Co-operative Foods Ltd |
ATO
ATO2 |
| Oct-98 |
Delta Gold Limited |
Zimbabwe Platinum Mines |
One for five |
No
|
Information not available
|
|
| Nov-05 |
Foodland Associated Limited
|
Progressive Enterprises Holdings Limited
|
One for one
|
Yes
|
|
|
|
70.00
|
ATO
Metcash |
| Aug-01 |
Futuris Corporation Ltd |
Australian Agricultural Co |
IPO |
No
|
|
|
|
|
|
| Aug-06 |
Macquarie Infrastructure Group |
Sydney Roads Group |
One for three |
Yes |
|
|
|
CALC
Note 5 below
|
ATO
|
| Nov-05 |
Mayne Group Limited (now Symbion Health Limited) |
Mayne Pharma Limited |
One for one |
Yes
|
|
|
|
44.217
|
ATO
ATO2 |
| Oct-03 |
Mincor Resources NL |
Tethyan Copper Company |
One for 3.37 |
Yes
|
|
|
|
9.582
|
ATO |
| Feb-05 |
Minotaur Resources Limited |
Minotaur Exploration Limited |
One for one |
Yes
|
|
|
|
18.22
|
ATO |
| Oct-01 |
MPH Limited |
AV Jennings Homes |
0.8 for one |
No
|
Shareholders in MPH were all Singapore based
|
|
| Nov-04 |
MPI Mines Limited |
Leviathan Resources Limited |
One for three |
Yes
|
|
|
|
Note 4 below
|
ATO |
| Dec-01 |
New Zealand Oil & Gas |
Pan Pacific Petroleum |
One for one |
No
|
$0.0845
|
28-Dec-01
|
$0.0845
|
|
|
| Jun-99 |
PBL Limited |
eCorp Limited |
IPO |
No
|
|
|
|
|
|
| Dec-02 |
Sonic Health Care Ltd |
SciGen Limited |
One CUFS for one |
Yes
|
|
|
|
0.66
|
ATO |
| Feb-07 |
Summit Resources Limited |
Pacific Mines Limited |
One for four (to be confirmed) |
Yes |
|
|
|
TBA |
ATO |
| Nov-06 |
Tower Ltd |
Tower Australia Group Ltd |
Note 6
below |
Yes |
|
|
|
60.75 |
ATO
ATO2 |
| Mar-01 |
Village Roadshow Ltd |
Austereo Limited |
IPO |
No
|
|
|
|
|
|
| Dec-04 |
Virtualplus Holdings Limited |
Novacoat Holdings Limited |
One for ten |
Yes
|
|
|
|
30.44
|
ATO |
| Dec-03 |
West Australian Metals Limited |
Austin Engineering Limited |
Two for nine |
Yes
|
|
|
|
14.591
|
ATO |
| Nov-02 |
WMC Limited (now Alumina) |
WMC Resources Limited |
One for one |
Yes
|
|
|
|
46.30
|
ATO |
TBA - To be
advised
Note 1: Shareholders in the Head Entity who received
shares in the Demerged Entity should reduce the cost base and
reduced cost base of their Head Entity shares by this amount per
share. (For Boral shareholders the $1.58 is per original Boral
share)
Note 2: This is the acquisition cost of the shares in the Demerged Entity which is to be deducted from the capital proceeds to arrive at the capital gain when the shares are sold. (The cost base may also include costs associated with the sale of the shares such as fees paid to a broker.)
Note 3: This is the percentage that the Demerged Entity represented of the market value of the group as a whole immediately after the demerger. Shareholders receiving shares in the Demerged Entity are to use this percentage to apportion the sum of the cost bases of their post-CGT Head Entity shares between these shares and the post-CGT Demerged Entity shares.
Note 4: According to the companies concerned, a reasonable basis for apportioning the cost base between the two different shares could be to use the relative market value of MPI shares pre and post the entitlement to the demerged Leviathan shares. Under this methodology the CGT cost base of an MPI share acquired at a cost of $1.50 (and assuming no other relevant incidental costs), would be allocated $0.1922 to the Leviathan entitlement relating to one MPI share (12.81% x $1.50) and $1.3078 (87.19% x $1.50) to the remaining (post-demerger) MPI share. As the distribution of Leviathan shares was made on a one for three basis (i.e. one Leviathan share for every three MPI shares), the cost base of the entitlement should be multiplied by three to ascertain the cost base of each Leviathan share received as a result of the demerger. In the above example of an MPI share acquired for $1.50 the cost base of each Leviathan share would be $0.5766 (3 x $0.1922).
Note 5: According to Sydney Roads Group this
should enable security holders to perform the calculation of
their cost base.
Note 6: The demerger was undertaken pursuant to a
New Zealand
Court approved scheme of arrangement.
Tower Ltd shareholders voted at a special meeting to approve (by
way of special resolution) the scheme of arrangement under which
Tower Ltd cancelled 0.4760 Tower Ltd shares for every Tower Ltd
share held and as consideration for the cancellation, Tower
transferred 0.6511 Tower Australia Ltd shares (subject to
rounding) for every Tower Ltd share held by a Tower shareholder.
Shareholders are deemed to have received A$2.81
as the capital proceeds in respect of the cancellation of each
of their Tower shares (the relevant market value on 20 November
2006). - to the extent
that the capital proceeds exceed the shares cost base, a capital
gain will result (this capital gain will be reduced by the
amount of the demerger dividend received) – to
the extent that the reduced cost base of each cancelled share
exceeds the capital proceeds amount, a capital loss will arise.
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Key tax relief criteria
To qualify for tax relief the key criteria are:
- The underlying ownership of the demerged entity must be maintained. (The ATO will examine the proportional interests and market values of ownership interests.)
- The Head Entity must divest at least 80% of its
ownership interests in the demerged entity. This is to ensure that only
‘genuine’ demergers are able to obtain the tax relief. (Importantly,
demerger relief will not be available for disposals of the remaining
ownership interests at a later date.)
Shareholder action
The Head Entity will normally advise shareholders if it has undertaken an eligible demerger and shareholders should be aware that:
- they may be entitled to choose rollover relief (see below) for any capital gain or loss
- they are required to calculate immediately
after the demerger the cost base and reduced cost base of their
interests in the Head Entity and their new interests in the Demerged
Entity
Rollover relief
If shareholders choose rollover relief:
- any capital gain or loss is disregarded
- the new interests are acquired on the date of
the demerger. (Note that if a proportion of your original interests was
acquired before 20 September 1985 (pre-CGT), the same proportion of the
new interests is treated as pre-CGT assets)
If shareholders do not choose rollover relief:
- any capital gain or loss cannot be disregarded
- all of the new interests are acquired on the
date of the demerger
A calculator at the ATO website helps shareholders work out the capital gains tax consequences under a demerger, including the BHP Billiton, CSR, Sonic Healthcare, Mincor and WMC demergers. It can be accessed here: http://ato.gov.au/distributor.asp?doc=/content/37788.htm
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