Demergers - capital loss?

[Tyler Durden]

Let's say you buy 1000 shares in Company A for $10 each. Six months down the track, Company A does a demerger and spins off one aspect of their business into Company B. The deal is that however many shares you have in Company A, you will be given the same number of shares in Company B.

After the demerger takes place, Company A shares drop to $5 and Company B shares are valued at $5 by the market (so you still haven't lost any 'value' as such, because you still hold $1,000 worth of shares in total).

A further six months down the track, Company A shares are now worth $6 on the market, and you decided to sell your 1000 shares, so you receive $6,000.

Have you made a loss, because you bought these Company A shares at $10 and sold them at $6? Or have you made a gain, because the total value of your shares is $11 as opposed to $10?

 

[McLovin]

At the time of the demerger your cost base will be split between the two entities. For arguments sake, say the cost base is split 50/50 meaning your new cost base is $5/share.

 

[Tyler Durden]

At the time of the demerger your cost base will be split between the two entities. For arguments sake, say the cost base is split 50/50 meaning your new cost base is $5/share.

Ok ok, very sensible, I should've known better. Thanks

 

[Huskar]

Each demerged entity will actually be allocated a specific theoretical "buy price" which you can find in the prospectus and is approved by the ATO. This is your capital base for any capital gains purposes. And it is not always just half of the previous price even when it is a 50/50 demerger...

 

[Huskar]

Each demerged entity will actually be allocated a specific theoretical "buy price" which you can find in the prospectus and is approved by the ATO. This is your capital base for any capital gains purposes. And it is not always just half of the previous price even when it is a 50/50 demerger...

Sorry I realise I was very vague and probably inaccurate. I still find it all rather confusing even after looking into it fairly closely. I think essentially for tax purposes it is as if you sold your shares at the demerger date then immediately bought them at a specified ratio in the 2 new companies. There are no CGT consequences only because the ATO allows a deferral.

See helpfully, for example, the Tabcorp demerger website:http://www.tabcorp.com.au/investor-centre_proposed-demerger.aspx

It gives a tax calculator though it is still kind of confusing - because what is your tax base before the demerger date?

The ATO ruling (also on the website) explains it in this way:

"38. A THL shareholder who chooses demerger roll-over for their
THL shares is required to recalculate the cost base and reduced cost
base of their THL and Echo shares.
"39. The first element of the cost base and reduced cost base of
each THL share and corresponding Echo share received under the
demerger is worked out as follows:
• take the sum of the cost bases of the THL shares (just
before the demerger); and
• apportion that sum over the THL shares and
corresponding new Echo shares received under the
demerger.
"40. The apportionment of this sum is done on a reasonable basis
having regard to the market values (just after the demerger) of the
THL and Echo shares, or a reasonable approximation of those market
values"

That sum apportioned on a "reasonable basis" is apparently 43.637%:56.363% as specified in the tax calculator. So if your capital base pre-demerger was $6, post-demerger it is 43.637% of $6 for TAH (ie $2.61822) and 56.363% of $6 for EGP (ie $3.38178). Simple!...

And remember this is just my opinion after reading the documents. It's not tax advice and might well be wrong!

 

[Tyler Durden]

Sorry I realise I was very vague and probably inaccurate. I still find it all rather confusing even after looking into it fairly closely. I think essentially for tax purposes it is as if you sold your shares at the demerger date then immediately bought them at a specified ratio in the 2 new companies. There are no CGT consequences only because the ATO allows a deferral.

See helpfully, for example, the Tabcorp demerger website:http://www.tabcorp.com.au/investor-centre_proposed-demerger.aspx

It gives a tax calculator though it is still kind of confusing - because what is your tax base before the demerger date?

The ATO ruling (also on the website) explains it in this way:

"38. A THL shareholder who chooses demerger roll-over for their
THL shares is required to recalculate the cost base and reduced cost
base of their THL and Echo shares.
"39. The first element of the cost base and reduced cost base of
each THL share and corresponding Echo share received under the
demerger is worked out as follows:
• take the sum of the cost bases of the THL shares (just
before the demerger); and
• apportion that sum over the THL shares and
corresponding new Echo shares received under the
demerger.
"40. The apportionment of this sum is done on a reasonable basis
having regard to the market values (just after the demerger) of the
THL and Echo shares, or a reasonable approximation of those market
values"

That sum apportioned on a "reasonable basis" is apparently 43.637%:56.363% as specified in the tax calculator. So if your capital base pre-demerger was $6, post-demerger it is 43.637% of $6 for TAH (ie $2.61822) and 56.363% of $6 for EGP (ie $3.38178). Simple!...

And remember this is just my opinion after reading the documents. It's not tax advice and might well be wrong!

Thanks mate, understand the non-advice thing, will do my own research.

It's funny you gave that example, because that is exactly what I had in mind when I asked the question. I had TAH shares when they demerged, and I looked at it the other day and wondered what the tax treatment would be if I sold them (bought them for $15, went down to $7 after GFC, then now $2.80 after demerger).