Demerger and Income Tax Act, 1961 . Basis language of the aforesaid amendment in Explanation 2A to Section 2(22), a plausible interpretation is that amendment applies only in the case of amalgamation and not to a demerger. Woolworths Woolworths Group Limited Endeavour Group Limited 7:00pm COST BASE ADJUSTMENTS DATE OF ACQUISITION CAPITAL GAINS . Assuming that tax demerger relief is obtained, there shouldnt be any tax implications for Australian resident shareholders from the demerger per se. 4. Step 4: Completing her 201213 tax return. The Act provides for certain tax concessions to companies involved in the scheme of demerger and alsoto their shareholders. Goodwill, in general, is not a depreciable asset and in fact depending upon how the business runs; goodwill may see appreciation or in the alternative no depreciation to its value. As per Section 72A(7)(aa) of the Act, the term industrial undertaking" means any undertaking which is engaged in(i) themanufacture or processing of goods; or (ii) the manufacture of computer software; or (iii) the business of generation or distribution of electricity or any other form of power; or (iv) the business of providing telecommunication services, whether basic or cellular, including radio paging, domestic satellite service, network of trunking, broadband network and internet services; or (v) mining; or (vi) the construction of ships, aircrafts or rail systems. Dividend amount of 1,000 $0.14195442 = $141.95, Capital return amount of 1,000 $0.14598558 = $145.98, Capital proceeds of $1.6248918 ($1.6347 99.4%), Total capital gain $38.766 ($0.19383 200 units), Capital proceeds of $0.0098082 ($1.6347 0.6%), Total capital gain $0.234 ($0.00117 200 units), Less cost base of $23,000.00 + 100.00 = $23,100.00, Dividend amount of 2,000 $0.14195442 = $283.90, Capital return amount of 2,000 $0.14598558 = $291.97, Capital proceeds of 400 $1.4397 = $575.88, Capital gain on the sale of her Woolworths shares of $35,700, Capital gain on the ending of the right to receive stapled securities = $291.98, Less prior year net capital loss of $50.00 = $35,941.98, Stacey now applies the 50% CGT discount $35,941.98 50% = $17,970.99, SCA Property Retail Trust units = $1.4310618, SCA Property Management Trust units = $0.0086382. By the first half of FY21, with hotels re-opening, Endeavours share had risen to almost 25% of Woolworths Group EBIT. Against this is that some investors will not want to have anything to do with a business that has poker machines. to make a short-term or one-off commercial gain. All investors should therefore consider the appropriateness of the advice, in light of their own objectives, financial situation and/or needs, before acting on the advice. Endeavour Group intends to follow Woolworths Group's established dividend policy, which is initially expected to deliver a payout ratio of 70% to 75% of profit after tax. Prima-facie, it seems that the said amendment should not apply to intangible assets other than Goodwill. The Act [58] has provided a specific exemption from the aforesaid provision to shareholders of transferor company where such shares are received as consideration for demerger and the resulting company is an Indian company. Judicial precedents in the context of amalgamation [74] have held that amalgamation constitutes succession, since post amalgamation, the amalgamating company ceases to exist. The transferee company is an Indian company. any capital gain or capital loss from the sale of your Woolworths shares, a capital gain from receiving the stapled securities, and. What are the taxation implications? Explanation 1(i)(c) to Section 2(42A) of the Act. The Budget Memorandum explained that while Goodwill is a depreciable asset (as held by Supreme Court), depreciation on mergeris governed by other provisions in the Act [63] and based on these provisions, the benefit of depreciation claim may not be available in certain cases. That is, he did not return the Unit Retention Form. She paid $100.00 brokerage. (iv) Carry forward of accumulated losses and unabsorbed depreciation. Example If WOW cost base as of the Scheme date is $32,050, Cost Base reduction is $4,547.895. Option 2 is a significant improvement over the status quo, as there would be no tax consequences which arise from holding shares in a demerged company. The only advantage of doing this is the saving on brokerage which on a tiny parcel of shares, could be considerable. Neville's 200 stapled securities were sold in the sale facility and he was sent $326.94 ($1.6347 for each stapled security). Woolworths by a nose.". resulting company), which becomes the property of the taxpayer in consideration of a demerger, there shall be included the period for which the share or shares held in the demerged company were held by the taxpayer. If you subsequently sell your Endeavour shares, then you may have to pay capital gains tax.One thing that will change is your cost base for your Woolworths shares. But they get off to a slow start because there is a weight of sellers wanting to get out upon listing and there is no compelling or urgent reason to buy. The result is the adjusted cost base of each of your Woolworths shares. The company that transfers such business operation is known as the "demerged" company, while the company to which the business is transferred is known as the "resulting . Supermarkets rival Coles (ASX: COL) is also up since then, though more broadly the retailer has seen its share price crater close to 10% over the past 6-months as investors cool on the stock. 8 Best Vegan Cereal Brands to Start Breakfast off Right! Assuming 148 is correct: Woolworths are paying a cash dividend of $0.62 per share = $91.76. Cipondoh adalah sebuah kecamatan di Kota Tangerang, Provinsi Banten, Indonesia . The Act also provides that while determining the book value of property, any change in the value of assets consequent to their revaluation needs to be ignored. When consideration is given in the form of shares to some shareholders and cash is paid to the balance shareholders, benefit of exemption is available only to those shareholders who have received consideration in the form of shares of the transferee company. CIT v.Smifs Securities Ltd.(SC)348 ITR 302. D. Insertion of Rule 8AC for computation of STCG and WDV. Example Own 1000 WOW as of the Scheme date - received 1000 EDV Shares from the demerger. The Act provides that deduction of one-fifth of the expenditure incurred wholly and exclusively for the purpose of demerger is allowed to an assessee (being an Indian company) in each of the five successive years, beginning from the year in which the demerger takes place [47] . As stated above, there is also anamendment made in section 50 of the Act as well(section 50 the Actprovides for computation of capital gains in case of depreciable assets).As per the amendments brought invide Finance Act, 2022, reduction of the amount of goodwill of a business or profession, from the block of asset shall be deemed to be transfer. The proposed settlement is for $44.5 million (inclusive of costs). The Supreme Court in case of Smifs Securities Limited [62] ruled that goodwill acquired on amalgamation (that is, excess of consideration paid over value of net assets acquired) is an intangible asset under section 32(1)(ii) of the Act and hence eligible for depreciation claim under the Act. Expand Company Description. The ATO is expected to publish the ruling in early August 2021. There is also a capital reduction resolution (this is also a formality, and wont have any impact for Woolworths shareholders taking demerger tax relief ). Demerger needs to be in accordance with conditions as notified under Section 72A(5) of the Act by the Central Government. I have a few questions around the cost base of the EDV and WOW shares that I now currently own. Supporting an argument that Endeavour is worth more than the notional split above is that the impact of Covid-19 was damaging to Endeavour. Woolworths shareholders will be entitled to receive one share in Endeavour Group for each Woolworths share held on Friday, 25 June 2021. A capital gains tax event happened when you received the capital return. Paul Rickard explains the demerger specifics and how itll impact shareholders. No tax holiday deduction would be allowed to the transferor company in the year of amalgamation or demerger as the case may be; The amalgamated / resulting company would be entitled to the tax holiday for the unexpired period, as if the amalgamation or demerger as the case may be had not taken place. From the Woolworths web site: "The basis for cost base apportionment will be formally determined by the ATO and published by the ATO as part of the final demerger tax relief class ruling. Woolworths Group today announced more details in relation to the demerger of Endeavour Drinks Group, revealing that investors could receive a potential $2 billion windfall when the company is demerged. Assume Neville has no other capital gains for the year and no current year or prior year unapplied capital losses. Create your myGov account and link it to the ATO, Help and support to lodge your tax return, Occupation and industry specific income and work-related expenses, Residential rental properties and holiday homes, Instalment notices for GST and PAYG instalments, Your obligations to workers and independent contractors, Encouraging NFP participation in the tax system, Australian Charities and Not-for-profits Commission, Departing Australia Superannuation Payment, Small Business Superannuation Clearing House, Annual report and other reporting to Parliament, Complying with procurement policy and legislation. You have the same number of 'parcels' of EDV as you do WOW each with their own . You may also have been allotted SCA Property Group stapled securities by participating in the Woolworths retail shareholders offer. An argument can also be put forth that since depreciation on goodwill is not allowable on account of the amendment, it becomes imperative to carve out goodwill from other intangibles which as a matter of practice may have been clubbed in a common basket and termed as goodwill in the financial statements. Luas. A plausible interpretation is that the aforementioned CBDT Circular may also support the proposition in principle that vesting pursuant to Court order is not the event of distribution and accordingly deemed dividend implication may not arise. If two or more organizations. Say you did the calculation and found out the numbers.But you bought shares in both . If you have owned your Woolworths shares for more than 12months you can reduce the capital gain by the 50% CGT discount (after first applying any net capital losses you have). In the context of a merger of a wholly-owned subsidiary with the holding company, the CBDT, vide Circular [43] , had taken a view that the vesting of assets of the wholly owned subsidiary pursuant to the Court order does not amount to distribution by the company of its accumulated profits to its shareholders, even though its accumulated profits are embedded in the assets so transferred by it. Woolworths Endeavour Demerger. Section 47(viab) read with Explanation 5 to Section 9(1)(i) of the Act. However, another reading of the Memorandum also appears to imply that the depreciation on goodwill arising out of tax neutral business reorganisations in any case was always impermissible. No capital gains tax arises to the shareholders as any gains are rolled over. The Explanatory Memorandum appears to give the impression that depreciation claim for the past years should be allowed basis the SC decision in CIT v. Smifs Securities Ltd [2012] 348 ITR 302 (SC). Once depreciation has been claimed and allowed in respect of any previous ear, unless there is retrospective amendment, the depreciation already allowed cannot be subject to any change on account of any subsequent amendment. For a demerger to be tax neutral, demerged undertaking should be transferred on a going concern basis. Neville still owns all of his 1,000 Woolworths shares. The demerger of a company simply means splitting of company into two or more parts. Step 3: Stacey reduces the capital gain by her Dividend amount of $283.90. The demerger group is also provided with limited CGT relief. Is this something we are still waiting information on? CIT v. Gautam Sarabhai Trust ([1988] 173 ITR 216 (Gujarat)) read with Supreme Court ruling in CIT v. Grace Collis [2001] 248 ITR 323 (SC), Explanation 1(i)(g) to Section 2(42A) of the Act, As per Rule 11UA(1) of the Income-tax Rules, 1962, Clause (IX) to proviso to Section 56(2)(x) of the Act. The ensuing paragraphs discuss the relevant key income tax provisions/ implicationsof tax neutral merger of companies. The demerger is in accordance with the conditions, if any, notified under Section 72A(5) of the Act by the Central Government in this behalf. For Neville, the distribution has the following components: The franking credit attached to the dividend amount is: Step 1: Neville includes the dividend amount of $141.95 and the franking credit amount of $60.83 at the dividend label of his 201213 tax return (along with any other dividends and franking credits he receives from Woolworths or other companies in which he owns shares). Here is an extract from the full table of demergers 1996-2022. Further, the Finance Act, 2021 has also made an amendment to section 55(2)(a) of the Act in relation to determination of cost of acquisition of certain intangible assets, including goodwill. If one goes by the legislative history and the judicial precedents on the changes made in the provisions pertaining to unabsorbed depreciation, it becomes clear that the amendment made in section 32(2) which deems the unabsorbed depreciation as depreciation of the current year, was only to facilitate its set-off against income from other heads (apart from income from business or profession) and to permit its carry forward and set-off without any time limit. This means that your cost base for Woolworths now becomes $22.50 (75% of $30.00), and your cost base for your Endeavour shares is $7.50 each (25% of $30.00). To address this, amendmentshave been brought in vide Finance Act, 2022, that theassessment, reassessment or other proceedings made or initiated against the predecessorduring the pendency ofsuccession would be deemed to be made or initiated against the successor. It may be noted that the Delhi Tribunal in NIIT technologies [48] has taken a view that deduction for expenses incurred on demerger is not allowable to the resulting company but is allowed only to the demerged company. As can be seen from the above definitions, the terms merger and amalgamation are quite synonymous and can be interchangeably used. "You will make a capital gain from CGT event G1 happening if the amount of the reduction of share capital for each Woolworths share (71 cents) was more than the cost base of the share. . Blacks Law Dictionary (7, The term amalgamate according to Oxford Advanced Learners Dictionary (8th edition 2010), means to put two or more things together so that they form one. It is up to you to work out the cost base of your Woolworths shares, just as you would if you were selling your shares and had to work out what they cost you. Even in this case, a plausible interpretation is that if entirety ofthe business is transferred to the resulting company, such that the demerged company is unable to continue the transferred business and continuity of business is preserved in the hands of the transferee companythere may be succession of business.The issue is however litigative and in absence of clarity on the issue it is important to review judicial developments on the subject when matter is being evaluated. $0.0086382 for each SCA Property Management Trust unit. compared to 4.1% in FY17. On amalgamation, all assets and liabilities of the transferor company stand vested to the transferee company, which includes credit for prepaid taxes (advance tax and withholding taxes). Woolworths' $10 billion demerger of its Endeavour drinks, pubs and pokies division will allow the company to focus more on tackling other social issues, CEO Brad Banducci says. This would have happened automatically if you were an Ineligible Overseas Shareholder, or at . What are the taxation implications?Assuming that tax demerger relief is obtained, there shouldn't be any tax implications for Australian resident shareholders from the demerger per se. Unlike in the case of merger, in a demerger, the demerged entity may not cease to exist. Paul was the founding Managing Director and CEO of CommSec, and was named Australian Stockbroker of the Year in 2005. Stacey acquired 2,000 Woolworths shares in 2002 and worked out their total cost base including brokerage was $23,000.00, or $11.50 each. Since the law has now been amended retroactively, it can be contended that given the depreciation rate on intangibles was the same, there was never a need to bifurcate goodwill into other intangible components at that point of time and therefore all intangibles were clubbed under a common head called Goodwill. Create an account to follow your favorite communities and start taking part in conversations. The Act specifically provides that transfer of a capital asset being shares in an Indian company [59] or shares of a foreign company, which derives directly or indirectly its value substantially from shares of an Indian company [60] by a transferor foreign company to the transferee foreign company pursuant to demerger is not a transfer for the purpose of capital gains tax if the following two conditions are fulfilled: The Act also provides that overseas demergers satisfying the aforementioned conditions should not attract any tax implications under Section 56(2)(x) for the transferee foreign company. In absence of clarity on the issue it is important to review judicial developments on the subject when matter is being evaluated. O_ 1 xl/workbook.xmlUmo8~o4q )D + D}m>$:]q lW'Ccxg&4Tg&hes}zi$YDQi>r YX5"iJs,3.R"a*FJ"TacehS0lBLi&7 &DEAKSR"e%LkP;g\U LoJY(xgo[NCj.++g0Hf%i#]-IU%Iy|E6DJjuLNBXI`K&@7[#-3R&r A place for Australians to discuss securities within Australia and abroad. Woolworths shareholders then received one unit in SCA Property Group for every five Woolworths shares held. You are free to copy, adapt, modify, transmit and distribute this material as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products). 2. All prices and analysis at 4 June 2021. Sixth proviso to Section 32(1) of the Act. As per Rule 11UA(1) of the Income-tax Rules, 1962. In the absence of a transfer or any other deeming charging provision in the statute, a question arises as to whether the notional capital gains arising due to reduction of standalone WDV of goodwill be brought within the ambit of capital gains merely by inserting a Rule to this effect? // -->