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Brambles Limited - Demerger of Recall Holdings Limited

Factsheet August 2014

Summary

Allocation - 1 share in Recall Holdings Limited (REC) for every 5 shares held in Brambles Limited (BXB), rounded up to the nearest whole number of REC shares.

Demerger date - 18 December 2013.

Market value - $8.68 per BXB share and $4.34 per REC share received.

Cash received in CMA - Nil. Demerger dividend will not be received in cash, as BXB shareholders received REC shares.

Capital reduction amount - $0.4803 per BXB share.

Demerger dividend amount - $0.3878 per BXB share. Demerger dividend is non-assessable, non-exempt (NANE) income of the BXB shareholder.

Demerger roll-over relief - choice available.

Cost base of REC - 9.09% of the BXB cost base just before the demerger.

Adjusted cost base of BXB - 90.91% of the BXB cost base just before the demerger.

Background

In July 2013, BXB proposed to implement a demerger and distribute shares it held in REC to BXB shareholders on a pro rata basis via an in-specie distribution for nil consideration.

What was the structure of an initial investment in BXB?

An investment in BXB represented an investment in fully paid ordinary shares in BXB.

What was the structure of the new direct investment in REC?

An investment in REC represents an investment in fully paid ordinary shares in REC.

What was the structure of the BXB demerger to its shareholders?

BXB shareholders received one REC share for every five BXB shares held on the record date as part of the demerger. Any fractional entitlement was rounded up to the nearest whole number of REC shares. The acquisition of the REC shares consisted of the following tax consequences:

  • A capital reduction amount (being a return of share capital) of approximately $0.4803 for each BXB and
  • A dividend amount (being a dividend paid on each BXB share) of approximately $0.3878 for each BXB share.

A reasonable approximation of the relative market value of BXB and REC on the demerger date is:

  • $8.68 per BXB share and
  • $4.34 per REC share.

When was the demerger implemented?

18 December 2013.

What does a BXB shareholder hold after the implementation of the demerger?

A BXB shareholder continues to hold their original investment in the BXB shares. However, the demerger will affect the cost base of the BXB shares (explained below).

A BXB shareholder will also hold an interest in the REC shares they are entitled to as part of the demerger.

What are the CGT consequences of the demerger?

CGT event G1 may occur where a shareholder holds BXB shares on the record date and continues to hold the shares on the demerger implementation date.

BXB shareholders will only make a capital gain where the capital reduction amount ($0.4803 per BXB share) exceeds the cost base of the BXB share. The capital gain will be equal to the amount of the excess. No capital loss will be made from CGT event G1.

If the amount of the return of capital is less than the cost base of the BXB shares, no CGT event G1 capital gain will arise.

Will demerger roll-over relief be available?

A BXB shareholder may choose demerger roll-over relief to apply where certain criteria are met.

What are the CGT consequences of applying demerger roll-over relief?

A BXB shareholder who chooses demerger roll-over relief will be able to disregard any CGT event G1 capital gain made under the demerger.

The cost base of the investor's original BXB shares must be apportioned over the BXB shares and the new REC shares.

A reasonable apportionment accepted by the Australian Taxation Office (ATO) of the original cost base of BXB shares, just before the demerger, is to attribute:

  • 90.91% of the cost base to BXB shares
  • 9.09% of the cost base to REC shares.

This rule replaces the cost base and reduced cost base adjustments in CGT event G1.

What are the CGT consequences of not applying demerger roll-over relief?

A BXB shareholder who does not, or cannot, choose to apply demerger roll-over relief, cannot disregard any CGT event G1 capital gain arising under the demerger.

Any CGT event G1 capital gain may be reduced by the CGT discount provided certain conditions have been satisfied. For resident individuals and trusts the discount is 50% and for superannuation funds the discount is 33 1/3%.

The cost base of the investor's original BXB shares must also be apportioned over the BXB shares and new REC shares in the same manner had demerger roll-over relief been applied, as outlined above.

What is the acquisition date of REC shares?

For CGT discount purposes, a REC share received by a BXB shareholder under the demerger will be taken to have been acquired on the date the shareholder acquired the corresponding BXB share. This will be the case regardless of whether or not demerger roll-over relief is chosen.

How does an investor calculate their cost base in BXB after the demerger?

The cost base of each BXB share will be 90.91% of the BXB cost base just before the demerger.

How does an investor calculate their cost base in REC?

The cost base for each REC share will be 9.09% of the BXB cost base just before the demerger.

How will the demerger dividend amount be treated for tax purposes for investors?

As part of the demerger distribution, BXB shareholders also received a demerger dividend component. This dividend will be treated as non-assessable, non-exempt income to the shareholder. Therefore, the demerger dividend will not form part of a BXB shareholder's assessable income.

The demerger dividend amount was $0.3878 per BXB share held. This amount was not received as a cash payment.

How will the capital return amount of the transaction be treated for tax purposes for investors that hold BXB shares on the record date but sell the shares before the demerger date?

CGT event C2 may occur where the shareholder holds BXB shares at record date but sells or ceases to hold the shares prior to the demerger date.

Where this occurs, the right to receive the demerger distribution becomes a separate CGT asset in itself. The acquisition date of this CGT asset will be the date of acquisition of the original BXB shares. The cost base of the new asset will generally be nil. The new asset will be disposed of on demerger date when the demerger distribution is made (i.e. when the shareholder receives the REC shares). The capital proceeds will be the market value of the REC shares on demerger date ($4.34 per REC share).

A capital gain will arise if the capital proceeds from the ending of the right exceed the cost base. The capital gain will be equal to the excess.

Any CGT event C2 capital gain may be reduced by the CGT discount provided certain conditions have been satisfied. For resident individuals and trusts the discount is 50% and for superannuation funds the discount is 33 1/3%.

The new REC shares received will be taken to have been acquired for CGT purposes on the allotment date 18 December 2013. The cost base of the new REC shares will be the market value of the REC shares received on demerger date ($4.34 per REC share).

How will the demerger be treated for non-resident investors?

A non-resident shareholder of BXB shares will be able to disregard any CGT event G1 or CGT event C2 capital gain that arises, as their investment in BXB is unlikely to constitute taxable Australian real property (TARP).

Where the dividend component paid is classified as non-assessable, non-exempt income, the non-resident shareholders will not be subject to non-resident dividend withholding tax.

Has the ATO issued any rulings relating to the demerger?

The ATO has issued Class Ruling CR 2014/12 Demerger of Recall Holdings Limited by Brambles Limited which was released on 29 January 2014.

How is the transaction reported by Wrap?

Capital reduction amount

Wrap has applied demerger roll-over relief where possible. As such, any capital gain arising from CGT event G1 will be disregarded.

Cost base/reduced cost base of BXB and REC

Wrap has apportioned the BXB cost base and reduced cost base just before the demerger between BXB and REC.

The BXB cost base just before the demerger was apportioned as follows on 18 December 2013:

  • 90.91% to BXB shares
  • 9.09% to REC shares.

A BXB shareholder was issued one new REC share for every five BXB shares held on record date. Fractional entitlements were rounded up to the nearest whole REC share. There was no change in the number of BXB shares held.

Demerger dividend amount

Wrap processed a non-assessable, non-exempt dividend on 18 December 2013. The dividend amount was $0.3878 per BXB share held on record date. Wrap has reported this amount in an investor's Tax Report as tax exempt under non-assessable income.

C2 capital gain

Where a shareholder holds BXB shares on record date but subsequently sells the BXB shares before the demerger date, Wrap has processed the acquisition of a new CGT asset, being the right to receive the demerger distribution. The acquisition date of the new CGT asset has been processed as the original date of acquisition of the underlying BXB shares. The cost base for the new CGT asset (being the right to receive the distribution) is nil. The new CGT asset was disposed of for the distribution amount on the demerger date, 18 December 2013. The capital proceeds are the market value of the REC shares, in this case $4.34 per REC share received. The CGT event C2 capital gain arising is processed as the difference between the capital proceeds received and the nil cost base. Wrap has processed any resulting C2 capital gain in an investor's Realised Gains Report.

The new REC shares acquired under this circumstance will have an acquisition date of 18 December 2013 for CGT purposes. The cost base and reduced cost base of the new REC shares will be the market value of REC on the demerger date, being $4.34 per REC share.

Fast facts

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