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01 Jun 2003

Company Restructuring: "Demergers" and "Spin-Outs" - BHP, WMC and CSR (June 2003)

QB (Jun 2003) clarifies tax consequences for NZ resident taxpayers who receive new shares as the result of a demerger or spin-out from a company restructuring.

The department has noted several recent occasions on which Australian-listed companies have restructured in such a way as to distribute shares in a subsidiary of the listed company. Such restructurings are commonly referred to as demergers or "spin-outs". We have been asked about the tax consequences for New Zealand resident taxpayers who receive new shares as the result of such a "spin-out".


We are aware of demergers or spin-outs in the last twelve months by BHP Billiton Limited, WMC Limited and CSR Limited.

Typically, the restructuring company ("head" company) reduces its own capital (but without reducing the number of shares it has on issue) and applies funds on behalf of the shareholders to acquire shares in a subsidiary company (the "spin-out" company), which are transferred or issued to the shareholder.

There will sometimes also be a "demerger" dividend declared at the time of the demerger, the proceeds also being applied to acquiring the spin-out shares.

After the demerger or spin-out the head company shareholders still hold the same number of shares in the head company and also hold shares in the spin-out company. Additional shareholders may also own some (typically less than 20%) of the spin-out company.


There are several taxation issues to consider: the dividend consequences, the treatment of gains on disposal of the new shares, and their cost base. The discussion following is specific to the above-mentioned Australian demergers as circumstances can vary from country to country and company to company.

Dividend consequences

A "capital reduction" of the type described above resulting in a "spin-out" or "demerger", is a dividend derived by New Zealand tax resident shareholders. It is derived on the date the capital reduction is effected. The dividend must be included in the shareholder's gross income for the period. Likewise any specific "demerger" dividend is also income and must be returned.

The term "dividend" is defined in section CF 2(1) of the Income Tax Act 1994. The definition is extensive: it applies to any company, and to any payment, distribution, or transaction, whether in money or money's worth, made to or with any person, with respect to their own or another person's capacity as a shareholder in that company.

While some transactions involving the cancellation of shares are treated as not constituting dividends, the Commissioner does not consider that those rules have any application in the transactions identified above or in other similarly structured demergers, as there is no cancellation of any shares. Nor would the transactions be treated as bonus issues for New Zealand tax purposes.

The value of the dividend is the New Zealand dollar equivalent of the amount credited to the shareholder. The market value of the shares subsequently acquired on the date of distribution is not relevant for dividend calculation purposes.

For the purpose of establishing an appropriate exchange rate the New Zealand/Australia exchange rate should be used (these are set out on page 23 for the purposes of those transactions identified). Taxpayers may use the department's IR 270 exchange rate form or its online calculator, which gives the mid-month telegraphic buying rates for Australia, or obtain from their bank the actual exchange rate for the day in question.

Tax treatment of the dividend differs according to whether the New Zealand tax resident is a corporate or non-corporate shareholder.

  1. Non-corporate shareholders (including individuals, trusts (other than unit trusts) and superannuation funds)

    New Zealand tax resident non-corporate shareholders must include the amount of the distribution derived (converted to equivalent New Zealand dollars) as dividend income, when calculating gross income in their income tax return for the relevant year.

    It is unlikely that any foreign tax credits would be available as these payments (including demerger dividends) are not treated as dividends under Australian tax rules, so no non-resident withholding tax (NRWT) will have been deducted.

  2. Corporate shareholders (including unit trusts)

    Dividends derived from a foreign company by corporate New Zealand tax resident shareholders are exempt income under section CB 10(1) ITA.

    However, corporate shareholders are required by section NH 1 ITA to deduct and pay to the Commissioner an upfront dividend withholding payment from foreign withholding payment dividends. The amount of dividend withholding payment is calculated according to a formula provided in section NH 2 ITA. The formula uses the basic company income tax rate of 33%.

    Underlying foreign tax credits would only be available if any person held more than 10% of the Australian head company's shares (which, in the examples discussed, is unlikely).

Gains on any disposal of shares

The Scheme of Arrangement (or equivalent documentation) sent to shareholders for a "spin-out" or "demerger" may include a sale facility option. That is, shareholders have the ability to instruct the company to sell the “spin-out” shares and receive cash.

The normal tax rules regarding share disposals apply to New Zealand resident shareholders wishing to sell shares received under the restructuring process.

Where the shares in the "head" company are held on capital account the shares in the "spin-out". Company should also be held on capital account. Thus there should be no tax implications for those shareholders who use the sale facility to sell their shares, or sell later, provided that the shares continue to be held on capital account. However, taxpayers, if uncertain, should obtain their own advice on the issue.

Sale proceeds, whether by way of the "sale facility option" or later, will be gross income if the "head" company shares which created the distribution entitlement were held on revenue account. A deduction is available for the cost of the shares.

Cost base of shares for tax purposes

The scheme applies funds that belong to the shareholders (being the capital reduction and any demerger dividend) to acquire shares in the demerged company. Therefore the cost base for tax purposes to the shareholder of the shares acquired in the demerged company will be equal to the amount of the dividend received.

Again for tax purposes the cost base of the shares in the head company does not change.

Recent Australian demergers

In the last twelve months at least three Australian-listed companies have demerged:

  • BHP Billiton Limited: shareholders now have shares in BHP Billiton Limited ("head") and, on a one-for-five basis, BHP Steel Limited (the "spin-out") (effective 22 July 2002 ),
  • WMC Limited: shareholders now have shares in Alumina Limited (formerly WMC Limited) and, on a one-for-one basis, WMC Resources Limited ("spin-out") (effective 11 December 2002 ), and
  • CSR Limited: shareholders now have shares in CSR Limited ("head") and, on a one-for-one basis, Rinker Group Limited ("spin-out") (effective 11 April 2003).

Each of these will have a number of New Zealand shareholders.

Using the exchange rates on IR 270, the dividend amounts of the three demergers (both the capital reduction, and where appropriate, the demerger dividend) are:

Head company


$A dividend per head share

$NZ dividend per head share

BHP Billiton Limited



WMC Limited



CSR Limited



Example of effect on a shareholder

Using WMC Limited as the example, the demerger involved the following steps:

  • A capital reduction in WMC Limited of $A2.78 per WMC Limited share
  • A "Share Scheme Dividend" or "demerger" dividend of $A0.73
  • The application of the total proceeds of this, $A3.51, to acquire shares in WMC Resources Limited, and
  • The renaming of WMC Limited to Alumina Limited.

The shareholder still has the same number of "head company" shares, now in Alumina Limited, at their original cost. The shareholder also has an equivalent number of shares in WMC Resources Limited at a cost of $A3.51 and has received a dividend of $A3.51.

Return filing

While taxpayers have a duty to make due enquiry about their own tax affairs, this item is published to clarify the Commissioner's position.

Some taxpayers may have already filed tax returns for the year ending 31 March 2003 and may have overlooked inclusion of the dividends (and where applicable the proceeds of share sales) derived from the spin-out. The department will accept and process a request to amend the return from those taxpayers.