How to carry out South32/BHP demerger

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  • (Edited)
Can anybody advise how to carry out a demerge function of a company i.e., BHP into BHP and South32. In Personal Plus 2015 the nearest "Transaction" I can find is "Corporate Securities Spin-Off" but it is not quite right. Any and all help/advice will be greatly appreciated
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Steven Vas

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Posted 4 years ago

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William Phillips

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Steve,
I'm no expert (my disclaimer), but what I did pending further info from the ATO or BHP's website on the cost base, was to use " Add - shares added" with a zero cost base.
I also tried corporate spin-off but it would not accept a zero cost base.
Cost base can be adjusted later if it is deemed not to be zero by the ATO.
Maybe corporate spin off would work then??
Hope this is right, some one might correct me if I am wrong.
Regards
Forgot to add that you may have to use the original purchase dates and numbers of shares purchased for capital  gains tax purposes, but I think that will be spelled out in the ATO ruling
Regards
(Edited)
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Steven Vas

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William,

Many thanks for your prompt response and as you have stated, it works.

As mergers and demergers are fairly common in the Corporate world, we should ask Reckon to incorporate this task in the Transaction section.

Once again, many thanks, regards.

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Reckon FAQs, Employee

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Hi Steve,

Welcome to the Reckon Community.

Although it is called a "De-merger", which can be handled by Account Personal's Corporate Spin-off,  from what I understand of S32 demerger, it is being funded by an "in-specie dividend" rather than a classic demerger of "splitting assets" between the two companies which involves adjusting your cost base for the original company.    

The information you need for this transaction should be on the documentation sent you by BHP or call their shareholder information hotline.  For your accounting and tax needs please talk to your accountant.

The transactions you will need to do is to receive a dividend payment and then use those funds to Buy S32 shares.  Your cost base for S32 is the in-specie dividend value and the share price is that value divided by the number of shares allocated to you.   


Hope this helps.


regards,
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Steven Vas

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Gentlemen, 

Sorry for the delayed response to your solution to my problem, but I was awaiting some sort of communications from BHP/South32 on the demerger.  Unfortunately nothing to date.

As far as I am aware, an ”in-specie dividend” of $2.13 has been declared by BHP, but I can not find any investor information of this.  However, irrespective of the cost of S32 shares, both yours and Mr. Phillips, recommendations have some shortcomings.  Using the "Corporate spin-off" results in a "Return of Capita" for BHP, which is quite different from the actual S32 share costs.  I believe it takes into the calculations the difference in the actual and calculated BHP share price.  This results in the difference in cost price of S32 to that based on actual "Corporate Spin-off" and that the figure calculated by Reckon.  Therefore all future "price gain/loss" indications are also incorrect.  By adjusting the S32 share price under "Buy - Shares Bought" and the BHP "Capital return" to that of the actual "in-specie dividend" will rectify this problem.  However I do not think that this procedure was what was envisaged by Reckon.

Using Mr. Phillips' solution results in no S32 "Cost Basis" and therefore no future "Gain/Loss" nor "Gain/Loss(%)" indication.

Finally, I would appreciate some indication when Reckon will include South32 in the "Download Securities" list.

Regards,

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Graham Boast, Accredited Partner

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Hi Steven

The Corporate Securities Spin-off is the correct way to do this, but I don't like it for a number of reasons:
  • it often results in fractional share quantities, whereas the allocation is usually rounded to a whole number; and
  • the process won't let you use an existing share.  The data to correctly do this transaction is generally released weeks after the event, so most people have already created the share.
To do this manually, the correct process is:
  • determine the cost basis of your existing ATO Shares;
  • Apply the ATO ratio (more on this later) to the cost basis of the S32 shares (Original Cost basis x ratio);
  • Reduce the cost basis of existing BHP shares via a return of capital;
  • Buy the S32 shares.  Total Cost = S32 Cost Basis
  • I have a step by step procedure on my website here.  This talks about the TOL VBA demerger but the BHP S32 demerger has the same process. 
The ATO ratio is the sticking point.  It is usually based on the weighted average of the first 5 days trading of both stocks post demerger, so it is never available straight away.  Keep your eye on the S32 website.

So what do do in the meantime?

I think the ATO ratio will value the S32 cost basis at around 7.5% of your BHP cost basis.  My suggestion is:
  • Buy the S32 shares using the number of shares equal to your allotment and Total Cost = 7.5% x BHP Cost Basis.  Date Transaction 25 May 2015.
  • When the ATO ratio is available, edit this transaction using the ATO Cost Basis (ATO Ratio x BHP Cost Basis)
  • Enter the Return of Capital transaction dated 25th May
This process will allow you to track your portfolio until the ATO Ratio is published.

Regarding the price download, I have just tested mine and it has downloaded the last 5 days.  You will need to manually enter prices before this if you want the full history.  


Graham Boast 0409317366
graham@reckonhelp.com.au
Reckon Accredited Consultant
(Edited)
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Graham Boast, Accredited Partner

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As per John's advice below, the ATO has now determined that the cost basis for S32 shares is $2.25 per share. So the procedure recommended by me is:
- return of capital = allotment x $2.25.
- buy shares = allotment @ $2.25 per share

Graham
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Graham Boast, Accredited Partner

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The ATO has now determined that the ratio for determining the cost basis for S32 shares is 7.1%., so the return of capital value is 7.1% of your BHP cost basis - NOT $2.25. 

Graham 15/6/15
(Edited)
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Steven Vas

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Hallo Graham,

Thank you very much for you quick response.  I shall try to find out the  actual BHP cost basis and the ATO factor to find out the true costs for S32 shares.

As far as the price downloading I cannot even get the code using the "Edit security details"..  When trying the "Look up Symbol" the "Stock Code Search" gives a message "Your search returned 0 results".  All the other investments are downloading their respective prices correctly.

Regards,

Steven Vas  

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Graham Boast, Accredited Partner

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Hi Steven

  • If you have entered your transactions correctly, Reckon should show the cost basis of your BHP Shares in the Security Detail View (go to Securities List and doubleclick on BHP.



Graham
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Steven Vas

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Hello Graham,

Thank you for your response. 

My cost basis are correct for both BHP and S32.  My only problem is downloading S32 share prices.  All other investments download and update correctly.  Why I have mentioned the lack of automatic working of South32 "Look up Symbol" function, as I believe that the update of S32 share prices and the finding of the security symbol are somehow connected.  I have in fact manually typed it in.

Regards,

Steven Vas

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Reckon FAQs, Employee

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Hi Steven,

Check the configuration of your South 32 shares.  My S32 shares are updating OK:






Hope this helps.


regards,
John
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Steven Vas

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John, Graham,

Many thanks for your prompt responses.  My configuration was exactly the same as yours, but I could not get an update of the S32 share price.  Finally in great frustration I have deleted all references to South 32 and reinstalled it from sketch and behold, all of a sudden it started to work.  I managed to download the last five days of S32 prices.  I just have to wait a few days to make certain that it will keep working.

Once again many thanks for persevering with me over the last few days and your very prompt responses.

Regards,

Steven Vas.

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Reckon FAQs, Employee

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Great to hear its finally up and running Steven.  

Sounds like the security item became corrupt in some small way.  For future reference, If everything is setup correctly and correct procedures are being followed, and the problem persists, Validate and SuperValidate the file and try again.  

regards,
John
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Graham Boast, Accredited Partner

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Hi John.

This is literally a "Dear John" question. Do you have a knowledge base article link to that?

Graham
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Steven Vas

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Hello John,

Many thanks for the additional information.  I will keep it in mind for the future I case I experience a similar problem.

Regards,

Steven Vas.

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Lex Wilson

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This reply was created from a merged topic originally titled How+to+enter+an+Allotment+of+Securities.

BHP have issued an Allotment of Securities. I now have Shares in South32 at no cost. How do I enter this?

Using 2015 version
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Mirko, Alum

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Hi Lex, please see posts in this thread relating to same issue.
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Angelo Fraietta

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I would say that it becomes an asset
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Reckon FAQs, Employee

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Hi Everyone,

Please see BHP's latest communication (10/6/15) at:
http://www.bhpbilliton.com/home/investors/news/Pages/Articles/Demerger-of-South32-Australian-Taxatio...

"Such [Australian resident] shareholders will be sent a letter providing further detail on the class ruling to assist in calculating the tax cost base allocation of BHP Billiton and South32 shares."


The ATO has released its tax ruling on the merger:
http://law.ato.gov.au/pdf/pbr/cr2015-040.pdf

This ruling includes the comment on the value of the distribution:
"26. The value of the BHP distribution amount of $7,226,304,986 was worked out by reference to the volume weighted average price of the South32 shares, $2.25, as traded on the ASX over the five trading days from when deferred settlement trading commenced on 18 May 2015."


Regards,
John
(Edited)
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John Campbell

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The corporate spin-off information is now available.

I did it as a corporate spin-off as a 1 for 1 spin off on May 25

The value of S32 is $2.25 and the value of BHP is $29.44. (these values are supplied to adjust the capital value of both companies)

Providing this information will adjust the capital value of both sets of shares accordingly (for future capital gains calculations when you sell)

Note that if you have BHP shares in more than 1 account, only do this once, as the share split will be applied to each account.

I would recommend against a more complex approach of doing a capital return and share purchase, as the spin-off does appear to work and adjust your capital value of both companies.

You will need to edit the company information for S32 to check the settings. Just make them the same as BHP.

John

(Edited)
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Graham Boast, Accredited Partner

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Hi john

If you have a look in the register of the brokerage account, the corporate spinoff is actually processed as a return of capital of BHP @ 2.25 per share, and a buy of S32 @ $2.25 per share. It has exactly the same result whichever way you do it. The price entered for BHP of $29.44 seems to be reflected only in the price history and has no impact on the cost basis.

Both methods are correct: the corporate securities spin-off has the advantage of doing multiple holdings at once, and the disadvantages of not being useable if you already have the share set up. In addition, in some spin-offs the ratio can yield a fractional value different from the allotment.

The capital return / buy is two transactions, but I like the fact that you can see exactly what is happening and why.

Horses for courses I guess.

Graham
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Diver Dave

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Sorry, Graham, but I don't think you're correct.  According to the ATO and BHP's release today, the Capital Return, which equates to the cost base of S32 shares is 7.1% of the Cost Base of the BHP shares, therefore every holder with have a different initial Coat for S32.  For CGT purposes the acquisition date for S32 is the same as each parcel of BHP shares held.

Hope that helps.
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Albert

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Fantastic. I used the ROC method @ $2.25 and used the funds to purchase S32 units. My BHP cost basis adjusted accordingly. Many thanks again. All I need now is the i/o price to go back up to $150/t again!!!
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Graham Boast, Accredited Partner

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Hi Dave

My bad.  I misread the info.  I was wondering why it was different to previous methods.  So scratch my last post.

See corrected method below.

Graham
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Julie Fichera

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Thanks appreciate your explanations of this event. 
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Graham Boast, Accredited Partner

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Both Methods - Correctly this time!

Method 1

Corporate Securities Spin-Off


Method 2

Return of Capital. The amount = cost basis of BHP shares x 7.1%
Buy.  No of Shares = amount allotted.  Total Cost = Return of Capital amount calculated above.

With both methods, you should check your BHP Cost Basis before you enter the transactions, then check the cost basis post-demerger and ensure that the amounts are correct.  BHP = 92.9% of original cost basis and S32 = 7.1%.


Graham
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Dima

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Thanks Graham for this advice. However, I am still not sure how I should proceed in Accounts Personal Plus 2015. I am confused by the ATO statement that South32 shares are taken to have been acquired on the same date as the original BHP shares.

I have acquired parcels of BHP shares in July 2006, November 2013 and 6th May 2015. If I choose to use Method 2 do I have to apply it to each individual parcel and calculate the value of returned capital as 7.1% of the cost base of the individual parcel?

Wouldn’t this sort of calculation have to be done in the future to assess any capital gain/loss when any portion of either BHP or South32 shares are sold?

Any help in this regard would be very much appreciated.

Dima Bartels

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Diver Dave

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Wadim, the correct procedure is to calculate a Capital Return of 7.1% of your pre-spin-off cost; Reckon will reduce the cost base of each parcel proportionately.

Then "Buy" the South 32 shares for the amount of the Capital Return.  Reckon will indicate the date of acquisition as 17th of May as it's not possible to back date the acquisition date.

If you are likely to sell less that your full South32 holding you could record the purchase of 3 parcels of South32, otherwise Reckon will show only one parcel.

If you sell your South32 shares within the next 12 months you'll have to remember not to follow the Capital Gains Report generated by Reckon for your Tax Return, as it will indicate they were held less than 12 months.  The 50% (or 30%) discount would still apply, assuming the BHP parcels were purchased at least 12 months previously. 

Hope that helps clarify the process.
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Dima

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Thanks Diver Dave. I am sorry if I appear a bit obtuse but how do I go about recording the purchase of the three parcels of South32 if they are all acquired on 17th May? Wouldn't it be also contrary to ATO advice that the acquisition date should be the same as for the BHP shares?

Dima


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Diver Dave

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Maybe I wasn't clear, Dima.  Reckon will record the purchase date as the 17th of May whether you decide to input 1 parcel or 3.  The ATO ruling on the "effective" date of purchase only comes into play when you sell some or all of the South32 shares. It's only consequence is whether or not you can claim a discount on the Capital Gain - if it's a Capital Loss it makes no difference.

Com back if that doesn't clarify your concerns. 
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Dima

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Thanks for that, Diver Dave. I understand what you are saying about the capital gains/loss situation but I was not clear on your statement “you could record the purchase of 3 parcels of South 32” and wanted to know how to go about doing it.

This is what I have now done and would appreciate your comment on it:

  1. I have created a Suspense Account although I could have used my Cash Account.

  2. I have followed Method 2 as described by Graham Boast where the cost basis was the sum of costs of my 3 parcels of BHP shares and the amount of capital returned (7.1% of the summated cost) was placed in the Suspense Account.

  3. For each individual original parcel of BHP shares, I have calculated the amount of capital return (i.e. 7.1%).

  4. I have created a South32 account.

  5. I have then entered in the South32 account three separate purchases of shares on the same dates and for the same number of shares as each of the BHP share parcels. Payment for each parcel was that calculated in para 3. The source of funds was the Suspense Account. I am now left with 0 balance in the Suspense Account and the cost basis of the S32 account is equal to the amount calculated as return of capital in para 2.

When I now look at the Security Detail View for BHP the Cost Basis is now 92.9% of the previous figure and for S32 the Cost Base is 7.1% of the previous BHP figure.

Although the total Cost Basis for BHP is now the reduced amount, the individual amounts as appearing in the Inv.Amt. column of the Transaction List have not changed and are still shown at their original values. I don’t understand this because I thought they too would now be shown at their reduced values as you implied when you said: “Reckon will reduce the cost base of each parcel proportionately”. Do you have a comment on this?

Dima

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Diver Dave

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Thanks, Dima.  Puzzled by your last para.  If you entered a Return of Capital transaction for BHP the Cost Base should reduce by that amount.  Check your Cost Base on the 16th of May and the 17th of May - if the total hasn't reduced by the amount of the Capital Return, I'd suggest deleting the transaction and re-entering.

There's no need to set up a Suspense Account, though it's of no significance.  I take it you don't have a Linked Account to your Investment Account - assuming you use the same account for all payments and receipts it reduces input time for transactions if you have a linked account, but it's not essential.

I may have misled you of the "proportionate reduction" of cost.  I have 4 parcels of BHP and have checked the change for each parcel.  Whilst the total cost has reduced by 7.1%, one parcel has been reduced by 17.45% and the other 3 by 2.35%!  I have learnt from experience that Quicken/Reckon is not good with multiple parcels.

If you are liable for Tax when you sell, I'd suggest you always manually check Quicken's report before you completing your Tax Return.  This is particularly important if you are nominating particular parcels to minimise Capital Gains.

Hope that helps - come back if not.

David
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Dima

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David, you have not misled me because I myself expected the Cost Base of each individual parcel to change since, as I said in my second last paragraph, the Cost Base of the total of my BHP holdings did reduce by the correct amount. So, if the total had changed, why has the individual value of each parcel not changed? In your case, the individual value of each parcel has changed, albeit not by the same % amount, but it changed. In my case it has not.
I must say that for taxation purposes I do calculate my gain/loss manually anyway.
Thanks.
Dima 
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Diver Dave

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Can't explain that, Dima.  Have you validated, then super validated your file?  Might be worth a try.
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John Campbell

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The key for this is to get the cost base split correctly, which CSO screen provides.

I noticed this since I have 2 accounts with different cost per share of BHP shares, which result in different cost per share of S32 shares.

All this is easy, compared to getting the correct cost base for the Westfield Trust restructure last year !

I still haven't bothered to fix that as yet.

John

(Edited)
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Richard Jasek

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Hello John,
I too am terrified of entering the Westfield restructure of 2014 into Quicken. After a huge (and expensive) effort by my accountant I have finally derived the cost basis of my holdings before and after the restructure, however I am bamboozled how to input the resultant figures. The strand devoted to this topic closed without a full explanation, so when you finally do get to fix that could you post your method?
Richard
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John G, Information Support Analyst

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Hi Richard,

Welcome to the Reckon Community.

If it is the Westfield restructure you are interested in, we have a guide for it here.  

This is only a simple guide and please do not overrule any other directives your Accountant has given you.


regards,
John
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Richard Jasek

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Many thanks John. It took some hammering to make the numbers my accountant provided fit, however I have emerged bloodied but victorious. I wonder if I can pass on the bill to Westfield for such a horrendous restructure?
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John G, Information Support Analyst

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Hi Richard,

Congratulations on your achievement!

regards,
John
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Rajesh Shanbhag

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Hi

I used the "Corporate Securities spin off" transaction. It reflected BHP as "Return of capital". However i encountered 3 problems:
a.  In P&L return of capital shows under "Uncategorised" account. Did I miss something?
b.  The reduction of cost of BHP was not uniform across my 300 shares. I expected that it will proportionately reduce cost. It did not. I am not sure what basis it adopted to adjust BHP cost
c.. The ATO ruling mentions that date of acquisition of S32 is the same date as date of acquisition of original BHP shares. However, using above method, all shares will reflect as acquired on 27/5/2015.

Could you please advise?


Rajesh
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Diver Dave

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Rajesh, as I've just commented to Dima, Quicken is not reliable when multiple parcels are held.  The total reduction in cost base is accurate, but it doesn't reduce each parcel by the correct %.

Re "acquisition date", Quicken can only record the 17th of May as the acquisition date, as that's the date of the transaction - when you come sell your South32 you'll have to manually adjust the purchase date; it's only of significance if you dispose of your South32 shares before 17/5/16 - Quicken's report will indicate they's been held for less than 12 months, and by implication no CGT discount is available, whereas you will be eligible to reduce the reported gain by the applicable discount.
 
Quicken is very good, but it's not perfect.  Unfortunately there are more and more problems arising which is very concerning.
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Graham Boast, Accredited Partner

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Hi Rajesh


a) Have a look in your "Brokerage Account" (in the Accounts List under "Investing Accounts".  There will be 2 transactions: a Return of Capital and a Buy.  In the Return of Capital, leave the "Transfer Account" blank.  In the Buy, ensure "from the accounts cash balance" is selected under "Use Cash from this transaction".
b) hmmm - I will have to test this, but unlike a sell, a return of capital doesn't allow any scope for applying different treatment to different lots of the same shares.
c) if you wanted to, you could backdate the buy date, but if you have different lots, you may have to breakup into different "buys"

Graham Boast 
graham@reckonhelp.com.au 
Reckon Accredited Consultant
http://www.reckonhelp.com.au/remotesupport.htm 
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Rajesh Shanbhag

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Hi Graham
a.  My Accounts are exactly as described. Reckon nevertheless posts entries to "Unspecified"
b.  Yes, strange. I could not find anywhere / any report on how the breakdown was calculated
c.  If I do backdate it, it posts to previous years. Reckon pops a warning message. It will mess with previous year accounts. Strange problem, not sure if there is a solution.

I have some screenshots from my Reckon. For sake of privacy, I wil not post it online. I will send it to your email.

Thanks

Rajesh
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John Campbell

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There has been a lot of discussion about this security spin-off, although I think it is much simpler that is being discussed.

Based on the prices of $2.25 for S32 and $29.44 for BHP, if at some stage you make a profit on the sale of S32 shares, 7.1% of all past BHP purchases can be allocated to the sale in your capital gains calculation; the ATO indicates this.

All that QPP has done is calculate the accumulated cost of shares and allocates 7.1% on the day of the spin-off. You need to keep track of the BHP purchase dates when estimating capital gains. It looks to me that QPP has done this accumulated cost correctly, but will probably incorrectly report the purchase date(s). I don't thing you will get better than that from QPP. Are the dates that complex?

Something for you to remember although I have forgotten what has happened with One-steel, Bluescope or Arrium?

Imagine the complexities of capital gains calculations if we were to ever make a profit on companies like GPT, with all their deferred tax and capital returns. The GFC at least made something simpler.

John

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Diver Dave

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Not sure I follow you John.  The ATO has indicated that the spin-off represents 7.1% of the cost base of each BHP parcel.  The cost base thus reduces by that amount which is transferred to the cost base of South32.  Those costs are the ones to be used in calculating the CGT implications of any future sale of either BHP or South32.
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John Campbell

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Diver Dave,

I was stating that QPP does do the cost base split correctly, but we are left to remember the correct (ATO permitted) purchase dates for S32 shares. These dates can affect the capital gains calculations in some cases, but probably not most.

I was also diverting to note that S32 is not the first case, as there are previous spin-off's by BHP.

And again, noted that other companies, such as those who do regular capital returns or deferred tax payments provide us with a much more difficult task, when we sell those shares. I have always been puzzled why the ATO lets companies such as GPT or Centro do such payments. I am sure most sellers of those shares don't get their capital gains calculation correct.

Is this any clearer ?

John

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Diver Dave

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Thanks, John.  I agree QPP gets the cost base adjustment correct for a single parcel, but not for multiple parcels - the total reduction in Capital is correct, but is not for each individual parcel.  As you say, generally speaking it's not an issue.

Regarding companies such as GPT an Centro, I follow the Tax Advice from each to identify how much of the annual distribution is "Tax Deferred", which is code for a Capital Return, so I enter that each year, which means the QPP calculation on disposal will correctly reflect the Gain incurred (excepting the comment on multiple parcels above).