On 16 March 2018, Wefarmers (ASX: WES) announced its intention to demerge Coles as a separately listed entity. The demerger was approved at the shareholder general meeting on 15 November 2018 and became effective on 20 November 2018. On 21 November 2018, Coles (ASX: COL) commenced trading on the ASX on a deferred settlement basis and Wesfarmers shares commenced trading on an ex-demerger entitlements basis.
The demerger was implemented on 28 November 2018. Wesfarmers retained a minority interest of 15% in Coles and the remaining 85% of Coles shares were distributed to Wesfarmers shareholders in proportion to their existing holdings in Wesfarmers. Wesfarmers also retained a 50% interest in the flybuys joint venture with Coles. Through the demerger, eligible Wesfarmers shareholders received one Coles share for every Wesfarmers share held on the applicable record date, 22 November 2018.
The cost base used to calculate the demerger percentage of Coles and demerger rollover relief were confirmed in the Class Ruling CR 2018/59 issued by the ATO on 14 December 2018 as below:
"For the purposes of working out the cost base and reduced cost base apportionment under subsections 125-80(2) and (3) of the ITTA 1997, the Commissioner accepts the volume weighted average prices of $12.8459 for the Coles shares and $31.5848 for the Wesfarmers shares, as traded on the ASX on a deferred settlement basis over the first five trading days (and including) 21 November 2018, as a reasonable approximation of the relative market value of those shares (para 68).
Based on the volume weighted average prices calculated in above paragraph, 71.09% of the total of the shareholder's original cost base and reduced cost base for WES shares becomes the first element of the cost base and reduced cost base of Wesfarmers shares, and 28.91% becomes the first element of the cost base and reduced cost base of the Coles shares (para 69)."
This Corporate Action has been automated in Class. Users can have the option to process this demerger either at Fund Level or at Business Level.
Optional - Elect for no demerger relief
If the trustees of the fund elect for no demerger relief, then the processing steps are the following:
- Process the demerger as per above. We recommend processing this at Fund Level
- Sell all the Coles shares on 28/11/2018 for $12.8459 per share
- Buy Coles shares on 28/11/2018 for $12.8459 per share
- Match Step 2 and Step 3.
Optional - Dispose of COL units for Small Shareholders who have elected to participate in the Sale Facility
As stated in ATO Class Ruling CR 2018/59, eligible shareholders who held up to 160 Wesfarmers shares as at the Record Date were able to choose to participate in the Sale Facility, receiving the proceeds of the sales of the Coles shares to which they were entitled. Wesfarmers made an announcement on 6 December 2018 to confirm the average sale price for Coles under the sale facility was $11.9921 per Coles share.
If your client made a valid election on this option, you are required to process the disposal transaction on those Coles share manually. This can then be matched with the capital proceed received by the fund.