ATO Interpretative Decision
ATO ID 2006/178
Income Tax
Capital gains tax: demerger - measurement of ownership interests - exceptions to subsection 125-70(2) - adjusting instrumentsFOI status: may be released
Status of this decision: Decision Current
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Is it possible to refer to the number of adjusting instruments issued in determining whether the threshold of 10% is reached in applying subsection 125-75(4) of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
Yes. Adjusting instruments can be measured by reference to either number or market value in applying subsection 125-75(4) of the ITAA 1997.
Facts
A listed public company proposes to demerge its subsidiary to its shareholders.
The company has both shares and adjusting instruments. The total percentage of adjusting instruments is not more than 10% by number of the total ownership interests in the head entity.
Reasons for Decision
Paragraph 1.8 of the Supplementary Explanatory Memorandum to the New Business Tax System (Consolidation, Value Shifting, Demergers and Other Measures) Bill 2002 provides that:
there are various means by which the level of ownership can be determined. For example, it may be appropriate to take account of just the value of the ownership interests, while in another case it may be appropriate to take account of a mix of the number, nature and value.
Subsection 125-75(1) of the ITAA 1997 excludes 3% of employee scheme ownership interests by 'taking into account either or both of their number and value'. Measuring the adjusting instruments under subsection 125-75(4) of the ITAA 1997 by either the number or the value is consistent with subsection 125-75(1).
Therefore, the company should use the most appropriate means, by number or by value, to determine its level of ownership interests.
Date of decision: 18 July 2006Year of income: Year ended 30 June 2005
Legislative References:
Income Tax Assessment Act 1997
subsection 125-75(1)
subsection 125-75(4)
Keywords
Capital gains tax
Demerger
Exception to proportionate test for adjusting instruments
ISSN: 1445-2782