ATO Interpretative Decision

ATO ID 2005/239 (Withdrawn)

Income Tax

Capital Gains Tax: demerger - original interests in the head entity of a demerger group
FOI status: may be released
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Issue

Does the reference in paragraph 125-70(1)(f) of the Income Tax Assessment Act 1997 (ITAA 1997) to 50% of original interests allow the head entity to take into account the sum of interests in subparagraphs 125-70(1)(f)(i) and 125-70(1)(f)(ii) of the ITAA 1997?

Decision

Yes. The 50% of original interests in the head entity referred to in paragraph 125-70(1)(f) of the ITAA 1997 takes into account the sum of interests in subparagraphs 125-70(1)(f)(i) and 125-70(1)(f)(ii) of the ITAA 1997.

Facts

Company X is the head entity of a demerger group. Just before restructuring, 45% of its original interests are owned by Australian residents and 15% of its original interests are owned by foreign residents whose new interests have the necessary connection with Australia just after they acquire those new interests.

Reasons for Decision

Paragraph 125-70(1)(f) of the ITAA 1997 requires that, just before the restructuring, it is reasonable for the head entity to assume that more than 50% of original interests in the head entity of the demerger group are owned by:

(i)
Australian residents, or
(ii)
foreign residents whose new interests have the necessary connection with Australia just after they acquire them.

The requirement of holding more than 50% of original interests in the head entity is satisfied if the sum of the interests held by the above two interest holder groups totals more than 50%.

The test in paragraph 125-70(1)(f) of the ITAA 1997 does not require that either the original interests relating to subparagraph 125-70(1)(f)(i) of the ITAA 1997 must be more than 50% or that the original interests relating to subparagraph 125-70(1)(f)(ii) of the ITAA 1997 must be more than 50%. This interpretation is also consistent with the explanations provided in paragraphs 15.14 and 15.27 of the Explanatory Memorandum for the New Business Tax System (Consolidation, Value Shifting, Demergers and other Measures) Bill 2002.

Date of decision:  12 August 2005

Year of income:  Year ended 30 June 2005

Legislative References:
Income Tax Assessment Act 1997
   paragraph 125-70(1)(f)
   subparagraph 125-70(1)(f)(i)
   subparagraph 125-70(1)(f)(ii)

Keywords
Capital gains tax
CGT assets
Company restructuring
Demerger
Demerger group
Demerger roll-over
Equitable interests
Non resident companies
Proportionate test
Residence in Australia

Business Line:  Losses and Capital Gains Tax Centre of Expertise

Date of publication:  19 August 2005

ISSN: 1445-2782

history
  Date: Version:
  12 August 2005 Original statement
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