ATO ID 2006/178: Capital gains tax: demerger - measurement of ownership interests - exceptions to subsection 125-70(2) - adjusting instruments
Date of decision: 18 July 2006
Year of income: Year ended 30 June 2005
Business line: Public Groups and International

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
Summary: 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.

Legislative references: Income Tax Assessment Act 1997 subsection 125-75(1) subsection 125-75(4)
Subject references: Capital gains tax Demerger Exception to proportionate test for adjusting instruments