Issue
Is the proportionate ownership test in paragraph 125-70(2)(a) of the Income Tax Assessment Act 1997 (ITAA 1997) satisfied, if shareholders' entitlements to new shares in a demerged company are rounded up or down to a whole number of shares?
Decision
Yes. The proportionate ownership test in paragraph 125-70(2)(a) of the ITAA 1997 is satisfied if shareholders' entitlements to new shares in a demerged company are rounded up or down to a whole number of shares.
Facts
A listed company (the head entity) with several hundred thousand shareholders undertook a demerger.
Under the demerger, the head entity transferred one share in a subsidiary (demerged entity) to the head entity shareholders for every three shares those shareholders owned in the head entity.
The number of shares transferred to head entity shareholders whose number of head entity shares was two more than a multiple of three was rounded up.
The number of shares transferred to head entity shareholders whose number of head entity shares was one more than a multiple of three was rounded down.
Reasons for Decision
Paragraph 125-70(2)(a) of the ITAA 1997 requires, as one of the conditions for a demerger satisfying the conditions of Division 125 of the ITAA 1997, that the shareholders in the head entity acquire as nearly as practicable the same proportion of shares in the demerged entity as they owned in the head entity immediately before the demerger.
If entitlements are rounded up or down, ownership proportions must change. However, in this case, because there are so many shares on issue, the differences are insignificant. Consequently, the proportions are as nearly as practicable the same.