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.