Online IR4 2008
Question 38 - Lowest economic interest of shareholders
Example
A company has two shareholders, Mark and Max. The company has two classes of shares.
- Class A shares carry a right to vote on matters other than the payment of dividends and appointment of directors.
- Class B shares carry unrestricted voting rights.
Mark holds all 100 of the A shares in the company while Max holds all 100 of the B shares.
Mark's percentage of voting interest in the company is measured as follows:
| Distributions | Constitution | Variation in capital | Directors | ||
| 0 100 |
50 100 |
50 100 |
0 100 = |
100 400 = |
25 % |
Max's percentage of voting interest is therefore 75%. It is calculated as follows:
| Distributions | Constitution | Variation in capital | Directors | ||
| 100 100 |
50 100 |
50 100 |
100 100 = |
300 400 = |
75 % |
The continuity thresholds will be satisfied by taking into account the lowest economic percentage of rights attached to shares held by each shareholder of a company.
If Mark and Max hold these proportions of shares for the entire income year the "total lowest economic interest of shareholders", or the minimum continuity, is 100% as Mark's 25% plus Max's 75% equals 100%.
In other words, if the proportion of shares held does not change during the entire income year the total lowest economic interest of shareholders will always be 100%.
Using the previous example
On 1 September 2007 Mark and Max swapped shares and held these proportions to 31 March 2008, being the company's balance date.
| 1 April 2007 | 1 Sept 2007 | 31 Mar 2008 | Lowest | |||||
| Mark | 25 % | 75 % | 75 % | 25 % | ||||
| Max | 75 % | 25 % | 25 % | 25 % |
The lowest percentage of rights held by each shareholder during the income year is 25%. Therefore the total lowest economic interest of shareholders, or the minimum continuity, is 50%.
In certain circumstances the shareholders' economic interests in a company will also be determined by the market value interests in the company. This is where the voting interests do not reflect the true economic interests held in a company.
A shareholder's market value interest in a company equals their percentage share of the total market value of shares (and options) held in that company.
The specific factors that require a market value interest to be calculated are called market value circumstances. A market value circumstance exists where:
- the company has on issue debentures to which sections FC 1 and FC 2 of the Income Tax Act 2004 apply
- the company has on issue shares where payment of dividends is guaranteed by a third party
- an option to acquire shares in the company exists
- an arrangement exists with the purpose of defeating a provision that depends on measurement of voting and market value interests.
Add together the lowest economic interest of each shareholder and enter the total in the "lowest economic interest" box. Enter percentages with two decimal places, for example, show 50% as 50.00, and 100% as 100.00.
Date published: 13 Mar 2008
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