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  • Part C Ownership test and business continuity test

    1 For each joining company that transferred a business continuity test tax loss or business continuity test net capital loss to the head company, determine the income year in which the joining company first failed the continuity of ownership or control tests.

    Against each of the listed income years, show the total amount of losses which first failed the continuity of ownership or control tests in that income year.

    The 'same business test' and the 'similar business test' are collectively referred to as the 'business continuity test'. For more information, see LCR 2019/1 The business continuity test - carrying on a similar business.

    • Do not include transferred film losses at item 1.
    • Do not include losses transferred by a joining company that satisfied the continuity of ownership and control transfer tests at item 1.
    • Do not include losses transferred by a joining trust at item 1.

    The aim of item 1 is to find out (in respect of companies that transferred losses to a head company of a consolidated group because a business continuity transfer test was satisfied):

    • the period of time between the year of failure of the continuity of ownership or control transfer tests and the trial year, and
    • the losses that failed the continuity of ownership or control tests at the joining time and in the trial year.

    Year ownership test failed

    At the appropriate year, write the total amount of tax losses and net capital losses of joining companies that first failed the continuity of ownership or control tests in the income year, but satisfied the business continuity test. If there is no amount, leave blank.

    For 2015–16 and earlier income years, write the total for those years.

    Example 5

    A consolidated group came into existence on 1 July 2020. During 2020–21 the following joining companies transferred tax losses and net capital losses because they satisfied the business continuity test:

    Tax losses and net capital losses transferable from joining entities to head company
    Tax losses and net capital losses transferable from joining entities to head company

    Joining company

    Loss year

    Amount $

    Type of loss

    Year of ownership change

    A

    2011–12

    1,000

    Tax

    2012–13

    A

    2017–18

    A

    2016–17

    50

    Net capital

    2018–19

    B

    2014–15

    350

    Tax

    2019–20

    B

    2016–17

    400

    Net capital

    2019–20

    C

    2014–15

    550

    Net capital

    2016–17

    For 2020–21 the head company completes item 1 part C on the schedule as follows:

    Year ownership test failed

    Label

    Amount
    $

    2019–20

    J

    750

    2018–19

    K

    50

    2017–18

    L

    0

    2016–17

    M

    550

    2015–16 and earlier income years

    N

    1,000

    The amount of the tax loss incurred by Company A ($1,000) is written at N because the first change of ownership occurred during 2012–13.

    End of example

    2 Amount of losses deducted/applied after consolidation, for which the continuity of ownership test is not passed but the business continuity test is satisfied

    The 'same business test' and the 'similar business test' are collectively referred to as the 'business continuity test'. For more information, see LCR 2019/1 The business continuity test - carrying on a similar business.

    Do not include film losses deducted at item 2.

    Do not include at item 2 losses deducted or applied for which the head company satisfied the continuity of ownership test. Write at item 2 the amount of tax losses deducted and net capital losses applied during 2020–21 by the head company after consolidation, where the continuity of ownership test was not passed, but the business continuity test was satisfied.

    O Tax losses

    Write at O the amount of tax losses deducted by the head company which did not satisfy the continuity of ownership and control tests, but did satisfy the business continuity test.

    P Net capital losses

    Write at P the amount of net capital losses applied by the head company which did not satisfy the continuity of ownership and control tests, but did satisfy the business continuity test.

    Example 6

    A consolidated group came into existence on 1 July 2020. On that date the following losses were transferred to the head company from a joining company that satisfied the continuity of ownership and control transfer tests.

    Losses transferred from joining company to head company

    Year loss incurred

    Type of loss

    Amount $

    2013–14

    Tax

    1,200

    2013–14

    Net capital

    4,600

    During the period from the start of the loss year (1 July 2013) until immediately after the joining time (1 July 2020) there was a 40% change in the persons who controlled the voting power of the head company and had the rights to the company's dividends and capital distributions. The joining company was a 100% owned subsidiary of the head company during this period.

    For 2020–21, the consolidated group generates sufficient capital gains and other assessable income to enable the transferred tax and net capital losses to be fully deducted or applied using the available fraction method. On 1 August 2020, there is a further 20% change in the persons who controlled the voting power of the head company and had rights to the company's dividends and capital distributions. The head company does not satisfy the continuity of ownership test because of the change of majority ownership on 1 August 2020; that is, combined ownership changes of 60% (40% + 20%). However, the head company satisfies the business continuity test because the consolidated group carried on the same or similar business during 2020–21 as it did immediately before the change of ownership.

    In determining whether a head company can deduct or apply a loss transferred to it from a joining company that passed the continuity of ownership and control tests, changes in ownership of the joining company before it joined the consolidated group are taken into account.

    The head company completes item 2 part C on the schedule as follows:

    Type of loss

    Label

    Amount
    $

    Tax losses

    O

    1,200

    Net capital losses

    P

    4,600

     

    End of example

    3 Amount of losses carried forward to later income years for which the business continuity test must be satisfied before they can be deducted/applied

    The 'same business test' and the 'similar business test' are collectively referred to as the 'business continuity test'. For more information, see LCR 2019/1 The business continuity test – carrying on a similar business.

    • Do not include film losses carried forward at item 3.
    • Do not include at item 3 losses carried forward to later income years for which the head company satisfies the continuity of ownership test.

    Write at item 3 the amount of tax losses and net capital losses carried forward to later income years for which the head company must satisfy the business continuity test to deduct or apply these losses.

    Q Tax losses

    Write at Q the amount of tax losses carried forward to later income years for which the head company must satisfy the business continuity test to deduct these losses.

    R Net capital losses

    Write at R the amount of net capital losses carried forward to later income years for which the head company must satisfy the business continuity test to apply these losses.

    Example 7

    A consolidated group came into existence on 1 July 2020. On that date, tax losses of $2,200 were transferred to the head company from a joining company that satisfied the continuity of ownership and control transfer tests.

    For 2020–21, the consolidated group made a group tax loss of $1,700 and a group net capital loss of $3,500, which are carried forward to 2021–22.

    There was a change of majority ownership of the head company during 2020–21, but this did not result in the head company joining another consolidated group. The head company must satisfy the business continuity test in later income years to deduct or apply the losses carried forward comprising tax losses of $3,900 ($2,200 + $1,700) and net capital losses of $3,500.

    The head company completes item 3 part C on the schedule as follows:

    Type of loss

    Label

    Amount
    $

    Tax losses

    Q

    3,900

    Net capital losses

    R

    3,500

     

    End of example
    Last modified: 27 May 2021QC 64887