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  • Part B Ownership and same business test

    Attention

    Warning:

    This information may not apply to the current year. Check the content carefully to ensure it is applicable to your circumstances.

    End of attention

    Company and listed widely held trust only.

    1 Whether continuity of majority ownership test passed

    Note: Answer Y for Yes or N for No if the entity has deducted, transferred in or transferred out (as applicable in the 2001-2002 income year) a loss incurred in any of the listed years.

    The aim of item 1 is to find out if:

    • the continuity of majority ownership test at section 165-12 of ITAA 1997-if the entity is a company or
    • the 50% stake test at Subdivision 269-C of Schedule 2F to ITAA 1936-if the entity is a listed widely held trust

    has been satisfied in respect of a loss if a loss in any of the periods listed at item 1 is applied by either:

    • being claimed as a deduction-if the entity is a company or listed widely held trust
    • being transferred out by a company to another group company or
    • being transferred in by a company from another group company.

    Note: If a loss has been transferred between group companies, both the transferor company and the transferee company are required to complete a Losses schedule and supply the information requested in this part as well as the information requested in part E.

    Company only

    A tax loss of an earlier income year is not deductible unless a company has maintained the same owners as prescribed at section 165-12 of ITAA 1997.

    For more information on the rules for arrangements affecting beneficial ownership refer to section 165-180 of ITAA 1997.

    For more information refer to label R-Tax losses deducted in the Reconciliation statement of the Company tax return instructions. To find out how to obtain a copy, see the inside back cover.

    The following conditions apply:

    • Where tax losses are claimed in an income year ending after 21 September 1999, majority ownership must be maintained from the start of the loss year to the end of the income year-ownership test period.
    • There must be persons who beneficially owned (between them) shares carrying (between them) the right to exercise more than 50% of the voting power in the company, and rights to receive more than 50% of the company 's dividends and rights to receive more than 50% of the company 's capital distributions at all times during the ownership test period. Refer to sections 165-150 to 165-160 of ITAA 1997.
    • It is reasonable to assume that there are persons (none of them companies) who between them have beneficial interests (directly, or indirectly through one or more interposed entities) in shares in the company carrying (between them)a majority of the voting power, and rights to dividend and capital distributions at all times during the ownership test period. Refer to sections 165-150 to 165-160 of ITAA 1997.
    • Where tax losses are claimed in an income year ending after 21 September 1999, the company must meet the 'same share and interest ' requirement, except where the 'saving' rule applies. Refer to section 165-165 of ITAA 1997.
    • A modified version of the above rules applies to shares held by a listed public company in a wholly owned subsidiary, and to interests in any entity interposed between a listed public company and its wholly owned subsidiary. Refer to Division 166 of ITAA 1997.

    If the company fails to meet a condition of section 165-12, the company must satisfy the conditions relating to carrying on the same business under section 165-13 of ITAA 1997.

    For more information see the same business test at item 2 below and refer to Taxation Ruling TR 1999/9. To find out how to obtain a copy, see infolines page.

    Note:

    • If the company satisfies the ownership tests of section 165-12 of ITAA 1997 or the same business test of section 165-13 of ITAA 1997, it cannot deduct earlier income year tax losses unless it satisfies the control test at section 165-15 of ITAA 1997.
    • Anti-avoidance provisions are found at Subdivisions 175-A and 175-B of ITAA 1997. For more information refer to Taxation Ruling TR 1999/9. To find out how to obtain a copy, see infolines page.

    For more information refer to label R-Tax losses deducted in the Reconciliation statement of the Company tax return instructions .To find out how to obtain a copy, see the inside back cover.

    Listed widely held trust only

    A tax loss for a listed widely held trust may not be deductible if abnormal trading in the units of the trust has occurred during the period from the beginning of the loss year until the end of the income year. Abnormal trading is defined in Subdivision 269-B of Schedule 2F to ITAA 1936. If abnormal trading has occurred the trust must meet the 50% stake test in Subdivision 269-C of Schedule 2F to ITAA 1936. If the trust cannot meet the 50% stake test it must satisfy the same business test in Subdivision 269-F of Schedule 2F to ITAA 1936.

    Note: If deductions for bad debts are involved, then section 266-135 of ITAA 1936 may apply.

    Completing question 1 of Part B

    Print Y for Yes in labels A to F inclusive (as applicable) if, during the 2001-2002 income year, the entity seeks to utilise a loss of the relevant year and the entity has passed:

    • the continuity of majority ownership test-if the entity is a company, or
    • the 50% stake test-if the entity is a listed widely held trust in respect of the loss of that particular year.

    Print N for No in labels A to F (as applicable) for each year in respect of which the entity seeks to deduct a loss if the continuity of majority ownership test or the 50% stake test-as applicable-has not been satisfied in respect of that loss and the entity is required to satisfy the 'same business test '.

    Note: Although examples 4-9 are for companies, the examples, notes and comments apply equally to listed widely held trusts-which must satisfy the 50% stake test-with the exception that losses cannot be transferred either from or to a trust.

    Example 4

    A company had incurred losses in earlier income years. The company applied all of these losses by either claiming them as a deduction against its own income or transferring them to another group company in the 2001-2002 income year.

    At the beginning of the 2001-2002 income year, the company had undeducted losses from the 1995-1996, the 1998-1999, the 1999-2000 and the 2000-2001 income years. The continuity of majority ownership test was failed during the 1999-2000 income year, but all other tests for allowing the losses to be applied, have been passed by the company. On these facts, for part of the losses of the 1999-2000 income year and for the losses of all earlier income years, the company has not passed the continuity of majority ownership test.

    Complete part B, item 1 as follows:

    Year of loss

    Label

    Print Y for Yes
    or N for No

    2001-2002

    A

    -

    2000-2001

    B

    Y

    1999-2000

    C

    N

    1998-1999

    D

    N

    1997-1998

    E

    -

    1996-1997 and earlier income years

    F

    N

    The above example shows that:

    • there was no loss deducted, transferred in or transferred out for the 1997-1998 or the 2001-2002 income years
    • the company passed the continuity of majority ownership test for the loss of the 2000-2001 income year
    • the company failed the continuity of majority ownership test for the losses of the 1996-1997 and earlier income years and the 1998-1999 income years and
    • the company failed the continuity of majority ownership test for part of the loss of the 1999-2000 income year.
    End of example

     

    Example 5

    A company (the transferee or gain company) received a number of loss transfers-these can be either tax losses or net capital losses-from another group company (the transferor or loss company) during the 2001-2002 income year. The transferor and the transferee companies satisfied all tests for being able to apply a loss in relation to the amounts transferred with the exception of the continuity of majority ownership test for some of the losses transferred.

    The losses transferred to the company were incurred by the loss company in the 1997-1998, the 1998-1999 and the 2000-2001 income years. The continuity of majority ownership test was failed in the 1999-2000 income year. As the companies failed the continuity of majority ownership test for the losses of the 1997-1998 and the 1998-1999 income years but passed the test in respect of the loss of the 2000-2001 income year, the Losses schedule for the transferee company shows Y for Yes at label B and N for No at labels D and E.

    The transferee company completes part B, item 1 as follows:

    Year of loss

    Label

    Print Y for Yes
    or N for No

    2001-2002

    A

    -

    2000-2001

    B

    N

    1999-2000

    C

    -

    1998-1999

    D

    N

    1997-1998

    E

    Y

    1996-1997 and earlier income years

    F

    -

     

    End of example

     

    Example 6

    An entity-company or listed widely held trust-that has satisfied the continuity of majority ownership test or the 50% stake test (as applicable) applies, in the 2001-2002 income year, a net capital loss incurred in the 1997-1998 income year.

    Print Y for Yes in the box at label E-1997-1998.

    End of example

     

    Example 7

    Both the loss company and the income company satisfy the continuity of majority ownership test. In accordance with the provisions of Division 170 of ITAA 1997,a loss incurred by the loss company in the 1999-2000 income year is transferred to the income company in the 2001-2002 income year.

    The income company prints Y for Yes at label C-1999-2000 (as does the loss company in its own Losses schedule).

    End of example

     

    Example 8

    A company that incurred a loss in the 1996-1997 income year, subsequently undergoes a change in majority ownership in the 1997-1998 income year. The company satisfies the same business test in respect of the 1996-1997 loss.

    The company incurs a further loss in the 1998-1999 income year. The company satisfies the continuity of majority ownership test in respect of this 1998-1999 loss.

    In the 2001-2002 income year the company deducts the losses incurred in the 1996-1997 and the 1998-1999 income years.

    Print Y for Yes at label D-1998-1999 and N for No at label F-1996-1997and earlier income years.

    End of example

     

    Example 9

    A company incurs a current year loss in the 2001-2002 income year. The company undergoes a change in majority ownership in the 2001-2002 income year but passes the same business test.

    The company transfers out a 1997-1998 loss in the 2001 -2002 income year. Another loss incurred by the company in the 1998-1999 income year remains undeducted.

    Leave both label A-2001-2002 and label D-1998-1999 blank as no deduction is being claimed in the 2001 -2002 year in respect of these losses.

    Print N for No at label E-1997-1998 because the company failed the continuity of majority ownership test for the loss incurred in that year.

    End of example

    2 Amount of losses deducted, transferred in or transferred out, for which the continuity of ownership test is not passed but the same business test is satisfied

    Excludes foreign source losses and film losses.

    Show at item 2 the total amount of losses applied during the 2001-2002 income year:

    • claimed as a deduction-if the entity is either a company or a listed widely held trust
    • either transferred in or transferred out-if the entity is a company and for which the same business test must be satisfied.

    Note:

    • Both the transfer or company and the transferee company must satisfy the same business test. Refer to Subdivisions 165-E, 170-A and 170-B of ITAA 1997.
    • A fund or a trust, including a listed widely held trust, cannot transfer losses. In addition to those companies with either tax losses or net capital losses that have not passed the continuity of majority ownership test, this item also applies to listed widely held trusts with tax losses that have had abnormal trading in their units as well as having failed the 50% stake test.

    Company only

    Under the same business test the company must carry on the same business throughout the income year that it carried on immediately before the disqualifying change of ownership-that is, before the end of the continuity period. The test is not satisfied if at any time during the income year the relevant entity did not carry on the same business as it did immediately before the change in the ownership of the entity or it derives assessable income from:

    • a business of a kind that it did not carry on before the disqualifying event, or
    • a transaction of a kind that it did not enter into in the course of its business operations before the disqualifying event.

    'Same ' means 'identical ' and not merely 'similar'. The term 'same business ' is to be read as referring to the same business, in the sense of the identical business. But the term does not mean identical in all respects. A company may expand or contract its activities without necessarily ceasing to carry on the same business. The organic growth of a business does not necessarily cause the business to fail the same business test provided the business retains its identity. But, if through a process of evolution a business changes its essential character, the entity would fail the test. Application of the same business test is a question of fact and is usually determined by a process of weighing up various relevant factors.

    For more information refer to sections 165-13 and 165-210 of ITAA 1997 and Taxation RulingTR 1999/9. To find out how to obtain a copy of the Ruling, see infolines page.

    Listed widely held trust only

    A listed widely held trust must carry on the same business as it carried on before the first abnormal trading in its units-that caused the failure of the 50% stake test-occurred.

    For application of the same business test for a listed widely held trust see Company only.

    For more information refer to section 266-125 and Subdivision 269-F of Schedule 2F to ITAA 1936.

    The principles outlined in Taxation RulingTR 1999/9 may be of assistance. To find out how to obtain a copy, see infolines page.

    Tax losses

    Show at label G the amount of tax losses deducted by the entity, including, if the entity is a company, the amount of tax losses transferred in and claimed as a deduction by that company, that do not meet the continuity of majority ownership test but satisfy the same business test. The amounts of any losses transferred out by a transferor company that do not meet the continuity of majority ownership test but satisfy the same business test are shown on the Losses schedule of the transferor company and the transferee company respectively.

    Net capital losses

    Show at label H the amount of net capital losses applied by a company, including the amount of any net capital losses transferred in and claimed as a deduction by that company, that do not meet the continuity of majority ownership test but satisfy the same business test.

    The amounts of any net capital losses transferred out by a transferor company that do not meet the continuity of majority ownership test but satisfy the same business test are also to be shown at label H on the Losses schedule of the transferor company.

    Example 10

    A company had the following losses:

    Year

    Tax loss
    $

    Net capital loss
    $

    1995-1996

    1,000

    -

    1996-1997

    2,000

    -

    1997-1998

    500

    -

    1998-1999

    1,600

    800

    1999-2000

    -

    -

    2000-2001

    10,000

    2,000

    2001-2002

    -

    -

    Totals

    14,600

    3,300

    There was a change in the underlying beneficial ownership of the company in the 1999-2000 year. The company passed the same business test and all other tests in relation to the losses incurred prior to that year and passed the continuity of majority ownership test and all other tests in relation to the 2000-2001 losses.

    Tax losses

    All tax losses incurred in the 1995-1996, the 1996-1997 and the 1998-1999 income years were deducted in the 2001-2002 income year, as well as $6,000 of the 2000-2001 tax loss.

    Net capital losses

    All of the 1997-1998 net capital loss and $600 of the 1998-1999 net capital loss were applied in the 2001-2002 income year. Of all of the above losses which are being applied in the 2001-2002 income year, those which are subject to the same business test being satisfied by the company are as follows:

    Tax losses

    Year

    Amount
    $

    1995-1996

    1,000

    1996-1997

    2,000

    1998-1999

    1,600

    Total

    4,600

    Net capital losses

    Year

    Amount
    $

    1997-1998

    500

    1998-1999

    600

    Total

    1,100

    Complete part B, item 2 as follows:

    Tax losses

    G

    4,600

    Net capital losses

    H

    1,100

    The 2000-2001 tax loss of $6 000 was deducted by the company on the basis that the company had satisfied the continuity of majority ownership test. Therefore, this amount is not shown at label G-Tax losses.

    Similarly, as $200 of the 1998-1999 net capital loss was not sought to be applied during the 2001-2002 income year, that amount of $200 is not shown at label H-Net capital losses for the 2001-2002 income year even though the same business test would need to be passed in a later income year in order for the company to be able to apply that net capital loss in a later income year.

    End of example

    3 Losses carried forward, for which the same business test must be satisfied

    before they can be deducted in later years-excludes foreign source losses and film losses

    Note: Item 3 asks for information about the tax losses and net capital losses for which the entity must satisfy the same business test in subsequent years for the entity to be able to utilise those losses.

    Company and listed widely held trust

    For more information on the same business test see Part B-Ownership and same business test, item 2

    Tax losses

    Show at label I the total amount of tax losses carried forward to later income years for which the same business test must be satisfied for the entity to deduct those tax losses in later income years.

    Net capital losses

    Show at label J the total amount of net capital losses carried forward to later income years for which the same business test must be satisfied for the company to apply those net capital losses in later income years.

    Example 11

    As at the end of the 2001-2002 income year, the company had the following losses available:

    Year

    Tax loss
    $

    Net capital loss
    $

    1995-1996

    1,500

    -

    1996-1997

    3,000

    -

    1997-1998

    700

    -

    1998-1999

    1,900

    900

    1999-2000

    -

    -

    2000-2001

    1,000

    1,500

    2001-2002

    -

    -

    Totals

    7,400

    3,100

    A change in the underlying beneficial interests in the company took place during the 1999-2000 income year. As a result, the company must satisfy the same business test for the tax losses of the following income years:

    • 1995-1996 ($1,500)
    • 1996-1997 ($3,000)
    • 1998-1999 ($1,900).

    It must also satisfy the same business test in respect of the net capital losses for the following income years:

    • 1997-1998 ($700)
    • 1998-1999 ($900)

    The 2000-2001 tax loss ($1,000) and the net capital loss ($1,500) are not affected.

    The company completes part B, item 3 as follows:

    Tax losses

    I

    6,400

    Net capital losses

    J

    1,600

     

    End of example

    4 Do 'current year loss ' provisions apply?

    Is the company required to calculate its taxable income or tax loss for the year under Subdivision 165-B or its net capital gain or net capital loss for the year under Subdivision 165-CB of ITAA 1997?

    The current year loss rules in Subdivision 165-B of ITAA 1997 apply to tax losses where the company does not satisfy either the continuity of majority ownership test or the same business test for the whole income year. Alternatively the current year loss provisions apply where a person begins to control, or becomes able to control, the voting power in the company for the purpose or one of the purposes of gaining an advantage under ITAA 1997 or gaining such a benefit for someone else. Refer to section 165-40 of ITAA 1997.

    The current year loss rules do not apply in those circumstances if the same business test is satisfied. The company calculates its taxable income and tax loss by dividing the income year into periods according to when the change in ownership or control took place. Each separate period is regarded as an income year, with a notional tax loss or notional taxable income calculated for each separate period.

    The company's tax loss for the income year-refer to section 165-70 of ITAA 1997-consists of the total of tax losses calculated under section 165-50 or 165-75 of ITAA 1997.

    An amended test also applies to companies with unrealised net losses where the continuity of ownership test is failed after 1.00pm. by legal time in the Australian Capital Territory on 11 November 1999.

    The current year loss rules in Subdivision 165-CB of ITAA 1997 apply in relation to net capital gains where the company is required to calculate its taxable income and tax loss for the income year under Subdivision 165-B of ITAA 1997-refer to section 165-102 of ITAA 1997. The company works out its net capital gain and net capital loss by dividing the income year into periods according to when the change in ownership or control took place.

    A notional net capital gain or notional net capital loss is calculated for each period.

    A company's net capital loss for the income year-refer to section 165-114 of ITAA 1997-consists of the total of notional net capital losses calculated under section 165-108 of ITAA 1997.

    Print Y for Yes at label K, if the company is required to calculate its taxable income or tax loss under the provisions of Subdivision 165-B or its net capital gain or net capital loss under the provisions of Subdivision 165-CB.

    Print N for No at label K, if the company is not required to calculate its taxable income or tax loss under the provisions of Subdivision 165-B or its net capital gain or net capital loss under the provisions of Subdivision 165-CB.

    Last modified: 09 Aug 2016QC 16568