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  • Part C Unrealised losses – company only

    L Has a changeover time occurred in relation to the company after 1.00pm by legal time in the Australian Capital Territory on 11 November 1999?

    A changeover time is the time of a change in majority ownership or in the control of a company.

    To determine whether a company has failed the continuity of majority ownership test or the change of control test for the purposes of Subdivision 165-CC of the ITAA 1997, see:

    • section 165-115C change in ownership of company
    • section 165-115D change in control of company.

    In determining whether there has been a change of ownership or control at a particular test time, the ownership or control profile is determined at two points in time, the reference time and the test time.

    For this purpose, the reference (base) time is the later of 1.00pm (by legal time in the Australian Capital Territory) on 11 November 1999 (the commencement time) for a company in existence at that time (or the time when it came into existence if not), and the time immediately after the last preceding changeover time, if any.

    The continuity of majority ownership test is subject to the 'same share and interest' rule in section 165-165 of the ITAA 1997. This requires (subject to special rules for share and unit 'splits' or 'consolidations') that exactly the same shares must continue to be held by the same persons throughout the 'test period' (that is, from reference time to test time) to count towards satisfaction of the test. Interests in any other entity (for example, shares in another company) must be exactly the same interests and beneficially owned by the same persons.

    There is a 'saving rule' in section 165-115C of the ITAA 1997 which provides that if the continuity of majority ownership test would have been satisfied but for the operation of the 'same share and interest rule', the test time is not a changeover time if the company has information from which it is reasonable to conclude that less than 50% of the company's unrealised net loss has been or will be duplicated as a result of any CGT event that happened during the test period.

    Subdivision 166-CA of Division 166 of the ITAA 1997 modifies the way in which Subdivision 165-CC of the ITAA 1997 applies to a widely held company or eligible Division 166 company.

    If the answer is yes, print X in the Yes box at L, and complete M.

    If the answer is no, print X in the No box at L, and do not complete M, N or O.

    M At the changeover time did the company satisfy the maximum net asset value test under section 152-15 of the ITAA 1997?

    Any company that has a net value of CGT assets of $6 million or less, as determined under section 152-15 of the ITAA 1997, at the time it failed the continuity of majority ownership test, is not subject to the operation of Subdivision 165-CC of the ITAA 1997. The maximum threshold amount of $6 million includes the net value of the CGT assets of the company and any entity connected or affiliated with the company as referred to in section 152-15 of the ITAA 1997.

    If the answer is yes, print X in the Yes box at M, and do not complete N and O.

    If the answer is no, print X in the No box at M, and complete N.

    If a company has failed the continuity of majority ownership test on two or more occasions since the commencement time, complete M in respect of the latest changeover time.

    N If you printed X in the No box at M, has the company determined it had an unrealised net loss at the changeover time?

    The 'same business test' and the 'similar business test' will be collectively known as 'business continuity test'. At the time of publishing, the changes had not yet become law. Losses cannot be accessed under this new test until the law is passed. For more information, see Increasing access to company losses.

    Where a company that answered yes at L and no at M has an unrealised net loss at the changeover time, the company cannot, to the extent of the unrealised net loss, have capital losses taken into account or deduct revenue losses in respect of CGT events that happen to CGT assets owned at the changeover time, unless the company satisfies the business continuity test. Whether a company has an unrealised net loss at the time of the change is determined in accordance with the method statement in section 165-115E of the ITAA 1997.

    If the answer is yes, print X in the Yes box at N, and complete O.

    If the answer is no, print X in the No box at N, and do not complete O.

    If a company has failed the continuity of majority ownership test on two or more occasions since the commencement time, complete N in respect of the latest changeover time. Subdivision 165-CC of the ITAA 1997 requires a company to determine whether it has an unrealised net loss each time that it experiences a changeover time.

    O If you printed X in the Yes box at N, what was the amount of unrealised net loss calculated under section 165-115E of ITAA 1997?

    Subdivision 165-CC of the ITAA 1997 does not specify when a company has to calculate whether it has an unrealised net loss. However, this calculation must be done before claiming any loss or deduction on an asset that was held at the changeover time. Where no calculation has been undertaken as at the date of lodging the company's income tax return, print X in the No box at N, and do not complete O.

    An unrealised net loss is, broadly, the excess of the company's unrealised losses on assets over unrealised gains on assets at the changeover time. This is determined by deeming such assets to be disposed of at market value at the changeover time. A company may choose to exclude every asset that it acquired for less than $10,000 from the calculation of the amount. A company may also choose to use the written down value of depreciable plant (not a building or structure) at the changeover time, rather than its market value at that time, provided:

    • the expenditure incurred by the company to acquire the plant was less than $1 million, and
    • it would be reasonable for the company to conclude that the market value of the plant at the changeover time was not less than 80% of its written down value at that time.

    Whether a company has an unrealised net loss at a changeover time is calculated using the steps in the method statement below.

    Method statement

    Step 1

    In respect of each CGT asset that the company owned at the changeover time, calculate any:

    • notional capital gain or notional revenue gain
    • notional capital loss or notional revenue loss in respect of the asset at that time.

    The notional calculation is made on the assumption that the company disposed of the asset at its market value at the changeover time. The company has a notional revenue gain equal to the excess for an asset that is an item of trading stock, if the item's market value at the changeover time exceeded:

    • the latest valuation under Division 70 of the ITAA 1997, or
    • the cost of the item at the changeover time (if there is no valuation under Division 70).

    The company has a notional revenue loss equal to the difference if the item's market value at the changeover time was less than the

    • latest valuation under Division 70, or
    • cost of the item at the changeover time (if there is no valuation under Division 70).

    Step 2

    Add up the sum of the company's notional capital gains and the sum of the company's notional revenue gains. The total is the unrealised gross gain at the changeover time.

    Step 3

    Add up the sum of the company's notional capital losses and the sum of the company's notional revenue losses. The total is the unrealised gross loss at the changeover time.

    Step 4

    If the unrealised gross loss at the changeover time exceeds the unrealised gross gain at that time, the excess is the company's preliminary unrealised net loss.

    Step 5

    Add up the company's preliminary unrealised net loss and any capital loss or deduction disregarded under Subdivision 170-D of the ITAA 1997. The total is the company's unrealised net loss.

    Write at O the amount of unrealised net loss the company has at the changeover time.

    Write zero at O if the company has an unrealised net gain at the changeover time.

    The Commissioner of Taxation may give advice about methods to be used, and other things to be done, in valuing assets for the purposes of Subdivision 165-CC of the ITAA 1997.

    Last modified: 30 May 2019QC 58658