ATO Interpretative Decision
ATO ID 2004/960
Income Tax
Consolidation: transfer testing - continuity of ownership test -a non-fixed trust holds fixed entitlements to 50% or more of the income or capital of the head companyFOI status: may be released
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If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Does Subdivision 165-F of the Income Tax Assessment Act 1997 (ITAA 1997) apply in determining whether a company satisfies the continuity of ownership test (COT) in respect of the loss in the trial year where:
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- the subsidiary member has incurred a tax loss that is available for transfer to the head company of a consolidated group under Subdivision 707-A of the ITAA 1997;
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- a non-fixed trust or non-fixed trusts hold fixed entitlements to a 50% or greater share of the income or capital of the head company of the consolidated group?
Decision
Yes. Subdivision 165-F of the ITAA 1997 is applicable in determining if the subsidiary member satisfies the COT in respect of the loss in the trial year.
Facts
Company A becomes a member of a consolidated group at a particular time (the joining time). At the joining time, a tax loss is available for transfer, under Subdivision 707-A of the ITAA 1997, from Company A to Head Co (the head company of the consolidated group).
Head Co holds fixed entitlements to all of the income and capital of Company A at all times during the ownership test period.
Trust B is a non-fixed trust that holds fixed entitlements to a 50% or greater share of the income of Head Co at all times during the ownership test period.
Reasons for Decision
Subsection 707-120(1) of the ITAA 1997 provides that a loss is transferred from a joining entity to the head company of a consolidated group to the extent that the loss could have been utilised by the joining entity for an income year consisting of the trial year, assuming:
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- that the entity had sufficient income or gains to utilise the loss; and
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- that the joining entity had not become a member of the consolidated group.
The trial year is defined in subsection 707-120(2) of the ITAA 1997. It consists of the period generally starting 12 months before the joining time and ending just after the joining time. Paragraph 707-110(2)(a) provides that an entity utilises a tax loss to the extent that it is deducted from an amount of the entity's assessable or exempt income.
Subdivision 165-A of the ITAA 1997 contains the conditions for determining if a company is able to deduct a tax loss under Division 36 of the ITAA 1997. Section 165-10 of the ITAA 1997 provides that a company cannot deduct a tax loss unless it meets the conditions in section 165-12 of the ITAA 1997 (that is, it satisfies the COT) or it meets the condition in section 165-13 of the ITAA 1997 (that is, it satisfies the same business test).
Subdivision 165-F of the ITAA 1997 contains special provisions relating to situations where fixed entitlements to a share of the income or capital of a company are held by one or more non-fixed trusts. Section 165-215 of the ITAA 1997 provides that a company that does not meet the conditions in the COT in respect of a loss is nevertheless taken to satisfy the COT, if it meets the conditions contained in that section. These conditions relate broadly to situations where non-fixed trusts (other than family trusts) hold, directly or indirectly, fixed entitlements to a 50% or greater share of the income or capital of the company.
As Trust B indirectly holds fixed entitlements to a 50% or greater share of the income of Company A, Subdivision 165-F of the ITAA 1997 is applicable when determining whether Company A satisfies the COT in respect of the loss in the trial year.
Date of decision: 1 December 2004Year of income: Year ended 30 June 2004
Legislative References:
Income Tax Assessment Act 1997
Division 36
Subdivision 165-A
section 165-10
section 165-12
section 165-13
Subdivision 165-F
Section 165-215
Subdivision 707-A
paragraph 707-110(2)(a)
subsection 707-120(1)
subsection 707-120(2)
ATO ID 2004/959
Keywords
Consolidation - continuity of ownership test
Consolidation - joining
Consolidation - losses
Continuity of ownership test
Joining entity
Joining time
Non fixed trusts
Transfer of losses
Trial year
Utilise a loss
ISSN: 1445-2782