• Legal database
Legal database

ATO Interpretative Decision

ATO ID 2006/157

Income Tax

Company tax loss: whether 'continuing shareholders' include trusts that have made family trust elections
FOI status: may be released
  • This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

CAUTION: This is an edited and summarised record of a Tax Office decision. This record is not published as a form of advice. It is being made available for your inspection to meet FOI requirements, because it may be used by an officer in making another decision.

This ATOID provides you with the following level of protection:

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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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

Can a family trust, which is deemed to be a notional entity under section 165-207 of the Income Tax Assessment Act 1997 (ITAA 1997) for company loss recoupment purposes, be a 'continuing shareholder' for the purposes of section 175-10 of the ITAA 1997?

Decision

Yes. A 'continuing shareholder' for the purposes of section 175-10 of the ITAA 1997 can include a family trust that is deemed to be a notional entity under section 165-207 of the ITAA 1997.

Facts

Company A has a tax loss available to it from an earlier income year (the loss year) which it is now seeking to deduct.

Company A derives an amount of assessable income in the income year that it would not have derived if the tax loss had not been available for deduction.

The trustees of trust B and C collectively own shares that carry more than 50% of the voting power in company A, and rights to more than 50% of the dividends and capital distributions of company A, during the whole (or the relevant part) of the loss year and during the whole of the income year.

Both trust B and C have made family trust elections (FTEs) pursuant to section 272-80 of Schedule 2F to the Income Tax Assessment Act 1936 (ITAA 1936). The FTEs are in force for all relevant income years.

For the purposes of the company loss recoupment rules, company A meets the conditions of the continuity of ownership test (COT) in section 165-12 of the ITAA 1997.

Reasons for Decision

Subsection 175-10(3) of the ITAA 1997 provides:

175-10(3) The continuing shareholders are:

(a)
all of the persons who had *more than 50% of the voting power in the company during the whole (or the relevant part) of the *loss year and during the whole of the income year; and
(b)
all of the persons who had rights to *more than 50% of the company's dividends during the whole (or the relevant part) of the loss year and during the whole of the income year; and
(c)
all of the persons who had rights to *more than 50% of the company's capital distributions during the whole (or the relevant part) of the loss year and during the whole of the income year.

To find out who they were, apply whichever tests are applied in order to determine whether the company can deduct the *tax loss (or the part of the tax loss) in the first place.
See section 165-12 (which is about the company maintaining the same owners).
Division 167 has special rules for working out rights to voting power, dividends and capital distributions in a company whose shares do not all carry the same rights to those matters.
* denotes a term defined in section 995-1 of the ITAA 1997

Therefore the COT in section 165-12 of the ITAA 1997 is used to establish who are the 'continuing shareholders' under subsection 175-10(3) of the ITAA 1997. The COT is expanded upon by the rules in Subdivision 165-D of the ITAA 1997, including section 165-207 of the ITAA 1997.

The trustees of trust B and C, both of which have made FTEs that are in force for all relevant income years, each own shares in company A. Therefore, two single notional entities that are persons (being neither companies nor trustees) are taken to own those shares in company A beneficially, in accordance with section 165-207 of the ITAA 1997.

The two single notional entities (representing trust B and C) collectively have more than 50% of the voting power in company A, and rights to more than 50% of the dividends and capital distributions of company A, during the whole (or the relevant part) of the loss year and during the whole of the income year.

Accordingly, the Commissioner will consider each single notional entity under section 165-207 of the ITAA 1997 to be a 'continuing shareholder' for the purposes of section 175-10 of the ITAA 1997.

Amendment History

Date of Amendment Part Comment
12 May 2017 Reason for Decision Update to include the new note referencing Division 167 at the end of subsection 175-10(3).

Date of decision:  20 June 2006

Year of income:  Year ended 30 June 2006

Legislative References:
Income Tax Assessment Act 1997
   section 165-12
   Subdivision 165-D
   section 165-207
   section 175-10
   subsection 175-10(3)

Income Tax Assessment Act 1936
   section 272-80 of Schedule 2F

Keywords
Continuity of ownership
Family trust election
Tax loss
Company losses

Siebel/TDMS Reference Number:  5186380; 1-8W2HMSK

Business Line:  Private Groups and High Wealth Individuals

Date of publication:  23 June 2006
Date reviewed:  4 May 2017

ISSN: 1445-2782

history
  Date: Version:
  20 June 2006 Original statement
You are here 12 May 2017 Updated statement

Back to top