ATO Interpretative Decision
ATO ID 2003/367
Income Tax
Group company loss transfers: effect of redeemable preference shares on wholly-owned company groupsFOI status: may be released
Status of this decision: Decision Current
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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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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
Will two companies be members of the same wholly-owned group, for the purpose of transferring tax losses, if one company owns all the shares in the other company, except for a small number of redeemable preference shares which are owned by a third party under a financing arrangement?
Decision
No. The ownership of redeemable preference shares by a third party is sufficient to compromise the 100% subsidiary relationship required for the companies to be members of the same wholly-owned group under Subdivision 975-W of the Income Tax Assessment Act 1997 (ITAA 1997).
Facts
A holding company owns 100% of the ordinary shares in a subsidiary company. Both companies are Australian residents. The subsidiary company issued redeemable preference shares to a non-group third party pursuant to a financing arrangement. The value of this arrangement represented a small percentage of the capital value of the subsidiary company. All conditions relevant to the valid issue of the redeemable preference shares were satisfied. No other classes of shares are on issue.
Reasons for Decision
For the subsidiary company to be a member of the same wholly-owned group as its holding company, it must be a 100% subsidiary of the holding company: paragraph 975-500(a) of the ITAA 1997. To be a 100% subsidiary of the holding company, all of the issued shares in the subsidiary company must be beneficially owned by the holding company (and/or other 100% subsidiaries of the holding company)(subsection 975-505(1) of the ITAA 1997).
In this case, the subsidiary company has pursued a financing arrangement that resulted in the issue of redeemable preference shares to a third party. These redeemable preference shares are a recognised class of shares and represent a small percentage of the capital of the company. Although all of the ordinary shares on issue are owned by the holding company, this shareholding represents less than 100% of the shares on issue by the subsidiary company.
As the redeemable preference shares in the subsidiary company are beneficially owned by a third party, the subsidiary company cannot be a 100% subsidiary of the holding company. It follows that the companies are not members of the same wholly-owned group and, therefore, cannot enter into a loss transfer agreement.
Date of decision: 7 April 2003Year of income: Year ended 30 June 2002
Legislative References:
Income Tax Assessment Act 1997
paragraph 975-500(a)
subsection 975-505(1)
Keywords
Group company loss transfers
Underlying ownership & interests
ISSN: 1445-2782
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