Edited version of your private ruling

Authorisation Number: 1012340198498

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Ruling

Subject: Continuity of ownership test- Accumulated tax losses

Question 1

Do you satisfy the continuity of ownership test in section 165-12 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20YY

The scheme commences on:

1 July 2008

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You previously applied for a private ruling relating to company losses - continuity of ownership for earlier income years.

The facts presented at that time were as follows:

1. you are a private company which is a wholly owned subsidiary of an overseas company.

2. previously, the parent company restructured its Asia Pacific operations to align its operations with that of other countries.

3. as a result the parent company converted the Asia Pacific operations to dealerships.

4. all your assets, namely fixed assets and inventory, were sold to a master dealer.

5. you have incurred losses for a number of years.

6. you have advised us that the ownership structure of your company has not changed since the parent company restructured its Asia Pacific operations.

7. the parent company has also indicated that there have been no "corporate changes" throughout the loss years. A "corporate change" could be a takeover bid (whether or not successful), an arrangement involving 50% or more of the company's shares, an increase in the issued capital or number of shares by 20% or more, or a corporate change in a majority stakeholder.

8. you provided a spreadsheet of the parent company's share ownership for the period 30 June 2001 to 20ZZ which showed:

(a) only one company owned more than 10% of the total

shareholding on 30/06/2002-2007. They held less than 10% as at

30/06/2001 and 30/06/20ZZ;

(b) no individuals in any of the institutions owned greater than 10%; and

(c) in addition to the spreadsheet, there are approximately 5,000 registered

shareholder accounts of which none have owned greater than 10%.

In 20XX, you were granted a private ruling that you have met the modified continuity of ownership test to enable you to utilise the losses that have accumulated from the beginning of the loss year to be offset against future income.

In 20YY, the master dealer went into receivership.

As a consequence, the parent company, through you, negotiated a buy back of the assets from the receivers of the master dealer.

You restructured your business which resulted in losses for the year ended 30 June 20YY.

The newly acquired business now operates as your trading arm.

You advised us that the ownership structure of your company has not changed since the parent company restructured its Asia Pacific operations right through to when it acquired back the assets from its failed master dealer.

You are applying for a private ruling in relation to company losses- continuity of ownership for the years ended 30 June 20XX to 20YY inclusive.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 165-10,

Income Tax Assessment Act 1997 section 165-12,

Income Tax Assessment Act 1997 subsection 165-12(2),

Income Tax Assessment Act 1997 subsection 165-12(3),

Income Tax Assessment Act 1997 subsection 165-12(4),

Income Tax Assessment Act 1997 subsection 165-12(5),

Income Tax Assessment Act 1997 subsection 165-150(2),

Income Tax Assessment Act 1997 subsection 165-155(2),

Income Tax Assessment Act 1997 subsection 165-160(2) and

Income Tax Assessment Act 1997 section 166-230.

Reasons for decision

These reasons for decision accompany the Notice of private ruling.

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

If a company has deductions that exceed its assessable income and net exempt income in an income year, the company has a loss which it can carry forward and use as a deduction in a future income year. However, the company can only deduct the tax loss if it satisfies either the continuity of ownership test (COT) or the same business test.

The COT is satisfied if the same persons hold more than 50% of voting power, and rights to dividends and capital distributions at all times during the relevant test period. To apply the COT, a company must trace its ownership through companies and trusts to identify the persons who ultimately hold, directly or indirectly, voting power and rights to dividends and capital distributions.

The continuity of ownership tests are found in Divisions 165 and 166 of the ITAA 1997.

The continuity of ownership test in Division 165 of the ITAA 1997

According to section 165-10 of the ITAA 1997, a company cannot deduct a tax loss unless:

· it meets the conditions in either section 165-12 of the ITAA 1997, which is about the company maintaining the same owners (the COT), or

· it meets the condition in section 165-13 of the ITAA 1997, which is about the company satisfying the same business test.

Only the test in section 165-12 of the ITAA 1997 is relevant to your situation.

The test in section 165-12 of the ITAA 1997 is applied over the ownership test period which is the period from the start of the loss year to the end of the income year in which the loss is sought to be deducted.

According to subsections 165-12(2) to (4) of the ITAA 1997, in order to meet the COT, at all times during the ownership test period there must be persons who had:

· more than 50% of the voting power in the company

· rights to more than 50% of the company's dividends, and

· rights to more than 50% of the company's capital distributions.

These conditions are applied either as a primary test or as an alternative test. According to subsection 165-12(5) of the ITAA 1997, the primary test will apply for a condition unless subsection 165-12(6) of the ITAA 1997 requires that the alternative test applies. Subsection 165-12(6) stipulates that the alternative test applies if one or more other companies beneficially owned shares or interests in shares in the test company during the ownership test period.

As you are the wholly owned subsidiary of another company, only the alternative tests are applicable to this case.

The alternative tests are set out in subsections 165-150(2), 165-155(2) and 165-160(2) of the ITAA 1997. These subsections require that there are persons, or it is reasonable to assume that there are persons:

· none of whom are companies or trustees, who between them, at a particular time, directly or indirectly (through an interposed entity), control, or are able to control, more than 50% of the voting power

· none of whom are companies, who between them, at a particular time have the right to receive for their own benefit, whether directly or indirectly more than 50% of any dividends the test company may pay, and

· none of whom are companies, who between them, at a particular time have the right to receive for their own benefit, whether directly or indirectly more than 50% of any distribution of capital of the company.

The modified continuity of ownership test

Division 166 of the ITAA 1997 modifies the way the rules in Division 165 of the ITAA 1997 apply to certain types of companies. It makes it easier for those companies to comply with the rules in Division 165. In particular, if the company has maintained the same owners as between certain points of time, it does not need to prove it has maintained the same owners throughout the periods in between. In addition, where there are certain small shareholdings in the company, these are treated as if they were held by a single notional entity making it unnecessary to trace through to the persons who beneficially owned those shareholdings.

The current Division 166 applies to losses incurred in an income year commencing on or after 1 July 2009. The current Division 166 also applies to losses in an income year commencing on or before 30 June 2009 and that could have been deductible, in accordance with Divisions 165 and 166 as in force at that time, in the first income year commencing after 30 June 2009 if the deduction had not been limited by the company's income for that income year.

You previously provided a spreadsheet of your parent company's shareholding for the period 30 June 2001 to 20ZZ. Only one company owned more than 10% as for the period 30 June 2002 to 2007 and they held less than 10% on 30 June 2001 and 30 June 20ZZ. No individuals in any of the institutions owned greater than 10%. In addition to these shareholdings, there are approximately 5,000 registered shareholder accounts of which none have owned greater than 10%.

No individuals in any of the institutions own greater than 10% in the parent company. These other shareholders which own less than 10% can be attributed to a single notional entity under section 166-230 of the ITAA 1997, for the test period.

As this single notional entity owns more than 50% of the voting power, rights to dividends and rights to capital distributions in your parent company, you would be considered to have met the COT as outlined above, for the test period.

As you have advised us that the ownership structure of your company has not changed since the parent company restructured its Asia Pacific operations right through to when it acquired back the assets from its failed master dealer, the current Division 166 also applies to the loss incurred in the income year commencing on or before 30 June 2009 as the deduction has not been limited by the company's income for that income year.

For loss years before and after 1 July 2009, at all times the proportion of shareholders in the parent company which held less than 10% of the shares in the parent company is greater than 50% as is evident from the information provided.

Therefore, you would have met the modified continuity of ownership test to enable you to utilise the losses that have accumulated from the 20ZZ-20XX income year to be offset against future income.

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