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Edited version of your written advice

Authorisation Number: 1051198008886

Date of advice: 8 March 2017

Ruling

Subject: substantial continuity of ownership test

Question 1

Does Company A satisfy the substantial continuity of ownership requirements in subsection 166-5(3) of the Income Tax Assessment Act 1997 (ITAA 1997) during the period 1 July 2012 to 30 June 2016?

Answer

Yes.

This ruling applies for the following period:

Income year ended 30 June 2016.

The scheme commences on:

1 July 2012

Relevant facts and circumstances

Company A is an Australian public company listed on the Australian Stock Exchange (ASX) since January 2012.

Company A only has ordinary shares on issue which all carry the same voting, dividend and capital rights.

Company A has incurred losses for the 2013 to 2015 income years. Company A identified a number of test times during that period.

During the period from 1 July 2012 to 18 December 2015 there was no shareholder that held more than 10 per cent of shares on issue. Following 19 December 2015 there was one holding that exceeded 10 per cent of the shares on issue.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 165

Income Tax Assessment Act 1997 Division 166

Income Tax Assessment Act 1997 section 165-12

Income Tax Assessment Act 1997 subsection 166-3(2)

Income Tax Assessment Act 1997 subsection 166-5(3)

Income Tax Assessment Act 1997 section 165-145

Income Tax Assessment Act 1997 section 166-225

Income Tax Assessment Act 1997 section 166-230

Income Tax Assessment Act 1997 section 166-235

Income Tax Assessment Act 1997 section 166-270

Income Tax Assessment Act 1997subsection 166-270(1)

Income Tax Assessment Act 1997 section 166-272

Income Tax Assessment Act 1997 subsection 166-272(1)

Income Tax Assessment Act 1997 section 166-275

Income Tax Assessment Act 1997 subsection 995-1

Reasons for decision

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

Division 165

Division 165 details the consequences of a change in ownership and its impact on the deductibility of tax losses of earlier income years.

Section 165-12 provides the continuity of ownership test (COT) a company must satisfy in order to be able to deduct losses of earlier years.

Subsection 165-12(1) states that the ownership test period is the period from the start of the loss year to the end of the income year, the income year being a year when the company has a positive assessable income from which it may deduct tax losses if all other tests for deducting those losses have been satisfied.

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

These tests are applied either as a primary test or as an alternative test.

According to subsection 165-12(5), the primary test will apply for a condition unless subsection 165-12(6) 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.

Division 166

Division 166 modifies the operation of Division 165 to make it easier for a widely held company, or an eligible Division 166 company to apply the rules of Division 165.

Subsection 166-3(2) states:

To be eligible to apply Division 166, a company must be a widely held company or an eligible Division 166 company.

Definition of a 'widely held company'

According to section 995-1, a 'widely held company' includes:

Approved 'stock exchanges' are listed in Schedule 5 of the Income Tax Assessment Regulations 1997 and includes the 'Australian Stock Exchange ASX.

Company A was a widely held company at all times during the income year ending 30 June 2016 because it has been listed on the official list of the ASX since January 2012. As such it meets the condition in paragraph 166-5(1)(a) such that Subdivision 166-A modifies the way the Subdivision 165-A applies to Company A.

Test times

Section 166-5 modifies the way Subdivision 165-A applies to a company that is 'a widely held company at all times during the income year'. Subsection 166-5(3) states that:

Conversely, a company is taken to have failed to meet the conditions in section 165-12 if there is no substantial continuity of ownership at specific times in the test period.

The meaning of the 'test period' as set out in subsection 166-5(2), is 'the period consisting of the loss year, the income year and any intervening period.'

The meaning of 'corporate change' is set out in section 166-175 and includes an issue of shares in the company that results in an increase of 20% or more in:

As per paragraph 166-175(2)(c), a corporate change of this kind ends when the offer period for the issue of shares ends.

Referring to the facts presented by Company A there has been a number of events involving corporate change in the testing period. Hence the test times for Company A as per subsection 166-5(3) are:

Start of the test period:

End of each income year in that period:

Corporate change:

Substantial continuity of ownership test

Section 166-145 states that for a widely held company to have substantial continuity of ownership of a company there must be:

The more than 50% voting power, rights to dividends and rights to capital distributions will be determined in accordance with the alternative tests contained in Subdivision 165-D.

Concessional tracing rules

Subdivision 166-E provides a number of concessional tracing rules to assist in determining whether the ownership tests are satisfied. Section 166-225 enables a tested company to aggregate all holdings in it which are less than 10% so as to form a single notional entity.

Section 166-225(1) states:

Notional shareholder

Section 166-225(2) states:

The terms voting stake, dividend stake and capital stake are defined in subsection 995-1(1) by reference to section 166-235. Such stakes can be held directly or indirectly through one or more interposed entities.

An entity will have a direct stake in a company where that entity is a registered holder of shares in a company and those shares carry a right to exercise voting power, a right to any or all of the dividends paid and a right to any or all capital distributions.

An entity will have an indirect stake in a company where one or more entities are interposed between it and the company and the entity can control or is able to control voting power the company indirectly through the interposed entities and has a right to receive for its own benefit through the interposed entity or entities dividends paid by the company and distributions of capital made by the company.

For the purpose of determining substantial continuity of ownership, Company A shares on issue at all times in the test period carried the same voting, dividend and capital rights.

The substantial continuity of ownership analysis performed by Company A shows the stake attributed to a single notional entity under section 166-225 was at all times above 85.12%.

Accordingly, as the single notional entity held more than 50% of the voting power, rights to divides and rights to capital distribution for the ownership test period, Company A is considered to have met the COT for the period from 1 July 2012 to 30 June 2016.

Same share same interest rule

Section 166-272 contains the “Same Share Test” integrity provision. Subsection 166-272(1) states:

In this regard, paragraph 1.128 of the Explanatory Memorandum to the Tax Laws Amendment (Loss Recoupment Rules and Other Measures) Bill 2005 states:

This section does not apply to the singe notional entity contained in section 166-225 and, as such, will not impact on the outcome of the Modified COT for Company A as 85.12% of shares in Company A were held by a single notional entity at all times during the test period.

Minimum interest rule

The minimum interest rule under section 166-270 restricts the total proportion of voting power, dividend rights or capital rights attributed to the single notional entity at an ownership test time that is after the start of the test period to the relevant proportion attributed at the beginning of the test period.

Subsection 166-270(1) states:

For Company A, the minimum interest rule caps the quantum of voting stakes of the relevant single entity at the quantum of the voting stake held by the single notional entity at the start of the relevant test period.

As a result of the testing undertaken by Company A, the minimum interest of the single notional entity has never fallen below 85.12%. Thus the minimum interest rule will not have any implication on the outcome of Modified COT for Company A.

Anti-detriment rule

Section 166-275 provides that where a company fails the COT as a result of applying a tracing rule to a voting, divided or capital stake and the company believes:

the COT is taken to have been met.

In Company A's case, none of the tracing concessions work to the detriment of Company A and as such there is no detriment caused to Company A as a result of the application of the tracing rules.


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