Edited version of your written advice

Authorisation Number: 1051266888258

Date of advice: 11 August 2017

Ruling

Subject: Continuity Ownership Test

Question

Will Entity A satisfy the conditions of section 165-12 of the Income Tax Assessment Act 1997 (ITAA 1997), as modified by Division 166 of the ITAA 1997, for each tax loss made in the years ended 30 June XXXX to 30 June XXXX during all the test periods that end on 30 June XXXX?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June XXXX

The scheme commences on:

1 July XXXX

Relevant facts and circumstances

Entity A is listed on the Australian Securities Exchange (ASX).

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

Entity A elected to form a consolidated group for the purposes of Australian income tax in XXXX.

Entity A in XXXX completed the acquisition of Entity AB.

Entity A incurred losses from the financial year starting 1 July XXXX up to 30 June XXXX,

The year ended 30 June XXXX is an income year for determining Entity A test periods as in this financial year should it not deduct carried forward income tax losses Entity A would be in a position of reporting taxable income.

The following dates and events are relevant to Entity A and its consideration of the law relating to tax losses during the period from 1 July XXXX to 30 June XXXX:

● Various dates

A shareholder analysis and reconciliation for all of the relevant dates identified above in fact 7 shows all shareholdings of less than 10% (considered to be held by a “single notional entity”). This single notional entity held in excess of 50% of the voting power, rights to dividends and rights to capital distributions at all relevant times.

Assumption

Entity A will not elect that Subdivision 165-A of the ITAA 1997 is to apply to it for the income year ended 30 June XXXX in which Entity A seeks to deduct a tax loss, without the modifications made by Subdivision 166-A of the ITAA 1997.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 165

Income Tax Assessment Act 1997 Division 166

Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision

All legislative references are to the ITAA 1997 unless otherwise stated.

Summary

Entity A will satisfy the conditions in section 165-12, as modified by Division 166 for each tax loss made in the years ended 30 June XXXX up to the period 30 June XXXX, during the test periods that end on 30 June XXXX.

Detailed reasoning

Section 165-10 provides that a company can deduct a tax loss, if either the company satisfies the conditions concerning continuity of ownership in section 165-12 or the same business test in section 165-13.

It is noted in section 165-10 that in the case of a widely held company or eligible Division 166 company, Subdivision 166-A modifies how Subdivision 165-A applies. Subdivision 165-A contains both section 165-10 and 165-12.

Widely held company

Paragraph 166-5(1)(b) provides that Subdivision 166-A modifies the way Subdivision 165-A applies to a company that is a widely held company or an eligible Division 166 company at all times during the income year.

A widely held company is defined by subsection 995-1(1) to include:

a company, shares in which (except shares that carry a right to a fixed rate of dividend) are listed for quotation in the official list of an approved stock exchange.

As Entity A has continually been listed on the ASX since XXXX it will be a widely held company and the modifications contained in Subdivision 166-A will prima facie apply to it.

However, under subsection 166-15(1), a company may elect that Subdivision 165-A is to apply to it for the income year in which it seeks to deduct a tax loss, without the modification made by Subdivision 166-A.

This ruling is made on the basis that Entity A will not elect that Subdivision 165-A is to apply to it for the income year ended 30 June 2016 in which Entity A seeks to deduct a tax loss, without the modifications made by Subdivision 166-A.

As such, Entity A meets the requirements of paragraph 166-5(1)(b) and Subdivision 166-A will operate to modify the way Subdivision 165-A applies to Entity A.

Subdivision 166-A

Subdivision 166-A includes sections 166-5 and 166-15.

Subsection 166-5(3) provides that the company is taken to have met the conditions in section 165-12 if there is substantial continuity of ownership as between the start of the test period and:

a) the end of each income year in that period, and

b) the end of each corporate change in that period

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 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:

persons (none of them companies or trustees) who had more than 50% of the voting power at the start of the test period and more than 50% of the voting power immediately after another time in the test period

persons (none of them companies) who had rights to more than 50% of the dividends at the start of the test period and more than 50% of the dividends immediately after another time in the test period, and

persons (none of them companies) who had rights to more than 50% of any capital distributions at the start of the test period and more than 50% of any capital distributions immediately after another time in the test period.

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.

Corporate change

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:

(i) the issued share capital of the company, or

(ii) the number of the company’s shares on issue.

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

There has been a number of events involving corporate change in the test period.

Relevant test times

Hence the test times for Entity A as per subsection 166-5(3) are:

(a) Start of the test period:

– Various dates

(b) End of each financial year in that period:

– Various dates

(c) End of the income year:

– 30 June XXXX

(d) Corporate changes

– Various dates

Concessional tracing rules

Subdivision 166-E provides the number of concessional tracing rules to assist in determining whether the ownership tests are satisfied at each relevant test time.

Section 166-225 modifies how the ownership tests in section 166-145 are applied to enable a tested company to aggregate all holdings in it which are less than 10% so as to form a single notional entity for the application of the ownership tests.

Accordingly, section 166-225 states:

This section modifies how the ownership tests in section 166-145 are applied to the tested company if:

(a) a voting stake that carries rights to less than 10% of the voting power in the company is held directly in the company; or

(b) a dividend stake that carries the right to receive less than 10% of any dividends that the company may pay is held directly in the company; or

(c) a capital stake that carries the right to receive less than 10% of any distribution of capital of the company is held directly in the company.

Notional shareholder

The tests are applied to the tested company as if, at the ownership test time, a single notional entity:

(a) a directly controlled the voting power that is carried by each such voting stake; and

(b) had the right to receive, for its own benefit and directly:

(i) any dividends the tested company may pay in respect of each such dividend stake; and

(ii) any distributions of capital of the tested company in respect of each such capital stake; and

(c) were a person (other than a company).

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 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 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, Entity A shares on issue at all times in the test period carried the same voting, dividend and capital rights.

As such, for the purposes of conducting the continuity of ownership tests at each of the relevant test times all shares in Entity A which were held by investors with less than 10% of the issued shares in the company at the relevant test time will be considered to be held by a single notional shareholder.

Same share same interest rule

In regards to the modified COT and tracing rules under subdivision 166-E, section 166-272 contains the same share same interest rule.

Subsection 166-272(1) provides that section 166-272 modifies how the ownership tests in section 166-145 are applied to a voting stake, a dividend stake or a capital stake in the tested company held by one of the following entities:

(a) a top interposed entity mentioned in section 166-230 (which is about indirect stakes of less than 10%);

(b) a widely held company mentioned in section 166-240;

(c) an entity mentioned in subsection 166-245(2) (which is about stakes held by other entities)

(d) a depository entity mentioned in section 166-260

(whether directly, or indirectly through one or more interposed entities)

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

The same share same interest rule does not apply in respect of stakes held by a single notional entity. The application of the same share same interest rule to direct interests in the tested company of less than 10 per cent would be inappropriate because it would be contrary to the policy of allowing the tested company to disregard interests of less than 10 per cent.

This section does not apply to the single notional entity contained in section 166-225 and, as such, will not impact on the outcome of the modified continuity of ownership test for Entity A.

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:

If:

(a) the ownership test time is after the start of the test period; and

(b) a single notional entity mentioned in section 166-225 or 166-255 has voting power in a company; and

(c) the voting power that the entity has at the ownership test time is greater than the voting power that the entity has at the start of the test period;

then the entity is taken to have voting power in the company at the ownership test time only to the extent that it had it at the start of the test period.

For Entity 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 Entity A, the minimum interest of the single notional entity has never fallen below 50%. Thus, the minimum interest rule will not have any implication on the outcome of modified continuity of ownership test for Entity A.

Anti-Detriment Rule

The section 166-275 “anti-detriment” rule ensures that a loss company that chooses concessional tracing under Division 166 will not be disadvantaged by doing so.

In the case of Entity A, the tracing rules will not be a detriment of Entity A.

The substantial continuity of ownership analysis shows the stake attributed to a single notional entity under section 166-225 was at all times above 50%.

Accordingly, by virtue of the modified rules provided in Division 166 in relation to the continuity of ownership test, the single notional entity held more than 50% of the voting power, rights to dividends and rights to capital distribution for every test time in the ownership test period. As such, Entity A is considered to have met the continuity of ownership test as stated in section 165-12 for the period 1 July XXXX to 30 June XXXX.

Conclusion

Entity A will satisfy the conditions in section 165-12, as modified by Division 166 for each tax loss made in the years ended 30 June XXXX up to 30 June XXXX and including the test periods that end on 30 June XXXX and is, therefore, entitled to deduct the carried forward losses in the year ended 30 June XXXX.

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