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Edited version of your written advice
Authorisation Number: 1051305992908
Ruling
Subject: Same business test
Question 1
Can a company retain carry forward losses after a change in its shareholding?
Answer
Yes
This ruling applies for the following period:
Year ended 30 June 2017
The scheme commenced on
1 July 2016
Relevant facts
A company has carried forward losses.
A change in shareholding occurred in 2017. Before and after the change in shareholding the officeholders were two foreign individuals, and an Australian individual.
The shareholders before the change in shareholding were:
Australian individual 10% of Ordinary shares
Foreign individual 90% of Ordinary shares
The shareholders after the change in shareholding were:
Foreign company 80% of Ordinary shares
Same Australian individual 20% of Ordinary shares
Voting powers, rights to dividends and rights to capital distributions are linked to shareholding, and the changes are as follows:
Before change in shareholding |
After change in shareholding | |
Voting rights |
Foreign individual 90% |
Foreign company 80% |
Australian individual 10% |
Australian individual 20% | |
Rights to dividends |
Foreign individual 90% |
Foreign company 80% |
Australian individual 10% |
Australian individual 20% | |
Rights to capital distributions |
Foreign individual 90% |
Foreign company 80% |
Australian individual 10% |
Australian individual 20% |
The business carried on by the company is sales and marketing.
There were no changes to the sources of assessable income, transactions or expenditure conducted by the company before and after the shareholding change.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 36-25
Income Tax Assessment Act 1997 Section 165-10
Income Tax Assessment Act 1997 Section 165-12
Income Tax Assessment Act 1997 Section 165-13
Income Tax Assessment Act 1997 Section 165-15
Income Tax Assessment Act 1997 Section 165-150
Income Tax Assessment Act 1997 Section 165-155
Income Tax Assessment Act 1997 Section 165-160
Income Tax Assessment Act 1997 Section 165-210
Reasons for decision
Can a company retain carry forward losses after a change in its shareholding?
Where a company does not satisfy the requirements concerning its continuing ownership and control, as described in section 165-12, section 165-15 and sections 165-150 to 165-205 of the Income Tax Assessment Act 1997 (ITAA 1997), the general rule is that the company cannot claim a deduction for losses incurred prior to the relevant change in ownership or control. The only exception to this general rule is where the company satisfies certain tests pertaining to the continuity of business in section 165-13 of the ITAA 1997.
The income tax consequences of changing ownership or control of a company are set out in Division 165 of the ITAA 1997.
SECTION 165-10 To deduct a tax loss
165-10 A company cannot deduct a tax loss unless either:
(a) it meets the conditions in section 165-12 (which is about the company maintaining the same owners); or
(b) it meets the condition in section 165-13 (which is about the company satisfying the same business test).
Ownership test
SECTION 165-12 Company must maintain the same owners
Ownership period
165-12(1) In determining whether section 165-10 prevents a company from deducting a tax loss, the ownership test period is the period from the start of the loss year to the end of the income year.
Voting power
165-12(2) There must be persons who had more than 50% of the voting power in the company at all times during the ownership test period.
Rights to dividends
165-12(3) There must be persons who had rights to more than 50% of the company’s dividends at all times during the ownership test period.
Rights to capital distributions
165-12(4) There must be persons who had rights to more than 50% of the company’s capital distributions at all times during the ownership test period.
The tests for voting power, rights to dividends and rights to capital distributions are discussed in sections 165-150, 165-155 and 165-160 of the ITAA 1997 respectively as follows:
SECTION 165-150 Who has more than 50% of the voting power in the company
The primary test
165-150(1) Applying the primary test: if there are persons who, at a particular time, beneficially own (between them) shares that carry (between them) the right to exercise more than 50% of the voting power in the company, those persons have more than 50% of the voting power in the company at that time.
The alternative test
165-150(2) Applying the alternative test: if it is the case, or it is reasonable to assume, that there are persons (none of them companies or trustees) who (between them) at a particular time control, or are able to control (whether directly, or indirectly through one or more interposed entities) the voting power in the company, those persons have more than 50% of the voting power in the company at that time.
SECTION 165-155 Who has rights to more than 50% of the company’s dividends
The primary test
165-155(1) Applying the primary test: if there are persons who, at a particular time, beneficially own (between them) shares that carry (between them) the right to receive more than 50% of any dividends that the company may pay, those persons have rights to more than 50% of the company’s dividends at that time.
The alternative test
165-155(2) Applying the alternative test: if it is the case, or it is reasonable to assume, that there are persons (none of them 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 that the company may pay, those persons have rights to more than 50% of the company’s dividends at that time.
SECTION 165-160 Who has rights to more than 50% of the company’s capital distributions
The primary test
165-160(1) Applying the primary test: if there are persons who, at a particular time, beneficially own (between them) shares that carry (between them) the right to receive more than 50% of any distribution of capital of the company, those persons have rights to more than 50% of the company’s capital distributions at that time.
The alternative test
165-160(2) Applying the alternative test: if it is the case, or it is reasonable to assume, that there are persons (none of them 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, those persons have rights to more than 50% of the company’s capital distributions at that time.
Application to your circumstances
The ownership test period is from 1 July 2016 to 30 June 2017. For the company to claim a tax loss there must be persons who had more than 50% of voting power, rights to dividends and rights to capital distributions at all times at all times during the ownership test period.
Before the change in shareholding, a foreign individual held 90% of the shares in the company, and an Australian individual held 10% of shares. After the change in shareholding, a foreign company held 80% of shares in the company, and the same Australian individual held 20% of shares. The shareholding is directly linked to voting power, rights to dividends and rights to capital distributions.
Therefore, there was not a person who held more than 50% of voting power, rights to dividends and rights to capital distributions at all times during the ownership test period, 1 July 2016 to 30 June 2017,
The company is not able to deduct a tax loss under the ownership test in section 165-12 of the ITAA 1997.
Alternatively, the same business test in section 165-13 of the ITAA 1997 needs to be considered.
Same business test
SECTION 165-13 Alternatively, the company must satisfy the same business test
165-13(1) This section sets out the conditions that a company must meet to be able to deduct the tax loss if:
(a) the company fails to meet a condition in subsection 165-12(2), (3) or (4); or
(b) it is not practicable to show that the company meets the conditions in those subsections.
165-13(2) The company must satisfy the same business test for the income year (the same business test period). Apply the test to the business the company carried on immediately before the time (the test time) shown in the relevant item of the table.
Test time |
||
Item |
If: |
The test time is: |
1 |
It is practicable to show there is a period that meets these conditions: (a) the period starts at the start of the ownership test period or, if the company came into being during the loss year, at the time the company came into being: (b) the company would meet the conditions in subsections 165-12(2), (3) and (4) if the period were the ownership test period for the purposes of this Act. |
The latest time that it is practicable to show is in the period |
2 |
Item 1 does not apply and the company was in being throughout the loss year |
The start of the loss year |
3 |
Item 1 does not apply and the company came into being during the loss year |
The end of the loss year |
The same business test is discussed in section 165-210 of the ITAA 1997;
SECTION 165-210 The test
165-210(1) A company satisfies the same business test if throughout the same business test period it carries on the same business as it carried on immediately before the test time.
165-210(2) However, the company does not satisfy the same business test if, at any time during the same business test period, it derives assessable income from:
(a) a business of a kind that it did not carry on before the test time; or
(b) a transaction of a kind that it had not entered into in the course of its business operations before the test time.
165-210(3) The company also does not satisfy the same business test if, before the test time, it:
(a) started to carry on a business it had not previously carried on; or
(b) in the course of its business operations, entered into a transaction of a kind that it had not previously entered into;
and did so for the purpose, or for purposes including the purpose, of being taken to have carried on throughout the same business test period the same business as it carried on immediately before the test time.
165-210(4) So far as the same business test is applied for the purpose of Subdivision 165-B (which is about working out the taxable income and tax loss for the income year of change of ownership or control), the company also does not satisfy the test if, at any time during the same business test period, it incurs expenditure:
(a) in carrying on a business of a kind that it did not carry on before the test time; or
(b) as a result of a transaction of a kind that it had not entered into in the course of its business operations before the test time.
For a company to satisfy the same business test, the company must be able to show that it carried on at all times during the same business test period the same business as the business that the company carried on at the change-over.
The issue of fact to be determined in applying the same business test is to identify the business carried on by the taxpayer immediately before the change-over, and to determine whether the taxpayer carried on the same business at all times during the same business test period.
Identifying the business carried on by the taxpayer immediately before the change-over involves looking at all the things done and the activities carried on by the taxpayer in the course of that business.
Application to your circumstances
The same business test period is 1 July 2016 to 30 June 2017. Under subsection 165-13(2) of the ITAA 1997, Item 1, the period starts at the start of the ownership test period, 1 July 2016, and the test time, being the latest time that it is practicable to show is in the period, is the date of the shareholding change, before 30 June 2017.
At the start of the same business test period, the nature of the business of the company was sales and marketing. The nature of the business did not change throughout the same business test period. The company carried on the same business throughout the same business test period as it did immediately before the test period. Subsection 165-210(1) of the ITAA 1997 is satisfied.
The sources of assessable income and nature of business activities of the company did not change during the same business test period. Subsection 165-210(2) of the ITAA 1997 is satisfied.
The company did not start a business it had not previously carried on, or entered into transactions it had not previously entered into. Subsection 165-210(3) of the ITAA 1997 is satisfied.
The company did not incur expenditure on a business that it did not carry on before the test time, or on a transaction of a kind that it had not entered into in the course of its business operations before the test time. Subsection 165-210(4) of the ITAA 1997 is satisfied.
Conclusion
All of the criteria in section 165-210 of the ITAA 1997 have been satisfied. The company satisfies the same business test. Whether a tax loss can be deducted is determined by section 165-15 of the ITAA 1997 as follows:
SECTION 165-15 The same people must control the voting power, or the company must satisfy the same business test
165-15(1) Even if a company meets the conditions in section 165-12 or 165-13, it cannot deduct the tax loss if:
(a) for some or all of the part of the ownership test period that started at the end of the loss year, a person controlled, or was able to control, the voting power in the company (whether directly, or indirectly through one or more interposed entities); and
(b) for some or all of the loss year, that person did not control, and was not able to control, that voting power (directly, or indirectly in that way); and
(c) that person began to control, or became able to control, that voting power (directly, or indirectly in that way) for the purpose of:
(i) getting some benefit or advantage in relation to how this Act applies;
(ii) getting such a benefit or advantage for someone else;
or for purposes including that purpose.
165-15(2) However, that person’s control of the voting power, or ability to control it, does not prevent the company from deducting the tax loss if the company satisfies the same business test for the income year (the same business test period).
165-15(3) Apply the same business test to the business that the company carried on immediately before the time (the test time) when the person began to control that voting power, or became able to control it.
Subsection 165-15(2) of the ITAA 1997 confirms that where the same business test is satisfied, a tax loss can be deducted
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