Edited version of private advice

Authorisation Number: 1051844198059

Date of advice: 2 June 2021

Ruling

Subject: Deducting company tax losses of earlier years and franking account credits

Question 1

Will XX (the Company) satisfy the 'continuity of ownership' test under Section 165-12 of the Income Tax Assessment Act (ITAA) 1997, to pass the Section 165-10 of ITAA 1997 for deduction of carried forward tax losses, if all Person 2's shares were transferred from Person 2's estate to Person 4?

Answer

Yes

Section 165-205 of the ITAA 1997 provides that, when an individual shareholder dies, if the shares are beneficially owned by someone who receives them as a beneficiary of the deceased's estate, the shares are taken to continue to be beneficially owned by the deceased, for the purpose of the 'continuity of ownership' test.

In this case, it is deemed that Person 2 continues to beneficially own the shares, therefore the requirements in the 'continuity of ownership' test, that is, there are persons who had more than 50% of the voting power, rights to dividends and rights to capital distributions in the Company at all times during the ownership test period (the Requirement), is considered satisfied.

Therefore, the Company can deduct the carry forward tax losses from the 20XX income year (the commencement of the 'ownership test period').

Question 2

After the share transfer in Question 1, will the Company satisfy the 'continuity of ownership' test under Section 165-12 of the ITAA 1997, to pass the Section 165-10 of ITAA 1997 for deduction of carried forward tax losses, if Person 3's remaining XX0 ordinary shares were transferred to Person 4?

Answer

Yes

It is supported by Clause XX of the Memorandum of Association of the Company in relation to the rights to capital distributions and under the assumption that the same class of shares rank equally in terms of voting power and rights to dividends, it is considered that the Requirement is met.

Therefore, the Company can deduct the carry forward tax losses from the 20XX income year (the commencement of the 'ownership test period').

Question 3

After the share transfers in Question 1 and 2, can the Company access its Franking Account?

Answer

Yes

Section 202-5 of the ITAA 1997 states that an entity franks a distribution if the following conditions are satisfied:

•         if the entity is a franking entity that satisfies the residency requirement when the distribution is made; and

•         if the distribution is a frankable distribution; and

•         the entity allocates a franking credit to the distribution.

The mechanism by which an entity allocates a franking credit is determined by the entity (for example, whether it is done by resolution or some other means). However, the decision to allocate a franking credit, without actual payment of the distributions, does not in itself give rise to a franking debit in the franking account - a debit to the franking account arises when the actual payment of the distribution is made, pursuant to Item 1 of the table in Subsection 205-30(1) of the ITAA 1997.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Company was incorporated in 19XX as pursuant to the Memorandum of Association of XX Pty Ltd (the Memorandum of Association).

The Memorandum of Association provides:

•         XX. ...dividends may be declared on the share of any class or classes to the exclusion of the share of any other class or classes...

•         XX. Subject to any conditions of issue in a winding up of the Company all shares shall rank equally both with respect to return of Capital and in the distribution of any surplus assets.

The Company operated a XX dealership.

The Company issued X000 shares, in which

•         XX00 shares were ordinary shares and

•         X00 shares were class A shares.

The shareholders and the number of shares they held included:

In 20XX, before the commencement of 'ownership test period', it's been processed for Person 3 to transferred half of her X00 ordinary shares to Person 4. After the transfer, the shareholders and the number of shares they held can be summarised as:

The four shareholders listed above have always been Australian resident for tax purposes.

The Company commenced to incur and carry forward tax losses from the 20XX income year (the commencement of the 'ownership test period').

The Company continued to incur and carry forward losses and remained in operation until the 20XX income year. It has a Franking Account credits $XX as on 30 June 20XX. It did not have any operation in the following income year.

One shareholder, Person 2 passed away on XX 20XX.

The family has not completed transferring all Person 2's shares from the late estate to Person 4 as set out in the will and probate, but is progressing it.

It is planned for Person 3 to transfer the remaining XX0 shares to Person 4.

Person 4 planned to operate a XX business under the Company structure.

Assumption

Within the same class of shares, they rank equally in terms of the voting power and the rights to dividends

Relevant legislative provisions

Income Tax Assessment Act 1997, Section 165-12

Income Tax Assessment Act 1997, Section 165-10

Income Tax Assessment Act 1997, Section 165-205

Income Tax Assessment Act 1997, Section 202-5

Income Tax Assessment Act 1997, Subsection 205-30(1)

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).