Edited version of private advice

Authorisation Number: 1052340011845

Date of advice: 20 June 2025

Ruling

Subject: Tax losses - modified continuity of ownership test

Question 1

Is the taxpayer eligible to apply the modified continuity of ownership test provisions in Subdivision 166-A of the Income Tax Assessment Act 1997 (ITAA 1997) in the income year for the tax losses incurred during previous income years?

Answer

Yes

Question 2

If the response to Question 1 is yes, does the taxpayer meet the conditions in section 165-12 of the ITAA 1997, as modified by Division 166 of the ITAA 1997, in the income year, to deduct the tax losses incurred during the previous income years?

Answer

Yes

This ruling applies for the following period:

The income year

The scheme commenced on:

The start of the first loss year

Relevant facts and circumstances

The taxpayer is an Australian resident company operating in the services sector.

The taxpayer is the head company of an income tax consolidated group.

At all times during the income year, all of the taxpayer's shares remained listed for quotation on an official list of an approved stock exchange.

The taxpayer has carried forward tax losses from previous income years.

No tax losses were transferred to the taxpayer by entities joining the taxpayer's income tax consolidated group. Any transferable losses were cancelled as part of the allocable cost amount (ACA) process. All the tax losses have either been incurred by the taxpayer's subsidiaries after joining the tax consolidated group or directly by the taxpayer.

The taxpayer was not a widely held company (as defined in subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) during some of the income years when losses were incurred.

A corporate change (as defined in section 166-175 of the ITAA 1997) was identified during part of a loss year.

In the income year, the taxpayer's total assessable income exceeded its total deductions (prior to applying tax losses).

There has only ever been one class of shares on issue in the taxpayer. All shares in the taxpayer carry the same voting, dividend and capital rights.

The shareholdings in the taxpayer at the start of the test period and at the end of each income year in the test period show that:

   (a) There were shareholders who had a greater than 10% direct voting, dividend and capital stake in the taxpayer and none of these shareholders, either individually or together, held more than 50% of the shares in the taxpayer (collectively referred to as Substantial Shareholders)

   (b) The balance of the shareholders of the taxpayer each held a less than 10% direct voting, dividend and capital stake in the taxpayer.

The percentage shareholding of the Substantial Shareholders includes any indirect interests of less than 10% in the taxpayer that have been attributed to the Substantial Shareholders as the top interposed company.

All shareholders with a direct interest in the taxpayer of less than 10% during the test period have been aggregated and attributed to a single notional entity, being the Notional Shareholder.

At all times during the during the test period:

   • no entity (the controlling entity) directly or indirectly (through one or more interposed entities) held the power over some or all of the rights to voting, dividends or capital in the taxpayer in circumstances where it was sufficiently influenced by the controlling entity

   • no natural person (together with his/her associates) owned shares (whether directly or indirectly through one or more interposed entities) in the taxpayer that gave control of more than 25% of the voting power in the taxpayer

   • no trustee or company (together with its associates) owned shares (whether directly or indirectly through one or more interposed entities) in the taxpayer that gave control of more than 50% of the voting power in the taxpayer

   • neither the taxpayer nor its directors were at any time, accustomed or under an obligation (whether formal or informal), or were reasonably expected, to act in accordance with the directions, instructions or wishes of an entity or entities (whether those directions, instructions or wishes were, or were reasonably expected to be, communicated directly or through interposed companies, partnerships or trusts), so as to be sufficiently influenced by the entity or entities.

The Notional Shareholder carried greater than 50% direct voting, dividend and capital stake in the taxpayer at all times during the test period.

The taxpayer has not made an election under section 166-15 of the ITAA 1997 for Subdivision 165-A to apply to it for the income year without the modifications made by Subdivision 166-A.

Relevant legislative provisions

Subdivision 165-A of the Income Tax Assessment Act 1997

Division 166 of the Income Tax Assessment Act 1997

Subsection 995-1(1) of the Income Tax Assessment Act 1997

Schedule 5 of the Income Tax Assessment Regulations 1997

Paragraph 318(6)(b) of the Income Tax Assessment Act 1936

Reasons for decision

All legislative references are to the Income Tax Assessment Act 1997 unless otherwise stated.

Question 1

Subdivision 165-A sets out the conditions that a company must meet to be able to deduct a tax loss of an earlier income year.

Pursuant to section 165-10, a company cannot deduct a tax loss unless it satisfies either:

   (i) the continuity of ownership test (COT) in section 165-12 or

   (ii) the same business test in section 165-13.

Broadly, Division 166 modifies the operation of Division 165 to make it easier for a company that is a widely held company or an eligible Division 166 company at all times during the income year, to apply the rules in Division 165, unless the company chooses not to apply the modifications.

Subsection 166-3(2) states:

This Division makes it easier to apply the rules in Division 165 by:

   (a) making it unnecessary for the company to prove that it has maintained the same owners throughout a period, if the company had the same owners at certain test times; and

   (b) making it unnecessary for the company to trace through to the ultimate beneficial owners of:

      (i) voting stakes, dividend stakes and capital stakes in the company held by certain entities (whether directly, or indirectly through one or more interposed entities); and

      (ii) small voting stakes, dividend stakes and capital stakes in the company.

Subsection 166-5(1) provides that:

This Subdivision modifies the way Subdivision 165-A applies to a company that is:

   (a) a widely held company at all times during the income year; or

   (b) an eligible Division 166 company at all times during the income year; or

   (c) a widely held company for a part of the income year and an eligible Division 166 company for the rest of the income year.

The 'income year' is referenced in paragraph 1.13 of the Explanatory Memorandum to the Tax Laws Amendment (Loss Recoupment Rules and Other Measures) Bill 2005 (the EM) where it provides that:

A company is eligible for the new modified COT if it is widely held or an eligible Division 166 company for the income year in which it seeks to deduct a tax loss. Companies that are neither widely held nor eligible Division 166 companies continue to use Division 165 to determine whether they satisfy the COT.

Subsection 995-1(1), defines 'widely held company' as:

   (a) 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; or

   (b) a company with more than 50 members, other than a company where at least one of the following conditions is met during an income year:

      (i) no more than 20 persons held, or had the right to acquire or become the holders of, shares representing at least 75% of the value of the shares in the company (other than shares that only carry a right to a fixed rate of dividend);

      (ii) at least 75% of the voting power in the company was capable of being exercised by no more than 20 persons;

      (iii) at least 75% of the amount of any dividend paid by the company during the year was paid to no more than 20 persons;

      (iv) if no dividend was paid by the company during the year--the Commissioner is of the opinion that, if a dividend had been paid by the company during the year, at least 75% of the amount of the dividend would have been paid to no more than 20 persons.

Subsection 995-1(1) defines 'approved stock exchange' as a stock exchange named in regulations made for the purposes of that definition.

Regulation 995-1.05 of the Income Tax Assessment Regulations 1997 states:

The stock exchanges specified in Schedule 5 are named for the purposes of the definition of approved stock exchange in subsection 995-1(1) of the Act.

At all times during the income year, the taxpayer was a 'widely held company' as its shares remained listed on an approved stock exchange.

Consequently, the taxpayer is eligible to apply the modifications in Subdivision 166-A when applying the COT in section 165-12 for the income year

The taxpayer did not, pursuant to section 166-15, make the choice that section 165-A is to apply to it for the income year without the modifications made by Subdivision 166-A.

Question 2

Application of Division 165

Subdivision 165-A sets out the conditions that a company must meet to be able to deduct a tax loss of an earlier income year.

Section 165-10 provides that a company cannot deduct a tax loss unless it satisfies:

   (a) the conditions in section 165-12 (which is about the company maintaining the same owners) or

   (b) the conditions in section 165-13 (which is about the company satisfying the business continuity test).

In determining whether a company has maintained the same owners, subsection 165-12(1) states that the ownership test period for the COT is the period from the start of the loss year to the end of the income year, with 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 are satisfied).

In order to satisfy the COT, subsections 165-12(2) to (4) provide that 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 tests for finding out whether a company has maintained the same owners are applied either as a primary test or as an alternative test. Pursuant to subsection 165-12(5), the primary test will apply unless subsection 165-12(6) requires the alternative test to apply. Subsection 165-12(6) stipulates that the alternative test applies if one or more other companies beneficially own shares or interests in shares in the test company at any time during the ownership test period.

As the taxpayer is beneficially owned by one or more other companies during the ownership test period, the alternative test applies to the taxpayer.

The Note to subsection 165-12(6) provides that for the alternative test, see subsections 165-150(2), 165-155(2) and 165-160(2). These provisions are set out below.

In determining who has more than 50% of the voting power in the company, subsection 165-150(2) states:

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.

In determining who has rights to more than 50% of the company's dividends, subsection 165-155(2) states:

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.

In determining who has rights to more than 50% of the company's capital distributions, subsection 165-160(2) states:

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 in the company, those persons have rights to more than 50% of the company's capital distributions at that time.

Before applying the alternative test to the taxpayer's circumstances, the application of Division 166 needs to be considered.

Application of Division 166

Division 166 modifies the operation of Division 165 to make it easier for a company that is a widely held company or an eligible Division 166 company at all times during the income year, to apply the rules in Division 165, unless the company chooses not to apply the modifications.

The taxpayer as a widely held company is eligible to apply the modifications in Subdivision 166-A when applying the COT in section 165-12 for the income year. The taxpayer has not made the choice under subsection 166-15(1) that Subdivision 165-A apply to it for the relevant income year without the modifications made by Subdivision 166-A.

Ownership Test Period

Pursuant to subsection 166-5(2), for a company to whom the modifications in Subdivision 166-A apply, the test period is the period consisting of the loss year, the income year, and any intervening period.

Subsection 166-5(3) provides that a company is taken to have met the conditions in section 165-12 (which is about the company maintaining the same owners) if there is substantial continuity of ownership of the company 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.

(collectively referred to as theownership test period).

Conversely, subsection 166-5(4) provides:

The company is taken to have failed to meet the conditions in section 165-12 if there is no substantial continuity of ownership of the company as between the start of the test period and:

   (a) the end of an income year in that period; or

   (b) the end of a corporate change in that period.

The taxpayer incurred tax losses during previous income years.

Pursuant to paragraph 166-5(3)(a), the end of each income year in that period is relevant in testing for substantial continuity of ownership.

Paragraph 166-5(3)(a) also requires that there be substantial continuity of ownership of the company as between the start of the test period and the end of each corporate change in that period.

Relevant corporate change

Section 166-175 provides that a corporate change occurs if:

   (a) there is a takeover bid for shares in the company; or

   (b) there is a scheme of arrangement, involving more than 50% of the company's shares, that has been approved by a court; or

   (c) there is any other arrangement, involving the acquisition of more than 50% of the company ' s shares, that is regulated under the Corporations Act 2001 or a foreign law; or

   (d) there is 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; or

   (e) there is a corporate change in another company which beneficially owns one or more of the following stakes in the first company:

      (i) a voting stake that carries rights to more than 50% of the voting power of the first company;

      (ii) a dividend stake that carries rights to receive more than 50% of any dividends the first company may pay;

      (iii) a capital stake that carries rights to receive more than 50% of any distribution of capital of the first company;

(whether the other company owns those stakes directly, or indirectly through one or more interposed entities).

A 'corporate change' was identified for the purposes of paragraph 166-5(3)(a).

According to subsection 166-175(2), this type of corporate change ends when the offer period for the issue of shares ends.

Deduction for part of a tax loss

Section 165-20 states that if section 165-10 prevents a company from deducting a tax loss, the company can deduct the part of the tax loss that was incurred during a part of the loss year. Section 165-20 is directed at situations where section 165-10 prevents a company from deducting a tax loss by reason of a change in ownership during the loss year and failure to satisfy the same business test in the income year. In such a situation, section 165-20 allows a deduction for the part of the tax loss incurred during the latter part of the loss year if, assuming that part of the loss year had been treated as the whole of the loss year for the purposes of section 165-10, the company would have been entitled to deduct the tax loss.

The identified corporate change occurred during part of the loss year. The losses incurred during the income year were wholly incurred after the corporate change.

Section 165-20 will allow the taxpayer a deduction for the part of the tax loss incurred during the latter part of the loss year if, assuming that part of the loss year (after the corporate change) had been treated as the whole of the loss year for the purposes of section 165-10, the taxpayer would have been entitled to deduct the tax loss.

Relevant test times

To recoup losses incurred during each of the loss years in the income year, the taxpayer will need to have maintained substantial continuity of ownership at each of the test times (as identified) from the start of each of the relevant test period until the end of the income year.

Substantial Continuity of Ownership

As stated above, subsection 166-5(3) requires substantial continuity of ownership.

The substantial continuity of ownership test is set out in section 166-145.

Subsections 166-145(1) to (5) provide:

   (1) There is substantial continuity of ownership of the company as between the start of the test period and another time in the test period if (and only if) the conditions in this section are met.

Note: Section 166-165, and Subdivision 166-E, affect how this section is applied.

Voting power

   (2) There must be persons (none of them companies or trustees) who had more than 50% of the voting power in the company at the start of the test period. Also, those persons must have had more than 50% of the voting power in the company immediately after the other time in the test period.

Note 1: To work out who had more than 50% of the voting power, see section 165-150.

Note 2: Subdivision 167-B has special rules for working out voting power in a company whose shares do not all carry the same voting rights, or do not carry all of the voting rights in the company.

Rights to dividends

   (3) There must be persons (none of them companies) who had rights to more than 50% of the company's dividends at the start of the test period. Also, those persons must have had rights to more than 50% of the company's dividends immediately after the other time in the test period.

Note 1: To work out who had rights to more than 50% of the company's dividends, see section 165-155.

Note 2: Subdivision 167-A has special rules for working out rights to dividends in a company whose shares do not all carry the same rights to dividends.

Rights to capital distributions

   (4) There must be persons (none of them companies) who had rights to more than 50% of the company's capital distributions at the start of the test period. Also, those persons must have had rights to more than 50% of the company's capital distributions immediately after the other time in the test period.

Note 1: To work out who had rights to more than 50% of the company's capital distributions, see section 165-160.

Note 2: Subdivision 167-A has special rules for working out rights to capital distributions in a company whose shares do not all carry the same rights to capital distributions.

Subsection 166-145(5) states that in working out whether the conditions in subsections 166-145(2) to (4) are satisfied at the ownership test time, the alternative test for that condition is to be applied. Consequently, the more than 50% voting power, rights to dividends and rights to capital distributions are to be determined in accordance with the alternative tests contained in subsections 165-150(2), 165-155(2) and 165-160(2) respectively (as set out in paragraphs 8, 9 and 10 above).

Concessional tracing rules

Subdivision 166-E also provides a number of concessional tracing rules to assist in determining whether the ownership tests in section 166-145 are satisfied. The concessional tracing rules apply to a company (tested company) that is a widely held company at all times during the income year (section 166-220). The taxpayer was a widely held company at all times during the income year.

The concessional tracing rules make it easier for a widely held company to work out if it satisfies the substantial continuity of ownership test by removing the need for the company to trace ownership of its shares through to the ultimate beneficial owners by attributing such ownership to another entity higher up the chain of ownership or to a single notional entity. The rules may apply where holdings in the company include the following:

   (a) Directly held voting, dividend or capital stakes of less than 10% in the company (section 166-225)

   (b) Indirectly held voting, dividend or capital stakes of less than 10% (section 166-230)

   (c) Stakes of between 10% and 50% that are held by widely held companies (section 166-240).

The rules are considered below.

Direct and Indirect Stakes of less than 10%

Section 166-225 enables a company to which Subdivision 166-E applies (the tested company) to aggregate all direct holdings in it which are less than 10% so as to form a single notional entity for the purposes of the ownership tests. This removes the need for widely held companies to trace ownership interests of less than 10%.

Subsections 166-225(1) and (2) state:

   (1) 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.

Note 1:

Other rules might affect this provision: see sections 166-270, 166-275 and 166-280.

...

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

      (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).

Note:

The persons who actually control the voting power and have rights to dividends and capital are taken not to control that power or have those rights: see section 166-265.

Where section 166-225 applies, for all registered shareholdings carrying less than 10% of the voting power, the voting power is taken to be controlled by the single notional entity. The single notional entity is taken to be a person (other than a company), and is therefore regarded as an ultimate owner for the purpose of the alternative tests in Subdivision 165-D. The same rule applies in relation to rights to dividends and distributions of capital. Section 166-225 treats voting power and rights to dividends and capital separately, so if the voting power, for example, is less than 10% but rights to capital are not, it is only the voting power interest which will be attributable to the single notional entity. The persons who actually hold the power or rights attributed to the single notional entity are taken not to hold those rights for the purposes of the alternative test. This prevents double counting of the voting power and rights to dividends and capital (section 166-265).

For indirect stakes of less than 10% in the tested company, subsections 166-230(1) and (2) provide that:

   (1) This section modifies how the ownership tests in section 166-145 are applied to the tested company if it is the case, or it is reasonable to assume that:

      (a) an entity (the stakeholder) indirectly holds any of these stakes in the tested company:

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

         (ii) a dividend stake that carries the right to receive less than 10% of any dividends that the company may pay; or

         (iii) a capital stake that carries the right to receive less than 10% of any distribution of capital of the company; and

      (b) either:

         (i) the stakeholder indirectly holds the stake in the tested company by holding shares directly in a company (the top interposed entity) that is interposed between the stakeholder and the tested company; or

         (ii) the stakeholder indirectly holds the stake in the tested company by holding another interest directly in an entity (the top interposed entity) that is not a company and that is interposed between the stakeholder and the tested company.

Note 1: There might also be other entities interposed between the top interposed entity and the tested company.

Note 2: Other rules might affect this provision: see subsection (3) and sections 166-272, 166- 275 and 166-280.

   (1) The tests are applied to the tested company as if, at the ownership test time:

      (a) if the stake is a voting stake - the top interposed entity controls, or is able to control, the voting power in the tested company that is carried by that stake at that time; and

      (b) if the stake is a dividend stake - the top interposed entity indirectly had the right to receive for its own benefit, any dividends the tested company may pay in respect of that stake at that time; and

      (c) if the stake is a capital stake - the top interposed entity indirectly had the right to receive, for its own benefit, any distributions of capital of the tested company in respect of that stake at that test time; and

      (d) in any case - the top interposed entity were a person (other than a company).

In these circumstances, the voting, dividend or capital stake is attributed to the top interposed company. The top interposed entity is taken to be a person (other than a company) and is regarded as an ultimate owner for the purpose of the alternative tests in Division 165. The persons who actually hold the power or rights attributed to the top interposed entity are taken not to hold those rights for the purposes of the alternative test (section 166-265). As a consequence, the tested company does not need to trace the beneficial owners of indirect interests in the company that carries less than 10% of the rights to voting, dividends and capital distributions.

The interposition of a holding company (on or after 1 July 2018) between the tested company and a less than 10% direct shareholder does not of itself cause a failure of the COT (subsections 166-230(5) and (6)). In addition, immaterial changes to the proportion of shareholding held by direct shareholders as a result of the interposition do not cause the failure of the COT.

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.

Pursuant to subsections 166-235(1), (3) and (5), an entity has 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 all or any dividends that the company may pay and a right to all or any of a distribution of capital of the company.

Subsection 166-235(2) provides that an entity also holds a voting, stake in a company if one or more entities are interposed between it and the company and the entity can control or is able to control voting power in the company indirectly through the interposed entities. Similarly, an entity also holds a dividend or a capital stake in a company, if one or more other entities are interposed between it and the company and it has the right to receive, for its own benefit and indirectly through the interposed entity or entities, all or any dividends that the company may pay, or all or any of a distribution of capital of the company (subsections 166-235(4) and (6)).

Subsection 166-235(7) provides that for the purposes of section 166-225 and 166-230, where a nominee company holds a voting power, dividend or capital stake in a company but holds the stake for more than one other entity, the parcels of shares held by the nominee company may be treated as separate stakes. This means that if the nominee company's registered shareholdings carry 10% or more of the voting power or rights, but the entities for which it holds the shares each have less than 10% of voting power or rights, each of the stakes of less than 10% can be attributed to the single notional entity.

The EM illustrates this in Example 1.4:

Beta Nominees Ltd is the registered holder of 30% of shares in the tested company (widely held company). It holds those shares on behalf of five different entities, each of which beneficially own 6% of the tested company's shares. Each stake of 6% may be attributed to the single notional entity.

There has only ever been one class of shares on issue in the taxpayer and the shares on issue at all times in the test period carried the same voting, dividend and capital rights.

The taxpayer has, pursuant to subsection 166-225(2), attributed the direct stakes of all registered shareholders of the taxpayer with less than 10% shareholding, to a single notional entity (being the Notional Shareholder).

Consequently, at all times during the Ownership Test Period:

   • the Notional Shareholder and the Substantial Shareholders are the only entities which have held stakes in the taxpayer

   • only the Substantial Shareholders have had an interest of 10% or more in the taxpayer. None of these shareholders, either individually or together, held more than 50% of the shares in the taxpayer

   • the stake attributed to the Notional Shareholder under section 166-225 in the taxpayer was greater than 50%.

Given that the Notional Shareholder has maintained an ownership interest above 50% at each of the applicable test times, there is substantial continuity of ownership of the taxpayer pursuant to section 166-145 during the Ownership Test Period pursuant to subsection 166-5(3).

Widely held company stakes between 10% and 50%

Section 166-240 contains concessional tracing rules relating to stakes held by widely held companies and provides that where a company is a widely held company for the whole of the income year in which the ownership test time occurs, the company is treated as the ultimate owner of a direct or indirect stake in the tested company where the stake is between 10% and 50% (inclusive). Voting, dividend and capital stakes are treated separately. Stakes of less than 10% are not covered by 166-240 but are covered by section 166-225 for direct stakes and 166-230 for indirect stakes.

At all times during the period that ended at the end of any income year, none of the entities that held interests in the taxpayer were widely held companies.

Provisions that affect the operation of section 166-225

Note 1 to subsection 166-225(1) highlights that the operation of section 166-225 may be affected by sections 166-270,166-275and 166-280. These latter provisions are considered below.

Section 166-270: Minimum Interest Rule

Section 166-270 applies to stakes taken to be held by a single notional entity under the tracing rule relating to direct stakes of less than 10% (section 166-225).

Pursuant to subsections 166-270(1) and 166-270(2), the minimum interest rule restricts the total proportion of voting power, dividend rights and 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 to it at the beginning of the test period.

The rule only applies in situations where there has been an increase in the proportion held by the single notional entity. Subsection 166-270(1) states that 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 time start of the test period if all of the following apply:

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

   (b) The single notional entity has voting power in a company

   (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.

Subsection 166-270(2) deals with the minimum percentage of rights to dividends and capital.

Other changes are disregarded for the purposes of section 166-270. Also disregarded are situations where, although there may be an increase in the number of shares that carry voting power or rights, there is no increase in the proportion of voting power or rights held by the single notional entity.

Based on Example 1.3 of the EM, dealing with the minimum interest rule, the total interest attributed to the Notional Shareholder is above 50% at each test time over the test period.

As the stake attributed to the Notional Shareholder in the taxpayer remains above 50% at each test time after applying the minimum interest rule imposed by section 166-270, there is substantial continuity of ownership of the taxpayer pursuant to section 166-145 during the Ownership Test Period.

Section 166-275: No detrimental operation of tracing rules

Section 166-275 provides that where a company fails the COT as a result of applying a tracing rule to a voting, dividend or capital stake and the company believes on reasonable grounds, that if the tracing rule did not modify how the tests apply to the company in respect of that stake, it would not fail the tests, the COT is taken to have been met.

Under section 166-275, a company is taken to have met the conditions in section 165-12 where all of the following apply:

   (a) A tracing rule modified how the ownership test in section 166-145 apply to the tested company in respect of a voting stake, a dividend stake or a capital stake (paragraph 166-275(a))

   (b) The company fails the tests (whether at the time of applying the tracing rule or at another time) (paragraph 166-275 (b))

   (c) The company believes on reasonable grounds, that if the tracing rule did not modify how the tests apply to the company in respect of that stake, it would not fail the tests (paragraph 166-275(c)).

As stated above, the taxpayer may apply the applicable concessional rules in Subdivision 166-E to assist the company in determining whether the ownership tests are satisfied.

It is not considered that section 166-275 has application in this instance.

Section 166-280: Controlled test companies

Section 166-280 provides that in certain circumstances, a tracing rule does not apply to modify how the ownership tests in section 166-145 apply to the tested company in respect of all or part of the voting power in the tested company, or all or some of the rights to dividends of, or capital in, the tested company.

Section 166-280 states:

   (1) A tracing rule does not modify how the ownership tests in section 166-145 apply to the tested company in respect of all or part of the voting power in the tested company, or all or some of the rights to dividends of, or capital in, the tested company, if:

      (a) either:

         (i) an entity (the controlling entity) directly holds that power or has those rights; or

         (ii) an entity (the controlling entity) indirectly holds that power or has those rights through one or more interposed entities; and

      (b) the tested company is sufficiently influenced (within the meaning of paragraph 318(6)(b) of the Income Tax Assessment Act 1936 by the controlling entity.

   (2) A tracing rule does not modify how the ownership tests in section 166-145 apply to the tested company in respect of all or part of the voting power in the tested company if:

      (a) the tested company is a widely held company; and

      (b) that voting power:

         (i) is more than 25% of the total voting power in the tested company and is controlled (whether directly, or indirectly through one or more interposed entities) by a natural person, together with his or her associates; or

         (ii) is more than 50% of the total voting power in the tested company and is controlled (whether directly, or indirectly through one or more interposed entities) by a trustee or company, together with its associates.

A 'tracing rule' is defined in subsection 995-1(1) to include the concessional tracing rules in sections 166-225 and 166-230.

Under subsection 166-280(1), a tracing rule does not apply to modify how the ownership tests apply in respect of voting power or dividend or capital rights held directly or indirectly by an entity that 'sufficiently influences' the tested company.

Paragraph 318(6)(b) of the Income Tax Assessment Act 1936 (ITAA 1936) provides that a company is sufficiently influenced by an entity or entities if the company, or its directors, are accustomed or under an obligation (whether formal or informal), or might reasonably be expected, to act in accordance with the directions, instructions or wishes of the entity or entities (whether those directions, instructions or wishes are, or might reasonably be expected to be, communicated directly or through interposed companies, partnerships or trusts).

Paragraph 1.141 of the EM explains that:

A minority shareholder would not generally be regarded as having sufficient influence over a company merely because it is assertive about how the company or its directors should act, or because it has a representative on the company's board of directors. In contrast, a shareholder may have sufficient influence where under a formal or informal arrangement with other shareholders it is able to control the majority of appointments to the company's board of directors.

Paragraph 1.142 of the EM further states that:

In addition, if the tested company is a widely held company, the tracing rule does not modify how the ownership tests apply in relation to the voting power of the tested company if:

   • a natural person, together with any associates, directly or indirectly, controls more than 25 per cent of the total voting power in the tested company; or

   • a company or trust, together with its associates, directly or indirectly, controls more than 50 per cent of the total voting power in the tested company.

Paragraph 1.145 of the EM states that the controlled test companies rule provided by section 166-280 only prevents the tracing rules applying to:

   • stakes held by controlling entities (the entities with 'sufficient influence or with associates inclusive voting power of more than 25 percent or 50 percent, as the case may be); and

   • stakes held by entities interposed between the tested company and controlling entities.

At all times during the Ownership Test Period, no entity (the controlling entity) directly or indirectly (through one or more interposed entities) held the power over some or all of the rights to voting, dividends or capital in the taxpayer in circumstances where the taxpayer was sufficiently influenced (within the meaning of paragraph 318(6)(b) of the ITAA 1936) by the controlling entity.

Subsection 166-280(2) requires the taxpayer, as a widely held company, to trace its ownership through to the entity who has sufficient influence, the natural person who (with associates) controls more than 25% of the voting power, or the company or trustee which (with associates) controls more than 50% of the voting power.

No natural person (together with any associates) directly or indirectly controls more than 25% of the total voting power in the taxpayer nor are there any companies or trustees which (together with their associates) directly or indirectly control more than 50% of the total voting power in the taxpayer, at each of the ownership test times.

Given that section 166-280 does not apply in the circumstances, the taxpayer is not prevented from applying the concessional tracing rules in section 166-225 for the purposes of the ownership tests in section 166-145.

Provisions that affect the operation of section 166-230

The operation of section 166-230 may be affected by sections 166-272, 166-275 and 166-280 (refer to note in subsection 166-230(1)).

In the taxpayer's circumstances, sections 166-272, 166-275 and 166-280 do not affect the operation of section 166-230.

Conclusion

The taxpayer satisfies the substantial continuity of ownership requirements in subsection 166-5(3) during the Ownership Test Period, as a single notional entity has maintained an ownership interest above 50% at each applicable test time.

Consequently, the taxpayer is taken to have met the conditions in section 165-12 (which requires the entity to have maintained the same owners throughout the Ownership Test Period).

As the taxpayer meets the conditions in section 165-12, as modified by Division 166, the taxpayer is entitled to deduct its carried forward tax losses in the income year.

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