New Business Tax System (Integrity and Other Measures) Act 1999 (Incorporating amendments up to Act No. 78 of 2001) (169 of 1999)

Schedule 6   Changes in ownership or control of company

Income Tax Assessment Act 1997

6   After Subdivision 165-CB

Insert:

Subdivision 165-CC - Change of ownership or control of company that has an unrealised net loss

Guide to Subdivision 165-CC

165-115 What this Subdivision is about

If a change occurs in the ownership or control of a company that has an unrealised net loss, the company cannot, to the extent of the unrealised net loss, have *capital losses taken into account, or deduct revenue losses, in respect of *CGT events that happen to *CGT assets that it owned at the time of the change, unless it satisfies the same business test.

Table of sections

Operative provisions

165-115A Application of Subdivision

165-115B What happens when the company makes a capital loss or becomes entitled to a deduction in respect of a CGT asset owned at a changeover time

165-115C Change in ownership of company

165-115D Change in control of company

165-115E What is an unrealised net loss

165-115F Notional gains and losses

[This is the end of the Guide.]

Operative provisions

165-115A Application of Subdivision

Application

(1) This Subdivision applies to a company if:

(a) a changeover time has occurred or occurs in relation to the company after the commencement time; and

(b) at the changeover time the company had an unrealised net loss (see section 165-115E); and

(c) the company makes a *capital loss, or apart from this section would be entitled to a deduction, in respect of a *CGT event that happens to a *CGT asset that the company owned at the changeover time.

Commencement time

(2) For the purposes of this Subdivision, the commencement time of a company is:

(a) if the company was in existence at 11.45 am (by legal time in the Australian Capital Territory) on 21 September 1999 - that time; or

(b) if the company came into existence after that time - the time when it came into existence.

Asset owned at more than one changeover time

(3) If:

(a) 2 or more changeover times have occurred or occur in relation to a company; and

(b) the company owned a particular asset at more than one of those changeover times;

this Subdivision applies to the company in respect of that asset only in relation to the later or latest of those changeover times.

Note: For changeover time see sections 165-115C and 165-115D.

165-115B What happens when the company makes a capital loss or becomes entitled to a deduction in respect of a CGT asset owned at a changeover time

Where capital loss or deduction is equal to or less than residual unrealised net loss

(1) If the *capital loss or deduction referred to in paragraph 165-115A(1)(c) is equal to or less than the company's residual unrealised net loss at the time of the occurrence of the event that resulted in the capital loss or entitled the company to the deduction:

(a) the capital loss is taken to have been a *net capital loss; or

(b) the deduction is taken to have been a *tax loss;

of the company for the income year immediately before the income year in which the changeover time occurred.

Where capital loss or deduction is greater than residual unrealised net loss

(2) If the *capital loss or deduction referred to in paragraph 165-115A(1)(c) is greater than the company's residual unrealised net loss at the time of the occurrence of the event that resulted in the capital loss or entitled the company to the deduction:

(a) the part of the capital loss that is equal to that unrealised net loss is taken to have been a *net capital loss; or

(b) the part of the deduction that is equal to that unrealised net loss is taken to have been a *tax loss;

of the company for the income year immediately before the income year in which the changeover time occurred.

Company does not meet certain conditions in relation to net capital loss or tax loss

(3) The company is taken not to have met, at the changeover time, the conditions in subsections 165-12(2), (3) and (4) in relation to the *net capital loss or the *tax loss. For the purposes of the application of section 165-13 in relation to the company, the continuity period is taken to have ended at the changeover time.

Need to meet same business test

(4) The effect of subsection (3) is that the company cannot apply the *net capital loss (see section 165-10 as it applies because of section 165-96), or deduct the *tax loss (see section 165-10), unless it meets the conditions in section 165-13 (the same business test).

Consequences for net capital loss

(5) The *net capital loss cannot be applied against *capital gains made in an income year before the income year in which the company made the capital loss referred to in paragraph 165-115A(1)(c).

Consequences for tax loss

(6) The *tax loss cannot be deducted from assessable income derived in an income year before the income year in which the company would have been entitled to the deduction referred to in paragraph 165-115A(1)(c).

Order in which assets to be applied

(7) In applying subsection (2) in respect of assets that the company owned at the changeover time:

(a) the company's *capital losses are taken to have been made, and the company is taken to have become entitled to deductions, in the order in which the events that resulted in the capital losses or deductions occurred; and

(b) if 2 or more such events occurred at the same time, they are taken to have occurred in such order as the company determines.

Residual unrealised net loss

(8) The company's residual unrealised net loss , at the time of an event (the relevant event ) that resulted in the company making a *capital loss, or resulted in the company becoming entitled to a deduction, in respect of an asset, is the amount worked out using the following formula:

(Unrealised net loss - Previous capital losses or deductions)

where:

previous capital losses or deductions means capital losses that the company made, or deductions to which the company became entitled, as a result of events earlier than the relevant event in respect of other assets that the company owned at the changeover time.

unrealised net loss means the company's unrealised net loss at the last changeover time that occurred before the relevant event.

Note: For changeover time see sections 165-115C and 165-115D.

165-115C Change in ownership of company

(1) A change takes place in the ownership of a company at a particular time (a changeover time ) if:

(a) persons who had *more than 50% of the voting power in the company at the reference time do not have more than 50% of that voting power immediately after the changeover time; or

(b) persons who had rights to *more than 50% of the company's dividends at the reference time do not have rights to more than 50% of those dividends immediately after the changeover time; or

(c) persons who had rights to *more than 50% of the company's capital distributions at the reference time do not have rights to more than 50% of those distributions immediately after the changeover time.

Note 1: See section 165-150 to work out who had more than 50% of the voting power in the company.

Note 2: See section 165-155 to work out who had rights to more than 50% of the company's dividends.

Note 3: See section 165-160 to work out who had rights to more than 50% of the company's capital distributions.

(2) To work out whether paragraph (1)(a), (b) or (c) applied at a particular time, apply the primary test unless subsection (3) requires the alternative test to be applied.

Note: For the primary test see subsections 165-150(1), 165-155(1) and 165-160(1).

(3) Apply the alternative test if one or more other companies beneficially owned *shares or interests in shares in the company at the reference time.

Note: For the alternative test see subsections 165-150(2), 165-155(2) and 165-160(2).

(4) For the purposes of the application of this section to a company at a changeover time, the reference time is:

(a) if no changeover time has previously occurred - the commencement time; or

(b) otherwise - the time immediately after the last preceding changeover time.

165-115D Change in control of company

(1) A change takes place in the control of a company at a particular time (a changeover time ) if, at that time:

(a) a person who did not control, or was not able to control, the voting power in the company:

(i) if no changeover time has previously occurred - at the commencement time; or

(ii) otherwise - immediately after the last changeover time;

began to control, or became able to control, that voting power; and

(b) that person so began, or became able, to control that voting power for the purpose of:

(i) getting some benefit or advantage in relation to how this Act applies; or

(ii) getting such a benefit or advantage for someone else;

or for purposes including that purpose.

(2) In this section:

control of the voting power in a company means control of that voting power either directly, or indirectly through one or more interposed entities.

165-115E What is an unrealised net loss

The question whether a company has an unrealised net loss at a particular time (the relevant time ) is worked out in this way.

Method statement

Step 1. Work out under section 165-115F in respect of each *CGT asset that the company owned at the relevant time any notional capital gain or notional revenue gain or any notional capital loss or notional revenue loss that the company has at that time in respect of the asset.

The sum of the notional capital gains is the company's unrealised capital gain at the relevant time.

The sum of the notional capital losses is the company's unrealised capital loss at the relevant time.

The sum of the notional revenue gains is the company's unrealised revenue gain at the relevant time.

The sum of the notional revenue losses is the company's unrealised revenue loss at the relevant time.

Step 2. Add up the unrealised capital gain and the unrealised revenue gain at the relevant time. The total is the unrealised gross gain at that time.

Step 3. Add up the unrealised capital loss and the unrealised revenue loss at the relevant time. The total is the unrealised gross loss at that time.

Step 4. If the unrealised gross loss at the relevant time exceeds the unrealised gross gain at that time, the excess is the company's unrealised net loss at that time.

165-115F Notional gains and losses

(1) This section applies for the purpose of calculating whether a company has at a particular time (the relevant time ) a notional capital gain, a notional capital loss, a notional revenue gain or a notional revenue loss in respect of a *CGT asset that it owned at that time.

(2) The calculation is to be made on the assumption that the company disposed of the asset at its market value at the relevant time.

(3) In relation to an asset other than an item of trading stock:

(a) if the company would make a *capital gain in respect of the disposal of the asset - the company has at the relevant time in respect of the asset a notional capital gain equal to the amount of the capital gain; or

(b) if an amount (other than a capital gain) would be included in the company's assessable income in respect of the disposal of the asset - the company has at the relevant time in respect of the asset a notional revenue gain equal to the amount so included; or

(c) if the company would make a *capital loss in respect of the disposal of the asset - the company has at the relevant time in respect of the asset a notional capital loss equal to the amount of the capital loss; or

(d) if the company would be entitled to a deduction in respect of the disposal of the asset - the company has at the relevant time in respect of the asset a notional revenue loss equal to the amount of the deduction.

(4) In relation to an asset that is an item of trading stock:

(a) if the item's market value at the relevant time exceeds:

(i) in respect of an item that has been valued under Division 70 - the item's latest valuation under that Division; or

(ii) otherwise - the *cost of the item at the relevant time;

the company has at the relevant time in respect of the article a notional revenue gain equal to the excess; or

(b) if the item's market value at the relevant time is less than:

(i) in respect of an item that has been valued under Division 70 - the item's latest valuation under that Division; or

(ii) otherwise - the *cost of the item at the relevant time;

the company has at the relevant time in respect of the article a notional revenue loss equal to the difference.