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Ruling

Subject: Prior year tax losses - amalgamated entities

Question 1

Is the amalgamated entity entitled to claim prior year tax losses of the pre amalgamated entities pursuant to section 165-13 of the Income Tax Assessment Act 1997 (ITAA 1997).

Advice/Answers

No

This ruling applies for the following period

Year ended 31 May 2011

Year ended 31 May 2012

Year ended 31 May 2013

Year ended 31 May 2014

The scheme commenced on

2010

Relevant facts

A number of incorporated entities were amalgamated to form a new entity.

Each of the pre amalgamated entities had carry forward tax losses.

The relevant section of an Act pertaining to the amalgamation of the incorporated entities considers the amalgamation a merger of assets and liabilities with the rights and liabilities of the original entities becoming the rights and liabilities of the new entity.

The new entity is conducting the same business activities of the pre-amalgamated entities and there was no change in the underlying members of each entity as a result of the amalgamation.

Assumptions

None

Relevant legislative provisions

Income Tax Assessment Act 1997 - Section 36 -10

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 - 210

Reasons for decision

Issue 1

Question 1

Division 36 of the ITAA 1997 provides for the deduction of tax losses incurred in earlier income years.

Section 36-10 of the ITAA 1997 provides that the tax loss for an income year is the excess of deductions over the sum of assessable income and net exempt income. That section uses the expression 'your tax loss' when describing the situation where a taxpayer has such an excess of deductions over the sum of assessable income and net exempt income for a particular income period.

Item 2 of the table in section 36-25 Tax Loss of Companies Item 2 provides:

A company wants to deduct a tax loss. It cannot do so unless:

(a) the same people owned the company during the loss year, the income year and intervening year; and

(b) no person controlled the company's voting power at any time during the income year who did not also control it during the whole of the loss year and any intervening year;

(c) or the company has satisfied the same business test

Division 165 of the ITAA 1997 outlines the rules which must be applied in relation to the utilisation of prior year tax losses by a company.

Under section 165-10 of the ITAA 1997, a company cannot deduct a tax loss unless it satisfies either the continuity of ownership test (COT) under section 165-12 of the ITAA 1997, or the same business test (SBT) under section 165-13 of the ITAA 1997.

The COT requires that the same natural persons beneficially own shares carrying more than half the voting, dividend and capital rights at all times during the test ownership period.

To satisfy the SBT, subsection 165-210(1) of the ITAA 1997 provides that a company must carry on the same business throughout the deduction year as it carried on immediately before the change in ownership occurred (test time). The ownership test period commences at the start of the tax loss period and ends at the end of the deduction period.

Under subsection 165-210(2) of the ITAA 1997, a company does not satisfy the same business test if at any time during the deduction year, the company derives assessable income from:

· A business of a kind that it did not carry on before the change of ownership (paragraph 165-210(2)(a));

· A transaction of a kind that it had not entered into in the course of its business operations before the change of ownership (paragraph 165-210(2)(b)).

Before we can consider the COT or the SBT, it needs to be determined if the entity which incurred the prior year tax losses is the same entity that is claiming the losses.

In the case 52/96 ATC 498; (1966) 33 ATR 1174, the taxpayer was a social and sporting club that merged with a golf club. The amalgamation was accomplished by the liquidation of the golf club and the transfer of its net assets to the taxpayer. The golf club had incurred losses in the year ended 30 June 1994 and the previous seven years.

The taxpayer claimed that these carry forward losses were available as a deduction against its assessable income in the year of income ended 30 June 1994. The Commissioner disagreed and the taxpayer sought a review of the Commissioner's decision.

The Commissioner contended that there was no merger or amalgamation of the two continuing entities into one. He contended that the factual position was that one entity, the taxpayer, had continued and had simply acquired the assets and liabilities of the golf club which had been dissolved.

It was held:

1. There was a clear requirement for the taxpayer who seeks a deduction for the prior year losses to be the same taxpayer that incurred the losses.

2. The taxpayer, as it was prior to 31 May 1994, was not a taxpayer who incurred losses in prior years. Another taxpayer incurred the losses. The golf club which incurred the losses was a separate entity which ceased to exist when it was dissolved.

In that case, BH Pascoe (Senior Member) stated at 96 ATC 500:

…There was no continuation of the former entity of the golf club. Thereafter the entity may have continued the operations of the operations formerly carried on by the golf club and former members of the golf club may have become members of the applicant, but the applicant remained the same legal entity as it had been prior to the acquisition. The position is no different to any trading company which acquires business and assets of another company. Any losses incurred by the other company cannot be deducted from income of the purchaser. Here, while the members and even their advisers, may have described what happened with the two clubs as a merger or amalgamation with the operations of the two now being carried on under one name instead of two, the fact is that one club disappeared and no longer exists. The applicant did not incur the losses in question and in any prior year or in the year ended 30 June 1994. The applicant was the taxpayer at 31 may 1994 and, presumably will continue to be the taxpayer in future years but the losses were not incurred by that taxpayer and they were not the taxpayer's losses.

This view has been confirmed by the Commissioner in ATO ID 2003/1118.

Based on the information provided, it is acknowledged that the new entity is conducting the same business that was conducted by the entities which amalgamated to form it. It is also acknowledged that under the relevant section of the relevant Act, the business obligations (rights and liabilities) along with the assets of the amalgamated entities will automatically vest in the new entity.

However, for tax law purposes, the AAT has held that where two entities merge and commence trading as a single entity then the original entity has ceased to exist (Case 52/96), and a deduction for the prior tax losses incurred by the pre existing entity is no longer available to the new entity.

Prior to the amalgamation, there were a number of separate legal entities recognised at law. The amalgamation of the original entities into the new body has meant that a new entity has been created and the original entities are no longer operational.

There is no provision within the legislation to allow a taxpayer a deduction for a tax loss incurred by another taxpayer.

The new entity has not incurred any tax losses itself. The pre amalgamated entities are separate entities for tax law purposes and the new entity is unable to deduct the tax losses of the pre amalgamated entities. The SBT does not apply in this case because the amalgamated entity is a new entity which has not incurred tax losses of which it is seeking to deduct in the period under this ruling. For the same reason, the COT does not apply either.

Therefore, the new entity is not eligible to claim a deduction for the prior year tax losses that were generated by any of the pre amalgamated entities.