Edited version of your private ruling

Authorisation Number: 1012121631501

This edited version of your ruling will be published in the public register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Ruling

Subject: Income Tax: Deducting a prior year tax loss

Question

For the purposes of working out whether there has been a change in the ownership and control of Holding Co Pty Ltd (Holding Co) under Division 165 of the Income Tax Assessment Act 1997 (ITAA 1997); does the appointment of an additional director of Trustee Co Pty Ltd (Trustee Co) as Trustee for the Holding Trust result in a new group beginning to control the Holding Trust under section 267-45 of Schedule 2F to the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2011.

The scheme commenced:

1 July 2010.

Relevant facts and circumstances

Holding Co is the head company of a tax consolidated group (the Holding Co group), taking effect from 1 July 2003. All the membership interests in Holding Co are held by Trustee Co as trustee for the Holding Trust.

Holding Co holds 100% of the shares in various entities, which make up the Holding Co group. Through these entities Holding Co holds both direct and indirect interests in a range of companies including listed public companies and property trusts.

Holding Co has tax losses carried forward from earlier income years.

An individual will be appointed as an additional director of Trustee Co during the year ended 30 June 2011.

Holding Co is required to work out whether there has been a change in the ownership and control under Division 165 of the Income Tax Assessment Act 1997 (ITAA 1997) for the purposes of deducting a tax loss (of an earlier income year) in the year ended 30 June 2011 under Division 36 of the ITAA 1997.

The Holding Trust

The Holding Trust is a non-fixed trust for income tax purposes, in accordance with section 272-70 of Schedule 2F to the ITAA 1936. No family trust election has been made.

The Holding Trust was established by a trust deed. The trust deed sets out the operational aspects of the trust and defines the objects of the trust and various terms used within the trust deed. The trust deed also specifies the powers of the trustee, including how the trustee is to treat the income and capital of the trust in various circumstances.

The trust deed has been amended over time. Changes made to the trust deed do not give rise to a resettlement of the trust.

Trustee Co

Trustee Co is beneficially owned in equal proportions by an individual and a company. No discretionary object of the Holding Trust is a director of the company.

Trustee Co is governed by its Memorandum and Articles of Association (the articles). Among other things, the articles set out the appointment, remuneration and removal of directors; the powers and duties of directors; and the proceedings of directors.

There have been a number of previous appointments of additional directors of Trustee Co. Those appointments of additional directors did not result in a new group beginning to control the Holding Trust under section 267-45 of Schedule 2F to the ITAA 1936.

The existing directors of Trustee Co are not an 'associate' of each other or of Trustee Co within the meaning of associate defined under section 318 of the ITAA 1936.

Additional director of Trustee Co

An individual will be appointed as an additional director of Trustee Co.

The individual does not presently and has never fallen within the definition of General Beneficiary under the Holding Trust deed. The individual signed a Deed Poll in respect of the Holding Trust, to unconditionally renounce any present interest which they might have, or any future interest that may arise, in respect of the trust.

The individual is not a member of any family group that is an object of the trust.

The individual is not an 'associate' of any director of Trustee Co within the meaning of associate defined under section 318 of the ITAA 1936.

There has been and is no individual that acts, who were accustomed to act, or could reasonably be expected to act in accordance with the directions, instructions or wishes of the individual or any of the other directors of Trustee Co (either individually or jointly).

Relevant legislative provisions

Income Tax Assessment Act 1936 Schedule 2F

Income Tax Assessment Act 1936 Subdivision 267-B

Income Tax Assessment Act 1936 Section 267-20

Income Tax Assessment Act 1936 Section 267-45

Income Tax Assessment Act 1936 Subsection 269-E

Income Tax Assessment Act 1936 Section 269-50

Income Tax Assessment Act 1936 Section 269-95

Income Tax Assessment Act 1936 Subsection 269-95(1)

Income Tax Assessment Act 1936 Subsection 269-95(4)

Income Tax Assessment Act 1936 Subsection 269-95(5)

Income Tax Assessment Act 1936 Section 318

Income Tax Assessment Act 1936 Section 318(1)

Income Tax Assessment Act 1936 Section 318(2)

Income Tax Assessment Act 1936 Section 318(3)

Income Tax Assessment Act 1936 Section 318(6)

Income Tax Assessment Act 1997 Subdivision 165-A

Income Tax Assessment Act 1997 Section 165-10

Income Tax Assessment Act 1997 Section 165-12

Income Tax Assessment Act 1997 Section 165-215

Income Tax Assessment Act 1997 Subsection 165-215(5).

Further issues for you to consider

There are other conditions in section 165-215 of the ITAA 1997 and section 267-20 of Schedule 2F to the ITAA 1936 that must also be satisfied before a company is eligible to claim a deduction for prior year losses under Division 36 of the ITAA 1997.

Reasons for decision

These reasons for decision accompany the Notice of private ruling.

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Question

Detailed reasoning

General discussion of the law

Deducting tax losses

Subdivision 165-A of the ITAA 1997 contains the conditions for determining if a company is able to deduct a tax loss under Division 36 of the ITAA 1997.

Section 165-10 of the ITAA 1997 provides that a company cannot deduct a tax loss unless it meets the conditions in section 165-12 of the ITAA 1997 (the continuity of ownership test) or meets the conditions in section 165-13 of the ITAA 1997 (the same business test).

Section 165-215 of the ITAA 1997 provides a special alternative test to the change of ownership test for Subdivision 165-A of the ITAA 1997. Section 165-215 of the ITAA 1997 contains four conditions which must be met if a company is to be deemed to have passed the continuity of ownership test contained in section 165-12 of the ITAA 1997. In particular it is the fourth condition that is of relevance to this ruling, which is contained in subsection 165-215(5) of the ITAA 1997 and provides:

It must be the case that, for each non-fixed trust (other than an excepted trust) that, at any time during the ownership test period, held directly or indirectly a fixed entitlement to a share of the income or capital of the company, section 267-20 of Schedule 2F to the Income Tax Assessment Act 1936 would not have prevented the non-fixed trust from deducting the tax loss concerned if it, rather than the company, had incurred the tax loss.

Under section 267-20 of Schedule 2F to the Income Tax Assessment Act 1936 (ITAA 1936), a non-fixed trust may be denied a deduction for a tax loss if it does not satisfy the conditions in subsection 267-20(2) of Schedule 2F to the ITAA 1936, which provides:

267-20(2) The trust cannot deduct the tax loss unless it meets:

· The condition in subsection 267-30(2) (if applicable); and

· The condition in section 267-35; and

· The condition in subsection 267-40(2) (if applicable); and

· The condition in section 267-45.

For the purposes of this ruling it is the condition set out in section 267-45 of Schedule 2F to the ITAA 1936 that is relevant.

Under section 267-45 of Schedule 2F to the ITAA 1936 'A group must not, during the test period, begin to control the trust directly or indirectly'. This section refers to Subdivision 269-E of Schedule to F to the ITAA 1936 to determine what it means for a group to control the trust.

Control of a non-fixed trust

Under subsection 269-95(1) of Schedule 2F to the ITAA 1936, a group 'controls a non-fixed' trust if any of these circumstances apply:

· the group has power, by means of the exercise of a power of appointment or revocation or otherwise, to obtain beneficial enjoyment (directly or indirectly) of the capital or income of the trust; or

· the group is able (directly or indirectly) to control the application of the capital or income of the trust; or

· the group is capable, under a scheme, of gaining the beneficial enjoyment in paragraph (a) the control in paragraph (b); or

· the trustee is accustomed, under an obligation or might reasonably be expected to act in accordance with the directions, instructions or wishes of the group;

· the group is able to remove or appoint the trustee; or

(f) the group acquires more than a 50% stake in the income or capital of the trust.

A 'group' is defined in subsection 269-95(5) of Schedule 2F to the ITAA 1936 as:

· a person; or

· a person and one or more associates; or

· 2 or more associates of a person.

For the purposes of paragraph 269-95(1)(f) of Schedule 2F to the ITAA 1936, a group acquires more than a 50% stake in income or capital of a trust in the way set out under section 269-50 of Schedule 2F to the ITAA 1936, which provides:

SECTION 269-50 MORE THAN A 50% STAKE IN INCOME OR CAPITAL

More than a 50% stake in income

269-50(1)

If there are individuals who have (between them), directly or indirectly, and for their own benefit, fixed entitlements to a greater than 50% share of the income of a trust, those individuals have more than a 50% stake in the income of the trust.

More than a 50% stake in capital

269-50(2)

If there are individuals who have (between them), directly or indirectly, and for their own benefit, fixed entitlements to a greater than 50% share of the capital of the trust, those individuals have more than a 50% stake in the capital of the trust.

An associate, as referred to in subsection 269-95(5) of Schedule 2F, is defined in section 272-140 of Schedule 2F of the ITAA 1936 as having the same meaning as in section 318 of the ITAA 1936. The definition of associate in section 318 of the ITAA 1936 includes:

318(1) [Associates of a natural person]

For the purposes of this Part, the following are associates of an entity (in this subsection called the "primary entity") that is a natural person (otherwise than in the capacity of trustee):

(a) a relative of the primary entity;

(b) a partner of the primary entity or a partnership in which the primary entity is a partner;

(c) if a partner of the primary entity is a natural person otherwise than in the capacity of trustee - the spouse or a child of that partner;

(d) a trustee of a trust where the primary entity, or another entity that is an associate of the primary entity because of another paragraph of this subsection, benefits under the trust;

(e) a company where:

(i) the company is sufficiently influenced by:

(A) the primary entity; or

(B) another entity that is an associate of the primary entity because of another paragraph of this subsection; or

(C) another company that is an associate of the primary entity because of another application of this paragraph; or

(D) 2 or more entities covered by the preceding sub-subparagraphs; or

(ii) a majority voting interest in the company is held by:

a) the primary entity; or

b) the entities that are associates of the primary entity because of subparagraph (i) of this paragraph and the preceding paragraphs of this subsection; or

c) the primary entity and the entities that are associates of the primary entity because of subparagraph (i) of this paragraph and because of the preceding paragraphs of this subsection.

318(2) [Associates of a company]

For the purposes of this Part, the following are associates of a company (in this subsection called the "primary entity"):

(a) a partner of the primary entity or a partnership in which the primary entity is a partner;

(b) if a partner of the primary entity is a natural person otherwise than in the capacity of trustee - the spouse or a child of that partner;

(c) a trustee of a trust where the primary entity, or another entity that is an associate of the primary entity because of another paragraph of this subsection, benefits under the trust;

(d) another entity (in this paragraph called the "controlling entity") where:

(i) the primary entity is sufficiently influenced by:

(A) the controlling entity; or

(B) the controlling entity and another entity or entities; or

(ii) a majority voting interest in the primary entity is held by:

(A) the controlling entity; or

(B) the controlling entity and the entities that, if the controlling entity were the primary entity, would be associates of the controlling entity because of subsection (1), because of subparagraph (i) of this paragraph, because of another paragraph of this subsection or because of subsection (3);

(e) another company (in this paragraph called the "controlled company") where:

(i) the controlled company is sufficiently influenced by:

(A) the primary entity; or

(B) another entity that is an associate of the primary entity because of another paragraph of this subsection; or

(C) a company that is an associate of the primary entity because of another application of this paragraph; or

(D) 2 or more entities covered by the preceding sub-subparagraphs; or

(ii) a majority voting interest in the controlled company is held by:

(A) the primary entity; or

(B) the entities that are associates of the primary entity because of subparagraph (i) of this paragraph and the other paragraphs of this subsection; or

(C) the primary entity and the entities that are associates of the primary entity because of subparagraph (i) of this paragraph and the other paragraphs of this subsection;

(f) any other entity that, if a third entity that is an associate of the primary entity because of paragraph (d) of this subsection were the primary entity, would be an associate of that third entity because of subsection (1), because of another paragraph of this subsection or because of subsection (3).

318(3) [Associates of a trustee]

For the purposes of this Part, the following are associates of a trustee (in this subsection called the "primary entity"):

(a) any entity that benefits under the trust;

(b) if a natural person benefits under the trust - any entity that, if the natural person were the primary entity, would be an associate of that natural person because of subsection (1) or because of this subsection;

(c) if a company is an associate of the primary entity because of paragraph (a) or (b) of this subsection - any entity that, if the company were the primary entity, would be an associate of the company because of subsection (2) or because of this subsection.

318(6) [Interpretation]

For the purposes of this section:

(a) a reference to an entity benefiting under a trust is a reference to the entity benefiting, or being capable (whether by the exercise of a power of appointment or otherwise) of benefiting, under the trust, either directly or through any interposed companies, partnerships or trusts; and

(b) a company is sufficiently influenced by an entity or entities if the company, or its director, 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); and

(c) an entity or entities hold a majority voting interest in a company if the entity or entities are in a position to cast, or control the casting of, more than 50% of the maximum number of votes that might be cast at a general meeting of the company.

ATO Interpretative Decision ATO ID 2005/276 and ATO Interpretative Decision ATO ID 2007/59 both discuss whether a group begins to take control of a non-fixed trust under subsection 269-95 of Schedule 2F to the ITAA 1936 as a result of the resignation of, or the death of, a director respectively.

In ATO ID 2005/276 and ATO ID 2007/59 the circumstances include that the number of groups had changed as a result of the resignation or death of the director. However the operation and control of the trust continued such that, of the remaining groups, no group possessed the ability to begin controlling the non-fixed trust.

Although the circumstances in these ATO IDs differ from this case; the same principles apply. Being that, the act of making a change in the number of directors of a trustee, does not necessarily result in a group beginning to control the trust. It is the circumstances of the groups remaining after that change that will determine whether a new group begins to control the trust.

Application of the law

In analysis of the facts and with reference to the definition of associate of a natural person as defined under subsection 318(1) of the ITAA 1936, it is considered that the additional director and the existing directors are not associates of each other.

In addition, according to the definition of an associate of a company as defined under section 318(2) of the ITAA 1936, it is considered that the additional director and the existing directors are not associates of Trustee Co or Holding Co.

Further, as the additional director and the existing directors are not beneficiaries and are not capable of benefitting either directly or indirectly from the trust, within the meaning set out under subsection 318(6) of the ITAA 1936; it is considered that each of those individuals are not an associate of a trustee within the meaning as defined in subsection 318(3) of the ITAA 1936.

For the purposes of Subdivision 269-E of Schedule 2 F to the ITAA 1936, with regard to the definition of group under subsection 269-95(5) of Schedule 2F to the ITAA 1936; it is considered that the additional director and the existing directors individually constitute separate groups.

Under Trustee Co's Memorandum and Articles of Association, resolutions made by the directors must be passed by a majority of votes of directors present at the meeting and no single individual has the power to achieve a majority vote. Decisions of the directors will continue to be decided by a majority vote.

In examining the conditions under subsection 269-95(1) of Schedule 2F to the ITAA 1936 that indicate whether a group controls a non-fixed trust, as each of the individual directors of Trustee Co constitute a separate group, and with regard to the facts, it is considered that:

· no group has power, by means of the exercise of a power of appointment or revocation or otherwise, to obtain beneficial enjoyment (directly or indirectly) of the capital or income of the Holding Trust

· no group is able (directly or indirectly) to control the application of the capital or income of the Holding Trust

· no group is capable, under a scheme, of gaining the beneficial enjoyment in , or the control of, the income or capital of the Holding Trust

· there is no evidence to suggest that the trustee is accustomed, under an obligation, or might reasonably be expected, to act in accordance with the directions, instructions or wishes of a group

· no group is able to remove or appoint the trustee

· no group has acquired more than a 50% stake in the income or capital of the Holding Trust.

Therefore, for the purposes of working out whether there has been a change in the ownership and control of Holding Co under Division 165 of the ITAA 1997; the appointment of an additional director of Trustee Co as Trustee for the Holding Trust does not result in a new group beginning to control the Holding Trust under section 267-45 of Schedule 2F to the ITAA 1936.