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Ruling

Subject: Deducting tax losses of earlier income years - Continuity of ownership test

Issue 1

Question 1

Does the transfer of A Company shares from B Company to C Company result in the 'same share/same interest rule' being failed via subsection 165-165(1) of the Income Tax Assessment Act 1997?

Answer

Yes. Please see our 'Reasons for decision'.

Issue 2

Question 1

If subsection 165-165(1) of the Income Tax Assessment Act 1997 applies, does the transfer of A Company shares from B Company to C Company satisfy the 'savings rule' under subsection 165-12(7) of the Income Tax Assessment Act 1997?

Answer

Yes. Please see our 'Reasons for decision'.

This ruling applies for the following period:

1 July 2012 to 30 June 2013

The scheme commences on:

1 July 2012

Relevant facts and circumstances

A Company has been 100% owned by B Company since at least 1 July 2005.

D Company has owned more than 50% of B Company's shares since at least 1 July 2005.

D Company has been 100% owned by E Company since at least 1 July 2005.

The sole shareholder of E Company has been F since at least 1 July 2005, with all shares carrying equal voting power, rights to dividends and rights to capital distributions.

The effect of the above ownership structure is that F has an indirect ownership of more than 50% of A Company's shares through E Company, D Company and B Company as interposed entities.

As part of a simplification process, the directors want to transfer the ownership of A Company from B Company to C Company for a consideration of $Z as determined via an independent market valuation.

The CGT cost base of B Company's shares in A Company is $Y, and the resulting capital gain will be $Z.

No tax losses have been or will be used in any entity that has a direct or indirect interest in A Company during each of the ownership test periods.

Trading is anticipated to continue as normal after the sale of A Company shares from B Company to C Company, and therefore it is not anticipated to be any reduced assessable income to any entity that has a direct or indirect interest in A Company as a result of this transaction.

The proposed restructure will result in F having an indirect ownership of 100% of A Company's shares through E Company and C Company as interposed entities.

As at 30 June 2011, A Company had tax losses of $X in respect of the following income years:

· 30 June 2011 $W

· 30 June 2009 $V

· 30 June 2006 $U

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 165-10,

Income Tax Assessment Act 1997 Paragraph 165-10(a),

Income Tax Assessment Act 1997 Section 165-12,

Income Tax Assessment Act 1997 Subsection 165-12(1),

Income Tax Assessment Act 1997 Subsection 165-12(2),

Income Tax Assessment Act 1997 Subsection 165-12(3),

Income Tax Assessment Act 1997 Subsection 165-12(4),

Income Tax Assessment Act 1997 Subsection 165-12(6),

Income Tax Assessment Act 1997 Subsection 165-12(7),

Income Tax Assessment Act 1997 Subsection 165-150(2),

Income Tax Assessment Act 1997 Subsection 165-155(2),

Income Tax Assessment Act 1997 Subsection 165-160(2) and

Income Tax Assessment Act 1997 Subsection 165-165(1).

Reasons for decision

Issue 1

Question 1

Summary

The transfer of A Company shares from B Company to C Company will result in the 'same share/same interest rule' being failed via subsection 165-165(1) of the Income Tax Assessment Act 1997.¹

Detailed reasoning

Paragraph 165-10(a) provides that a company can deduct a tax loss if it meets the conditions in section 165-12, which is about the company maintaining the same owners.

In determining whether section 165-10 will prevent A Company from deducting a tax loss, the ownership test periods for the purposes of subsection 165-12(1) will be the periods from the start of the loss years to the end of the income year ended 30 June 2013. In other words, the ownership test periods will be as follows:

· Loss year 30 June 2011 - 1 July 2010 to 30 June 2013

· Loss year 30 June 2009 - 1 July 2009 to 30 June 2013

· Loss year 30 June 2006 - 1 July 2005 to 30 June 2013

When determining if the 'voting power' (subsection 165-12(2)), 'dividends' (subsection 165-12(3)) and 'capital distributions' (subsection 165-12(4)) conditions have been satisfied, subsection 165-12(6) requires the alternative test to be applied as Mr F's indirect interest in A Company will be via interposed companies during each of the ownership test periods.

The 'voting power' condition in subsection 165-12(2) will be satisfied as F will, at all times during each of the ownership test periods, be able to indirectly control the voting power in A Company as his indirect interest will be more than the 50% required by the alternative test in subsection 165-150(2).

The 'dividends' condition in subsection 165-12(3) will be satisfied as F's indirect right to receive A Company's dividends will, at all times during each of the ownership test periods, be more than the 50% required by the alternative test in subsection 165-155(2).

The 'capital distributions' condition in subsection 165-12(4) will be satisfied as Mr F's indirect right to receive A Company's capital distributions will, at all times during each of the ownership test periods, be more than the 50% required by the alternative test in subsection 165-160(2).

Subsection 165-165(1) however states that only those shares and interests in the company that remain exactly the same during each of the ownership test periods can be taken into account when determining if it meets the conditions in section 165-12.

As the A Company shares will be transferred from B Company to C Company, none of F's indirect interest in A Company will remain exactly the same.

Therefore, none of F's indirect interest in A Company can be taken into account when determining if the conditions in section 165-12 will be met. This means that subsection 165-165(1) has applied to result in the failure of the 'same share/same interest rule'.

Issue 2

Question 1

Summary

The transfer of A Company shares from B Company to C Company will satisfy the 'savings rule' under subsection 165-12(7).

Detailed reasoning

Subsection 165-12(7) states that any of the conditions in subsections 165-12(2), 165-12(3) and 165-12(4) will be satisfied, notwithstanding the operation of subsection 165-165(1), if A Company has information from which it would be reasonable to conclude that less than 50% of the tax loss has been reflected in:

· deductions that occurred, or could occur in future, because of the happening of any CGT event in relation to any of its direct or indirect interests during each of the ownership test periods

· capital losses that occurred, or could occur in future, because of the happening of any CGT event in relation to any of its direct or indirect interests during each of the ownership test periods, or

· reduced assessable income that occurred, or could occur in future, because of the happening of any CGT event in relation to any of its direct or indirect interests during each of the ownership test periods.

As the direct and indirect ownership interests have remain unchanged since at least 1 July 2005, the only CGT event with respect to those interests during each of the ownership test periods will be the sale of A Company shares from B Company to C Company.

Therefore based on the relevant facts we accept that the savings provision in subsection 165-12(7) will be satisfied, as none of the tax losses will be reflected in:

· deductions of any entity that has a direct or indirect interest in A Company during each of the ownership test periods

· capital losses of any entity that has a direct or indirect interest in A Company during each of the ownership test periods, and

· reduced assessable income of any entity that has a direct or indirect interest in A Company during each of the ownership test periods.