Edited version of private advice

Authorisation Number: 1012645065610

Ruling

Subject: Tax Losses

Question 1

Can the tax losses incurred by A Co, as the head company of the A Co tax consolidated group (A Co TCG) be transferred to B Co, as the head company of the B Co MEC Group, pursuant to section 707-120 of the Income Tax Assessment Act 1997 (ITAA 1997) at the time of A Co joining the B Co MEC Group because the modified same business test in section 707-125 is satisfied?

Answer

Yes.

Question 2

Does A Co, as the head company of the A Co TCG, satisfy the modified continuity of ownership test in Division 166 of the ITAA 1997, in respect of tax losses, as modified under Subdivision 707-A of the ITAA 1997, for the purposes of determining whether the losses can be transferred to B Co, as the head company of the B Co MEC Group, at the time of A Co joining the B Co MEC Group?

Answer

Yes.

Relevant facts and circumstances

1. A Co was the head company of A Co TCG until it joined the B Co MEC Group.

2. When A Co joined the B Co MEC Group, A Co had unutilised losses.

3. A Co failed the continuity of ownership test (COT) in the change year. When COT was failed there was a corporate change as defined in section 166-175 of the ITAA 1997.

4. When A Co failed the COT, D Co, a widely held company, started to hold more than a 10% interest in C Co.

5. Prior to the failure of COT, no single entity beneficially held more than 10% of ordinary shares in C Co, and C Co indirectly held more than 50% of the shares in A Co.

6. More than 50% of the shares in B Co are owned by C Co.

7. C Co is listed for quotation in the official list of an approved stock exchange.

8. Although there have been some expansion and changes, A Co carried on the same business from the first loss year until it joined the B Co MEC Group.

9. From the beginning of the first loss year until it joined the B Co MEC Group, A Co did not derive assessable income from a business of a kind that it did not carry on before.

10. From the beginning of the first loss year until it joined the B Co MEC Group, A Co did not enter into derive income from a transaction of a kind that it had not previously entered into.

11. A Co and B Co have not made a choice under section 166-15 of the ITAA 1997 to apply Subdivision 165-A of the ITAA 1997 without the modifications made by Subdivision 166-A of the ITAA 1997.

12. There are no transferred losses in A Co that were transferred under a previous application of the consolidation loss transfer provisions in Subdivision 707-A of the ITAA 1997.

13. The same ultimate publicly listed entities controlled the voting power of A Co during the period from when A Co failed COT to the time just after it joined the B Co MEC Group.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 165-12

Income Tax Assessment Act 1997 section 165-13

Income Tax Assessment Act 1997 section 165-210

Income Tax Assessment Act 1997 section 166-5

Income Tax Assessment Act 1997 section 166-145

Income Tax Assessment Act 1997 section 166-175

Income Tax Assessment Act 1997 section 166-240

Income Tax Assessment Act 1997 section 707-120

Income Tax Assessment Act 1997 section 707-125

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

Question 1

Based on the facts provided and the operation of section 165-13 of the ITAA 1997 as modified by Division 166 of the ITAA 1997 and sections 707-120 and 707-125 of the ITAA 1997, the test time, change year and trial year were established.

Further, Taxation Ruling TR 2007/2 (TR 2007/2) states that the principles set out in TR 1999/9 in respect of the application of the same business test (SBT) to a single company apply equally to the head company of a consolidated group. In determining the one overall business carried on by the head company of a consolidated group for the purposes of subsection 165-210(1) of the ITAA 1997, it is necessary to have regard to the activities of the subsidiary members of the group.

Further, when applying the new business test and new transactions test to the head company, regard must be had to the enterprises, undertakings and transactions that were carried on or entered into before the test time by entities while they were members of the consolidated group. These activities are then compared with the enterprises, undertakings and transactions carried on or entered into by all entities while they are members of the consolidated group during the SBT period.

Further, activities, undertakings and enterprises taking place within a consolidated group (not involving the derivation of income through dealings outside the group) will be relevant for characterising the business of the head company. Taxation Ruling TR 1999/9 (TR 1999/9) sets out at paragraph 60 guidelines in determining whether a taxpayer has satisfied the SBT.

On the facts of this scheme, it is considered that A Co has carried on the same business during the test time, change year and trial year and thus, has satisfied the SBT.

New Business Test

TR 2007/2 states that when applying the new business test to the head company, regard must be had to the enterprises, undertakings and transactions that were carried on or entered into before the test time by entities while they were members of the consolidated group. These activities are then compared with the enterprises, undertakings and transactions carried on or entered into by all entities while they are members of the consolidated group during the SBT period. This comparison determines whether the enterprises, undertakings and transactions before the test time and during the SBT period are different in kind.

Further, it is not necessary that a business carried on or a transaction entered into during the SBT period by an entity in the group be of a kind carried on by that same entity before the test time. In accordance with the operation of the single entity rule, where an entity within the group undertook a business or transaction of that kind before the test time when that entity was a member of the consolidated group, the new business or new transactions test will be satisfied.

Paragraphs 68 to 77 of TR 1999/9 discuss the application of the new business test.

The new business test looks at each particular undertaking or enterprise carried on or out by the taxpayer, as part of its overall business in the period of recoupment. The new business test limits the expansion available under the SBT. The taxpayer cannot add to its operations a business, that is, an undertaking or enterprise of a kind it had not carried on before the change-over.

Generally, the new business test permits a company to expand or develop during the period of recoupment within the same fields of endeavour as it was engaged in before the change-over provided the effect of the expansion or development is not such as to cause it to fail the SBT.

On the facts of the scheme, it is considered that A Co has satisfied the new business test.

New Transaction Test

The new transaction test is to ensure that a company deducts losses from income from transactions of the same kind as the operations by which it generated income before the change-over.

A company fails the new transactions test if the company derives income during the period of recoupment from a transaction that was of a different kind from the transactions the company had entered into in the course of the business carried on by the company at the change-over, even if the first mentioned transaction is a transaction ordinarily involved in carrying on the business of the taxpayer during the period of recoupment. The new transactions test ensures that the company deducts losses from income from transactions of the same kind as the operations by which it generated income before the change-over.

On the facts of the scheme, it is considered that A Co has satisfied the new transactions test.

Conclusion - SBT

Based on the facts provided, the same business has been carried on between test time and the end of the trail year. Thus, A Co has satisfied the SBT as modified by Subdivision 166-A of the ITAA 1997 and section 707-125 of the ITAA 1997. As the SBT has been passed, the losses incurred by A Co will be transferred to B Co as the head company of the B Co MEC Group.

Question 2

Based on the facts provided, A Co satisfies the COT as modified by Division 166 of the ITAA 1997 and section 707-120 of the ITAA 1997.

Prior to the failure of COT, no single entity beneficially held more than 10% of ordinary shares in C Co, and C Co indirectly held more than 50% of the shares in A Co. Therefore, all the indirect interests held in A Co by ultimate owners through C Co were individual stakes of less than 10%, and thus, in accordance with the rules in section 166-230 of the ITAA 1997, they were all taken to be held by C Co.

Section 166-240 of the ITAA 1997 applies where a widely held company directly or indirectly (through one or more interposed entities), or both directly and indirectly holds a 10%-50% voting stake, dividend stake or capital stake in the tested company. Here, section 166-240 of the ITAA 1997 will apply on the day the COT was failed as D Co, a widely held company, started to hold more than a 10% interest in C Co.

For losses incurred in the income year after COT was failed and for the period between the end of the income year after COT was failed and A Co joining the B Co MEC Group, the modified COT has been passed, as there has been substantial continuity of ownership between the beginning of the after COT was failed and when A Co joined the B Co MEC Group, as the notional shareholder in C Co and D Co indirectly owned more than 50% of the shares in A Co.

Furthermore, as there has been no change in the control of the voting power of A Co during this time, the losses in relation to the income year after COT was failed and for the period between the end of the income year after COT was failed and A Co joining the B Co MEC Group will be transferred to B Co as the head company of the B Co MEC group in accordance with section 707-120 of the ITAA 1997.