Edited version of your written advice

Authorisation Number: 1012693717627

Ruling

Subject: Continuity of ownership test (COT)

Question:

During the relevant income year, did Company A pass the COT under section 165-12 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer:

Yes

This ruling applies for the following period

Year ended 30 June 20YY

The scheme commenced on

1 July 20XX

Facts

In the relevant income year Company A undertook a transaction that constituted a corporate change as per section 166-175(1) of the ITAA 1997.

Company A's shares carry the same voting, dividend and capital rights.

At 1 July 20XX, Company A's shares were owned as follows:

• Company B 15%

• Company C 15%

• Other (each less than 10%) 70%

After the transaction, Company A's shares were owned as follows:

• Company B 15%

• Other (each less than 10%) 75%

At 30 June 20YY, Company A's shares were owned as follows:

• Company B 20%

• Other (each less than 10%) 80%

Company A has not made a choice that the COT applies to it without modification under subsection 166-15(1) of the ITAA 1997.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 166-E

Income Tax Assessment Act 1997 Division 165

Income Tax Assessment Act 1997 Division 166

Income Tax Assessment Act 1997 section 165-12

Income Tax Assessment Act 1997 section 166-3

Income Tax Assessment Act 1997 subsection 166-5(3)

Income Tax Assessment Act 1997 subsection 166-15(1)

Income Tax Assessment Act 1997 section 165-145

Income Tax Assessment Act 1997 section 166-225

Income Tax Assessment Act 1997 section 166-230

Income Tax Assessment Act 1997 section 166-235

Income Tax Assessment Act 1997 section 166-240

Income Tax Assessment Act 1997 section 166-272

Income Tax Assessment Act 1997 section 166-275

Income Tax Assessment Act 1997 paragraph 166-275(a)

Income Tax Assessment Act 1997 paragraph 166-275(b)

Income Tax Assessment Act 1997 paragraph 166-275(c)

Income Tax Assessment Act 1997 subsection 995-1

Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision

Section 165-12 of the ITAA 1997 details the COT a company must satisfy in order to be able to deduct losses of earlier years. The COT requires that shares carrying more than 50% of the voting, dividend and capital rights be beneficially owned by the same persons at all times during the ownership test period. The ownership test period is the period from the start of the loss year to the end of the income year in which the loss is to be deducted.

Section 166-3 of the ITAA 1997 states that Division 166 of the ITAA 1997 modifies the COT in Division 165 of the ITAA 1997 to make it easier for (relevantly) widely held companies to apply the rules. Specifically, Division 166 of the ITAA 1997 provides concessional tracing rules which remove the need to trace down to the beneficial owner of shares and interests and provides for testing of continuity of ownership at specific points in time rather than continuously throughout the ownership test period.

Broadly speaking, a company will be eligible to apply Division 166 of the ITAA 1997 if it is a widely held company. Subsection 995-1(1) of the ITAA 1997 defines a widely held company to include a company whose shares are listed on an approved stock exchange. As Company A is listed on the ASX, it is a widely held company for the purposes of the Act, and is therefore eligible to apply Division 166 of the ITAA 1997.

Company A can choose that the COT applies to it without modification under subsection 166-15(1) of the ITAA 1997. Company A has not made such a choice.

Subsection 166-5(3) of the ITAA 1997 provides that a company is taken to meet the conditions in section 165-12 of the ITAA 1997 if there is substantial continuity of ownership between the start of the ownership test period, the end of each income year in that period and the end of each corporate change in that period. Conversely, a company is taken to have failed to meet the conditions in section 165-12 of the ITAA 1997 if there is no substantial continuity of ownership at specific times in the ownership test period. The ownership test period consists of the loss year, the income year and any intervening period.

Section 166-145 of the ITAA 1997 states that for a widely held company to have substantial continuity of ownership there must be:

• persons (none of them companies or trustees) who had more than 50% of the voting power at the start of the ownership test period and more than 50% of the voting power immediately after another time in the ownership test period;

• persons (none of them companies) who had rights to more than 50% of the dividends at the start of the ownership test period and more than 50% of the dividends immediately after another time in the ownership test period; and

• persons (none of them companies) who had rights to more than 50% of any capital distributions at the start of the ownership test period and more than 50% of any capital distributions immediately after another time in the ownership test period.

The more than 50% of voting power, rights to dividends and rights to capital distributions will be determined in accordance with the alternative tests contained in Subdivision 165-D of the ITAA 1997.

For the purposes of determining substantial continuity of ownership, the Company A shares on issue at all times in the ownership test period carried the same voting, dividend and capital rights.

Subdivision 166-E of the ITAA 1997 provides a number of concessional tracing rules to assist in determining whether the ownership tests are satisfied. The concessional tracing rules applicable to Company A are those that attribute:

• directly held voting, dividend or capital stakes of less than 10% in Company A to a single notional shareholder (section 166-225 of the ITAA 1997)

• indirectly held voting, dividend or capital stakes of less than 10% in Company A to the top interposed entity (section 166-230 of the ITAA 1997); and

• directly and/or indirectly held voting, dividend or capital stakes of between 10% and 50% by a widely held company to the widely held company as ultimate owner (section 166-240 of the ITAA 1997).

The terms voting stake, dividend stake and capital stake are defined in subsection 995-1(1) of the ITAA 1997 by reference to section 166-235 of the ITAA 1997. Such stakes can be held directly or indirectly through one or more interposed entities.

An entity will have a direct stake in a company where that entity is a registered holder of shares in a company and those shares carry a right to exercise voting power, a right to any or all of the dividends paid, or a right to any or all capital distributions made.

An entity will have an indirect stake in a company where one or more entities are interposed between it and the company and the entity can control or is able to control voting power the company indirectly through the interposed entities and has a right to receive for its own benefit through the interposed entity or entities dividends paid by the company or distributions of capital made by the company.

Section 166-272 of the ITAA 1997 requires only the same shares/interests held by (relevantly for these purposes) a top interposed entity to be considered in determining whether there has been substantial continuity of ownership

At no time in the ownership test period did the single notional shareholder hold less than 70% of the total shareholding.

Thus, as the single notional shareholder held more than 50% of the voting power, rights to dividends and rights to capital distributions for the ownership test period, Company A is considered to have met the COT for the relevant income year.