Edited version of your written advice

Authorisation Number: 1012763961579

Ruling

Subject: Continuity of ownership test

Question

Does the entity meet the continuity of ownership test under section 165-12 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following period

Year ending 30 June 2015

The scheme commenced on

1 July 2014

Relevant facts

The entity is a private Australian company.

The entity is undergoing a significant business transformation under which it is envisaged that income will be earned by the company from new transactions it has not entered into previously.

As a result of the above business transformation the entity is anticipating that all the accounting and taxation losses will be recouped. It is also anticipated that the entity will earn taxable income in the 2014-15 financial year.

As at 30 June 2013 the company had total tax losses from previous years.

With the exception of an entity shareholder transferring its holdings in the entity to another related entity in a previous financial year, all of the increase in the shares held by each shareholder has been as a result of an issue of new shares in the company. The transfer of these shares accounted for a minor change in the total issued shares in the company. The transferor entity did not make a capital loss, claim a deduction or have its assessable income reduced in respect of this disposal.

At the start of the loss period there were X shares issued in the entity and there are currently many more shares on issue.

It is not anticipated that there will be any changes in the shareholding of the entity in the 2014-15 financial year.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 165-10

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(5)

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)

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

Reasons for decision

Summary

As a consequence of conditions under subsection 165-12(7) being met, the conditions under subsections 165-12(2), (3) & (4) are treated as though they have been satisfied. As all conditions under subsections 165-12(2), (3) & (4) have been met, the entity has maintained the same owners for the ownership test periods under section 165-12.

Detailed reasoning

All references are to the Income Tax Assessment Act 1997.

Under section 165-10 a company cannot deduct a tax loss unless either:

(a) it meets the conditions in section 165-12 (which is about the company maintaining the same owners); or

(b) it meets the conditions in section 165-13 (which is about the company satisfying the same business test)

Same Owners

In determining whether section 165-10 prevents a company from deducting a tax loss, under subsection 165-12(1) the ownership test period is the period from the start of the loss year to the end of the income year.

In this case the ownership test periods were for a number of years.

Under subsections 165-12(2), (3) & (4) there must be persons who had the rights to more than 50% of the company's voting power in the company, dividends & capital distributions at all times during the ownership test period.

Subsection 165-12(5) states you apply the primary test when a condition in this section was satisfied at all times during the ownership test period, apply the primary test for that condition unless subsection (6) required the alternative test to be applied.

Subsection 165-12(6) states you apply the alternative test if one or more other companies beneficially owned shares or interest in shares in the company at any time during the ownership test period.

In this case as one or more entities beneficially owned shares in the entity the alternative test must be applied.

The alternative test for voting power is covered under subsection 165-150(2). It states if it is the case, or it is reasonable to assume, that there are persons (none of them companies or trustees) who (between them) at a particular time control voting power in the company, those persons have more than 50% of the voting power in the company at that time.

In this case the alternative test for voting power has not been met as at all times during each of the ownership test periods, persons were not, either directly or indirectly, able to control the voting power in the entity (i.e. controlled less than 50% of the voting power).

The alternative test for the right to more than 50% of the company's dividends is covered under subsection 165-155(2). It states if it is the case, or it is reasonable to assume, that there are persons (none of them companies) who (between them) at a particular time have the right to receive for their own benefit (whether directly or indirectly) more than 50% of the dividends that the company may pay, those persons have rights to more than 50% of the company's dividends at that time.

In this case the alternative test for the right to receive more than 50% of the dividends that the entity may pay has not been met as at all times during the ownership test period persons did not, either directly or indirectly, have the right to receive more than 50% of the entity's dividends.

The alternative test for the right to more than 50% of the company's capital distributions is covered under subsection 165-160(2). It states if it is the case, or it is reasonable to assume, that there are persons (none of them companies) who (between them) at a particular time have the right to receive for their own benefit (whether directly or indirectly) more than 50% of the distribution of capital of the company, those persons have rights to more than 50% of the company's capital distributions at that time.

In this case the alternative test for the right to receive more than 50% of the company's capital distributions that the company may pay has not been met as at all times during the ownership test period persons did not, either directly or indirectly, have the right to receive more than 50% of the entity's capital distributions.

As a result of the above the alternative tests under subsections 165-150(2), 165-155(2) & 165-160(2) have not been met.

The conditions under subsections 165-12(2), (3) & (4) may however be satisfied in certain circumstances. Subsection 165-12(7) states if any of the conditions in subsection (2),(3) and (4) have not been satisfied, those conditions are taken to have been satisfied if:

(a) they would have been satisfied except for the operation of section 165-165; and

(b) the company has information from which it would be reasonable to conclude that less than 50% of the tax loss has been reflected in deductions, capital losses, or reduced assessable income, that occurred, or could occur in future, because of the happening of any CGT event in relation to any direct equity interests or indirect equity interests in the company during the ownership test period.

Subsection 165-165(1) states for the purpose of determining whether a company has satisfied a condition or whether a time is a changeover time or an alteration time in respect of a company:

(a) a condition that has to be satisfied is not satisfied; or

(b) a time that, apart from this subsection, would not be a changeover time or alteration time is taken to be a changeover time or alteration time, as the case may be;

unless at all relevant times:

(c) the only shares in the company that are taken into account are exactly the same shares and are held by the same persons; and

(d) the only interests in any other entity (including share in another company) that are taken into account are exactly the same interests and are beneficially owned by the same persons.

In this case as at the start of the loss period there were X shares issued in the company, whereas there are currently many more shares on issue. Due to there being additional shares on issue the conditions under subsections 165-12(2) (3) & (4) would have been met but for subsection 165-165(1) (consequently paragraph 165-12(7)(a) has been met).

Under paragraph 165-12(7)(b), you have stated that there have been limited sales of shares in the entity during the period which amount to a minor percentage of the total issued shares. The seller of those shares did not make a capital loss, claim a deduction or have its assessable income reduced in respect of this disposal. As a result, the conditions under paragraph 165-12(7)(b) in relation to past events have been met. You have also stated that it is also expected that all tax losses will be recouped by the entity through the changes currently being contemplated, therefore the savings provision for future events will also be satisfied. As a result the conditions under paragraph 165-12(7)(b) have been met.

As a consequence of all conditions under subsection 165-12(7) having been met, the conditions under subsections 165-12(2),(3) & (4) are treated as though they have been satisfied consequently it is considered that the company has maintained the same owners for the ownership test periods.