Edited version of your written advice

Authorisation Number: 1012908046326

Date of advice: 11 November 2015

Ruling

Subject: Tax losses - continuity of ownership test

Legislative references

All legislative references are to the Income Tax Assessment Act 1997 unless otherwise stated.

Question 1

Will section 166-240 operate to modify the application of the ownership tests in section 166-145 to company A so that, at the relevant ownership test times during the period from XX/XX/XXXX to XX/XX/XXXX, an indirect % voting stake, dividend stake and capital stake held by company B in company A is attributed to company B as a person (other than a company)?

Answer

Yes.

Question 2

Will section 166-280 operate to prevent a tracing rule (as defined in subsection 995-1(1)) from modifying how the ownership tests in section 166-145 apply to company A, in respect of the indirect % voting stake, dividend stake and capital stake held by company B in company A?

Answer

No.

This ruling applies for the following periods

Year ended XX/XX/XXXX

Year ended XX/XX/XXXX

Year ended XX/XX/XXXX

Year ended XX/XX/XXXX

Year ended XX/XX/XXXX

Year ended XX/XX/XXXX

The scheme commenced on

XX/XX/XXXX

Relevant facts and circumstances

Company A and ownership structure

1. Company A operates as an incorporated joint venture between company B and company C.

2. The incorporated joint venture commenced on XX/XX/XXXX, under an agreement between company B and company C.

3. At all times, from XX/XX/XXXX to XX/XX/XXXX:

• Company A has not been a listed company on a stock exchange.

• Company B has been a listed company on the Australian Securities Exchange (ASX).

• Company B and company C have each held indirectly a % shareholding in company A.

• Company B has held an indirect % shareholding in company A, through a wholly owned subsidiary, being company D.

• Company B has held the same shares in company D.

• Company D has held the same shares in company A.

• There have been no new shares issued by either company A or company D.

• The economic groups of company B and company C have been legally independent of each other.

• Company B and company C have had equal representation on the Board of Directors of company A.

• Company B and company C have formed an equal part of the quorum for Board meetings of company A.

• There has been no provision of the company A Shareholders Agreement or any other relevant company document that has allowed company B and its economic group to influence company A, without the agreement of company C.

• The only shares company A has issued are ordinary shares of the same class.

• All company A shares carried equal rights:

• to exercise voting power in company A;

• to receive dividends paid by company A; and

• to receive any distributions of capital of company A.

4. Since XX/XX/XXXX, company A has incurred tax losses and net capital losses in each income year up to the year ending XX/XX/XXXX.

Assumptions

1. Company A will be an eligible Division 166 company at all times during the income year in which company A seeks to deduct a tax loss.

2. Company A will not elect that Subdivision 165-A is to apply to it for the income year in which company A seeks to deduct a tax loss, without the modifications made by Subdivision 166-A.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 318

Income Tax Assessment Act 1997 Section 165-10

Income Tax Assessment Act 1997 Section 165-12

Income Tax Assessment Act 1997 Section 165-13

Income Tax Assessment Act 1997 Section 166-5

Income Tax Assessment Act 1997 Section 166-15

Income Tax Assessment Act 1997 Section 166-145

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 166-245

Income Tax Assessment Act 1997 Section 166-255

Income Tax Assessment Act 1997 Section 166-260

Income Tax Assessment Act 1997 Section 166-272

Income Tax Assessment Act 1997 Section 166-280

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

Reasons for decision

Question 1

Will section 166-240 operate to modify the application of the ownership tests in section 166-145 to company A so that, at the relevant ownership test times during the period from XX/XX/XXXX to XX/XX/XXXX, an indirect % voting stake, dividend stake and capital stake held by company B in company A is attributed to company B as a person (other than a company)?

Summary

Subdivision 166-A will apply to company A to modify the ownership tests under Subdivision 165-A. Subsequently, company B, as a widely held company, indirectly holds a voting stake, dividend stake and capital stake in company A that carries % of the voting power, dividend rights and capital distribution rights in company A. Therefore, section 166-240 will operate to modify the application of the ownership tests in section 166-145 to company A so that, at the relevant ownership test times during the period from XX/XX/XXXX to XX/XX/XXXX, an indirect % voting stake, dividend stake and capital stake held by company B in company A is attributed to company B as a person (other than a company).

Detailed reasoning

Section 165-10 provides that a company can deduct a tax loss, if either the company satisfies the conditions concerning continuity of ownership in section 165-12 or the same business test in section 165-13.

It is noted in section 165-10 that in the case of a widely held company or eligible Division 166 company, Subdivision 166-A modifies how Subdivision 165-A applies. Subdivision 165-A contains both sections 165-10 and 165-12.

Eligible Division 166 company

Paragraph 166-5(1)(b) provides that Subdivision 166-A modifies the way Subdivision 165-A applies to a company that is an eligible Division 166 company at all times during the income year. However, under subsection 166-15(1), a company may elect that Subdivision 165-A is to apply to it for the income year in which it seeks to deduct a tax loss, without the modifications made by Subdivision 166-A.

This ruling is made on the basis that:

1. Company A will be an eligible Division 166 company at all times during the income year in which company A seeks to deduct a tax loss.

2. Company A will not elect that Subdivision 165-A is to apply to it for the income year in which company A seeks to deduct a tax loss, without the modifications made by Subdivision 166-A.

Due to these assumptions, company A meets the requirements of paragraph 166-5(1)(b) and Subdivision 166-A will operate to modify the way Subdivision 165-A applies to company A.

Subdivision 166-A

Subdivision 166-A includes sections 166-5 and 166-15. Subsection 166-5(3) provides that the company is taken to have met the conditions in section 165-12 if there is substantial continuity of ownership of the company as between the start of the test period and:

a) the end of each income year in that period, and

b) the end of each corporate change in that period.

Subsection 166-145(1), under Subdivision 166-D, provides that there is a substantial continuity of ownership of the company as between the start of the test period and another time in the test period if (and only if) the conditions in section 166-145 are met.

Tracing rule under section 166-240

In regards to satisfying the ownership test conditions in section 166-145, Subdivision 166-E provides tracing rules.

Subdivision 166-E includes section 166-240 which modifies how the ownership tests in section 166-145 are applied to the tested company if a widely held company directly or indirectly (through one or more interposed entities), or both directly and indirectly, holds any of the following:

• a voting stake that carries rights to between 10% and 50% (inclusive) of the voting power in the company (paragraph 166-240(1)(a));

• a dividend stake that carries the right to receive between 10% and 50% (inclusive) of any dividends that the company may pay (paragraph 166-240(1)(b));

• a capital stake that carries the right to receive between 10% and 50% (inclusive) of any distribution of capital of the company (paragraph 166-240(1)(c)).

Where the requirements of paragraphs (a), (b), and (c) of subsection 166-240(1) are satisfied in relation to a voting stake, a dividend stake or a capital stake, subsection 166-240(2) states that the ownership tests in section 165-145 are applied to the tested company as if, at the ownership test time:

(a) the widely held company controls, or is able to control, the voting power in the tested company that is carried by that stake at that time; and

(b) the widely held company had the right to receive (whether directly or indirectly), for its own benefit, any dividends the tested company may pay in respect of that stake at that time; and

(c) the widely held company had the right to receive (whether directly or indirectly), for its own benefit, any distributions of capital of the tested company in respect of that stake at that time; and

(d) the widely held company were a person (other than a company).

Subsection 166-240(3) states that the tracing rule in section 166-240 does not apply if the company is not a widely held company for the whole income year in which the ownership test time occurs.

Subsection 995-1(1) provides that a widely held company includes a company whose shares (except shares that carry a right to a fixed rate of dividend) are listed for quotation in the official list of an approved stock exchange or a company with more than 50 members.

Subsection 995-1(1) defines a 'share' in a company to mean a share in the capital of the company, and includes stock.

Subsection 995-1(1) defines an 'approved stock exchange' to mean a stock exchange named in regulations made for the purposes of the definition. Regulation 995-1.05 of the Income Tax Assessment Regulations 1997 (ITAR 1997) states that the stock exchanges specified in Schedule 5 to the ITAR 1997 are named for the purposes of the definition of 'approved stock exchange' in subsection 995-1(1). The ASX Limited is listed in Schedule 5 to the ITAR 1997.

Subsection 995-1(1) states that 'voting stake', dividend stake' and 'capital stake' has the meaning given by section 166-235.

Voting stake

Subsection 166-235(1) states that an entity holds a voting stake in a company if the entity is the registered holder of shares in the company, and the shares carry rights to exercise voting power in the company.

Subsection 166-235(2) states that an entity (the stakeholder) also holds a voting stake in a company if one or more other entities are interposed between the company and the stakeholder, and the stakeholder controls, or is able to control, voting power in the company indirectly through the interposed entity or entities.

Dividend stake

Subsection 166-235(3) states that an entity holds a dividend stake in a company if the entity is the registered holder of shares in the company, and the shares carry rights to all or any dividends that the company may pay.

Subsection 166-235(4) states that an entity (the stakeholder) also holds a dividend stake in a company if one or more other entities are interposed between the company and the stakeholder, and the stakeholder has the right to receive, for its own benefit and indirectly through the interposed entity or entities, all or any dividends that the company may pay.

Capital stake

Subsection 166-235(5) states that an entity holds a capital stake in a company if the entity is the registered holder of shares in the company, and the shares carry rights to all or any of a distribution of capital of the company.

Subsection 166-235(6) states that an entity (the stakeholder) also holds a capital stake in a company if one or more other entities are interposed between the company and the stakeholder, and the stakeholder has the right to receive, for its own benefit and indirectly through the interposed entity or entities, all or any of a distribution of capital of the company.

Application of section 166-240 to the indirect interest held by company B in company A

The shares in company B are listed on the ASX and have been listed throughout each income year from XX/XX/XXXX. As such, company B meets the definition of a widely held company, as prescribed by subsection 995-1(1).

Since XX/XX/XXXX, company B has held a % indirect shareholding in company A through a wholly owned interposed entity, being company D.

At all times, since XX/XX/XXXX, all company A shares have had equal rights:

• to exercise voting power,

• to receive dividends paid by company A, and

• to receive any distributions of capital.

As such, this indirect holding of shares in company A provides rights to voting power, to receive dividends and to receive any capital distributions.

By virtue of company B's indirect holding in company A, company B, as a stakeholder, would be taken to hold:

• a voting stake in company A through an interposed entity under subsection 166-235(2),

• a dividend stake in company A through an interposed entity under subsection 166-235(4), and

• a capital stake in company A through an interposed entity under subsection 166-235(6).

Therefore, company B has been a widely held company throughout the period covered by this ruling and company B's indirect % shareholding in company A holds a voting stake, dividend stake and capital stake which carry % of the voting, dividend and capital distribution rights in company A.

Subsequently, company B indirectly holds:

• a voting stake in company A that carries rights of between 10 and 50% (inclusive) of the voting power in company A, meaning paragraph 166-240(1)(a) is satisfied;

• a dividend stake in company A that carries the right to receive between 10% and 50% (inclusive) of any dividends that company A may pay, meaning paragraph 166-240(1)(b) is satisfied; and

• a capital stake in company A that carries the right to receive between 10% and 50% (inclusive) of any distribution of capital of company A, meaning paragraph 166-240(1)(c) is satisfied.

The requirements of paragraphs (a), (b), and (c) of subsection 166-240(1) are satisfied in relation to the voting stake, dividend stake and capital stake held by company B in company A, where company B is a widely held company throughout the period covered by this ruling. Therefore, section 166-240 will modify how the ownership tests in section 166-145 are applied to company A.

Same share same interest rule

In regards to the modified COT and tracing rules under Subdivision 166-E, section 166-272 contains the same share same interest rule.

Subsection 166-272(1) provides that section 166-272 modifies how the ownership tests in section 166-145 are applied to a voting stake, a dividend stake or a capital stake in the tested company held by a widely held company mentioned in section 166-240. The widely held company is referred to as the stakeholder for the purposes of section 166-272. Subsection 166-272(1) applies regardless of whether the relevant voting stake, dividend stake or capital stake is held directly or indirectly, through one or more interposed entities by the stakeholder.

Section 166-272 provides only shares in the tested company that are exactly the same shares and held be same persons are taken into account. In addition, only interests (including shares) in any other entity that is interposed between the stakeholder and the tested company that are taken into account are exactly the same interests and are held by the same persons.

At all times, since XX/XX/XXXX, company B has held the same shares in company D. In addition, at all times, since XX/XX/XXXX, company D has held the same shares in company A. There have been no new shares issued by either company A or company D.

Consequently, throughout the period covered by this ruling, company B have maintained the same shares and same interests in company A. Therefore, the same share same interest rule will be satisfied for company B's indirect % voting stake, dividend stake and capital stake held in company A.

Conclusion

Section 166-240 will operate to modify the application of the ownership tests in section 166-145 to company A so that, at the relevant ownership test times during the period from XX/XX/XXXX to XX/XX/XXXX, an indirect % voting stake, dividend stake and capital stake held by company B in company A is attributed to company B as a person (other than a company).

Question 2

Will section 166-280 operate to prevent a tracing rule (as defined in subsection 995-1(1)) modifying how the ownership tests in section 166-145 apply to company A, in respect of the indirect % voting stake, dividend stake and capital stake held by company B in company A?

Summary

Company A operates as an incorporated joint venture between company B and company C where both entities have equal shareholding, voting power, representation on the Board of Directors and form an equal part of the quorum for Board meetings. Due to these conditions, company A is not sufficiently influenced (within the meaning of paragraph 318(6)(b) of the Income Tax Assessment Act 1936 (ITAA 1936)) by either company B or company C. As such, subsection 166-280(1) is not satisfied. Additionally, as company A is not a widely held company, subsection 166-280(2) is not satisfied.

Accordingly, section 166-280 will not apply to company A to prevent the operation of the tracing rules, in respect of the indirect % voting stake, dividend stake and capital stake held by company B in company A.

Detailed reasoning

Controlled test companies rule

Section 166-280 provides that in certain circumstances, a tracing rule does not modify how the ownership tests in section 166-145 apply to the tested company in respect of all or part of the voting power in the tested company, or all or some of the rights to dividends of, or capital in, the tested company.

The circumstances under which subsection 166-280(1) will prevent a tracing rule modifying how the ownership tests in section 166-145 apply to the tested company are:

(a) either an entity (the controlling entity) directly holds that power or has those rights, or an entity (also referred to as 'the controlling entity') indirectly holds that power or has those rights through one or more interposed entities; and

(b) the tested company is sufficiently influenced (within the meaning of paragraph 318(6)(b) of the ITAA 1936) by the controlling entity.

It is noted in section 166-280, however, that a tracing rule can modify how the ownership tests in section 166-145 apply to the tested company in respect of voting power or dividend or capital rights held by entities other than controlling entities.

The meaning of the term 'tracing rule' is provided by subsection 995-1(1) and includes the rules in sections 166-225, 166-230, 166-240, 166-245, 166-255 and 166-260. These provisions are under Subdivision 166-E.

Paragraph 318(6)(b) of the ITAA 1936 provides that a company is sufficiently influenced by an entity or entities if the company, or its directors, 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).

Paragraph 1.41 of the Explanatory Memorandum to the Tax Laws Amendment (Loss Recoupment Rules and Other Measures) Bill 2005 (the EM to the LRROM 2005) provides that a minority shareholder would not generally be regarded as having sufficient influence over a company merely because it is assertive about how the company or its directors should act, or because it has a representative on the company's board of directors. In contrast, a shareholder may have sufficient influence where under a formal or informal arrangement with other shareholders it is able to control the majority of appointments to the company's board of directors.

In addition to the rules in subsection 166-280(1), where the tested company is a widely held company, subsection 166-280(2) provides that a tracing rule does not modify how the ownership tests in section 166-145 apply to the tested company in respect of all or part of the voting power in the tested company if that voting power is more than:

(i) 25% of the total voting power in the tested company and is controlled (whether directly, or indirectly through one or more interposed entities) by a natural person, together with his or her *associates, or

(ii) % of the total voting power in the tested company and is controlled (whether directly, or indirectly through one or more interposed entities) by a trustee or company, together with its associates.

Paragraph 1.145 of the EM to the LRROM 2005 states that the controlled test companies rule provided by section 166-280 only prevents tracing rules applying to:

• stakes held by controlling entities (i.e., entities with sufficient influence or with associate inclusive voting power of more than 25 per cent or 50 per cent, as the case may be); and

• stakes held by entities interposed between the tested company and controlling entities.

The controlled test companies rule provided by subsection 166-280(1) and 166-280(2) will now be applied to the indirect % shareholding of company B in company A. Where the provisions of section 166-280 are satisfied in relation to these stakes held by the relevant entities, the modifications to the ownership tests provided by the tracing rules under Subdivision 166-E will not be able to be applied.

Application of subsection 166-280(1)

As determined in question 1, throughout the period covered by this ruling, company B has had an indirect % shareholding in company A that has held a voting stake, dividend stake and capital stake which carry % of the voting, dividend and capital distribution rights in company A.

Company A operates as an incorporated joint venture between company B and company C where each party has an equal interest in company A. The economic groups of company B and company C are independent.

In relation to company A, company B and company C have equal representation on the Board of Directors and both parties form an equal part of the quorum for Board meetings.

Given company A is an incorporated joint venture between non-related entities of company B and company C where both entities hold indirect % shareholdings carrying equal voting rights, company A is not 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 either company B or company C and their respective economic groups.

This view is supported by the requirement of both company B and company C having equal representation on the Board of Directors and both parties forming an equal part of the quorum for Board meetings. Furthermore, there has been no provision of the company A Shareholders Agreement or any other relevant company document that has allowed company B and its economic group to influence company A, without the agreement of company C.

Therefore, company A is not sufficiently influenced by company B or company C, in accordance with paragraph 318(6)(b) of the ITAA 1936. Consequently, in relation to company B's holding in company A, subsection 166-280(1) is not satisfied.

Application of section 166-280(2)

Throughout the period covered by this ruling, pursuant to subsection 995-1(1), company A has not been a widely held company, as it has not been listed on any stock exchange. Additionally, company A does not have more than 50 members due to company B and company C holding all shares. As such, subsection 166-280(2) will not apply with the effect of preventing modifications to the ownership tests provided by the tracing rules under Subdivision 166-E.

Conclusion

The elements of subsections 166-280(1) and 166-280(2) are not satisfied as a result of company B holding indirectly % of the voting power, rights to dividends and rights to capital in company A. Therefore, the modifications provided by the tracing rules in Subdivision 166-E to the ownership tests in section 166-145 will not be prevented from applying to company A, in relation to company B's voting power, rights to dividends and rights to capital, due to the application of section 166-280.