Edited version of your written advice

Authorisation Number: 1012984920709

Date of advice: 23 March 2016

Ruling

Subject: Commissioner's discretion - subsection 272-30(3) of Schedule 2F to the Income Tax Assessment Act 1936

Question 1

Does the Commissioner consider it fair and reasonable to treat Company A as holding, at each of the test times, the whole or part of its fixed entitlement to the income and capital of Trust B as an individual and for the individual's own benefit pursuant to subsection 272-30(3) of Schedule 2F to the Income Tax Assessment Act 1936 ('ITAA 1936')?

Answer

Yes.

This ruling applies for the following periods:

Year Ended xx xx 20XX

The scheme commences on:

xx June xx

Relevant facts and circumstances

Background

Trust B is a subsidiary unit trust of Company A and operates a business in Australia. Company A is a large international group listed on a foreign stock exchange.

Trust B was settled under a Deed dated xx June xx that came into operation on the same date. The current trustee of Trust B, and applicant in relation to this private ruling, is Company C. The two unitholders of Trust B are:

• Company D - holding a xx units in Trust B; and

• Company E - holding xx units in Trust B.

The units in Trust B have been held by these entities since the Trust B was established.

The applicant has undertaken a detailed tracing of Company A's ownership in Trust B through each of Company A's subsidiaries using publicly available information, trust deeds, etc.

Trust B is currently wholly owned by Company A through a number of interposed subsidiary entities of Company A including Company D and Company E.

Trust B - The Deed

The original Deed was signed on xx June xx, and was later amended on xx December xx. There have been no further amendments to the Deed since xx December xx.

The Deed provides that all assets and liabilities of Trust B's Australian business are included in the trust fund of Trust B.

The Deed provides that the Trustee shall hold the capital of Trust B upon trust for the Registered Holders in proportion to the units held by them.

The Deed provides that the Trustee shall, at the request of the Registered Holder, pay, apply or otherwise deal with the share of the income to which the Registered Holder is entitled in the manner as that Registered Holder may from time to time direct.

The Deed states that the 'Registered Holders' are:

• Company D - holding xx units in Trust B; and

• Company E - holding xx units in Trust B.

By the operation of the Deed, the Registered Holders are entitled to a beneficial interest in the trust fund.

The Deed provides that the beneficial interest in Trust B shall be divided into units. Under the Deed the Trustee is empowered, subject to receiving the consent of the Registered Holders, to issue additional units and to reclassify units as the Trustee thinks fit.

Since the establishment of Trust B in xx, the units in Trust B have not changed, nor is there any intention at this time to change or amend the trust unit structure.

The Deed provides that no unit may be sold, transferred, charged or otherwise disposed except to, or in favour of, a Registered Holder.

The Deed requires the Trustee, in each financial year, pay, apply or set aside the whole of the income of Trust B for that financial year to, or for the benefit, of the Registered Holders in proportion to the unit holdings at the end of the financial year. Under the Deed the Trustee is entitled to make an interim distribution of income during the financial year in proportion to the Registered Holders' unit holding.

The Deed provides that the capital is to be distributed in proportion to the units held by the Registered Holders.

The amended Deed deleted the previous clause xx of the original Deed, which allowed the Trustee to disregard the proportions of the units held by the Registered Holders and, if the Trustee does so, the Registered Holders' entitlements to income of the trust fund is varied accordingly. No income was ever distributed under this clause by the Trustee of Trust B.

Company A

Company A is a very large and very widely held company. As at xx xx 20XX, Company A had many shares on issue and a very large market capitalisation through its listing on an international stock exchange. There are many individual shareholders of Company A and there are also hundreds of institutional shareholders (which in turn have their own substantial number of individual and other institutional shareholders).

The top XX institutional shareholders of Company A are primarily made up of various mutual and pension funds and investment banks. The top XX of these have a combined total of less than 30% of the ordinary shares of Company A as at xx xx 20XX.

At each year end from xx xx xx to xx xx 20XX there were no institutional shareholders which held more than 6% of the ordinary shares of Company A. Furthermore, approximately 55% of the institutional shareholders have held a continuous shareholding in Company A from xx xx xx to xx xx 20XX, evidencing a stable shareholder base over a number of years.

The applicant has been unable to obtain or provide a shareholding list of the non-institutional shareholders and, as such, is not able to identify any meaningful number of individual entitlement holders. The applicant advises that they are not aware of any change before or after the test times in the individual shareholders of Company A who can be identified. It is unlikely that any individual shareholder holds more than a slight fraction of Company A stock.

The applicant further advises the following:

• They are not aware of any change or future change to the capital structure or shareholding of Company A that would either allow them to identify individual entitlement holders or be different to the current shareholder structure; and

• If Division 166 of the Income Tax Assessment Act 1997 were to apply to Company A, it would have passed the Continuity of Ownership Test.

External ownership of Trust B

Prior to xx, Company A did not wholly own Trust B. In particular, there were shares issued by interposed entities to external parties in the ownership chain of Trust B that diluted the ownership of Company A.

Characteristics of Trust B under Schedule 2F

Fixed Entitlement to the income and capital of Trust B

For the purposes of Schedule 2F to the Income Tax Assessment Act 1936 ('ITAA 1936'), Company A maintained a greater than 50% 'fixed entitlement' to the income and capital of Trust B at the start of the relevant loss year, and the end of each income year from that year to xx xx 20XX. The fixed entitlement to the income and capital of Trust B was determined as follows:

• Fixed entitlement to income - Company A's entitlement to receive dividend income and trust distributions from its interests at each of the subsidiary levels relative to the amount of dividends entitled to be paid on the externally issued shares for each year in the test period; and

• Fixed entitlement to capital - Company A's entitlement to a return of capital upon liquidation of its interests at each of the subsidiary levels relative to the amount of preference capital that would be returned to the externally issued shares at each year end in the test period.

Company A's fixed entitlement to the income of Trust B was greater than 85% at all of the year-ends between and including the end of the relevant loss year and xx xx 20XX. Company A's fixed entitlement to the capital of Trust B was greater than 60% at all of the year-ends between and including the end of the relevant loss year and xx xx 20XX.The number of individuals that are indirect holders of fixed entitlement to the income and capital of Trust B will be very large when Company A's individual shareholders are added to the individuals holding interests through the institutional shareholders of Company A.

Furthermore, Company A's institutional shareholders are practically impossible to trace through to their ultimate individual entitlement holders. For example, many of the institutional shareholders will have their own institutional shareholders that will also be practically impossible to trace through.

Relevantly, over half of the potential pool of individual entitlement holders cannot be identified or contacted to confirm their ownership. It would not be practical (from either a logistical or cost point of view) for Company A or the applicant to trace and potentially contact these and other individuals in relation to each of the test times required.

Taxable Income / Tax Losses of Trust B

Since its establishment, Trust B has had taxable income for multiple income years and tax losses for multiple income years. Some of these tax losses were already used to reduce the taxable income of Trust B to nil in prior years.

The 'test period' in relation to determining the deductibility of prior year tax losses in the income year ended xx xx 20XX (for the purposes of Division 266 of Schedule 2F to the Income Tax Assessment Act 1936) is the beginning of the relevant loss year to xx xx 20XX.

The following business factors were responsible for the tax losses of Trust B:

1. Competitive business environment.

2. Losses incurred by Trust B on the sale of certain assets.

Relevant legislative provisions

Income Tax Assessment Act 1936 Schedule 2F,

Income Tax Assessment Act 1936 Division 266 of Schedule 2F,

Income Tax Assessment Act 1936 Section 269-50 of Schedule 2F,

Income Tax Assessment Act 1936 Subsection 269-50(1) of Schedule 2F,

Income Tax Assessment Act 1936 Subsection 269-50(2) of Schedule 2F,

Income Tax Assessment Act 1936 Section 269-55 of Schedule 2F,

Income Tax Assessment Act 1936 Subsection 269-55(1) of Schedule 2F,

Income Tax Assessment Act 1936 Section 272-30 of Schedule 2F,

Income Tax Assessment Act 1936 Subsection 272-30(1) of Schedule 2F,

Income Tax Assessment Act 1936 Subsection 272-30(3) of Schedule 2F,

Income Tax Assessment Act 1936 Paragraph 272-30(3)(a) of Schedule 2F,

Income Tax Assessment Act 1936 Subsection 272-30(4) of Schedule 2F,

Income Tax Assessment Act 1936 Paragraph 272-30(4)(a) of Schedule 2F,

Income Tax Assessment Act 1936 Paragraph 272-30(4)(b) of Schedule 2F,

Income Tax Assessment Act 1936 Paragraph 272-30(4)(c) of Schedule 2F,

Income Tax Assessment Act 1936 Section 272-135 of Schedule 2F,

Income Tax Assessment Act 1997 Subdivision 36-A,

Income Tax Assessment Act 1997 Division 166 and

Income Tax Assessment Regulations 1997 Schedule 5.

Reasons for decision

All legislative references are to Schedule 2F to the Income Tax Assessment Act 1936 ('ITAA 1936') unless otherwise stated.

Summary

The Commissioner considers it fair and reasonable to treat Company A as holding, at each of the test times, the whole or part of its fixed entitlement to the income and capital of Trust B as an individual and for the individual's own benefit pursuant to subsection 272-30(3).

Detailed reasoning

Background

This private ruling relates to whether the Commissioner's discretion contained in subsection 272-30(3) applies to Trust B at particular times (referred to as 'test times' by subsection 272-30(1)) for the purpose of determining whether one or more prior year tax losses of Trust B are deductible under Schedule 2F.

The discretion operates in conjunction with subsection 272-30(1) to alter certain provisions that include the phrase 'directly or indirectly' in Schedule 2F. In particular, subsections 272-30(1) and 272-30(3) state:

272–30 Additional special cases of fixed entitlements held directly or indirectly

Coverage of section

(1) This section also affects references in this Schedule (other than in subparagraph 269–75(b)(ii) and section 272–25) to a person or individual having, directly or indirectly, a fixed entitlement to a share of the income or capital of a company, partnership or trust (the main entity) at a particular time (the test time).

Note: This section will not affect a reference to a person or individual having a fixed entitlement where the phrase "directly or indirectly" is not used.

…

Interposed listed public companies and widely held unit trusts

(3) If:

(a) at the test time a listed public company or widely held unit trust has, directly or indirectly, a fixed entitlement to a share of the income or capital of the main entity; and

(b) having regard to the matters set out in subsection (4), the Commissioner considers it fair and reasonable to treat the company or trust as holding, at the test time, the whole or part of its fixed entitlement as an individual and for the individual's own benefit;

the company or trust is treated as so holding the whole or the part of its fixed entitlement. …

The applicant has indicated through their private ruling application that they are primarily concerned with whether Division 266 of Schedule 2F limits the deductibility of prior and current year tax losses of the Trust B.

The deductibility of tax losses

Tax losses are generally deductible under Subdivision 36-A of the Income Tax Assessment Act 1997 ('ITAA 1997') in the order they are incurred. However, Division 266 requires that a fixed trust must, in some circumstances, 'pass the 50% stake test' in respect of certain times during a 'test period' in order to deduct the tax losses.

The applicant has indicated that the 'test period' for the purposes of Division 266 and the 50% stake test is xx xx xx to xx xx 20XX (meaning that the relevant 'loss year' for the purposes of Division 266 is xx xx xx to xx xx xx).

Consequently, Trust B must 'pass the 50% stake test' in respect of certain times between the beginning of the loss year and xx xx 20XX inclusive.

Passing the 50% stake test

A trust will 'pass the 50% stake test' in relation to two times or at all times during a period in the circumstances outlined in section 269-55, which states:

269–55 Passing the 50% stake test

(1) If, at all times during a period, or at 2 times:

(a) the same individuals have more than a 50% stake in the income of a trust; and

(b) the same individuals (who may be different from those in paragraph (a)) have more than a 50% stake in the capital of the trust;

the trust passes the 50% stake test for the period or in respect of the 2 times.

(2) If a trust is a widely held unit trust it is taken to pass the 50% stake test for a period or in respect of 2 times if it is reasonable to assume that the requirements of paragraphs (1)(a) and (b) are satisfied in respect of the period or the 2 times.

The term 'more than a 50% stake' is itself defined by section 269-50, which states:

269–50 More than a 50% stake in income or capital

More than a 50% stake in income

(1) If there are individuals who have (between them), directly or indirectly, and for their own benefit, fixed entitlements to a greater than 50% share of the income of a trust, those individuals have more than a 50% stake in the income of the trust.

More than a 50% stake in capital

(2) If there are individuals who have (between them), directly or indirectly, and for their own benefit, fixed entitlements to a greater than 50% share of the capital of the trust, those individuals have more than a 50% stake in the capital of the trust.

Consequently, for Trust B to pass the 50% stake test under subsection 269-55(1), the same individuals must have, directly or indirectly and for their own benefit, fixed entitlement to a greater than 50% share of income and capital of Trust B at the relevant time or times during the test period.

The relevant test times for the Commissioner's discretion

In accordance with subsection 272-30(1), the Commissioner's discretion will not have any effect on other provisions in Schedule 2F without a reference to a person or individual having 'directly or indirectly' a fixed entitlement to a share of the income or capital of an entity.

In this case, the relevant uses of the phrase 'directly or indirectly' are contained in subsections 269-50(1) and 269-50(2) as part of the legislative definition of 'more than a 50% stake'. It is this section's operation that will be altered if the Commissioner's discretion is exercised.

The Commissioner's discretion must also be exercised in relation to one or more particular times, referred to as 'test times' under section 272-30. In this case, due to the circumstances of Trust B and the legislative background described above, the relevant test time or times all fall between xx xx xx and xx xx 20XX inclusive.

The Commissioner's discretion in ss272-30(3)

Where a 'listed public company' has, directly or indirectly, a fixed entitlement to a share of income or capital of an entity, subsection 272-30(3) allows the Commissioner to treat the company as holding the whole or part of its fixed entitlement as an individual and for the individual's own benefit. In practical terms, subsection 272-30(3) can provide taxpayers with relief from the need to undertake tracing of fixed entitlement to, and through, the shareholders of listed public companies.

Specifically, subsections 272-30(3) and 273-30(4) state:

272–30 Additional special cases of fixed entitlements held directly or indirectly

…

Interposed listed public companies and widely held unit trusts

(3) If:

(a) at the test time a listed public company or widely held unit trust has, directly or indirectly, a fixed entitlement to a share of the income or capital of the main entity; and

(b) having regard to the matters set out in subsection (4), the Commissioner considers it fair and reasonable to treat the company or trust as holding, at the test time, the whole or part of its fixed entitlement as an individual and for the individual's own benefit;

the company or trust is treated as so holding the whole or the part of its fixed entitlement.

Matters for the purposes of paragraph (3)(b)

(4) For the purposes of paragraph (3)(b), the matters are:

(a) the practicability of identifying any individuals who at the test time have fixed entitlements to a share of the income or capital of the main entity indirectly through the company or trust and for their own benefit; and

(b) any change before or after the test time in the individuals who can be identified as having fixed entitlements of the kind mentioned in paragraph (a); and

(c) any other matter that the Commissioner considers relevant.

In the present case, Company A's shares are listed for quotation in the official list of an international stock exchange (being listed as an 'approved stock exchange' in Schedule 5 to the Income Tax Assessment Regulations 1997). Company A is therefore a 'listed public company' for the purposes of the relevant legislative definition in section 272-135 at all times between the beginning of the relevant loss year and xx xx 20XX.

In addition, Company A maintained an indirect 'fixed entitlement' to a share of the income and capital of Trust B at the beginning of the relevant loss year and at each year end between and including the end of the relevant loss year and xx xx 20XX. As such, and in the circumstances, the Commissioner accepts that paragraph 272-30(3)(a) is satisfied with respect to each of the test times.

Therefore, at issue is whether the Commissioner, having regard to subsection 272-30(4), considers it is fair and reasonable to treat Company A as holding, at each of the test times, the whole or part of its fixed entitlement to the income and capital of Trust B as an individual and for the individual's own benefit (consistent with paragraph 272-30(3)(b)).

Relevantly, paragraphs 13.43 and 13.44 of the Explanatory Memorandum to Taxation Law Amendment (Trust Loss and other Deductions) Bill 1997 (Cth) ('EM') provide some guidance as to the legislative intent of the Commissioner's discretion in subsection 272-30(3):

13.43 There are considerable practical difficulties in tracing interests in or through listed public companies, because of the large number of shareholders and the likelihood that individuals will not hold shares in the listed public company directly. Similar problems arise for widely held unit trusts. The main problem is that it may be difficult, in particular cases, to identify all the direct and indirect holders of fixed entitlements in those entities.

13.44 A provision has been included in the Bill to assist in overcoming difficulties in appropriate cases. This provision will allow the Commissioner to treat all or part of the fixed entitlements in a trust (or interposed entity where relevant) held, directly or indirectly, by a listed public company or widely held unit trust as being held by that company or trust as an individual for its own benefit.

As required by paragraph 272-30(3)(b), the Commissioner must consider the three paragraphs in subsection 272-30(4).

Paragraph 272-30(4)(a)

The first matter, as provided by paragraph 272-30(4)(a), is the practicability of identifying any individuals who, at each of the test times, have fixed entitlements to a share of the income or capital of Trust B indirectly through Company A and for their own benefit.

In regard to paragraph 272-30(4)(a), the following is taken into consideration to show the impracticability of identifying individuals who had fixed entitlements at the test times:

1. The scale of Company A's shareholding would make tracing individual entitlements difficult. As at xx xx 20XX, Company A had many shares on issue and a very large market capitalisation. There are many individual shareholders and hundreds of institutions (which in turn have their own substantial number of individual and other institutional shareholders). Therefore, the number of possible individual entitlement holders may be very large.

2. It is not practical either logistically or from a cost point of view to trace individual entitlement holders all over the world for each of the test times.

3. The top 50 shareholders of Company A comprise of various mutual and pension funds and investment banks. Thus, identifying and confirming individual entitlements at each of the test times is extremely difficult and any meaningful analysis for the purpose of the 50% stake test would be practically impossible to undertake.

4. Between the beginning of the loss year and xx xx 20XX there were no institutional shareholders that held more than 6% of the shares in Company A at each year end.

5. 55% of the institutional shareholders held a continuous shareholding in Company A from xx xx xx to xx xx 20XX. This evidences a stable shareholder base over the test period including each of the test times.

Taking into account the facts provided by the applicant and the guidance provided by the EM, the Commissioner accepts that, in this case, it is not practicable to trace individual shareholding for the purposes of the 50% stake test.

Paragraph 272-30(4)(b)

The second matter, as provided by paragraph 272-30(4)(b), is any change before or after the test time in the individuals who can be identified as having fixed entitlements of the kind mentioned in paragraph 272-30(4)(a).

The applicant has advised that they are not aware of any change in individual shareholders who can be identified before or after each test time as it is not practicable to identify any meaningful number of individual entitlement holders at these times.

The Commissioner accepts that it is unpractical and problematic to identify any individuals and consequently any meaningful changes in individual shareholdings before and after the test times.

Paragraph 272-30(4)(c)

The final heading, as provided by paragraph 272-30(4)(c), is any other matters that the Commissioner considers relevant.

Below is a list of matters the Commissioner considers relevant for the application of subsection 272-30(3).

1. There has been no change in the units in Trust B since its establishment. There is no intention at this time to change or amend the trust unit structure of Trust B.

2. The applicant is not aware of any change or future change to the capital structure or shareholdings of Company A that would either allow them to identify individual entitlement holders or be different to the current shareholder structure.

3. If Division 166 of the Income Tax Assessment Act 1997 were to apply to Company A, it would have passed the Continuity of Ownership Test.

In general these matters support the application of subsection 272-30(3) in this case.

Conclusion

Having regard to the matters under Subsection 272-30(4), the Commissioner considers it fair and reasonable to treat Company A as holding, at each of the test times, the whole or part of its fixed entitlement to the income and capital of Trust B as an individual and for the individual's own benefit pursuant to subsection 272-30(3).