Edited version of your written advice

Authorisation Number: 1013056439525

Date of advice: 21 July 2016

Ruling

Subject: Losses - Continuity of Ownership

Question 1

Will Company A satisfy the conditions of section 165-12 of the Income Tax Assessment Act 1997 (ITAA 1997), as modified by Division 166 of the ITAA 1997, for each tax loss made in the years ended 30 June 20ww and 30 June 20xx during test periods that end on 30 June 20yy and 30 June 20zz?

Answer

Yes.

This ruling applies for the following periods:

Income year ended 30 June 20yy

Income year ending 30 June 20zz

Relevant facts and circumstances

1. Company A is the head company of an income tax consolidated group (ATCG). The shares in Company A are held by less than five widely held companies.

2. For the income years ended 30 June 20ww and 20xx, ATCG incurred tax losses.

3. During the income year ended 30 June 20ww, Company A issued additional shares to its existing shareholders.

4. There has been no CGT event in relation to any direct equity interests or indirect equity interests held in Company A.

5. The shareholders of Company A will not dispose of any of their beneficial interest in Company A on or before 30 June 20zz.

6. Following the issue of additional shares during the 20ww income year, there have been and there will be no changes to the ownership structure of Company A between that date and 30 June 20zz.

7. The current net asset value of Company A is higher relative to the issue prices of its shares.

8. Company A is an eligible Division 166 company as defined in subsection 995-1(1) of the ITAA 1997.

9. There is a reasonable basis to conclude that less than 50% of each tax loss made in the 20ww and 20xx income years has been reflected or will be reflected in deductions, capital losses or reduced assessable income.

10. From the ruling application date to 30 June 20zz, no CGT event will happen in relation to any direct equity interests or indirect equity interests held in Company A by the shareholders.

11. From the ruling application date to 30 June 20zz, there will be no changes to the existing voting power, rights to dividends and rights to capital distributions of shareholders.

12. Company A will not issue any additional shares during the period from the ruling application date to 30 June 20zz.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 166-5

Income Tax Assessment Act 1997 section 165-12

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 166-272

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

Reasons for decision

Section 165-12 of the ITAA 1997 specifies conditions that a company must satisfy in order to deduct a tax loss. Broadly, section 165-12 provides that the company must maintain more than 50% continuity of ownership throughout 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 company seeks to deduct the tax loss.

Division 166 of the ITAA 1997 modifies the way the rules in Division 165 of the ITAA 1997 apply to a widely held company or an eligible Division 166 company. However, the company may choose that Subdivision 165-A of the ITAA 1997 is to apply to it for the income year without the modifications made by Subdivision 166-A of the ITAA 1997 (subsection 166-15(1) of the ITAA 1997).

As Company A is an eligible Division 166 company, Division 166 of the ITAA 1997 will apply to Company A.

Section 166-5 of the ITAA 1997 provides that an eligible Division 166 company is taken to have met the conditions in section 165-12 of the ITAA 1997 if there is substantial continuity of ownership of the company as between the start of the test period and:

• the end of each income year in that period; and

• the end of each corporate change in that period.

The substantial continuity of ownership is defined in section 166-145 of the ITAA 1997. If there is substantial continuity of ownership under section 166-145, the effect of subsection 166-5(3) of the ITAA 1997 is that Company A will be taken to have satisfied section 165-12 of the ITAA 1997.

Pursuant to subsection 166-5(2) of the ITAA 1997, the company's test period is the period consisting of the loss year, the income year and any intervening period.

Substantial continuity of ownership

During the 20ww income year, Company A issued additional shares. This resulted in a corporate change as defined in paragraph 166-175(1)(d) of the ITAA 1997 because the issue of shares in the company resulted in an increase of 20% or more in the number of Company A's shares on issue.

Under section 166-145 of the ITAA 1997, there is substantial continuity of ownership of a company as between the start of the test period and another time in the test period if, at the start of the test period and immediately after the other time in the test period:

• the same persons (none of them companies or trustees) had more than 50% of the voting power in the company;

• the same persons (none of them companies) had rights to more than 50% of the company's dividends; and

• the same persons (none of them companies) had rights to more than 50% of the company's capital distributions.

Section 166-240 of the ITAA 1997 modifies how the ownership tests in section 166-145 of the ITAA 1997 are applied to the tested company if a widely held company directly or indirectly, or both directly and indirectly holds any of the following:

• voting stake that carries rights to between 10% and 50% (inclusive) of the voting power in the company;

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

• a capital stake that carries the right to receive between 10% and 50% (inclusive) of any distribution of capital of the company.

Broadly, the effect of section 166-240 of the ITAA 1997 is that a widely held company is treated as the ultimate owner of a direct or indirect stake in a tested company, if the stake is between 10% and 50% (inclusive).

For the purposes of subsection 166-240(3) of the ITAA 1997, each of the shareholders of Company A are widely held companies for the whole of each income year in which each ownership test time occurs (from 1 July 20aa to 30 June 20zz).

In this case, the voting, dividend and capital stake in Company A is between 10% and 50%, and therefore section 166-240 of the ITAA 1997 modifies how the ownership tests in section 166-145 of the ITAA 1997 are applied to Company A. This is discussed below.

Same share same interest rule

Section 166-272 of the ITAA 1997 modifies how the ownership tests in section 166-145 of the ITAA 1997 are applied to a voting stake, a dividend stake or a capital stake in Company A held by a stakeholder, being (under paragraph 166-272(1)(b) of the ITAA 1997) a widely held company referred to in section 166-240 of the ITAA 1997 (whether directly, or indirectly through one or more interposed entities).

Subsection 166-272(2) of the ITAA 1997 provides:

For the purpose of determining whether the tested company has satisfied a condition or whether a time is a changeover time or an alteration time in respect of the tested 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 tested company that are taken into account are exactly the same shares and are held by the same persons; and

(d) the 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.

Broadly, the effect of subsection 160-272(2) of the ITAA 1997 is that a company can only take account of interests held by persons if they are the same interests and are held by the same persons throughout the test period.

Accordingly, for the purpose of the application of section 166-145 of the ITAA 1997, the only shares in Company A that are taken into account are the shares in existence on 1 July 20aa, is the numbers in which they were held directly by the relevant shareholders on that date.

20ww year tax loss

Based on the facts as provided, as a result of the same share same interest rule in subsection 166-272(2) of the ITAA 1997, the dividend rights condition in subsection 166-145(3) of the ITAA 1997 and the capital distribution rights condition in subsection 166-145(4) of the ITAA 1997 are not satisfied in the test period from 1 July 20aa to 30 June 20zz. However, if that provision were disregarded, all of the shares in existence in company A at an ownership test time would be taken into account at that time and the conditions in subsections 166-145(3) and 166-145(4) of the ITAA 1997 would have been satisfied for the test period from 1 July 20aa to 30 June 20zz.

Saving rule

Subsection 166-272(8) of the ITAA 1997 provides that if any of the conditions in section 166-145 of the ITAA 1997 have not been satisfied (in this case, the dividend rights condition in subsection 166-145(3) of the ITAA 1997 and the capital distribution rights condition in subsection 166-145(4) of the ITAA 1997), those conditions are taken to have been satisfied if:

(a) they would have been satisfied except for the operation of subsection 166-272(2); and

(b) Company A has information from which it would be reasonable to conclude that less than 50% of:

(i) the tax loss; or

(ii) the notional loss; or

(iii) the bad debt; or

(iv) the unrealised net loss (within the meaning of section 165-115E);

as the case requires, 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 held in the tested company by the stakeholder, or an entity interposed between the stakeholder and the tested company, during the test period.

As discussed above, the dividend rights condition in subsection 166-145(3) of the ITAA 1997 and the capital distribution rights condition in subsection 166-145(4) of the ITAA 1997 would have been satisfied for the test period from 1 July 20aa to 30 June 20zz except for the operation of subsection 166-272(2) of the ITAA 1997.

Based on the information provided, subsection 166-272(8) of the ITAA 1997 is satisfied.

Accordingly, the dividend rights condition in subsection 166-145(3) of the ITAA 1997 and the capital distribution rights condition in subsection 166-145(4) of the ITAA 1997 are taken to have been satisfied.

20xx year tax loss

Based on the information provided the voting power condition in subsection 166-145(2) of the ITAA 1997, the dividend rights condition in subsection 166-145(3) of the ITAA 1997 and the capital distribution rights condition in subsection 166-145(4) of the ITAA 1997 is satisfied for the test period from 1 July 20ww to 30 June 20zz.

Conclusion

Company A will satisfy the conditions in section 165-12 of the ITAA 1997, as modified by Division 166 of the ITAA 1997, for each tax loss made in the years ended 30 June 20ww and 30 June 20xx during test periods that end on 30 June 20zz.