Edited version of your written advice

Authorisation Number: 1051376754765

Date of advice: 7 June 2018

Ruling

Subject: Corporate change

Question

Is the interposition of Holding Company (Y) between Company X (X) and its shareholders a corporate change under section 166-175 of the ITAA 1997and does it cause a failure of same share same interest rule in section 166-272 of the ITAA 1997?

Answer

No.

This ruling applies for the following period:

The year ended 20XX

Relevant facts and circumstances

X is the head company of a consolidated group for Australian tax purposes.

Y is a newly incorporated resident company for Australian tax purposes.

The shareholders of X will exchange all their shares in X for shares in Y in the same proportion as their original holdings in X and nothing else.

The shares in Y will be identical to the shares in X with regards to rights to dividend, voting rights and capital distribution rights.

Y will make and election under section 615-30 that the consolidated group is to continue to exist.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 166-175

Income Tax Assessment Act 1997 section 166-272

Reasons for decision

166-175(1) defines the meaning of corporate change as follows:

There is a corporate change in a company if:

(a) there is a *takeover bid for *shares in the company; or

(b) there is a scheme of arrangement, involving more than 50% of the company ' s shares, that has been approved by a court; or

(c) there is any other arrangement, involving the acquisition of more than 50% of the company ' s shares, that is regulated under the Corporations Act 2001 or a *foreign law; or

(d) there is an issue of *shares in the company that results in an increase of 20% or more in:

(i) the issued share capital of the company; or

(ii) the number of the company ' s shares on issue; or

(e) there is a corporate change in another company which beneficially owns one or more of the following stakes in the first company:

(i) a *voting stake that carries rights to more than 50% of the voting power of the first company;

(ii) a *dividend stake that carries rights to receive more than 50% of any dividends the first company may pay;

(iii) a *capital stake that carries rights to receive more than 50% of any distribution of capital of the first company;

(whether the other company owns those stakes directly, or *indirectly through one or more interposed entities).

* denotes a term defined in subsection 995-1(1) of the ITAA 1997

The purpose of the same share same interest rule is to ensure that the same people must hold exactly the same shares or interests in shares for the entire ownership test period and it is found in section 166-272. Specifically subsection 166-272(2) states:

For the purpose of determining whether the tested company has satisfied a condition …:

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

(b) …

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

* denotes a term defined in subsection 995-1(1) of the ITAA 1997

In this case, Y a newly incorporated resident company for Australian tax purposes, is interposed between X, a head entity of a consolidated group, and its shareholders.

The shareholders of X exchanged all their shares in X for shares in Y in the same proportion as their original holdings in X and nothing else. Shares in X will be identical to the shares in Y with regards to rights to dividend, voting rights and capital distribution rights. Y will make an election under section 615-30 that the consolidated group is to continue to exist.

The acquisition by Y of 100% of the shares in X would give rise to a prima facie corporate change under subsection 166-175(1). Under paragraph 166-5(3)(b) a company must apply the test for substantial continuity of ownership at the end of each corporate change in the relevant test period.

However, a company that makes a choice under Division 615 to interpose a new head company of the consolidated group is affected by sections 703-65 to 703-80. Under subsection 703-75(1), everything that happened in relation to the original head company before the time of the interposition of new head company is taken to have happened in relation to the interposed company.

Under subsection 703-75(3), subsection 703-75(1) has this effect for the head company core purposes. Subsection 701-1(2) defines the 'head company core purposes' as including 'working out the amount of the head company's liability (if any) for income tax'.

The ability of the new head company to recoup the tax loss under Division 166 of the ITAA 1997 will affect the calculation of the company’s liability for income tax. This is one of the head company core purposes.

Section 166-175 of the ITAA 1997 affects the ability to recoup tax losses because if a corporate change occurs it will require the new head company to apply the test for substantial continuity of ownership at an additional time. If the company is not able to satisfy the test at that time, it may not be able to deduct the tax loss which is relevant to that test period.

The effect of subsection 703-75(1) of the ITAA 1997 is that nothing has happened in respect of the shares in the new head entity. The shares are taken to have been owned, just before and just after the interposition, by the shareholders of the original head company who became the shareholders of the new head company. The corporate change is thus taken not to have happened.

Based on the facts, the interposition of Y between X and its shareholders is taken not to give rise to corporate change and not to cause a failure of same share same interest rule.