Edited version of your written advice

Authorisation Number: 1051387988042

Date of advice: 22 June 2018

Ruling

Subject: Tax Losses: modified continuity of ownership test

Question 1

Is the Company a ‘widely held company’ at all times during the relevant income year for the purpose of applying the modified continuity of ownership test (COT) provisions contained within Division 166 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Will the Company satisfy the substantial continuity of ownership requirements in subsection 166-5(3) of the ITAA 1997 for each test period from the formation of the income tax consolidated group to the relevant income year (including at the end of the relevant corporate change)?

Answer

Yes.

Question 3

If the answer to Question 2 is yes, will the Company be able to deduct tax losses carried forward under section 36-17 of the ITAA 1997 in the relevant income year?

Answer

Yes.

Question 4

If the answer to Question 2 is yes, in calculating the Company’s net capital gain for the relevant income year, can the Company apply previously unapplied net capital losses from earlier income years at step 2 of the method statement contained in subsection 102-5(1) of the ITAA 1997?

Answer

Yes.

Question 5

Will the Commissioner seek to apply section 165-15, 165-180, 165-185 or 165-190 of the ITAA 1997?

Answer

No.

This ruling applies for the following period:

An income year ending before 30 June 2019.

The scheme commences on:

Day of an income year.

Relevant facts and circumstances

The Company is on the official list of ASX Limited.

The Company operates a business in Australia.

The Company has one class of shares, which all carry equal voting, dividend and capital distribution rights. The shares do not carry a right to a fixed rate of dividend.

The Company is the head company of an income tax consolidated group.

Losses were transferred to the Company in accordance with Part 3-90 of the Income Tax Assessment Act 1997 (ITAA 1997) on day the income tax consolidated group was formed.

The Company has incurred losses, including capital losses, since the formation of the income tax consolidated group.

On a certain date, the Company had a share issue that resulted in an increase of 20% or more in the number of the company’s shares (the corporate change).

At the end of the corporate change, the Company had:

● a greater than 20% change in the underlying beneficial ownership in the Company

● one natural person, together with their associates, controlled more than 25%, but less than 50%, of the voting interest in the Company through their direct and indirect holdings (one natural person).

At all relevant testing times, including at the end of the corporate change, registered holders of shares which carry a less than 10% direct voting, dividend and capital stake in the Company, will, together, be the registered holders of shares which carry a greater than 50% direct voting, dividend and capital stake in the Company.

The Company is not aware of any person or persons who began, or became able to control the voting power (directly or indirectly) in the Company since the formation of the income tax consolidated group where those persons did not control and were not able to control (directly or indirectly) the voting power at that date and in the circumstances where that person or persons so began, or became able to control the voting power in the Company for the purposes of:

● getting some benefit or advantage in relation to how the tax law applies or

● getting such a benefit or advantage for someone else,

or for the purposes including that purpose.

The Company is not aware that at any time, any arrangements have been entered into that in any way (directly or indirectly) related to, affected or depended for their operation on:

● a beneficial interest in the Company’s shares, or the value of that beneficial interest

● a right carried by or relating to the Company’s shares, or

● the exercise of a right referred to above

where the arrangement was entered into for the purpose, or for the purposes including the purpose, of eliminating or reducing a liability of an entity to pay income tax for a financial year.

With the exception of the one natural person, the Company is not aware that at any time since the formation of the income tax consolidated group, in respect of voting, dividend and capital stakes held in the Company that have been taken into account in calculating the interest in the Company for the purpose of the notional shareholder rule in section 166-225 of the ITAA 1997:

● an entity (the controlling entity) directly or indirectly (through one or more interposed entities) held the power over some or all of the rights to voting, dividends or capital in the company in circumstances where it was sufficiently influenced by the controlling entity

● any other natural person (together with his/her associates) owned shares (whether directly or indirectly through one or more interposed entities) in the company giving control of more than 25% of the voting power of the company, or

● any trustee or company (together with its associates) owned shares (whether directly or indirectly through one or more interposed entities) in the company giving control of more than 50% of the voting power of the company.

None of the Directors of the Company have an overarching authority, nor are they 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 any of the shareholders and their respective economic groups.

For the relevant income year, the Company will have:

● total assessable income that exceeds its total deductions (except tax losses)

● no exempt income, and

● a capital gain.

The Company will not make an election to apply section 166-15 of the ITAA 1997 to disregard the application of Subdivision 166-A of the ITAA 1997.

Relevant legislative provisions

Income Tax Assessment Act 1936 Paragraph 318(6)(b)

Income Tax Assessment Act 1997 Division 36

Income Tax Assessment Act 1997 Section 36-17

Income Tax Assessment Act 1997 Subsection 36-17(2)

Income Tax Assessment Act 1997 Subsection 36-17(3)

Income Tax Assessment Act 1997 Section 36-25

Income Tax Assessment Act 1997 Section 102-5

Income Tax Assessment Act 1997 Subsection 102-5(1)

Income Tax Assessment Act 1997 Section 102-15

Income Tax Assessment Act 1997 Section 102-30

Income Tax Assessment Act 1997 Division 165

Income Tax Assessment Act 1997 Subdivision 165-A

Income Tax Assessment Act 1997 Section 165-10

Income Tax Assessment Act 1997 Section 165-12

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 Section 165-13

Income Tax Assessment Act 1997 Section 165-15

Income Tax Assessment Act 1997 Section 165-20

Income Tax Assessment Act 1997 Subdivision 165-CA

Income Tax Assessment Act 1997 Section 165-96

Income Tax Assessment Act 1997 Section 165-150

Income Tax Assessment Act 1997 Section 165-155

Income Tax Assessment Act 1997 Section 165-160

Income Tax Assessment Act 1997 Section 165-180

Income Tax Assessment Act 1997 Section 165-185

Income Tax Assessment Act 1997 Subsection 165-185(1)

Income Tax Assessment Act 1997 Section 165-190

Income Tax Assessment Act 1997 Subsection 165-190(1)

Income Tax Assessment Act 1997 Division 166

Income Tax Assessment Act 1997 Subdivision 166-A

Income Tax Assessment Act 1997 Section 166-5

Income Tax Assessment Act 1997 Paragraph 166-5(1)(a)

Income Tax Assessment Act 1997 Subsection 166-5(2)

Income Tax Assessment Act 1997 Subsection 166-5(3)

Income Tax Assessment Act 1997 Subsection 166-5(4)

Income Tax Assessment Act 1997 Section 166-15

Income Tax Assessment Act 1997 Subdivision 166-D

Income Tax Assessment Act 1997 Section 166-145

Income Tax Assessment Act 1997 Subsection 166-145(2)

Income Tax Assessment Act 1997 Subsection 166-145(3)

Income Tax Assessment Act 1997 Subsection 166-145(4)

Income Tax Assessment Act 1997 Section 166-175

Income Tax Assessment Act 1997 Subsection 166-175(1)

Income Tax Assessment Act 1997 Paragraph 166-175(2)(c)

Income Tax Assessment Act 1997 Subdivision 166-E

Income Tax Assessment Act 1997 Paragraph 166-220(a)

Income Tax Assessment Act 1997 Section 166-225

Income Tax Assessment Act 1997 Subsection 166-225(1)

Income Tax Assessment Act 1997 Subsection 166-225(2)

Income Tax Assessment Act 1997 Section 166-230

Income Tax Assessment Act 1997 Section 166-235

Income Tax Assessment Act 1997 Subsection 166-235(1)

Income Tax Assessment Act 1997 Subsection 166-235(2)

Income Tax Assessment Act 1997 Subsection 166-235(3)

Income Tax Assessment Act 1997 Subsection 166-235(4)

Income Tax Assessment Act 1997 Subsection 166-235(5)

Income Tax Assessment Act 1997 Subsection 166-235(6)

Income Tax Assessment Act 1997 Section 166-240

Income Tax Assessment Act 1997 Subsection 166-245(2)

Income Tax Assessment Act 1997 Section 166-260

Income Tax Assessment Act 1997 Section 166-270

Income Tax Assessment Act 1997 Subsection 166-270(1)

Income Tax Assessment Act 1997 Section 166-272

Income Tax Assessment Act 1997 Subsection 166-272(1)

Income Tax Assessment Act 1997 Section 166-275

Income Tax Assessment Act 1997 Section 166-280

Income Tax Assessment Act 1997 Subsection 166-280(1)

Income Tax Assessment Act 1997 Subsection 166-280(2)

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

Income Tax Assessment Regulations 1997 Regulation 995-1.05

Income Tax Assessment Regulations 1997 Schedule 5

Reasons for decision

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

Question 1

Summary

The Company is a ‘widely held company’ at all times during the relevant income year for the purpose of applying the modified COT provisions contained within Division 166.

Detailed reasoning

Division 165 contains the rules a company must meet before it can deduct a tax loss for an earlier income year.

Division 166 modifies the operation of Division 165 to make it easier for a widely held company to apply the rules of Division 165, unless the company chooses otherwise.

Paragraph 166-5(1)(a) provides that the modification applies to a company that is a ‘widely held company’ at all times during the income year.

A ‘widely held company’ for the purposes of Division 166 is defined in subsection 995-1(1) to include a company, shares in which (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’.

The ASX is listed as an ‘approved stock exchange’ in Schedule 5 to the Income Tax Assessment Regulations 1997.

In this instance, all of the Company’s shares, which do not carry a right to a fixed rate of dividend, will remain listed for quotation on the official list of the ASX at all times during the relevant income. The relevant income year is the income year the Company seeks to deduct a tax loss.

Conclusion

As such, the Company is a ‘widely held company’ at all times during the relevant income year for the purpose of applying the modified COT provisions contained within Division 166.

Question 2

Summary

The Company satisfies the substantial continuity of ownership requirements in subsection 166-5(3) for each test period (including at the end of the relevant corporate change).

Detailed reasoning

The COT and modified COT are found in Divisions 165 and 166.

Division 165

As stated above, Division 165 contains the rules a company must meet before it can deduct tax losses of earlier income years.

Section 165-12 provides the COT a company must satisfy in order to be able to deduct losses of earlier years.

Subsection 165-12(1) states that the ownership test period is the period from the start of the loss year to the end of the income year. The income year is a year when the company has a positive assessable income from which it may deduct tax losses if all other tests for deducting those losses have been satisfied.

According to subsections 165-12(2) to (4), in order to meet the COT, at all times during the ownership test period there must be persons who had:

n more than 50% of the voting power in the company

n rights to more than 50% of the company’s dividends, and

n rights to more than 50% of the company’s capital distributions.

These tests are applied either as a primary test or as an alternative test.

According to subsection 165-12(5), the primary test should be applied for a condition unless subsection 165-12(6) requires that the alternative test be applied.

Subsection 165-12(6) stipulates that the alternative test be applied if one or more other companies beneficially owned shares or interests in shares in the test company at any time during the ownership test period.

Division 166

As stated above, Division 166 modifies the operation of Division 165 to make it easier for a widely held company to apply the rules of Division 165 unless the company chooses otherwise.

To be eligible to apply Division 166, a company must be a widely held company or an eligible Division 166 company.

As determined by the Commissioner in Question 1, the Company is a widely held company for the purposes of Division 166 at all times during the relevant income year. Accordingly, pursuant to paragraph 166-5(1)(a), Subdivision 166-A modifies the way Subdivision 165-A applies to the Company.

Further, the Company will not make an election to apply section 166-15 to disregard the application of Subdivision 166-A.

Test times

Section 166-5 modifies the way Subdivision 165-A applies to a company that is a widely held company at all times during the income year.

Subsection 166-5(3) provides that a company is taken to have met the conditions in section 165-12 if there is substantial continuity of ownership 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.

Conversely, subsection 166-5(4) provides that a company is taken to have failed to meet the conditions in section 165-12 if there is no 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, or

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

The meaning of the ‘test period’ is defined in subsection 166-5(2) as the period consisting of the loss year, the income year and any intervening period.

Subsection 995-1(1) provides that the meaning of ‘corporate change’ is set out in section 166-175. Under subsection 166-175(1) a ‘corporate change’ includes 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.

As per paragraph 166-175(2)(c), a corporate change of this kind ends when the offer period for the issue of shares ends.

Referring to the Facts and assumptions, there is one specifically identified corporate change. Hence the test periods for the Company as per subsection 166-5(3) are:

● start of each loss year

● end of each income year in that period:

● the identified corporate change

The substantial continuity of ownership test

Subsection 995-1(1) provides that the requirement of ‘substantial continuity of ownership’ is given by section 166-145.

Subsections 166-145(2) to (4) provide that for a widely held company to have substantial continuity of ownership of a company there must be:

● persons (none of them companies or trustees) who had more than 50% of the voting power at the start of the test period and more than 50% of the voting power immediately after another time in the test period

● persons (none of them companies) who had rights to more than 50% of the company’s dividends at the start of the test period and rights to more than 50% of the dividends immediately after another time in the test period, and

● persons (none of them companies) who had rights to more than 50% of the company’s capital distributions at the start of the test period and rights to more than 50% of the company’s capital distributions immediately after another time in the test period.

The more than 50% voting power, rights to dividends and rights to capital distributions will be determined in accordance with the alternative tests contained in sections 165-150, 165-155 and 165-160 respectively.

Concessional tracing rules

Subdivision 166-E provides a number of concessional tracing rules which make it easier for a widely held company to satisfy the ownership tests in Subdivision 166-D. Relevantly, section 166-225 enables a company (the tested company) to aggregate all holdings in it which are less than 10% so as to form a single notional entity.

Subsections 166-225(1) and (2) state:

(1) This section modifies how the ownership tests in section 166-145 are applied to the tested company if:

(a) a voting stake that carries rights to less than 10% of the voting power in the company is held directly in the company; or

(b) a dividend stake that carries the right to receive less than 10% of any dividends that the company may pay is held directly in the company; or

(c) a capital stake that carries the right to receive less than 10% of any distribution of capital of the company is held directly in the company.

Note 1: Other rules might affect this provision: see sections 166-270, 166-275 and 166-280.

…

Notional shareholder

(2) The tests are applied to the tested company as if, at the ownership test time, a single notional entity:

(a) a directly controlled the voting power that is carried by each such voting stake; and

(b) had the right to receive, for its own benefit and directly:

(i) any dividends the tested company may pay in respect of each such dividend stake; and

(ii) any distributions of capital of the tested company in respect of each such capital stake; and

(c) were a person (other than a company).

…

The terms ‘voting stake’, ‘dividend stake’ and ‘capital stake’ are defined in subsection 995-1(1) by reference to section 166-235. Such stakes can be held directly or indirectly through one or more interposed entities.

According to subsections 166-235(1), (3) and (5), an entity has a direct stake in a company where that entity is a registered holder of shares in a company and those shares carry a right to exercise voting power, a right to all or any of the dividends the company may pay and a right to all or any of a distribution of capital of the company.

According to subsections 166-235(2), (4) and (6), an entity has an indirect stake in a company where one or more entities are interposed between it and the company and the entity can control or is able to control voting power the company indirectly through the interposed entities and has a right to receive for its own benefit through the interposed entity or entities all or any dividends that the company may pay and all or any of a distribution of capital of the company.

For the purpose of determining substantial continuity of ownership, the Company’s shares on issue at all times in the test periods (as stated above) carried the same voting, dividend and capital rights.

An analysis of the Company’s shareholdings for the purposes of determining substantial continuity of ownership shows the stake attributed to a single notional entity under section 166-225 was, at all times, above 50% for the test periods (including at the end of the identified corporate change).

However, Note 1 to subsection 166-225(1) highlights that sections 166-270, 166-275 and 166-280 may affect section 166-225.

Section 166-270: Minimum Interest Rule

The facts and circumstances of the Company confirm that the minimum interest of a single notional entity has not fallen to 50% or below during the test periods. Thus, section 166-270 will not have any implication on the outcome of modified COT for the Company.

Section 166-275: No detrimental operation of tracing rules

In this instance, none of the tracing concessions work to the detriment of the Company. As such, section 166-275 is not applicable.

Section 166-280: Controlled test companies

In this instance, the Company does not have any majority shareholders. Further, none of Directors of the Company have an overarching authority, nor are they accustomed or under any formal or informal obligation, or might reasonably be expected, to act in accordance with the directions, instructions or wishes of any of the shareholders and their respective economic groups.

Accordingly, section 166-280 does not prevent the tracing rules under section 166-225 from applying to the ownership tests in section 166-145.

However, subsection 166-280(2) prevents the tracing rules under section 166-225 from modifying the ownership tests in section 166-145 in respect to the votes associated with the one natural person.

As a result of excluding the shareholdings related to the one natural person, the stake attributed to a single notional entity under section 166-225 remains above 50%.

Section 166-272: Same share same interest rule

Section 166-272 does not apply to a single notional entity contained in section 166-225 and, as such, it will not impact on the outcome of the modified COT for the Company as at least 50% of the shares in the Company were held by a single notional entity at all times during the test period.

Conclusion

The Company satisfies the substantial continuity of ownership requirements in subsection 166-5(3) for each relevant test period (including at the end of the identified corporate change), as a single notional entity has maintained an ownership interest above 50% at each applicable test time.

As such, the Company is taken to have met the conditions in section 165-12 for the period.

Question 3

Summary

The Company is able to deduct tax losses carried forward from earlier income years under 36-17 in the relevant income year.

Detailed reasoning

Section 36-17 sets out the rules on how corporate tax entities may deduct tax losses from a loss year in a later income year.

In this instance, the Company’s total assessable income will exceed its total deductions (except tax losses) for the relevant income year. The Company will also have no exempt income for the income year and it has tax losses carried forward from earlier income years.

Special rules

Section 36-25 provides special rules about tax losses of certain entities.

Item 2 of the table under the heading ‘Tax losses of companies’ contained within section 36-25 provides that Subdivision 165-A is applicable in relation a company that wants to deduct a tax loss.

In Subdivision 165-A, section 165-10 provides that a company cannot deduct a tax loss unless it meets the conditions of continuity of ownership in section 165-12 (or the same business test in section 165-13).

As concluded by the Commissioner in Question 2, the Company is taken to have met the conditions in section 165-12 for the period.

Accordingly, the special rules contained in section 36-25 are satisfied.

Conclusion

The Company is able to deduct a tax loss carried forward from earlier income years under 36-17 in the relevant income year.

Question 4

Summary

The Company is able to apply previously unapplied net capital losses from earlier income years at step 2 of the method statement contained in subsection 102-5(1) for the relevant income year.

Detailed reasoning

Section 102-5 provides that your assessable income includes your net capital gain (if any) for an income year.

Step 2 of the method statement contained in subsection 102-5(1) provides that in working out your net capital gain, you may apply any previously unapplied net capital losses from earlier income years to reduce the amounts (if any) remaining after the application of Step 1.

The Note to subsection 102-5(1) provides that section 102-30 sets out exceptions and modifications to these rules.

Special rules

Section 102-30 contains special rules affecting capital gains and capital losses.

Item 5 of the table contained within section 102-30 provides that Subdivision 165-CA applies in relation a company that wants to apply a net capital loss.

In Subdivision 165-A, section 165-10 provides that a company cannot deduct a tax loss unless it meets the conditions of continuity of ownership in section 165-12 (or the same business test in section 165-13).

In this instance, the Company has a capital gain in the relevant income year and previously unapplied net capital losses from earlier income years.

As concluded by the Commissioner in Question 2, the Company is taken to have met the conditions in section 165-12 for the period.

Accordingly, the special rule in item 5 of the table contained within section 102-30 is satisfied.

Conclusion

The Company is able to apply previously unapplied net capital losses from earlier income years at step 2 of the method statement contained in subsection 102-5(1) for the relevant income year.

Question 5

Summary

The Commissioner will not apply section 165-15, 165-180, 165-185 or 165-190.

Detailed reasoning

Although a company may meet the conditions in section 165-12 or 165-13, Division 165 contains further restrictions and certain integrity measures in sections 165-15, 165-180, 165-185 and 165-190 respectively.

Section 165-15: same people must control voting power

In this instance, there was no person or person who began or became able to control the Company at any time where those person did not control and were not able to control (directly or indirectly) the voting power at that date and in the circumstances where that person or persons began, or became able to control the voting power in the Company for the purpose or purposes of obtaining a tax benefit or advantage for that person or someone else.

As such, section 165-15 will not apply.

Section 165-180: Arrangements affecting beneficial ownership of shares

In this instance, no arrangements have been entered into that in any way (directly or indirectly) related to, affected or depended for their operation on:

● a beneficial interest in the Company’s shares, or the value of that beneficial interest; or

● a right carried by or relating to the Company’s shares; or

● the exercise of a right referred to above;

where the arrangement was entered into for the purpose, or for the purposes including the purpose, of eliminating or reducing a liability of an entity to pay income tax for a financial year.

As such, section 165-180 will not apply.

Sections 165-185 and 165-190: Changes to rights attaching to shares

Sections 165-185 and 165-190 allow the Commissioner to treat, in applying a test for the purpose of Division 165 (other than Subdivision 165-CC), as having or not having carried particular rights for all or part of the ownership test period, if there has effectively been a substantial change in the rights attaching to shares because of an arrangement, including changes to a company’s constitution, made at any time during the ownership test period.

In this instance, the Company has one class of shares, which all carry equal voting, dividend and capital distribution rights during the ownership period. Further, there is no arrangement, including any changes to the Company’s constitution, which changed the rights associated with the shares.

As such, sections 165-185 and 165-190 will not apply.

Conclusion

Based on the facts, the Commissioner will not apply either section 165-15, 165-180, 165-185 or 165-190.