Edited version of private advice

Authorisation Number: 1051630022915

Date of advice: 4 February 2020

Ruling

Subject: The continuity of ownership test

Question 1

Will the transfer of a share on the death of the shareholder to the beneficiaries of the person's estate cause you to fail the ownership conditions in Division 165 of the Income Tax assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2

Does the change in the voting rights attached to the "A" class management share under the Special Resolution clause cause you to fail the ownership conditions in Division 165 of the ITAA 1997?

Answer

No

Question 3

Should either shareholder purchase all the shares owned by the other, resulting in one shareholder becoming 100% owner of all shares, are the ownership conditions in Division 165 of the ITAA 1997 satisfied?

Answer

No

This ruling applies for the following period:

Years ended 30 June 2020 to 30 June 2021

The scheme commences on:

1 July 2019

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Up until 20XX the shares in ABC Pty Ltd (the Company) were held as follows:

The "A" class management share gave peter the right, in the case or ordinary and special resolutions, "to cast as many votes as shall constitute 75% of the votes cast personally or by proxy or attorney on such resolution" (extract from a Special Resolution passed at an Extraordinary meeting of the company on 16 April 1980).

Mr B and Mr C are the children of Mr A.

Mr A passed away in 20XX. Through the estate of MrA, the shares held by Mr A were transferred equally to Mr B and Mr C. After Mr A's death the shares in the Company were held as follows:

The Special Resolution passed at the Extraordinary meeting of the company on X April 19XX contains clauses that reduce the voting rights conferred upon the holder of the "A" class management share to be equivalent to one vote, changed from 75% of the votes, when the "A" class management share is not held by Mr A. The "A" class management share does not confer upon the holder any right to dividends or to participate in any surplus upon winding up the company other than the right to repayment of the capital value of the share.

There have not been any other changes to the Company shareholdings.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 165-10

Income Tax Assessment Act 1997 section 165-12

Income Tax Assessment Act 1997 section 165-15

Income Tax Assessment Act 1997 section 165-150

Income Tax Assessment Act 1997 subsection 165-205(1)

Income Tax Assessment Act 1997 subsection 165-205(2)

Reasons for decision

Question 1 & 2

Section 165-10 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a company cannot deduct a tax loss unless either:

(a) it meets the conditions in section 165-12 (which is about the company maintaining the same owners) (continuity of ownership test); or

(b) it meets the condition in section 165-13 (which is about the company satisfying the business continuity test).

In determining whether section 165-10 of the ITAA 1997 prevents a company from deducting a tax loss, the ownership test period is the period from the start of the loss year to the end of the income year.

Section 165-12 of the ITAA 1997 addresses the requirements for a company to maintain the same owners. These are:

·        There must be persons who had more than 50% of the voting power in the company at all times during the ownership test period (section 165-12(2) of the ITAA 1997)

·        There must be persons who had rights to more than 50% of the company's dividends at all times during the ownership test period (section 165-12(3) of the ITAA 1997)

·        There must be persons who had rights to more than 50% of the company's capital distributions at all times during the ownership test period (section 165-12(4) of the ITAA 1997)

In 20XX Mr A passed away in. Where a shareholder of a company dies, section 165-205(1) of the ITAA 1997 provides that:

If an individual beneficially owns shares in a company when he or she dies, this section applies if and while the shares:

(a) are owned by the trustee of the deceased ' s estate; or

(b) are beneficially owned by someone who receives them as a beneficiary of the deceased ' s estate.

Section 165-205(2) of the ITAA 1997 goes on to provide that for the purposes of a test:

(a) the *shares are taken to continue to be beneficially owned by the deceased; and

(b) as a result of being taken to continue to beneficially own the shares, the deceased is taken to continue:

(i) to have any rights to exercise, or to be able to control (whether directly, or indirectly through one or more interposed entities), any of the voting power in the company; and

(ii) to have any rights to receive for the deceased ' s own benefit (whether directly or *indirectly) any *dividends that the company may pay; and

(iii) to have any rights to receive for the deceased ' s own benefit (whether directly or indirectly) any distributions of capital of the company.

In your circumstances, for the purposes of the ownership conditions in Division 165 of the ITAA 1997, as long as the shares in the company continue to be owned beneficially by the beneficiaries of the deceased persons estate, those shares will be taken to continue to be owned beneficially by the deceased, pursuant to paragraph 165-205(a) of the ITAA 1997. Additionally the deceased maintains voting rights due to section 165-205 of the ITAA 1997, enabling section 165-12 of the ITAA 1997 to be satisfied.

Question 3

As stated above, where a shareholder of a company dies, subsection 165-205(1) and subsection 165-205(2) of the ITAA 1997 allows for the deceased shareholder to maintain the rights to voting, dividend and capital distributions as though they continue to hold the shares, where the shares are owned beneficially by the beneficiaries

If either shareholder were to transfer their ownership in the shares which they received as beneficiaries of the deceased's estate to the other shareholder, section 165-205 of the ITAA 1997 will not apply to those shares as the share ownership which is transferred will no longer be owned as a beneficiary of the estate, rather it will be owned as a result of an ordinary ownership transfer.

As a result, the requirements of section 165-12 of the ITAA 1997 will not be satisfied and the continuity of ownership test will be failed.