Edited version of private advice

Authorisation Number: 1051691955935

Date of advice: 3 June 2020

Ruling

Subject: Carried forward losses

Question

Does the company satisfy the continuity of ownership test under section 165-10 of the Income Tax Assessment Act 1997 (ITAA 1997) and is able to utilise the carried forward losses?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Person A and Family Trust A combined own more than 50% of the shares in the company.

At the start of the first year where Person A and Family Trust A owned their shareholdings the company made a loss.

The other shareholders of the company include companies.

All of the shares have the same voting, dividend and capital distribution rights.

There are no plans to continue the same business so the same business test won't be passed.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 36-17

Income Tax Assessment Act 1997 section 165-10

Income Tax Assessment Act 1997 section 165-12

Income Tax Assessment Act 1997 section 165-13

Income Tax Assessment Act 1997 subsection 165-150(2)

Income Tax Assessment Act 1997 subsection 165-155(2)

Income Tax Assessment Act 1997 subsection 165-160(2)

Income Tax Assessment Act 1997 section 165-207

Reasons for decision

Section 36-17 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a tax loss of an entity for a loss year is deducted in a later income year if the entity is a corporate tax entity at any time during the later income year.

However, section 165-10 of the ITAA 1997 provides that a company cannot deduct a tax loss unless either:

a)    it meets the conditions in section 165-12 of the ITAA 1997 (which is about the company maintaining the same owners); or

b)    it meets the condition in section 165-13 of the ITAA 1997 (which is about the company satisfying the same business test).

Only the test in section 165-12 of the ITAA 1997 is relevant to this situation. The same business test under section 165-13 of the ITAA 1997 will not apply as you have stated there are no plans to continue the same business.

The test in section 165-12 of the ITAA 1997 is applied over the ownership test period which is the period from the start of the loss year to the end of the income year in which the loss is sought to be deducted. According to subsections 165-12(2) to (4) of the ITAA 1997, in order to meet the continuity of ownership test, at all times during the ownership test period there must be persons who had:

·         rights to exercise more than 50% of the voting power in the company

·         rights to more than 50% of the company's dividends, and

·         rights to more than 50% of the company's capital distributions.

These conditions are applied either as a primary test or as an alternative test. According to subsection 165-12(5) of the ITAA 1997, the primary test will apply for a condition unless subsection 165-12(6) of the ITAA 1997 requires that the alternative test applies. Subsection 165-12(6) stipulates that the alternative test applies if one or more other companies beneficially owned shares or interests in shares in the test company during the ownership test period.

As there are shareholders who are companies, only the alternative tests are applicable to this case.

The alternative tests are set out in subsections 165-150(2), 165-155(2) and 165-160(2) of the ITAA 1997. These subsections require that there are persons, or it is reasonable to assume that there are persons:

·         none of whom are companies or trustees, who between them, at a particular time, directly or indirectly (through an interposed entity), control, or are able to control, more than 50% of the voting power

·         none of whom are companies, who between them, at a particular time have the right to receive for their own benefit, whether directly or indirectly more than 50% of any dividends the test company may pay, and

·         none of whom are companies, who between them, at a particular time have the right to receive for their own benefit, whether directly or indirectly more than 50% of any distribution of capital of the company.

Section 165-207 provides that where the relevant interests in a company are held by the trustee of a family trust, a single notional entity that is a person will be taken to own the interests. This means that there is no need to trace past the family trust.

Relevantly, subsections 165-207(1) and (3) of the ITAA 1997 state:

(1) This section applies if one or more trustees of a family trust:

(a)  owns shares in a company; or

(b)  controls, or is able to control, (whether directly, or indirectly through one or more interposed entities) voting power in a company; or

(c)   has a right to receive (whether directly, or indirectly through one or more interposed entities) a percentage of a dividend or a distribution of capital of a company.

(3) For the purposes of an alternative test, a single notional entity that is a person (but is neither a company nor a trustee) is taken:

(a)  to control, or have the ability to control, the voting power in the company; or

(b)  to have the right to receive (whether directly or indirectly) the percentage of the dividend or distribution for the entity's own benefit.

A trust is a 'family trust' at any time when a family trust election (FTE) in respect of the trust is in force.

As Family Trust A will be a family trust throughout the ownership test periods, it is taken, for the purposes of the primary test, to be a single person (being neither a company nor trustee) that beneficially owns shares in the company. Combined with Person A's shares they own more than 50% of the shares in the company.

On this basis, it is considered that the company satisfies the continuity of ownership test because, at all times during the relevant ownership test periods, it had persons who beneficially owned more that 50% of its shares. Consequently the carried forward losses that were incurred can be deducted in future income years provided they maintain their shareholdings.