ATO ID 2007/107: Company tax losses: is a 'corporate change' under section 166-175 of the ITAA 1997 taken not to have happened because of the effect of section 703-75 of the ITAA 1997
Date of decision: 2 March 2007
Year of income: Year ended 30 September 2008
Business line: Public Groups and International

Issue
Where an interposed holding company becomes the owner of another company during an income year, causing a prima facie corporate change under section 166-175 of the Income Tax Assessment Act 1997 (ITAA 1997), is the effect of section 703-75 of the ITAA 1997 that the corporate change is taken not to have happened?

Decision
Yes. The effect of section 703-75 of the ITAA 1997 is that the reorganisation which causes the interposed holding company to become the owner of the other company is taken not to give rise to a corporate change under section 166-175 of the ITAA 1997.

Facts
Company X has a tax loss for an earlier income year. Company X is the head company of a consolidated group. During an income year in which the tax loss is sought to be deducted, there is a reorganisation under which an interposed holding company (Holding Company) acquires 100% of the shares in Company X. Just after that and in exchange for the shares in Company X, Holding Company issues an identical number of shares in itself to the former shareholders of Company X. The former shareholders of Company X become the shareholders of Holding Company. Holding Company makes a choice under subsection 124-380(5) of the ITAA 1997 that the consolidated group is to continue in existence. As a result of the reorganisation, Holding Company becomes the head company of the consolidated group.

Reasons for decision
Summary: The acquisition by Holding Company of 100% of the shares in Company X, and the issuing by Holding Company of an identical number of shares, gives rise to a prima facie 'corporate change' under section 166-175 of the ITAA 1997. Under paragraph 166-5(3)(b) of the ITAA 1997, a company must apply the test for substantial continuity of ownership at the end of each corporate change in the relevant test period. This means that there is an additional testing time. A company that makes a choice under subsection 124-380(5) of the ITAA 1997 to interpose a new head company of the consolidated group is affected by sections 703-65 to 703-80 of the ITAA 1997. Under subsection 703-75(1) of the ITAA 1997, everything that happened in relation to the original head company (Company X) before the time of the reorganisation is taken to have happened in relation to the interposed company (Holding Company) instead of in relation to the original head company (Company X). Under subsection 703-75(3) of the ITAA 1997, subsection 703-75(1) of the ITAA 1997 has this effect for the head company core purposes. Subsection 701-1(2) of the ITAA 1997 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 Holding Company (the new head company) to recoup the tax loss under Division 166 of the ITAA 1997 will affect the calculation of Holding 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 Holding Company to apply the test for substantial continuity of ownership at an additional time. If Holding 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 Holding Company. The shares are taken to have been owned, just before and just after the reorganisation, by the shareholders of Company X who became the shareholders of Holding Company. The corporate change is thus taken not to have happened.

Legislative references: Income Tax Assessment Act 1997 subsection 124-380(5) Division 166 paragraph 166-5(3)(b) section 166-175 subsection 701-1(2) section 703-65 section 703-75 subsection 703-75(1) subsection 703-75(3) section 703-80
Related ATO interpretative decisions: ATO ID 2007/106
Subject references: Consolidated group Head company Consolidation - continuity of ownership test Tax loss