ATO ID 2003/508: Company losses: shares in loss company held by corporate trustee of non-fixed trust - whether shareholders of corporate trustee beneficially own the shares
Date of decision: 7 May 2003
Year of income: 30 June 2002
Business line: Public Groups and International

Issue
Are the shareholders of a corporate trustee of a non-fixed trust, that is a discretionary trust, taken to be beneficial owners of shares held by the corporate trustee in a loss company, for the purposes of satisfying the same ownership test under section 165-12 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision
No. The shareholders of the corporate trustee (in their capacity as such) are not the legal or beneficial owners of the shares in the loss company.

Facts
Loss Company derived assessable income in an income year and wants to claim a deduction for an undeducted tax loss of an earlier income year (the 'loss year'). Loss Company has been wholly owned by the corporate trustee of a discretionary trust from the start of the loss year to the end of the relevant income year. The discretionary trust has not made a family trust election. Subdivision 166-A of the ITAA 1997 does not apply to Loss Company.

Reasons for decision
Summary: Loss Company is entitled to claim a deduction for an undeducted tax loss of the loss year, subject to certain conditions, against its assessable income in a subsequent income year under section 36-15 of the ITAA 1997. In section 36-25 of the ITAA 1997, a special rule in Item 2 concerning tax losses of companies provides that a company must satisfy conditions in Subdivision 165-A of the ITAA 1997 in order to deduct a tax loss. Section 165-10 of Subdivision 165-A of the ITAA 1997 provides that a company cannot deduct a tax loss unless it satisfies either section 165-12 or 165-13 of the ITAA 1997. Section 165-12 of the ITAA 1997 provides that a loss company cannot deduct a tax loss unless it satisfies conditions in subsections 165-12(2), (3) and (4) of the ITAA 1997 during the ownership test period. The relevant ownership test period is defined in subsection 165-12(1) of the ITAA 1997 as being the period from the start of the loss year to the end of the income year in which the deduction is claimed. As no company beneficially owned shares in Loss Company at the beginning of the ownership test period the 'alternative test' is not relevant (per subsection 165-12(6) of the ITAA 1997). Accordingly, to satisfy the conditions in subsections 165-12(2), (3) and (4) Loss Company must satisfy the respective 'primary test' in subsections 165-150(1), 165-155(1) and 165-160(1) of the ITAA 1997. Whilst the corporate trustee is the legal owner of the shares in Loss Company, neither it nor its shareholders in their capacity as shareholders in the corporate trustee, are the beneficial owners of those shares. Accordingly, the existence and identification of the shareholders of the corporate trustee is irrelevant for determining whether the Loss Company has satisfied section 165-12 of the ITAA 1997, as the primary tests to be applied in subsections 165-150(1), 165-155(1) and 165-160(1) are all referable to the identification of beneficial owners of shares in the Loss Company. As the relevant trust is a discretionary trust, for the purposes of the tests in Subdivision 165-A it is not possible to trace through that trust arrangement in order to establish the beneficial owners of the shares in the company held by the corporate trustee. Note: In applying Subdivision 165-A of the ITAA 1997 in circumstances where there is ownership of a loss company by non-fixed trusts, the possible application of Subdivision 165-F of the ITAA 1997 should be considered.

Legislative references: Income Tax Assessment Act 1997 section 36-15 section 36-25 Subdivision 165-A subsection 165-12(1) section 165-10 section 165-12 subsection 165-12(1) subsection 165-12(2) subsection 165-12(3) subsection 165-12(4) subsection 165-12(6) section 165-13 subsection 165-150(1) subsection 165-155(1) subsection 165-160(1) Subdivision 165-F Subdivision 166-A
Subject references: Company losses Continuity of ownership Discretionary trusts Prior year losses