ATO ID 2007/106: Company tax losses: a 'widely held company' that replaces another 'widely held company' for part of the income year - whether a widely held company 'at all times' during the income year
Date of decision: 2 March 2007
Year of income: Year ended 30 September 2008
Business line: Public Groups and International

Issue
Where a 'widely held company' is replaced during the income year by an interposed 'widely held company' that makes a choice under subsection 124-380(5) of the Income Tax Assessment Act 1997 (ITAA 1997), will the interposed company be a widely held company 'at all times' during the income year for the purposes of Division 166 of the ITAA 1997?

Decision
Yes. As a result of the choice under subsection 124-380(5) of the ITAA 1997, the effect of section 703-75 of the ITAA 1997 is that the interposed widely held company is a widely held company at all times during the income year for the purposes of Division 166 of the ITAA 1997.

Facts
Company X has a tax loss for an earlier income year. Shares in Company X are listed for quotation in the official list of an approved stock exchange. 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. 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, and its shares are listed for quotation in the official list of an approved stock exchange.

Reasons for decision
Summary: A widely held company can recoup its tax losses under Division 166 of the ITAA 1997. Division 166 of the ITAA 1997 contains concessional tracing rules, that make it easier for a company to satisfy the continuity of ownership test in section 165-12 of the ITAA 1997, as modified by the test for substantial continuity of ownership in subsection 166-5(3) of the ITAA 1997. The definition of 'widely held company' in subsection 995-1(1) of the ITAA 1997 includes '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'. Throughout the income year until the time when all of the shares in Company X are disposed of to Holding Company, the shares in Company X are listed for quotation in the official list of an approved stock exchange. As a result of the reorganisation, Holding Company becomes the head company of the consolidated group, and the shares in Holding Company are listed for quotation in the official list of an approved stock exchange. 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 company (Company X) before the completion time is taken to have happened in relation to the interposed company (Holding Company) instead of in relation to the original company (Company X). Sections 703-65 to 703-80 of the ITAA 1997 focus on the 'completion time'. Under Subdivision 124-G of the ITAA 1997, this is the time when the interposed company (Holding Company) owns all of the shares in the original company (Company X) just after all of the shareholders in the original company have transferred their shares in the original company. Under subsection 703-75(3) of the ITAA 1997, subsection 703-75(1) of the ITAA 1997 has 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. In order to recoup the tax loss under Division 166 of the ITAA 1997, subsection 166-5(1) of the ITAA 1997 requires Holding Company to be a widely held company at all times during the income year in which it seeks to deduct the tax loss. As a result of subsection 703-75(1) of the ITAA 1997, Holding Company is a widely held company, for the purposes of Division 166 of the ITAA 1997, before the completion time, and will be a widely held company for the remainder of the income year. Therefore, Holding Company is a widely held company at all times during the income year.

Legislative references: Income Tax Assessment Act 1997 Subdivision 124-G subsection 124-380(5) section 165-12 Division 166 subsection 166-5(1) subsection 166-5(3) subsection 701-1(2) section 703-65 section 703-75 subsection 703-75(1) subsection 703-75(3) section 703-80 subsection 995-1(1)
Related ATO interpretative decisions: ATO ID 2007/107
Subject references: Consolidated group Head company Tax loss