ATO ID 2013/5: Losses: bearer shares in foreign listed companies - disclosure of beneficial owners
Date of decision: 18 January 2013
Year of income: Year ending 30 June 2013
Business line: Public Groups and International

Issue
If the names of individual owners of bearer shares in a pooled group are listed but the number of shares held by each member of the group is unknown, have the beneficial owners of those bearer shares been disclosed for the purposes of paragraph 166-255(1)(f) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision
No. The beneficial owners of those bearer shares have not been disclosed for the purposes of paragraph 166-255(1)(f) of the ITAA 1997.

Facts
Loss Co is wholly owned by a foreign listed company, European Co. Loss Co is an 'eligible Division 166 company' as defined in subsection 995-1(1) of the ITAA 1997. European Co has only bearer shares on issue. The annual report of European Co shows a number of shareholders in a pooled group that own 5% of the company's bearer shares. The names of the individual members of the group are listed, but the number of shares held by each member is not stated. The members of the pooled group are unrelated, other than through the pooled group. The number of shares held by each member of the pooled group is not known to European Co.

Reasons for decision
Summary: Section 165-12 of the ITAA 1997 specifies conditions that a company must satisfy in order to deduct a tax loss. Broadly, section 165-12 provides that the company must maintain more than 50% continuity of ownership throughout the ownership test period. This is known as the continuity of ownership test (COT). Division 166 of the ITAA 1997 modifies the way the rules in Division 165 of the ITAA 1997 apply to a widely held company or an eligible Division 166 company. Division 166 was introduced to simplify the application of the COT for these companies by providing tracing rules (such as section 166-255 of the ITAA 1997) that make it unnecessary for them to trace the ultimate owner of shares held by certain intermediaries and small shareholdings. Under subsection 166-255(1) of the ITAA 1997, an indirect stake in the loss company held by way of bearer shares in a foreign listed company that is interposed between the bearer shareholders and the loss company is attributable to a single notional entity at an ownership test time if all the following conditions are satisfied: The term 'disclosed' in paragraph 166-255(1)(f) of the ITAA 1997 is not defined in the legislation. Whether a disclosure has occurred under these provisions is a question of fact, in the context of Divisions 165 and 166 of the ITAA 1997. A disclosure has not occurred where European Co knows that a pooled group collectively are the holders of 5% of the bearer shares, but does not know the individual holdings of the members of that group. The COT requires a loss company to identify the percentage of the voting power, rights to dividends and rights to capital distributions of the loss company held by specific entities at all times during the ownership test period (Division 165) or at the relevant ownership test times in the test period (Division 166). This enables the loss company to trace any changes in the percentages held during the relevant period by those entities, which is crucial in establishing whether or not the loss company has satisfied the COT. The mere identity of the bearer shareholders without knowledge of their individual holdings does not constitute disclosure for the purposes of paragraph 166-255(1)(f) of the ITAA 1997.

Legislative references: Income Tax Assessment Act 1997 Division 165 section 165-12 Division 166 Subdivision 166-E section 166-255 subsection 166-255(1) paragraph 166-255(1)(f) subsection 995-1(1)
Subject references: company losses continuity of ownership continuity of ownership test losses