ATO ID 2004/723: Transfer of tax losses from a company limited by shares to a company limited by shares and guarantee
Date of decision: 12 August 2004
Year of income: Year ended 30 June 2002
Business line: Public Groups and International

Issue
Can the continuity of ownership test, found in section 165-12 of the Income Tax Assessment Act 1997 (ITAA 1997) be applied to a company limited by shares and guarantee?

Decision
Yes. The continuity of ownership test, found in section 165-12 of the ITAA 1997, can be applied to a company limited by shares and guarantee.

Facts
B Co was a company limited by shares and guarantee. B Co had never issued shares. It owned 100% of the shares in a subsidiary company, A Co Pty Limited. B Co demutualised on 30 June of the relevant income year. For the relevant income year for B Co, there was continuity of membership of 50% or more for the period 1 July to 29 June. The shares issued as a consequence of the demutualisation did not materially alter this position. The notice of assessment in relation to B Co for a certain year of income showed an amount of taxable income. B Co requested an amendment to its assessment, for the year of income to utilise a loss transferred from A Co, which would reduce taxable income by the amount of that loss. Throughout the relevant year there was 50% or more continuity of the underlying ownership of both B Co and A Co.

Reasons for decision
Summary: Section 170-5 of the ITAA 1997 outlines certain basic principles for transferring tax losses. Subsection 170-5(4) of the ITAA 1997 provides that neither the loss company nor the income company must be prevented from deducting the loss by Divisions 165 or 175 of the ITAA 1997. On the basis of the particular facts of the case, and in accordance with long established ATO administrative practices, it is considered that Division 165 of the ITAA 1997 did not prevent B Co from deducting its own carry forward losses. Consequently, the two companies are able to make an agreement for the transfer of an amount of loss from A Co to B Co.

Legislative references: Income Tax Assessment Act 1997 section 165-12 section 165-13 section 170-5
Subject references: Continuity of ownership test Group company loss transfers Same business test