ATO ID 2003/367: Group company loss transfers: effect of redeemable preference shares on wholly-owned company groups
Date of decision: 7 April 2003
Year of income: Year ended 30 June 2002
Business line: Public Groups and International

Issue
Will two companies be members of the same wholly-owned group, for the purpose of transferring tax losses, if one company owns all the shares in the other company, except for a small number of redeemable preference shares which are owned by a third party under a financing arrangement?

Decision
No. The ownership of redeemable preference shares by a third party is sufficient to compromise the 100% subsidiary relationship required for the companies to be members of the same wholly-owned group under Subdivision 975-W of the Income Tax Assessment Act 1997 (ITAA 1997).

Facts
A holding company owns 100% of the ordinary shares in a subsidiary company. Both companies are Australian residents. The subsidiary company issued redeemable preference shares to a non-group third party pursuant to a financing arrangement. The value of this arrangement represented a small percentage of the capital value of the subsidiary company. All conditions relevant to the valid issue of the redeemable preference shares were satisfied. No other classes of shares are on issue.

Reasons for decision
Summary: For the subsidiary company to be a member of the same wholly-owned group as its holding company, it must be a 100% subsidiary of the holding company: paragraph 975-500(a) of the ITAA 1997. To be a 100% subsidiary of the holding company, all of the issued shares in the subsidiary company must be beneficially owned by the holding company (and/or other 100% subsidiaries of the holding company)(subsection 975-505(1) of the ITAA 1997). In this case, the subsidiary company has pursued a financing arrangement that resulted in the issue of redeemable preference shares to a third party. These redeemable preference shares are a recognised class of shares and represent a small percentage of the capital of the company. Although all of the ordinary shares on issue are owned by the holding company, this shareholding represents less than 100% of the shares on issue by the subsidiary company. As the redeemable preference shares in the subsidiary company are beneficially owned by a third party, the subsidiary company cannot be a 100% subsidiary of the holding company. It follows that the companies are not members of the same wholly-owned group and, therefore, cannot enter into a loss transfer agreement.

Legislative references: Income Tax Assessment Act 1997 paragraph 975-500(a) subsection 975-505(1)
Subject references: Group company loss transfers Underlying ownership & interests