ATO ID 2004/960: Consolidation: transfer testing - continuity of ownership test -a non-fixed trust holds fixed entitlements to 50% or more of the income or capital of the head company
Date of decision: 1 December 2004
Year of income: Year ended 30 June 2004
Business line: Consolidation Centre of Expertise

Issue
Does Subdivision 165-F of the Income Tax Assessment Act 1997 (ITAA 1997) apply in determining whether a company satisfies the continuity of ownership test (COT) in respect of the loss in the trial year where:

Decision
Yes. Subdivision 165-F of the ITAA 1997 is applicable in determining if the subsidiary member satisfies the COT in respect of the loss in the trial year.

Facts
Company A becomes a member of a consolidated group at a particular time (the joining time). At the joining time, a tax loss is available for transfer, under Subdivision 707-A of the ITAA 1997, from Company A to Head Co (the head company of the consolidated group). Head Co holds fixed entitlements to all of the income and capital of Company A at all times during the ownership test period. Trust B is a non-fixed trust that holds fixed entitlements to a 50% or greater share of the income of Head Co at all times during the ownership test period.

Reasons for decision
Summary: Subsection 707-120(1) of the ITAA 1997 provides that a loss is transferred from a joining entity to the head company of a consolidated group to the extent that the loss could have been utilised by the joining entity for an income year consisting of the trial year, assuming: The trial year is defined in subsection 707-120(2) of the ITAA 1997. It consists of the period generally starting 12 months before the joining time and ending just after the joining time. Paragraph 707-110(2)(a) provides that an entity utilises a tax loss to the extent that it is deducted from an amount of the entity's assessable or exempt income. Subdivision 165-A of the ITAA 1997 contains the conditions for determining if a company is able to deduct a tax loss under Division 36 of the ITAA 1997. Section 165-10 of the ITAA 1997 provides that a company cannot deduct a tax loss unless it meets the conditions in section 165-12 of the ITAA 1997 (that is, it satisfies the COT) or it meets the condition in section 165-13 of the ITAA 1997 (that is, it satisfies the same business test). Subdivision 165-F of the ITAA 1997 contains special provisions relating to situations where fixed entitlements to a share of the income or capital of a company are held by one or more non-fixed trusts. Section 165-215 of the ITAA 1997 provides that a company that does not meet the conditions in the COT in respect of a loss is nevertheless taken to satisfy the COT, if it meets the conditions contained in that section. These conditions relate broadly to situations where non-fixed trusts (other than family trusts) hold, directly or indirectly, fixed entitlements to a 50% or greater share of the income or capital of the company. As Trust B indirectly holds fixed entitlements to a 50% or greater share of the income of Company A, Subdivision 165-F of the ITAA 1997 is applicable when determining whether Company A satisfies the COT in respect of the loss in the trial year.

Legislative references: Income Tax Assessment Act 1997 Division 36 Subdivision 165-A section 165-10 section 165-12 section 165-13 Subdivision 165-F Section 165-215 Subdivision 707-A paragraph 707-110(2)(a) subsection 707-120(1) subsection 707-120(2)
Related ATO interpretative decisions: ATO ID 2004/959
Subject references: Consolidation - continuity of ownership test Consolidation - joining Consolidation - losses Continuity of ownership test Joining entity Joining time Non fixed trusts Transfer of losses Trial year Utilise a loss