Private ruling: Net capital losses and the application of the modified continuity of ownership test
Date of advice: 30 October 2018
Published: January 2019
Ruling period: Income year ended 31 December 20XX
Date scheme commenced: 1 January 20XX

Ruling: Q1: Is Company B able to apply its previously unapplied net capital losses from earlier income years to reduce the amounts remaining after the reduction of the capital gains under step 1 of the method statement contained in section 102-5 of the Income Tax Assessment Act 1997 (ITAA 1997) by virtue of having maintained the same owners for the purposes of section 165-12 of the ITAA 1997 as modified by Division 166 of the ITAA 1997 for the year ended 31 December 20XX? | A1: Yes

Relevant facts and circumstances: 1 Company B is an indirectly wholly owned subsidiary of Company H. 2 Company H’s Annual Reports state that Company H was listed on a foreign stock exchange. 3 The foreign stock exchange is an “approved stock exchange” within the meaning of subsection 995-1(1) of the ITAA 1997 and regulation 995-1.05 of Schedule 5 to the Income Tax Assessment Regulations 1997 . 4 Therefore, Company H is a “widely held company”, as defined in subsection 995-1(1) of the ITAA 1997, for the whole of the relevant income years. 5 Company H’s share capital consists of XXXX shares with a nominal value of $X each. The XXXX shares are bearer shares and as such Company H does not maintain a register of shareholders. 6 All of Company H’s bearer shareholders are entitled to vote at each annual general meeting and have the same entitlements to dividends and capital distributions. The bearer shares, being listed on the foreign stock exchange, do not carry a right to a fixed rate of dividend. 7 Company H also has on issue XXXX non-voting equity securities that are not part of the share capital and confer no voting rights. However, each non-voting equity security confers the same rights as each bearer share to participate in the available earnings and in any surplus proceeds from liquidation. Bearer shares 8 A shareholders’ group with pooled voting rights (pooled shareholders’ group) has owned at least XX% of the issued bearer shares. 9 The pooled shareholders’ group was comprised of X individuals at 31 December 20XX. X of those same individuals were members of the group for the relevant income years. 10 P was a member of the shareholders’ group until the relevant income years, but has disclosed that P now owns XX% of Company H’s issued bearer shares, independently of the pool for each of the relevant income years. 11 In addition, Company D has disclosed that it owned XX% of Company H’s issued bearer shares for each of the relevant income years. Company D is a company whose shares were listed for quotation on the foreign stock exchange for the whole of the relevant income years. 12 Details of XX% of issued bearer shares are undisclosed to Company H for the whole of the relevant income years. Taxation information As at 31 December 20XX, Company B has unapplied capital loss of $XXXX which were incurred by the company in the year ended 31 December 20XX. Company B proposes to apply a portion of these carried forward capital losses against capital gains it made in the year ended 31 December 20XX from the sale of Company B’s assets. The estimated gross capital gain and the amount of the net capital losses Company B wishes to apply in the calculation of its 31 December 20XX taxable income will be approximately $XXXX. Corporate change Company B confirms that no corporate change (listed in subsection 166-175(1) of the ITAA 1997) took place in the test period (the relevant income years).

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 102-5 | Income Tax Assessment Act 1997 Division 165 | Income Tax Assessment Act 1997 Subdivision 165-A | Income Tax Assessment Act 1997 Section 165-12 | Income Tax Assessment Act 1997 Subsection 165-12(1) | Income Tax Assessment Act 1997 Section 165-96 | Income Tax Assessment Act 1997 Division 166 | Income Tax Assessment Act 1997 Subdivision 166-A | Income Tax Assessment Act 1997 Subsection 166-5(1) | Income Tax Assessment Act 1997 Subsection 166-5(2) | Income Tax Assessment Act 1997 Subsection 166-5(3) | Income Tax Assessment Act 1997 Subsection 166-15(1) | Income Tax Assessment Act 1997 Subdivision 166-D | Income Tax Assessment Act 1997 Section 166-145 | Income Tax Assessment Act 1997 Subsection 166-145(2) | Income Tax Assessment Act 1997 Subsection 166-145(3) | Income Tax Assessment Act 1997 Subsection 166-145(4) | Income Tax Assessment Act 1997 Subsection 166-175(1) | Income Tax Assessment Act 1997 Subdivision 166-E | Income Tax Assessment Act 1997 Section 166-230 | Income Tax Assessment Act 1997 Section 166-240 | Income Tax Assessment Act 1997 Subsection 166-240(2) | Income Tax Assessment Act 1997 Subsection 166-240(3) | Income Tax Assessment Act 1997 Section 166-255 | Income Tax Assessment Act 1997 Section 166-265 | Income Tax Assessment Act 1997 Subsection 995-1(1).

Reasons for decision: Summary: All legislative references are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise stated. Section 165-12 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. Subsection 165-12(1) defines the term ‘ownership test period’, for the purposes of these provisions, as the period from the start of the loss year to the end of the income year. Section 165-96 provides that a company can only apply a net capital loss if it satisfies Subdivision 165-A assuming that the net capital loss was a tax loss that the company was trying to deduct. Division 166 modifies the way the rules in Division 165 apply to a widely held company or an eligible Division 166 company. A company may choose that Subdivision 165-A is to apply to it for the income year without the modifications made by Subdivision 166-A (subsection 166-15(1)). For Company B to be eligible to apply Division 166, it must therefore be a widely held company or an eligible Division 166 company. Company B is an “eligible Division 166 company” (as defined in subsection 995-1(1)) for the whole of the income years from 1 January 20XX to 31 December 20XX because it is not a “widely held company” and all of the voting stakes, dividend stakes or capital stakes in it are wholly owned, beneficially and indirectly through interposed entities, by a widely held company (Company H). To satisfy the conditions in section 165-12, as modified by Division 166, subsection 166-5(3) requires Company B to satisfy the conditions for ‘substantial continuity of ownership’ in section 166-145 as between the start of the test period and: ● The end of each income year in that period ● The end of each corporate change in that period. The test period is the period consisting of the loss year, the income year and any intervening period (subsection 166-5(2)). The start of the test period in this case is 1 January 20XX. Under section 166-145, there is substantial continuity of ownership of a company as between the start of the test period and another time in the test period if, at the start of the test period and immediately after the other time in the test period: ● The same persons (none of them companies or trustees) had more than 50% of the voting power in the company. ● The same persons (none of them companies) had rights to more than 50% of the company’s dividends. ● The same persons (none of them companies) had rights to more than 50% of the company’s capital distributions. If there is substantial continuity of ownership under section 166-145, the effect of subsection 166-5(3) is that Company B will be taken to have satisfied section 165-12. Company H throughout the test period had XXXXX non-voting equity securities on issue that conferred the same rights as each bearer share to participate in the available earnings and in any surplus proceeds from liquidation. However these shares are not counted for the purposes of applying the continuity of ownership test as they are not shares and do not confer shareholder type rights. | Detailed Reasoning - Concessional tracing rules: Subdivision166-E has rules which make it easier for a company to satisfy the tests contained in Subdivision 166-D to work out if a widely held company or an eligible Division 166 company has satisfied the substantial continuity of ownership test. | Detailed Reasoning - Application of the bearer share concession – section 166-255: Section 166-255 provides for the concessional tracing rules relating to bearer shares in foreign listed companies. Under section 166-255, 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 attributed to a single notional entity at an ownership test time if all the following conditions are satisfied: ● There is a foreign listed company interposed between the bearer shareholders and the loss company at the ownership test time. ● At all times during the relevant income years, the principal class of shares in the foreign listed company is listed for quotation in the official list of an approved stock exchange. ● At the ownership test time, the bearer shares must carry rights to 50% or more of the voting power, rights to dividends or rights to capital distributions of the foreign listed company. ● The beneficial owners of some or all of the bearer shares have not been disclosed to the foreign listed company. If a beneficial owner of bearer shares has been disclosed to the foreign listed company, those bearer shares are excluded from this tracing rule. ● No other tracing rule has applied. For example section 166-225 relates to direct stakes of less than 10%; section 166-230 relates to indirect stakes of less than 10%; section 166-240 relates to stakes held by widely held companies; or section 166-245 relates to stakes held by specified entities such as superannuation funds. Company H is a foreign listed company interposed between the bearer shareholders and Company B. At all times during the relevant income years in which each ownership test time occurred, the bearer shares, being the principal class of shares in Company H, were listed on the foreign stock exchange. The bearer shares carry 100% voting rights, rights to dividends and capital distribution rights. Apart from Company D’s holding of XX%, the XX% collective shareholding of the pooled shareholders’ group and the XX% holding of the one (1) independent shareholder, the beneficial owners of the other bearer shares have not been disclosed to Company H (the foreign listed company). Therefore XX% of indirect stake in Company B (being a direct stake in Company H) has not been disclosed to Company H. As no other tracing rule has been applied to them, they are attributed to a single notional entity under section 166-255. | Detailed Reasoning - Application of the widely held company concession – section 166-240: Section 166-240 contains the concessional tracing rules relating to stakes held by widely held companies. Under section 166-240, a direct or indirect stake in a loss company of between 10% and 50% held by a widely held company is attributed to the widely held company, which is deemed to be a person other than a company. For the purposes of subsection 166-240(3), Company D is a “widely held company” for the whole of the relevant income years (being the test period in which each ownership test time occurs) because its shares are listed on the foreign stock exchange. Company D indirectly held during the whole of each income year in which each ownership test time occurred, the following: ● A voting stake that carried XX% of the voting power in Company H. ● A dividend stake that carried the right to receive XX% of any dividends that Company H may pay. ● A capital stake that carried the right to receive XX% of any distribution of capital of Company H. Under subsection 166-240(2), the section 166-145 ownership tests are applied to Company B as if, at each relevant ownership test time, Company D was a person (other than a company) which held a voting stake, dividend stake and capital stake of XX%. Section 166-265, provides that, because section 166-240 applies, the persons who actually held each affected voting stake, dividend stake and capital stake are taken not to have held it. | Detailed Reasoning - Application of the “indirect stake of less than 10%” concession – section 166-230: Section 166-230 contains the concessional tracing rules whereby an indirect stake of less than 10% is attributed to the top interposed entity. Based on the bearer share concession and the widely held company concession discussed above, it has been established that the same persons held at least XX% stakes in Company B at each ownership test time. The substantial continuity of ownership test in section 166-145 requires that there must be persons who had more than 50% of the voting power, and rights to more than 50% of the company’s dividends and capital distributions, at each ownership test time. In order for Company B to satisfy section 166-145, it needs to be established that one or more remaining bearer shareholders in Company H had: 1. at least XX% of the voting power, rights to the company’s dividends and capital distributions, during the relevant ownership test time; and 2. at least XX% of the voting power, rights to the company’s dividends and capital distributions, during the relevant ownership test time. Based on the Annual Reports for each of the relevant years, the pooled shareholders’ group has between XX% and XX% of the issued bearer shares Amongst the members of the pooled shareholders’ group, the same X individuals were always in the group throughout the test period. Section 166-230 applies if it is the case, or it is reasonable to assume, that a stakeholder indirectly holds a stake carrying rights to less than 10% of the voting power, or rights to receive less than 10% of the dividends or capital distributions, of the loss company. In this situation, the top interposed entity is taken to hold the relevant voting stake, dividend stake or capital stake, and to be a person (other than a company). In this case, on the basis that: ● the pooled shareholders’ group owned collectively a minimum of XX% of the voting rights, rights to dividends and capital distributions of Company H at each ownership test time in the test period; and ● X individuals were always members of the group at 1 January 20XX and for each of the years to 31 December 20XX it is reasonable to assume that at least one individual among those X individuals owned less than 10% of the voting power and rights to dividends and capital distributions at each ownership test time in the test period; and the same individual owned: 1. at least XX% of the voting power, rights to the company’s dividends and capital distributions, during the relevant ownership test time; and 2. at least XX% of the voting power, rights to the company’s dividends and capital distributions, during the relevant ownership test time. Accordingly, Company B satisfied the voting power condition in subsection 166-145(2), the dividend rights condition in subsection 166-145(3) and the capital distribution rights condition in subsection 166-145(4) during the test period from during the relevant years. As there is substantial continuity of ownership under section 166-145, Company B is taken to satisfy the continuity of ownership test in section 165-12 in respect of the test period during the relevant income years. For the year ended 31 December 20XX, Company B will be able to apply its previously unapplied net capital losses from earlier income years to reduce the amounts remaining after the reduction of the capital gains under step 1 of the method statement contained in section 102-5.