Private ruling: Continuity of ownership test
Date of advice: 23 February 2016
Published: April 2016
Ruling period: The income year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Does Company A satisfy the continuity of ownership tests (COT) in section 165-12 of the ITAA 1997 in respect of the tax losses that it incurred in each of the following loss years that it seeks to recoup in the income year ended 30 June 20XX: (a) Income year ended 30 June 20XX? (b) Income year ended 30 June 20XX? | A1: (a) Income year ended 30 June 20XX- Yes (b) Income year ended 30 June 20XX- Yes

Relevant facts and circumstances: Company A is a private company. Since dd/mm/yyyy, 100% of the shares in Company A have been held by the trustee for Trust B. Trust B is a discretionary trust which has made a family trust election (FTE), effective from the income year ended 30 June 2000. Company A incurred a tax loss in the relevant income years. In 20XX, a liquidator and a manager and receiver were appointed to manage the winding up of Company A. During the income year ended 30 June 20XX, the receivers and managers sold the assets of Company A, resulting in a taxable gain. Company A is now seeking to deduct a portion of the tax losses incurred in the relevant income years in its tax return for the income year ended 30 June 20XX.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 165-10 | Income Tax Assessment Act 1997 section 165-12 | Income Tax Assessment Act 1997 subsection 165-12(1) | Income Tax Assessment Act 1997 subsection 165-12(2) | Income Tax Assessment Act 1997 subsection 165-12(3) | Income Tax Assessment Act 1997 subsection 165-12(4) | Income Tax Assessment Act 1997 subsection 165-12(5) | Income Tax Assessment Act 1997 section 165-15 | Income Tax Assessment Act 1997 subsection 165-150(1) | Income Tax Assessment Act 1997 subsection 165-155(1) | Income Tax Assessment Act 1997 subsection 165-160(1) | Income Tax Assessment Act 1997 subsection 165-165(1) | Income Tax Assessment Act 1997 section 165-175 | Income Tax Assessment Act 1997 section 165-207 | Income Tax Assessment Act 1997 section 165-208 | Income Tax Assessment Act 1936 Schedule 2F section 272-75 | Income Tax Assessment Act 1936 Schedule 2F subsection 272-80(11)

Reasons for decision: Summary: Company A satisfies the COT in section 165-12 of the ITAA 1997 in respect of the tax losses that it incurred in the relevant income years that it seeks to recoup in the income year ended 30 June 2015. | Detailed Reasoning - Detailed reasoning: If a company has deductions that exceed its assessable income and net exempt income in an income year, the company has a loss which it can carry forward and use as a deduction in a future income year. In the current circumstances, Company A incurred a tax loss in the relevant years. Company A has derived assessable income in the income year ended 30 June 20XX and is now seeking to deduct the tax loss from 20XX and a portion of the 20XX tax loss against this income. A company can however only deduct a carried forward tax loss if it satisfies one of the tests in section 165-10 of the ITAA 1997. Under section 165-10 of the ITAA 1997, a company cannot deduct a tax loss unless either: (a) it meets the conditions in section 165-12 of the ITAA 1997 (which is about the company maintaining the same owners); or (b) it meets the condition in section 165-13 of the ITAA 1997 (which is about the company satisfying the same business test) In the current circumstances, only the test in section 165-12 of the ITAA 1997 is relevant. The conditions in this provision are known as the Continuity of Ownership Tests or COT. Ownership test period The tests in section 165-12 of the ITAA 1997 are applied over the 'ownership test period' which is the period from the start of the loss year to the end of the income year in which the loss is sought to be deducted. In this case, the ownership test period for each loss year is as follows: • Tax Loss for the year ended 30 June 20XX - 1 July 20XX to 30 June 20XX • Tax Loss for the year ended 30 June 20XX - 1 July 20XX to 30 June 20XX Continuity of Ownership Tests According to subsections 165-12(2) to 165-12(4) of the ITAA 1997, in order to meet the COT, there must be persons who, at all times during the ownership test period, had: • more than 50% of the voting power in the company • rights to more than 50% of the company's dividends, and • rights to more than 50% of the company's capital distributions. These conditions are applied either as a primary test or as an alternative test. According to subsection 165-12(5) of the ITAA 1997, the primary test will apply for a condition unless subsection 165-12(6) of the ITAA 1997 requires that the alternative test applies. Subsection 165-12(6) of the ITAA 1997 stipulates that the alternative test applies if one or more other companies beneficially owned shares or interests in shares in the test company during the ownership test period. In the current circumstances, the only shareholder of Company A during the ownership test periods was the trustee of Trust B and therefore the primary test applies. Subdivision 165-D of the ITAA 1997 provides greater detail on how the tests for determining whether the company has maintained the same owners are applied and satisfied. In this regard, subsections 165-150(1) of the ITAA 1997, 165-155(1) of the ITAA 1997 and 165-160(1) of the ITAA 1997 further explain that the primary test will be satisfied if there are persons who, at a particular time, beneficially own (between them) shares that carry (between them) the right: (a) to exercise more than 50% of the voting power in the company; (b) to receive more than 50% of any dividends that the company may pay; and (c) to receive more than 50% of any distribution of capital of the company. In the current circumstances, all the shares in Company A were held by the trustee for Trust B throughout the ownership test period. Trust B is a discretionary trust that has made a FTE and therefore it is necessary to consider section 165-207 of the ITAA 1997 which contains special rules which affect how the COT applies to family trusts. Section 165-207 of the ITAA 1997 Section 165-207 of the ITAA 1997 contains measures designed to ensure that concessional tracing rules are available for companies which are held by family trusts (as defined in section 272-75 of Schedule 2F to the Income Tax Assessment Act 1936 (ITAA 1936)). In this regard, subsection 165-207(1) of the ITAA 1997 states that: This section applies if one or more trustees of a *family trust: (a) owns *shares in a company; or (b) controls, or is able to control, (whether directly, or indirectly through one or more interposed entities) voting power in a company; or (c) has a right to receive (whether directly, or *indirectly through one or more interposed entities) a percentage of a *dividend or a distribution of capital of a company A trust is a family trust at any time when a FTE in respect of the trust is in force (see section 995-1 of the ITAA 1997 and section 272-75 of Schedule 2F to the ITAA 1936). Where subsection 165-207(1) of the ITAA 1997 applies, subsection 165-207(2) of the ITAA 1997 states that for the purposes of a primary test, a single notional entity that is a person (but is neither a company nor a trustee) is taken to own the shares beneficially. In the current circumstances, the trustee of Trust B made a FTE in the income year ended 30 June 2000 and is therefore a family trust throughout the ownership test periods. As the trustee of Trust B was a family trust (for the purposes of section 272-75 of Schedule 2F to the ITAA 1936) throughout the ownership test periods, it is taken, for the purposes of the primary test, to be a single person (being neither a company nor trustee) that beneficially owns all the shares in Company A. On this basis, subject to the following additional considerations, it is considered that Company A satisfies the COT because, at all times during the relevant ownership test periods, it had persons who beneficially owned more that 50% of its shares (with the requisite voting power and rights to dividends and capital). For completeness, it is noted that the 'persons' requirement of the COT is still satisfied even where, as in this case, a single person owns all the shares in the company (see section 165-175 of the ITAA 1997). 'Same share - same interest' rule - section 165-165 of the ITAA 1997 A further requirement of the COT is that exactly the same shares or interests must be held during the relevant test time. Subsection 165-165(1) of the ITAA 1997 specifically states: For the purpose of determining whether a company has satisfied a condition or whether a time is a changeover time or an alteration time in respect of a company: (a) a condition that has to be satisfied is not satisfied; or (b) a time that, apart from this subsection, would not be a changeover time or alteration time is taken to be a changeover time or alteration time, as the case may be; unless at all relevant times: (c) the only shares in the company that are taken into account are exactly the same shares and are held by the same persons; and (d) the only interests in any other entity (including shares in another company) that are taken into account are exactly the same interests and are beneficially owned by the same persons. The purpose of this rule is to ensure that the same people under consideration for the COT must hold exactly the same shares or interests in shares for the entire ownership test period. Based on the information provided, the same shares have been held by the trustee of Trust B through the ownership test periods. The requirements of section 165-165 of the ITAA 1997 are therefore met and consequently will not cause the COT to be failed. Companies in liquidation etc. In the current circumstances, Company A is the subject of winding up proceedings and therefore it is relevant to consider the application of section 165-208 of the ITAA 1997. Subsection 165-208(1) of the ITAA 1997 provides that, for the purposes of the COT, an entity's beneficial ownership of shares in a company, right to exercise voting power in a company, right to receive dividends that a company may pay or right to receive any distribution of capital of a company are not affected merely because the company is or becomes an ' externally-administered body corporate ' within the meaning of the Corporations Act 2001 or a provisional liquidator is appointed to the company. For these purposes, it is relevant to note that section 9 of the Corporations Act 2001 defines an ' externally-administered body corporate ' to mean a body corporate: (a) that is being wound up; or (b) in respect of property of which a receiver, or a receiver and manager, has been appointed (whether or not by a court) and is acting; or (c) that is under administration; or (ca) that has executed a deed of company arrangement that has not yet terminated; or (d) that has entered into a compromise or arrangement with another person the administration of which has not been concluded. In the current circumstances, as part of proceedings to wind up Company A, a liquidator and receivers and managers were appointed in 20XX. Applying section 165-208 of the ITAA 1997 to these circumstances, it is clear that the fact that a liquidator and receivers and managers have been appointed to Company A during the ownership test periods as part of the winding up of Company A will not cause the COT to be failed. Section 165-15 of the ITAA 1997 Even if a company would otherwise be able to recoup a tax loss because it passes the COT, the recoupment may be denied by the overriding operation of the control test in section 165-15 of the ITAA 1997. This provision denies a tax loss if a person who controlled, or was able to control, the voting power in the company for some or all of the ownership test period (starting at the end of the loss year) did not control, or was not able to control, that voting power for the whole of the loss year with the purpose or purposes of obtaining a tax benefit (for that person or someone else). Based on the information provided, there is no evidence to indicate that a change of control of the voting power in Company A, such as that described in section 165-15 of the ITAA 1997, occurred during the ownership test periods (starting from the end of the relevant loss years). In this regard, it is also relevant to note that, as detailed in section 165-250 of the ITAA 1997, the fact that a company is or becomes an externally administered body corporate will not affect an entity's ability to control the company. Consequently section 165-15 of the ITAA 1997 will have no application to the current circumstances. | Detailed Reasoning - Conclusion: Based on the above analysis, it is considered that, in respect of the carried forward tax losses that it incurred in the relevant income years that it seeks to recoup in the income year ended 30 June 20XX, Company A satisfies the COT in section 165-12 of the ITAA 1997. This is because 100% of Company A's shares (with their associated rights to vote, receive dividends and capital) are taken to have been beneficially owned by a single person throughout the relevant ownership test periods.