Private ruling: utilising prior year losses
Published: April 2014
Ruling period: 1 July 2011 to 30 June 2013
Date scheme commenced: 2011

Ruling: Q1: Would Head Co, an unlisted public company, continue to satisfy the modified continuity of ownership test (COT) in section 166-5 of the Income Tax Assessment Act 1997 (ITAA 1997) for the purposes of utilising losses transferred to it on consolidation, following a 'debt for equity swap' arrangement in 2012? | A1: Yes | Q2: Would the 'same share same interest' rule in section 166-272 of the ITAA 1997 preclude satisfaction of the modified COT due to the 'debt for equity' swap? | A2: No, Head Co would meet the modified COT when the same share same interest rule is applied.

Relevant facts and circumstances: Formation of the consolidated group Head Co and its wholly-owned subsidiary entities B Ltd and C Ltd propose to form a tax consolidated group from 2011 onwards with Head Co as the head company. The principal reason for undertaking the proposed tax consolidation is to create administrative and costs savings. B Ltd and C Ltd and Head Co are unlisted public companies, being companies limited by shares, which have issued shares not listed on the Australian Securities Exchange (ASX). Head Co is eligible to form a consolidated group Head Co as the proposed head company of the consolidate group has assessable income against which it can deduct transferred losses for the years ended 30 June 2012 and 2013. Transfer of tax losses on consolidation B Ltd, C Ltd and Head Co each had carried forward tax losses which would be transferred to Head Co, as the head company, on consolidation on 1 July 2011 under either the (COT) or the same business test (SBT) as follows, B Ltd - 2005 to 2010 tax losses transferred under the SBT, - 2011 tax loss transferred under the COT. C Ltd - 2007 to 2010 tax losses transferred under the SBT, - 2011 tax loss transferred under the COT. Head Co - 2011 tax loss transferred under the COT. Ownership B Ltd XYZ Ltd, a listed widely held company, held a direct stake of less than 10% in B Ltd at all times between 2005 and 2009, at which time it transferred its shares to Head Co. At July 2010 Head Co Ltd directly owned more than 90% of B Ltd and less than 10% was directly owned by shareholders that each had a less than 10% direct stake. In 2010, Head Co had acquired 100% of the shares in B Ltd by issuing shares in itself to the remaining shareholders of B Ltd in exchange for their shares. C Ltd XYZ Ltd did not hold a direct stake in C LTD at any time. Head Co progressively acquired 100% of the shares in C Ltd between late 2009 to early 2010 by issuing shares in itself to the shareholders of C Ltd in exchange for their shares. Head Co XYZ Ltd held a direct stake of less than 10% in Head Co at all times between late 2009 and late 2012. The remaining shareholders in Head Co each held a direct stake of less than 10% at all times between 30 June 2010 and 30 June 2013. Events that occurred after the proposed consolidation date In late 2012, Head Co entered into a 'debt for equity swap' arrangement (DES) with XYZ Ltd, an existing shareholder, whereby XYZ Ltd received some $X shares in Head Co in payment of an existing debt owed to it by Head Co. The DES resulted in XYZ Ltd increasing its shareholding to 50% of the total issued share capital in Head Co. Head Co entered into the DES for a reconstruction of debts with XYZ Ltd AIl the shares in Head Co, B Ltd and C Ltd carry equal rights in relation to voting, dividends and capital distribution. XYZ Ltd is not able to control the voting power in Head Co.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 165-12 | Income Tax Assessment Act 1997 section 166-5 | Income Tax Assessment Act 1997 section 166-15 | Income Tax Assessment Act 1997 section 166-145 | Income Tax Assessment Act 1997 section 166-175 | Income Tax Assessment Act 1997 section 166-225 | Income Tax Assessment Act 1997 section 166-230 | Income Tax Assessment Act 1997 section 166-240 | Income Tax Assessment Act 1997 section 166-272 | Income Tax Assessment Act 1997 subsection 703-50(3) | Income Tax Assessment Act 1997 Subdivision 707-B | Income Tax Assessment Act 1997 subsection 707-205(2) | Income Tax Assessment Act 1997 subsection 707-210(1) | Income Tax Assessment Act 1997 subsection 707-210(2) | Income Tax Assessment Act 1997 subsection 707-210(4) | Income Tax Assessment Act 1997 subsection 707-210(5) | Income Tax Assessment Act 1997 subsection 707-210(6) | Income Tax Assessment Act 1997 section 995-1

Reasons for decision: Summary: All references in this document to 'losses' is a reference to tax losses incurred under section 36-17 of the Income Tax Assessment Act 1997 (ITAA 1997). All legislative references are in relation to the ITAA 1997 unless otherwise stated. Loss transfer rules upon consolidation Before Head Co, as the head company, can determine whether it can use the transferred losses from itself, B Ltd and C Ltd against its income for the 2012 and 2013 income years, it must apply the general loss recoupment provisions as modified by Subdivision 707-B. Firstly, it needs to apply the COT and the control test in respect of the transferred losses. If it does not satisfy these tests, it will then apply the same business test (SBT). SBT transferred losses The losses for the 2005 to 2010 years transferred to Head Co as a result of the SBT being satisfied are effectively refreshed in the hands of Head Co; refer (the Explanatory Memorandum to the New Business Tax System (Consolidation) Act (No.1) 2002, Chapter 7.15) . Although Head Co is taken to have made the losses for the income year in which the transfer occurred, the loss year is taken to commence at the transfer time as per subsection 707-205(2). This means the ownership test period starts on 1 July 2011 (the loss year) and ends at the end of each recoupment year. COT transferred losses The COT rules are applied to each of B Ltd, C Ltd and Head Co for the 2011 income year losses to determine whether Head Co, as the head company of the proposed consolidated group, can utilise the losses; refer ( the Explanatory Memorandum to the New Business Tax System (Consolidation) Act (No.1) 2002, Chapter 7.12) . In this case, the ownership test period for each entity commences on 1 July 2010 and ends at the end of each recoupment year. A failure of the COT by the test company is attributed to the head company so that it can then apply the SBT if necessary. Division 166 Division 166 provides concessionary rules for applying the COT in section 166-5, for eligible companies seeking to utilise prior year tax losses. The Division applies with effect from 1 July 2002 to a company that is a 'widely held company' or an 'eligible Division 166' company at all times during the income year in which the deduction is sought (subsection 166-5(1)). It also applies.to a company that is a 'widely held company' for a part of the income year and an 'eligible Division 166' company for the rest of the Income year (paragraph 166-5(1)(c)). Both a 'widely held company' and an 'eligible Division 166 company' are defined in section 995-1. Prior to the DES arrangement in 2012 Head Co would qualify as a 'widely held company' as; - it had more than 50 members; and - more than 20 people held 75% or more of the shares in Head Co and were capable of exercising 75% or more of the voting power and receiving dividends paid by Head Co. Following the DES arrangement, Head Co would qualify as an 'eligible Division 166 company', as more than 50% of the voting power, rights to dividends or rights to capital distributions were collectively held by a widely held company, XYZ Ltd, several complying superannuation funds and non-profit companies or charitable institutions. Therefore, Head Co can apply Division 166 for ownership tracing purposes to deduct its carry forward losses. Based on the facts provided in this case, it is determined that there is no failure of the COT. The outcome of the tracing is that the same persons held more than 50 per cent of the voting power and rights to dividends and capital at the test times during the test period and the Head Co can deduct these tax losses in the relevant income years, subject to its income and the available fraction.

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