Private ruling: Tax losses – Modified Continuity of Ownership test (Modified COT)
Date of advice: 11 April 2019
Published: June 2019
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Does the Company meet the conditions in section 165-12 of the Income Tax Assessment Act 1997 (ITAA 1997), as modified by Division 166 of the ITAA 1997, to deduct the tax losses made in earlier loss years for each test period that ends in the current year? | A1: Yes

Relevant facts and circumstances: The Company Limited (the Company), is an Australian public company that trades on the Australian Securities Exchange (ASX). The Company carries on a business. The Company is the head entity of an income tax consolidated group (the Company Group). The Company has undertaken a review of the group losses of the Company Group and has determined that the group losses disclosed in the ruling application have been carried forward by the Company for the relevant financial years and are available for recoupment in the current financial year subject to satisfying the conditions of section 165-12 of the ITAA 1997, as modified by Division 166 of the ITAA 1997. For the entire period, the Company has been the head entity of the Company Group. The Company intends to utilise a portion of the carry forward group losses disclosed in the current year. The current year is an income year for the purpose of determining the test periods as in this financial year the Company has total assessable income that exceeds its total deductions (except tax losses). The Company has identified the relevant test times for the purposes of considering whether the Company has maintained substantial continuity of ownership (COT) as required under subsection 166-5(3) of the ITAA 1997. There have been a number of events involving corporate change in the Company during the applicable test periods. The shareholders of the Company mainly comprise of companies and individuals. A shareholder analysis of the Company for the relevant period has been prepared on behalf of the Company for all relevant test times. At all relevant test times, registered holders of shares which carried a less than 10% direct voting, dividend and capital stake in the Company were, together, the registered holders of shares which carry a greater than 50% direct voting, dividend and capital stake in the Company. In the analysis, nominee shareholders were treated as beneficially holding the shares in their own right, rather than adopting the look-through tracing rule (subsection 166-235(7) of the ITAA 1997). The Company has only had ordinary shares on issue, all of which carry the same voting, dividend and capital rights. At all times during the current income year, the Company’s shares were listed for quotation on the official list of the ASX. During the relevant test periods, in respect of voting, dividend and capital stakes held in the Company that have been taken into account in calculating the interest in the Company for the purpose of the single notional shareholder rule in section 166-225 of the ITAA 1997, the Company did not have: ● an entity (the controlling entity) directly or indirectly (through one or more interposed entities) that held the power over some or all of those rights to voting, dividends or capital in the Company in circumstances where the Company was sufficiently influenced (within the meaning of paragraph 318(6)(b) of the ITAA 1936) by the controlling entity; ● any natural person (together with his/her associates) that owned shares (whether directly or indirectly through one or more interposed entities) in the Company giving control of more than 25% of the voting power of the Company; or ● any trustee or company (together with its associates) that owned shares (whether directly or indirectly through one or more interposed entities) in the Company giving control of more than 50% of the voting power of the Company. At no time were there any person or persons who began, or became able to control the voting power (directly or indirectly) in the Company where those persons did not control and were not able to control (directly or indirectly) the voting power during the loss year and in the circumstances where that person or persons so began or became able to control the voting power in the Company for the purposes of: ● getting some benefit or advantage in relation to how the tax law applies, or ● getting such a benefit or advantage for someone else; or for purposes including that purpose. Assumptions The Company does not have net exempt income for the current income year. The Company will not make an election under section 166-15 of the ITAA 1997 to apply Subdivision 165-A to it for the current income year without the modifications made by Subdivision 166-A. The shareholder analysis prepared on behalf of the Company is accurate. The Company has carried forward group losses from each of the identified loss years.

Relevant legislative provisions: Income Tax Assessment Act 1936 Paragraph 318(6)(b) | Income Tax Assessment Act 1997 Division 36 | Income Tax Assessment Act 1997 Division 165 | Income Tax Assessment Act 1997 Subdivision 165-A | Income Tax Assessment Act 1997 Section 165-10 | Income Tax Assessment Act 1997 Section 165-12 | Income Tax Assessment Act 1997 Section 165-15 | Income Tax Assessment Act 1997 Division 166 | Income Tax Assessment Act 1997 Subdivision 166-A | Income Tax Assessment Act 1997 Section 166-5 | Income Tax Assessment Act 1997 Section 166-15 | Income Tax Assessment Act 1997 Subdivision 166-D | Income Tax Assessment Act 1997 Section 166-145 | Income Tax Assessment Act 1997 Section 166-175 | Income Tax Assessment Act 1997 Subdivision 166-E | Income Tax Assessment Act 1997 Paragraph 166-220 | Income Tax Assessment Act 1997 Section 166-225 | Income Tax Assessment Act 1997 Section 166-235 | Income Tax Assessment Act 1997 Section 166-270 | Income Tax Assessment Act 1997 Subsection 166-270 | Income Tax Assessment Act 1997 Section 166-272 | Income Tax Assessment Act 1997 Section 166-275 | Income Tax Assessment Act 1997 Section 166-280 | Income Tax Assessment Act 1997 Subsection 995-1(1) | Income Tax Assessment Regulations 1997 Regulation 995-1.05 | Income Tax Assessment Regulations 1997 Schedule 5

Reasons for decision: Summary: All legislative references are to the Income Tax Assessment Act 1997 unless otherwise specified. The Company will satisfy the conditions in section 165-12, as modified by Division 166, for each tax loss made in the loss years during the test periods that end on 30 June in the current year. | Detailed Reasoning - Detailed reasoning: Subdivision 165-A in Part 3-5 sets out the conditions that a company must meet to be able to deduct a tax loss. Section 165-10 provides that a company cannot deduct a tax loss unless it: ● satisfies the conditions concerning continuity of ownership (COT) in section 165-12; or ● satisfies the same business test in section 165-13. It is noted in section 165-10 that in the case of a widely held company or eligible Division 166 company, Subdivision 166-A modifies how Subdivision 165-A applies. Division 166 modifies the operation of Division 165 to make it easier for a widely held company to apply the rules of Division 165 1 unless the company chooses not to apply the modifications 2 . | Detailed Reasoning - Eligibility for the modified COT test: Subsection 166-5(1) provides that Subdivision 166-A modifies the way Subdivision 165-A applies to a company that is a widely held company or an eligible Division 166 company at all times during the income year. Paragraph 1.13 of the Explanatory Memorandum for Tax Laws Amendment (Loss Recoupment Rules and Other Measures) Bill 2005 (the EM) explains that the reference to being a widely held company during ‘the income year’ means the income year the company seeks to deduct a tax loss. A widely held company is defined in subsection 995-1(1) to include: a company, shares in which (except shares that carry a right to a fixed rate of dividend) are listed for quotation in the official list of an approved stock exchange; An ‘approved stock exchange’ is defined in subsection 995-1(1) as a stock exchange named in regulations made for the purposes of this definition. Australian Securities Exchange (ASX) is specified in regulation 995-1.05 of, and Schedule 5 to, the Income Tax Assessment Regulations 1997 for the purposes of the definition of an approved stock exchange. Under subsection 166-15(1), a company may elect that Subdivision 165-A is to apply to it for the income year in which it seeks to deduct a tax loss, without the modification made by Subdivision 166-A. Application to your circumstances As the Company’s shares were listed for quotation on the official list of the ASX all times during the current income year it will be a widely held company at all times during the current income year and is eligible to apply the modified COT tests in Subdivision 166-A. This ruling is made on the basis that the Company will not elect that Subdivision 165-A is to apply to it for the current income year in which it seeks to deduct a tax loss without the modifications made by Subdivision 166-A. As such, the Company meets the requirements of subsection 166-5(1) and Subdivision 166-A will operate to modify the way Subdivision 165-A applies to the Company. | Detailed Reasoning - Division 165: Section 165-12 provides the COT a company must satisfy in order to deduct losses of earlier years. Subsection 165-12(1) states that the ownership test period is the period from the start of the loss year to the end of the income year. The income year is a year when the company has a positive assessable income from which it may deduct tax losses if all other tests for deducting those losses have been satisfied. According to subsections 165-12(2) to (4), in order to meet the COT, at all times during the ownership test period there must be persons who 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 tests are applied either as a primary test or as an alternative test. According to subsection 165-12(5), the primary test should be applied for a condition unless subsection 165-12(6) requires that the alternative test be applied. Subsection 165-12(6) stipulates that the alternative test be applied if one or more other companies beneficially owned shares or interests in shares in the test company at any time during the ownership test period. As the Company is beneficially owned by companies during the ownership test period, the alternative test applies. | Detailed Reasoning - Division 166: As stated above, Division 166 modifies the operation of Division 165 to make it easier for a widely held company to apply the rules of Division 165 unless the company chooses otherwise. Test times Section 166-5 modifies the way Subdivision 165-A applies to a company that is a widely held company at all times during the income year. Subsection 166-5(3) provides that a company is taken to have met the conditions in section 165-12 if there is substantial COT as between the start of the test period and: a) the end of each income year in that period, and b) the end of each corporate change in that period. Conversely, subsection 166-5(4) provides that a company is taken to have failed to meet the conditions in section 165-12 if there is no substantial COT of the company as between the start of the test period and: a) the end of each income year in that period, or b) the end of each corporate change in that period. The meaning of the ‘test period’ is defined in subsection 166-5(2) as the period consisting of the loss year, the income year and any intervening period. Subsection 995-1(1) provides that the meaning of ‘corporate change’ is set out in section 166-175. There have been a number of events involving corporate change in the Company during the applicable test periods. The relevant test times for the Company for the purposes of this ruling were set out in the facts. | Detailed Reasoning - The substantial COT test: Subsection 995-1(1) provides that the requirement of ‘substantial continuity of ownership’ is given by section 166-145. Subsections 166-145(1) to (4) provide that for a widely held company to have substantial COT as between the start of the test period and another time in the test period there must be: ● persons (none of them companies or trustees) who had more than 50% of the voting power at the start of the test period and more than 50% of the voting power immediately after the other time in the test period ● persons (none of them companies) who had rights to more than 50% of the company’s dividends at the start of the test period and rights to more than 50% of the dividends immediately after the other time in the test period, and ● persons (none of them companies) who had rights to more than 50% of the company’s capital distributions at the start of the test period and rights to more than 50% of the company’s capital distributions immediately after the other time in the test period. The more than 50% voting power, rights to dividends and rights to capital distributions tests will be determined in accordance with the alternative tests contained in sections 165-150, 165-155 and 165-160 respectively: subsection 166-145(5). | Detailed Reasoning - Concessional tracing rules: Subdivision 166-E provides a number of concessional tracing rules which make it easier for a widely held company to satisfy the ownership tests in Subdivision 166-D. Relevantly, section 166-225 enables a company to which Subdivision 166-E applies (the tested company) to aggregate all holdings in it which are less than 10% so as to form a single notional entity. Subsections 166-225(1) and (2) state: (1) This section modifies how the ownership tests in section 166-145 are applied to the tested company if: (a) a voting stake that carries rights to less than 10% of the voting power in the company is held directly in the company; or (b) a dividend stake that carries the right to receive less than 10% of any dividends that the company may pay is held directly in the company; or (c) a capital stake that carries the right to receive less than 10% of any distribution of capital of the company is held directly in the company. Note 1: Other rules might affect this provision: see sections 166-270, 166-275 and 166-280. … Notional shareholder (2) The tests are applied to the tested company as if, at the ownership test time, a single notional entity: (a) directly controlled the voting power that is carried by each such voting stake; and (b) had the right to receive, for its own benefit and directly: (i) any dividends the tested company may pay in respect of each such dividend stake; and (ii) any distributions of capital of the tested company in respect of each such capital stake; and (c) were a person (other than a company). … The terms ‘voting stake’, ‘dividend stake’ and ‘capital stake’ are defined in subsection 995-1(1) by reference to section 166-235. Such stakes can be held directly or indirectly through one or more interposed entities. According to subsections 166-235(1), (3) and (5), an entity has a direct stake in a company where that entity is a registered holder of shares in a company and those shares carry a right to exercise voting power, a right to all or any of the dividends the company may pay and a right to all or any of a distribution of capital of the company. According to subsections 166-235(2), (4) and (6), an entity has an indirect stake in a company where one or more entities are interposed between it and the company and the entity: a) controls or is able to control voting power in the company indirectly through the interposed entities; or b) has a right to receive for its own benefit through the interposed entity or entities: i. all or any dividends that the company may pay; or ii. all or any of a distribution of capital of the company. Application to your circumstances For the purpose of determining substantial COT, the Company shares on issue at all times in the test period carried the same voting, dividend and capital rights. The analysis of the Company’s shareholdings referred to in the facts for the purposes of determining substantial COT shows the stake attributed to a single notional entity under section 166-225 was, at all test times, above 50%, including at the end of any corporate change during that period. However, Note 1 to subsection 166-225(1) highlights that sections 166-270, 166-275 and 166-280 may affect section 166-225. | Detailed Reasoning - Section 166-270: Minimum Interests Rule: The minimum interest rule under section 166-270 restricts the total proportion of voting power, dividend rights or capital rights attributed to a single notional entity at an ownership test time that is after the start of the test period to the relevant proportion attributed at the beginning of the test period. Subsection 166-270(1) states: If: (a) the ownership test time is after the start of the test period; and (b) a single notional entity mentioned in section 166-225 or 166-255 has voting power in a company; and (c) the voting power that the entity has at the ownership test time is greater than the voting power that the entity has at the start of the test period; then the entity is taken to have voting power in the company at the ownership test time only to the extent that it had it at the start of the test period. In this regard, the following paragraphs of the EM explain its application: 1.130 The minimum interests rule restricts the total proportion of voting power, dividend rights and capital rights attributed to the single notional entity to the proportion attributed to it at the beginning of the test period. [Schedule 1, item 79, section 166-270] 1.131 Changes among the less than 10 per cent stakeholders are not relevant to the operation of the minimum interests rule. It is only an increase in the aggregate proportion that is taken to be held by the single notional entity that is prevented. 1.132 Further, an increase in the number of shares that carry voting power or rights is not relevant if it does not correspond to an increase in the proportion of voting power or rights. For example, the tested company may raise capital during the test period by issuing shares to existing shareholders. This may substantially increase the number of shares holding voting power or dividend or capital rights that are attributed to the single notional entity. However, unless it causes an increase in the proportion of voting power or rights, the minimum interests rule has no operation. Application to your circumstances Having regard to the shareholder analysis for the Company referred to in the facts, the minimum interest rule would not prevent the Company from satisfying the substantial COT test because the proportion of voting shares that the single notional entity held at each of the test times has not fallen to 50% or below. Thus, the minimum interest rule will not have any implication on the outcome of modified COT for the Company. | Detailed Reasoning - Section 166-275: No detrimental operation of tracing rules: The purpose of the tracing rules in Subdivision 166-E is to make it easier for companies to test for substantial COT. However, where a company fails the substantial COT in section 166-145 as a result of applying a tracing rule to a voting, divided or capital stake, then section 166-275 provides that the company is taken to satisfy the COT in section 165-12 if the company believes on reasonable grounds that it would not fail the ownership tests if the tracing rule did not apply. Application to your circumstances In this instance, none of the tracing concessions work to the detriment of the Company and as such there is no detriment caused as a result of the application of the tracing rules. | Detailed Reasoning - Section 166-280: Controlled test companies: Section 166-280 provides that in certain circumstances, a tracing rule does not modify how the ownership tests in section 166-145 apply to the tested company in respect of all or part of the voting power in the tested company, or all or some of the rights to dividends of, or capital in, the tested company. A ‘tracing rule’ is defined by subsection 995-1(1) to include the concessional tracing rule in section 166-225. The circumstances under which subsection 166-280(1) will prevent a tracing rule (such as the rule in section 166-225) modifying how the ownership tests in section 166-145 apply to the tested company are: (a) either: (i) an entity (the controlling entity) directly holds that power or has those rights; or (ii) an entity (the controlling entity) indirectly holds that power or has those rights through one or more interposed entities; and (b) the tested company is sufficiently influenced (within the meaning of paragraph 318(6)(b) of the Income Tax Assessment Act 1936 ) by the controlling entity. However, it is noted in section 166-280 that a tracing rule can modify how the ownership tests in section 166-145 apply to the tested company in respect of voting power or dividend or capital rights held by entities other than controlling entities. Paragraph 318(6)(b) of the Income Tax Assessment Act 1936 (ITAA 1936) provides that a company is sufficiently influenced by an entity or entities if the company, or its directors, are accustomed or under an obligation (whether formal or informal), or might reasonably be expected, to act in accordance with the directions, instructions or wishes of the entity or entities (whether those directions, instructions or wishes are, or might reasonably be expected to be, communicated directly or through interposed companies, partnerships or trusts). Paragraph 1.141 of the EM explains that a minority shareholder would not generally be regarded as having sufficient influence over a company merely because it is assertive about how the company or its directors should act, or because it has a representative on the company's board of directors. In contrast, a shareholder may have sufficient influence where, under a formal or informal arrangement with other shareholders, it is able to control the majority of appointments to the company's board of directors. In addition to the rules in subsection 166-280(1), where the tested company is a widely held company, subsection 166-280(2) provides that a tracing rule does not modify how the ownership tests in section 166-145 apply to the tested company in respect of all or part of the voting power in the tested company if: … (b) that voting power: (i) is more than 25% of the total voting power in the tested company and is controlled (whether directly, or indirectly through one or more interposed entities) by a natural person, together with his or her associates; or (ii) is more than 50% of the total voting power in the tested company and is controlled (whether directly, or indirectly through one or more interposed entities) by a trustee or company, together with its associates. The following paragraphs of the EM further explain the role of the controlled test companies rule: 1.143 The controlled test companies rule requires a company to trace its ownership through to the entity who has sufficient influence, the natural person who (with associates) controls more than 25 per cent of the voting power, or the company or trustee which (with associates) controls more than 50 per cent of the voting power. 1.144 The controlled test companies rule prevents the strict operation of the tracing rules hiding significant interests in the tested company. For example, if a company indirectly holds more than 50 per cent of the tested company, but does so through a number of stakes in entities which directly hold less than 10 per cent of the tested company, in the absence of the controlled test company rule, the rule about direct stakes of less than 10 per cent would attribute these interests to a single notional entity. Paragraph 1.145 of the EM states that the controlled test companies rule provided by section 166-280 only prevents tracing rules applying to: ● stakes held by controlling entities (ie, entities with sufficient influence or with associate inclusive voting power of more than 25 per cent or 50 per cent, as the case may be); and ● stakes held by entities interposed between the tested company and controlling entities. Application to your circumstances In this case, during the relevant test periods, in respect of voting, dividend and capital stakes held in the Company that have been taken into account in calculating the interest in the Company for the purpose of the single notional shareholder rule in section 166-225, the Company did not have: ● an entity (a controlling entity) directly or indirectly (through one or more interposed entities) that held the power over some or all of those rights to voting, dividends or capital in the Company in circumstances where the Company was sufficiently influenced (within the meaning of paragraph 318(6)(b) of the ITAA 1936) by the controlling entity; ● any natural person (together with his/her associates) that owned shares (whether directly or indirectly through one or more interposed entities) in the Company giving control of more than 25% of the voting power of the Company; or ● any trustee or company (together with its associates) that owned shares (whether directly or indirectly through one or more interposed entities) in the Company giving control of more than 50% of the voting power of the company. Therefore, the concessional tracing rule in section 166-225 is not prevented from applying to any of the relevant stakes by the controlled test companies rule. | Detailed Reasoning - Section 166-272: Same share same interest rule: In certain circumstances, where concessional tracing rules apply under Subdivision 166-E, section 166-272 (same share same interest rule) can treat conditions in section 166-145 as not being satisfied. Subsection 166-272(1) provides that the section modifies how the ownership tests in section 166-145 are applied to a voting stake, a dividend stake or a capital stake in the tested company held by one of the following entities (the stakeholders): (a) a top interposed entity mentioned in section 166-230 (which is about indirect stakes of less than 10%); (b) a widely held company mentioned in section 166-240; (c) an entity mentioned in subsection 166-245(2) (which is about stakes held by other entities); (d) a depository entity mentioned in section 166-260; (whether directly, or indirectly through one or more interposed entities). In this regard, paragraph 1.128 of the EM states: The same share same interest rule does not apply in respect of stakes held by a single notional entity. The application of the same share same interest rule to direct interests in the tested company of less than 10 per cent would be inappropriate because it would be contrary to the policy of allowing the tested company to disregard interests of less than 10 per cent. This section does not apply to a single notional entity contained in section 166-225 and, as such, it will not impact on the outcome of the modified COT for the Company as at least 50% of the shares in the Company were held by a single notional entity at all relevant times during the test period. | Detailed Reasoning - Conclusion: The Company satisfies the substantial COT requirements in subsection 166-5(3) for each test period (including at the end of the relevant corporate change events), as a single notional entity has maintained an ownership interest above 50% at each applicable test time. As such, the Company is taken to have met the conditions in section 165-12 for the relevant test periods. | Detailed Reasoning - Section 165-15: same people must control voting power: Section 165-15 operates to deny deductions of tax losses from earlier income years, even if the conditions in section 165-12 and 165-13 are met, 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 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 advantage for that person or someone else. The control or ability to control voting power may be direct, or indirect, through one or more interposed entity. In this case, at no time were there any person or persons who began, or became able to control the voting power (directly or indirectly) in the Company where those persons did not control and were not able to control (directly or indirectly) the voting power during the loss year and in the circumstances where that person or persons so began or became able to control the voting power in the Company for the purposes of: ● getting some benefit or advantage in relation to how the tax law applies, or ● getting such a benefit or advantage for someone else; or for purposes including that purpose. As such, section 165-15 will not apply.

Other provisions the ruling does not cover: This ruling does not consider the application of any of the specific anti-avoidance provisions of sections 165-180, 165-185 and 165-190 of the ITAA 1997 and Subdivision 175-A of the ITAA 1997.