Private ruling: Continuity of ownership test
Date of advice: 5 March 2020
Published: April 2020
Ruling period: An income year
Date scheme commenced: The start of the first loss year

Ruling: Q1: Does the taxpayer satisfy the continuity of ownership test ( COT ) in section 165-12 of the Income Tax Assessment Act 1997 ( ITAA 1997 ) as modified by subsection 166-5(3) to deduct the tax losses made in previous income years for the test period that ended at the end of an income year? | A1: Yes

Relevant facts and circumstances: 1. The taxpayer is an Australian proprietary company registered with the Australian Securities and Investments Commission. 2. The taxpayer has carried forward tax losses from previous income years. 3. At all times during the income year, the taxpayer: 4. At all times during the start of the first loss year to the end of the income year ( the test period ): 5. At all times during the test period, the same shares in the taxpayer were held by the Parent Company and all shares in the Parent Company carried the same voting, dividend and capital rights. 6. A list of the shareholders of the Parent Company at the start of the test period and at the end of each income year in the test period shows that: 7. The shareholders in the Parent Company do not have any formal or informal arrangement with other shareholders for any shareholder to be able to control the majority of appointments to the company's board of directors. Furthermore, there is no shareholders agreement or any other relevant company document that allows any shareholder to influence the board of directors. None of the directors of the Parent Company have an overarching authority, nor are they accustomed or under any formal or informal obligation, or might reasonably be expected, to act in accordance with the directions, instructions or wishes of any of the shareholders and their respective economic groups. Assumption(s) 1. The taxpayer will derive assessable income in the income year. 2. The taxpayer will not make an election under section 166-15 of the ITAA 1997 for Subdivision 165-A to apply to it for the income year without the modifications made by Subdivision 166-A.

Relevant legislative provisions: Subdivision 165-A of the Income Tax Assessment Act 1997 Division 166 of the Income Tax Assessment Act 1997 | Subsection 995-1(1) of the Income Tax Assessment Act 1997 | Schedule 5 of the Income Tax Assessment Regulations 1997 | Paragraph 318(6)(b) of the Income Tax Assessment Act 1936

Reasons for decision: Summary: All legislative references are to the Income Tax Assessment Act 1997 unless otherwise stated. Application of Division 165 1. Division 165-A sets out the conditions that a company must meet to be able to deduct a tax loss. 2. Section 165-10 provides that a company cannot deduct a tax loss unless it: 3. Subsection 165-12(1) states that the ownership test period for COT is the period from the start of the loss year to the end of the income year, the income year being 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. 4. In order to satisfy the COT, subsections 165-12(2) to (4) provides that at all times during the ownership test period there must be persons who had: 5. The COT is applied either as a primary test or as an alternative test. Pursuant to subsection 165-12(5), the primary test will apply unless subsection 165-12(6) requires the alternative test to apply. Subsection 165-12(6) stipulates that the alternative test applies if one or more other companies beneficially own shares or interests in shares in the test company during the ownership test period. 6. As the taxpayer is beneficially owned by another company (i.e. the Parent Company) during the ownership test period, the alternative test applies to the taxpayer. Application of Division 166 7. Division 166 modifies the operation of Division 165 to make it easier for a company that is a widely held company or an eligible Division 166 company at all times during the income year to apply the rules in Division 165 [1] , unless the company chooses not to apply the modifications. [2] Subsection 166-3(2) states that: This Division makes it easier to apply the rules in Division 165 by: 8. Pursuant to subsection 995-1(1), an eligible Division 166 company includes a company: 9. 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. 10. Approved stock exchanges are listed in Schedule 5 of the Income Tax Assessment Regulations 1997, and include the foreign stock exchange on which the Parent Company is listed. 11. The taxpayer is an eligible Division 166 company at all times during the income year as the taxpayer was not a widely held company as its shares were not listed on any approved stock exchange, but instead its shares were beneficially owned by the Parent Company which is a widely held company with shares (which do not carry a right to a fixed rate of dividend) listed on the relevant foreign stock exchange. 12. Consequently, the taxpayer is eligible to apply the modified COT tests in Division 166. Ownership Test Times 13. Pursuant to subsection 166-5(2), the test period is the period consisting of the loss year, the income year and any intervening period. 14. Subsection 166-5(3) provides that a company is taken to have met the conditions in section 165-12 if there is substantial continuity of ownership as between the start of the test period and: ( the ownership test times ). 15. The meaning of corporate change is set out in section 166-175, none of which apply to the taxpayer. Substantial Continuity of Ownership 16. As stated above, subsection 166-5(3) requires substantial continuity of ownership. Pursuant to section 166-145, there is substantial continuity of ownership if: 17. The more than 50% voting power, rights to dividends and rights to capital distributions will be determined in accordance with the alternative tests contained in subdivision 165-D. 18. In applying the ownership tests in section 166-145, subdivision 166-E provides concessional tracing rules to assist in determining whether the ownership tests are satisfied. 19. For indirect stakes of less than 10% in the tested company, subsections 166-230(1) and (2) provide that: 20. The terms voting stake, dividend stake and capital stake are defined in subsection 995-1(1) by reference to section 166-235. According to subsections 166-235(2), 166-235(4) and 166-235(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: 21. In the present case, the shareholders of the Parent Company have an indirect stake in the taxpayer where the Parent Company is the interposed entity. 22. Therefore, pursuant to subsection 166-230(2), the stakes of all shareholders of the Parent Company with a less than 10% shareholding are attributed to the top interposed entity, being the Parent Company ( the attributed stakes ), and the Parent Company is deemed to be a person (other than a company). 23. At each of the ownership test times, the attributed stakes together amounted to a greater than 50% indirect voting, dividend and capital stake in the taxpayer. 24. At all times during the test period, the shares in the Parent Company carried the same voting, dividend and capital rights. 25. Accordingly, there is substantial continuity of ownership pursuant to section 166-145 at each of the ownership test times. Provisions that affect the operation of section 166-230 26. The operation of section 166-230 may be affected by sections 166-272, 166-275 and 166-280. [3] 27. Section 166-272 requires that the shares held by one of the entities listed in subsection 166-272(1) (the stakeholder) in the test company (i.e. the taxpayer) must be the same shares at each ownership test time to be taken into account for the substantial continuity ownership test in section 166-145. Paragraph 166-272(1)(a) provides that a stakeholder includes a top interposed entity mentioned in section 166-230. Accordingly, the Parent Company (as the top interposed entity under section 166-230) is a stakeholder for the purposes of applying section 166-272. 28. Paragraph 1.119 of the Explanatory Memorandum to the Tax Laws Amendment (Loss Recoupment Rules and Other Measures) Bill 2005 ( the EM ) relevantly states that: The same share same interest rule does not require that shares or interests held by persons in a top interposed entity...be the same share or interests. Nor does the rule require that stakes attributed from less than 10 per cent stakeholders to a top interposed entity, for example be the same at each test time. Provided that the top interposed entity itself holds the same shares or other interests, all stake attributed to it through the top interposed entity tracing rule can be taken into account. | Detailed Reasoning - Example 1.11: Same share same interest rule and attribution of stakes: Alpha Pty Ltd holds 30 per cent of shares in the tested company throughout the test period. At the start of the period, the top interposed entity tracing rule attributes stakes totalling 15 per cent to Alpha. At the second time in the test period, the top interposed entity tracing rules attributes stakes totalling 30 per cent to Alpha. Provided Alpha continues to hold the same shares, the fact that the stakes attributed to it have increased from 15 per cent to 30 per cent is irrelevant to the same share same interest rule. It is also irrelevant that the people whose stakes have been attributed to Alpha may have changed. 29. At each ownership test time, the same shares in the taxpayer were held by the Parent Company. Therefore, section 166-272 has no application and all stakes attributed to the Parent Company through section 166-230 can be taken into account for the substantial continuity ownership test in section 166-145. 30. Section 166-275 provides that where a company fails the COT as a result of applying a tracing rule to a voting, dividend or capital stake and the company believes on reasonable grounds, that if the tracing rule did not modify how the tests apply to the company in respect of that stake, it would not fail the tests, the COT is taken to have been met. In the present circumstances, none of the tracing concessions work to the detriment of the taxpayer and as such, section 166-275 has no application. 31. Section 166-280 provides that: 32. 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. 33. Paragraph 318(6)(b) of the 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). 34. 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. 35. At all times during the test period, the taxpayer did not have an 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 taxpayer in circumstances where the taxpayer was sufficiently influenced (within the meaning of paragraph 318(6)(b) of the ITAA 1936) by the controlling entity. Therefore, subsection 166-280(1) has no application. Further, the taxpayer is not a widely held company and as such subsection 166-280(2) does not apply. 36. In conclusion, as the taxpayer satisfies the substantial continuity of ownership test in section 166-145 at each ownership test time, pursuant to section 166-5(3) the taxpayer is taken to have met the conditions in section 165-12. Consequently, the taxpayer is entitled to deduct its carried forward tax losses in the income year. [1] Subsection 166-5(1). [2] Section 166-15. Refer to assumption 2. [3] See Note 2 at the end of subsection 166-230(1).

was wholly owned by a company registered in a foreign country and listed on a foreign stock exchange ( the Parent Company ); and | The shares in the Parent Company did not have a right to a fixed rate of dividend. | There was no takeover bid for shares in the taxpayer; | There was no scheme of arrangement involving more than 50% of the shares in the taxpayer; | There was no other arrangement involving the acquisition of more than 50% of the shares in the taxpayer; | There was no issue of shares in the taxpayer that resulted in an increase of 20% or more in the issued share capital of the taxpayer or the number of shares on issue in the taxpayer; | A voting stake that carried rights to more than 50% of the voting power in the taxpayer; | A dividend stake that carried rights to more than 50% of any dividends the taxpayer may pay; | A capital stake that carried rights to receive more than 50% of any distribution of capital of the taxpayer (whether the other company owned those stakes directly or indirectly through one or more interposed entity). | There was one shareholder who had a greater than 10% direct voting, dividend and capital stake in the Parent Company (consequently, a greater than 10% indirect voting, dividend and capital stake in the taxpayer). | The balance of the shareholders of the Parent Company each held a less than 10% direct voting, dividend and capital stake in the Parent Company (consequently, a less than 10% indirect voting, dividend and capital stake in the taxpayer). | Satisfies the conditions concerning the continuity of ownership test ( COT ) in section 165-12, or | Satisfies the same business test in section 165-13. | 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. | making it unnecessary for the company to prove that it has maintained the same owners throughout a period, if the company had the same owners at certain test times; and | voting stakes, dividend stakes and capital stakes in the company held by certain entities (whether directly, or indirectly through one or more interposed entities); and | small voting stakes, dividend stakes and capital stakes in the company. | That is not a widely held company; and | In which greater than 50% of the voting rights, dividend stakes and capital stakes are beneficially owned by a widely held company. | The end of each income year in that period; and | The end of each corporate change in that period | The same persons (none of them companies or trustees) have more than 50% of the voting power at each of the ownership test times; | The same persons (none of them companies) have rights to more than 50% of the dividends at each of the ownership test times; and | The same persons (none of them companies) have rights to more than 50% of any capital distributions at each of the ownership test times. | a voting stake that carries rights to less than 10% of the voting power in the company; or | a dividend stake that carries the right to receive less than 10% of any dividends that the company may pay; or | capital stake that carries the right to receive less than 10% of any distribution of capital of the company; and | the stakeholder indirectly holds the stake in the tested company by holding shares directly in a company (the top interposed entity ) that is interposed between the stakeholder and the tested company; or | the stakeholder indirectly holds the stake in the tested company by holding another interest directly in an entity (the top interposed entity ) that is not a company and that is interposed between the stakeholder and the tested company. | if the stake is a voting stake - the top interposed entity controls, or is able to control, the voting power in the tested company that is carried by that stake at that time; and | if the stake is a dividend stake - the top interposed entity indirectly had the right to receive for its own benefit, any dividends the tested company may pay in respect of that stake at that time; and | if the stake is a capital stake - the top interposed entity indirectly had the right to receive, for its own benefit, any distributions of capital of the tested company in respect of that stake at that test time; and | in any case - the top interposed entity were a person (other than a company). | Controls or is able to control voting power in the company indirectly through the interposed entities; or | All or any dividends that the company may pay; or | All or any of a distribution of capital of the company. | an entity (the controlling entity) directly holds that power or has those rights; or | an entity (the controlling entity) indirectly holds that power or has those rights through one or more interposed entities; and | the tested company is sufficiently influenced (within the meaning of paragraph 318(6)(b) of the Income Tax Assessment Act 1936 [ ITAA 1936 ]) by the controlling entity. | the tested company is a widely held company; and | 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 | 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.