Private ruling: Modified continuity ownership test
Date of advice: 19 December 2023
Published: 12 February 2024
Ruling period: A particular income year
Date scheme commenced: During a particular loss year

Ruling: Q1: Is Trust B 'a superannuation fund' for the purposes of subsection 166-245(2) of the Income Tax Assessment Act 1997 ( ITAA 1997 ), which satisfies the condition in subsection 166-245(3)? | A1: Yes. | Q2: Is Company A an 'eligible Division 166 company' (as defined in section 995-1 of the ITAA 1997) at all times during the relevant income year? | A2: Yes. | Q3: Will Trust B be taken to hold voting, dividend and capital stake in Company A for the purposes of subsection 166-245(6) of the ITAA 1997 during the test period? | A3: Yes. | Q4: Does Company A satisfy the continuity of ownership test in section 165-12 of the ITAA 1997, as modified by Division 166, to deduct in the relevant income year the capital losses made by it in previous years? | A4: Yes. | Q5: Will section 165-15 of the ITAA 1997 apply to deny Company A a deduction in the relevant income year in respect of the capital losses made by it in previous years? | A5: No. | Q6: Will the Commissioner seek to apply sections 165-180, 165-185 or 165-190 of the ITAA 1997 to deny Company A a deduction in the relevant income year in respect of the capital losses made by it in previous years? | A6: No.

Relevant facts and circumstances: Company A is an Australian resident private company for income tax purposes and the head company of its Australian income tax consolidated group. Company A made capital losses in previous years and proposed to deduct the capital loss in the relevant income year. At all relevant times during the test period, being the period between the start of the first loss year to the end of the relevant income year ( Test Period ): a. Company A had less than 50 members b. there were three classes of shares on issue by Company A: ordinary shares, B class shares and preference shares c. Entity X, Entity Y and Entity Z ( Trust B Interposed Entities ) together held more than 50% of the ordinary shares, B class shares and preference shares of Company A, and d. the Trust B Interposed Entities were wholly owned by Trust B. Trust B is a legal trust established under the laws of a foreign country ( Country C ) and regulated in accordance with the rules and regulations governing pension plans in Country C. Trust B has more than 10 members. Trust B formed under a trust agreement which: e. provided that the trust was created to administer and invest the trust fund for the purpose of providing pension and related benefits, including disability, death and termination benefit to its members in accordance with the pension plan f. prohibits any amendment that could result in diverting the trust fund to a purpose other than the provision of benefits for its members, and g. sets out the process in the event of termination or wind up of the trust but did not contemplate Trust B to end at a defined point in time. On a date during the Test Period ( Reorganisation Date ), Entity X and Entity Y transferred a number of ordinary shares and B class shares to Entity Z. None of these entities made a capital loss in respect of the CGT event that happened on the Reorganisation Date. On another date during the Test Period ( Issue Date 1 ), Company A issued new ordinary shares and B class shares, which resulted in a more than 20% increase in the shares of the respective classes. On another date during the Test Period ( Issue Date 2 ), Company A issued new ordinary shares and B class shares, which resulted in a more than 20% increase in the shares of the respective classes. At all times during the test period, there was: • no takeover bid for shares in Company A • no scheme of arrangement involving more than 50% of the shares in Company A • no other arrangement involving the acquisition of more than 50% of the shares in Company A, and • no corporate change in another company which beneficially owned one or more of the following stakes in Company A: i. a voting stake that carried rights to more than 50% of the voting power in Company A ii. a dividend stake that carried rights to more than 50% of any dividends Company A may pay, or iii. a capital stake that carried rights to receive more than 50% of any distribution of capital of Company A. Company A has not and will not make an election under section 166-15 of the ITAA 1997 for Subdivision 165-A to apply to it for the relevant income year without the modifications made by Subdivision 166-A. At all times during the test period, Company A did not have an entity directly or indirectly (through one or more interposed entities) that held the power over some or all of the rights to vote, dividends or capital in Company A in circumstances where Company A was sufficiently influenced (within the meaning of paragraph 318(6)(b) of the Income Tax Assessment Act 1936 ( ITAA 1936 )) by the controlling entity.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 165 | Income Tax Assessment Act 1997 section 165-12 | Income Tax Assessment Act 1997 section 165-15 | Income Tax Assessment Act 1997 section 165-180 | Income Tax Assessment Act 1997 section 165-185 | Income Tax Assessment Act 1997 section 165-190 | Income Tax Assessment Act 1997 Division 166 | 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 section 166-235 | Income Tax Assessment Act 1997 section 166-245 | Income Tax Assessment Act 1997 section 166-272 | Income Tax Assessment Act 1997 Subsection 995-1(1) | Superannuation Industry (Supervision) Act 1993 s ection 10

Reasons for decision: Summary: Yes. Trust B is a 'superannuation fund' for the purposes of subsection 166-245(2) and satisfies the condition in subsection 166-245(3). | Detailed Reasoning - Detailed reasoning: Subdivision 166-E contains the rules to make it easier for a widely held or eligible Division 166 company to satisfy the ownership tests contained in Subdivision 166-D. It does this by providing a number of concessional tracing rules. Relevantly, section 166-245 treats some types of entities as the ultimate owners if they meet particular conditions. This negates the need for a company to trace through all corporate shareholders and trusts until it identifies the ultimate individual holders of voting power and rights to dividend and capital. | Detailed Reasoning - Trust B is an entity mentioned in subsection 166-245(2): The entities to which section 166-245 applies are listed in subsection 166-245(2) and includes a superannuation fund. The term 'superannuation term' is defined in subsection 995-1(1) as having the meaning given by section 10 of the Superannuation Industry (Supervision) Act 1993 ( SIA 1993 ). Section 10 of the SIA 1993 defines a 'superannuation fund' as including a fund that is: (i) an indefinitely continuing fund; and (ii) a provident, benefit, superannuation or retirement fund | Detailed Reasoning - An 'indefinitely continuing fund': The trust agreement set out the process in the event of termination or wind up of Trust B. There is no indication in the termination clause that there is any contemplation of Trust B ending at a defined point in time. Therefore, it is accepted that Trust B will continue to operate in accordance with the trust agreement for an indefinite period of time and this requirement is satisfied. | Detailed Reasoning - A 'provident, benefit, superannuation or retirement fund': The phrase 'provident, benefit, superannuation or retirement fund' is not defined in either the ITAA 1997, ITAA 1936 or SIA 1993. However, its individual terms have been the subject of judicial consideration. When considering the term in the context of subsection 118-520(1) of the ITAA 1936, the Commissioner in ATO Interpretative Decision ATO ID 2009/67 Income Tax: Superannuation fund for foreign residents noted that: The courts have held that for a fund to be a 'provident, benefit, superannuation or retirement fund', the fund's sole purpose must be to provide superannuation benefits, that is, benefits to a member upon the member reaching a prescribed age or upon their retirement, death or other cessation of employment ( Scott v. FC of T (No 2) (1966) 14 ATD 333; (1966) 10 AITR 290, per Windeyer J; Mahony v. FC of T (1967) 14 ATD 519, per Kitto J; Walstern Pty Ltd v. Commissioner of Taxation (2003) 138 FCR 1; 2003 ATC 5076; (2003) 54 ATR 423, per Hill J and Cameron Brae Pty Ltd v. Federal Commissioner of Taxation (2007) 161 FCR 468; 2007 ATC 4936; (2007) 67 ATR 178, per Stone and Allsop JJ). It is clearly set out in the trust agreement that Trust B administers the Plan for its eligible members. Trust B's role, as plan administrator, is to provide pension and related benefit (including disability, death and termination benefit) exclusively to its members in accordance with the pension plan. Therefore, Trust B is a provident, benefit, superannuation or retirement fund. Consequently, Trust B is a 'superannuation fund' for the purposes of subsection 166-245(2). | Detailed Reasoning - Trust B meets the condition in subsection 166-245(3): Relevantly, to satisfy the condition in subsection 166-245(3), Trust B must be a superannuation fund that is established in a foreign country and regulated under a foreign law relating to the supervision of superannuation funds (subparagraph 166-245(3)(a)(ii)). The term 'foreign law' is defined in subsection 995-1(1) as a law of a foreign country. Trust B was established in Country C under the laws of Country C. Trust B is regulated in accordance with the rules and regulations governing pension plans in Country C. On that basis, Trust B is a superannuation fund that is established in a foreign country and regulated under a foreign law. Therefore, Trust B satisfies the condition in subsection 166-245(3). | Detailed Reasoning - Question 2: Is Company A an 'eligible Division 166 company' (as defined in section 995-1) at all times during the relevant income year? | Summary: Yes. Company A is an eligible Division 166 company at all times during the relevant income year. | Detailed Reasoning - Detailed reasoning: To satisfy the continuity of ownership test in Division 165, a company must maintain the same owners continuously from the start of the loss year to the end of the income year (section 165-12). Division 166 modifies this rule for widely held and eligible Division 166 companies by requiring substantial continuity of ownership only between the start of the test period and certain specified times (rather than continuously) (subsection 166-5(3)). The term 'eligible Division 166 company' is defined in subsection 955-1(1) to include a company: (a) that is not a *widely held company; and (b) in which: (i) *voting stakes that carry rights to more than 50% of the voting power in the company; or (ii) *dividend stakes that carry rights to receive more than 50% of any dividends that the company may pay; or (iii) *capital stakes that carry rights to receive more than 50% of any distribution of capital of the company; are beneficially owned (whether directly, or *indirectly through one or more interposed entities) by: (iv) a widely held company; or (v) an entity mentioned in subsection 166-245(2) that satisfies the condition in subsection 166-245(3); or (vi) a *non-profit company; or (vii) a charity; or (viii) 2 or more entities mentioned in subparagraphs (iv) to (vii). The term 'widely held company' is defined in subsection 995-1(1) as being a company that is either listed for quotation in the official list of an approved stock exchange, or a company with more than 50 members where 75% of the shares, voting power and rights to dividend are held by more than 20 persons. Approved stock exchanges are listed in Schedule 5 of the Income Tax Assessment Regulations 1997 . At all times during the relevant income year, Company A's shares were not publicly listed for quotation on an approved stock exchange and had less than 50 members. Accordingly, Company A is not a 'widely held company' within the meaning of subsection 955-1(1). As discussed above, Trust B is an entity mentioned in subsection 166-245(2) that satisfies the condition in subsection 166-245(3). At all times during the relevant income year, Trust B wholly owned the Trust B Interposed Entities, and the Trust B Interposed Entities held more than 50% of the ordinary shares, B class shares and preference shares in Company A. Taking into account the voting power, rights to dividends and rights to capital contributions conferred by each class of shares issued by Company A, the indirect ownership of more than 50% of each class of shares on issue by Company A gives Trust B (indirectly) more than 50% of the voting power, right to dividend and right to capital distribution in Company A. Accordingly, Company A is an eligible Division 166 company as defined in subsection 995-1(1) at all times during the relevant income year. | Detailed Reasoning - Question 3: Will Trust B be taken to hold voting, dividend and capital stake in Company A for the purposes of subsection 166-245(6) during the test period? | Summary: Yes. Trust B will be taken to hold voting, dividend and capital stake in Company A for the purposes of subsection 166-245(6) during the test period. | Detailed Reasoning - Detailed reasoning: For a superannuation fund that has more than 10 members, subsection 166-245(6) provides a concessional tracing rule to treat that fund as a person (other than a company or a trustee) who held the relevant voting right, right to dividend and right to capital distribution. Subsection 166-245(6) states that the ownership tests in section 166-145 are applied to the tested company as if, at the ownership test time: (a) if the stake is a *voting stake - the entity controls, or is able to control, the voting power in the tested company that is carried by that stake at that time; and (b) if the stake is a *dividend stake - the entity had the right to receive (whether directly or *indirectly), for its own benefit, any *dividends the tested company may pay in respect of that stake at that time; and (c) if the stake is a *capital stake - the entity had the right to receive (whether directly or indirectly), for its own benefit, any distributions of capital of the tested company in respect of that stake at that time; and (d) in any case - the entity were a person (other than a company or a trustee). 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), (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 up, or ii. all or any of a distribution of capital of the company. Trust B has more than 10 members. Trust B has an indirect stake in Company A where, at all relevant times through the Trust B Interposed Entities, it controlled the voting power and had the right to receive dividends and distributions of capital from Company A. Accordingly, pursuant to subsection 166-245(6), Trust B is taken to be the ultimate owner of the voting stake, dividend stake and capital stake in Company A that are held by the Trust B Interposed Entities and will be treated as a person (other than a company or a trustee) for the purpose of applying the modified ownership test in section 166-145. | Detailed Reasoning - Question 4: Does Company A satisfy the continuity of ownership test in section 165-12, as modified by Division 166, to deduct in the relevant income year the capital losses made by it in previous years? | Summary: Yes. Company A satisfies the continuity of ownership test in section 165-12, as modified by Division 166, to deduct in the relevant income year the capital losses made by it in previous years. | Detailed Reasoning - Ownership test times: Subsections 166-5(2) & (3) provide that a company is taken to have met the continuity of ownership test in section 165-12 if there is substantial continuity of ownership between the start of the lost year and the end of each income year in that period and the end of each corporate change in that period (individually and collectively, the Ownership Test Time(s)). Subsection 166-175(1) relevantly provides that there is a 'corporate change' if: ... (d) there is an issue of *shares in the company that results in an increase of 20% or more in: (i) the issued share capital of the company; or (ii) the number of the company's shares on issue; ... According to subsection 166-175(2), this type of corporate change ends when the offer period for the issue of shares ends. There were two corporate changes that occurred that resulted in the number of shares on issue in Company A increasing by 20% or more, one was on Issue Date 1 and the other was on Issue Date 2. Therefore, the Ownership Test Times for Company A in respect of the capital losses made by it were: • the first day of the first loss year • the last day of each year during the Test Period • Issue Date 1 • Issue Date 2, and • the last day of the relevant income year. | Detailed Reasoning - Substantial continuity of ownership: Pursuant to section 166-145, there is substantial continuity of ownership where the same persons (none of them companies or trustees), directly or indirectly, hold more than 50% of the voting power, rights to dividends and rights to capital distributions in the company at each of the Ownership Test Times. The Trust B Interposed Entities have collectively held more than 50% in all three classes of shares on issue by Company A at each of the Ownership Test Times. Accordingly, Trust B, collectively via Trust B Interposed Entities, held more than 50% in all three classes of shares on issue by Company A at each of the Ownership Test Times. These shares together resulted in Trust B holding more than 50% of the right to voting, right to dividends and right to capital distributions of Company A at each of the Ownership Test Times. | Detailed Reasoning - Same share same interest rule: Subsection 166-272(2) broadly requires that the shares held in the tested company to be the same shares at each Ownership Test Time for the purposes of applying the substantial continuity ownership test in section 166-145. If an entity holds shares in another company that holds shares in the tested company, both the shares in the tested company and the interposed company must be the same shares and held by the same persons at each Ownership Test Time. The transfer of shares on the Reorganisation Date resulted in each of the Trust B Interposed Entities not holding exactly the same shares after the transfer as they did before the transfer. On this basis, the condition in subsection 166-272(2) is not satisfied. | Detailed Reasoning - Saving Provision: The same share same interest rule is subject to a savings provision contained in subsection 166-272(8). The savings provision in effect negates the same share same interest rule if less than 50% of the tax loss, notional loss, bad debt or unrealised net loss has been reflected in deductions, capital losses, or reduced assessable income through CGT events occurring in respect of direct or indirect interests in the tested company during the test period. None of the Trust B Interposed Entities made a capital loss in respect of the CGT event that happened on the Reorganisation Date. Therefore, no capital losses of Company A have been reflected in any of the Trust B Interposed Entities' deductions, capital losses, or reduced assessable income because of the happening of any CGT event in connection to the shares they held in Company A. On this basis, the savings provision in subsection 166-272(8) applies to treat section 166-145 as being satisfied (despite the failure of the same share, same interest rule). | Detailed Reasoning - Conclusion: In conclusion, there is substantial continuity of ownership pursuant to section 166-145 at each of the Ownership Test Times. Pursuant to subsection 166-5(3), Company A is taken to have met the conditions in section 165-12. Company A is entitled to deduct in the relevant income year the capital losses made by it in previous years. | Detailed Reasoning - Question 5: Will section 165-15 apply to deny Company A a deduction in the relevant income year in respect of the capital losses made by it in previous years? | Summary: No. Section 165-15 will not apply to deny Company A a deduction in the relevant income year in respect of the capital losses made by it in previous years ended 30 June 2020 and 30 June 2021. | Detailed Reasoning - Detailed reasoning: Section 165-15 provides that even if the company satisfies the continuity of ownership test, it will not be able to deduct the loss if there is a change in the control of the voting power in the company which is associated with a purpose of gaining a tax benefit. As has been discussed above, Trust B held, indirectly via the Trust B Interposed Entities, more than 50% of each class of share on issue (and therefore, controlled more than 50% of the voting power) in Company A at each of the Ownership Test Times. There is no evidence of any change related to the control of the voting power of Company A for the purpose of gaining a tax benefit. Therefore, section 165-15 will not apply to deny Company A a deduction in the relevant income year in respect of the capital losses made by it in previous years. | Detailed Reasoning - Question 6: Will the Commissioner seek to apply sections 165-180, 165-185 or 165-190 to deny Company A a deduction in the relevant income year in respect of the capital losses made by it in previous years? | Summary: No. The Commissioner will not seek to apply any of sections 165-180, 165-185 or 165-190 to deny Company A a deduction in the relevant income year in respect of the capital losses made by it in previous years. | Detailed Reasoning - Detailed reasoning: Section 165-180 provides that the Commissioner may treat a person as not having beneficially owned particular shares at a particular time if an arrangement was entered into in relation to the beneficial interest in or a right relating to the shares of a company for the purpose (or one of the purposes) of eliminating or reducing a liability of a person to pay income tax for a financial year. There is no evidence of any arrangements being entered into in relation to the beneficial interest in or a right relating to the shares of Company A. Therefore, the Commissioner will not apply section 165-180. Sections 165-185 and 165-190 are integrity provisions directed at arrangements varying the rights attaching to shares. In broad terms, section 165-185 allows the Commissioner to treat the shares as not carrying particular rights, whereas section 165-190 allows the Commissioner to treat the shares as carrying particular rights, during the ownership test period. The Commissioner is not aware of any arrangement in place varying the rights attaching to the shares of Company A. The Commissioner will not, therefore, apply sections 165-185 and 165-190 to deny the deduction of the capital losses against any capital gains arising to Company A in the relevant income year.

Does IVA apply to this private ruling?: Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or diverted profits tax benefit in connection with an arrangement. | If Part IVA applies, the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax. | We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part. | If you want us to rule on whether Part IVA applies, we will need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply. | For more information on Part IVA, go to our website ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select 'Part IVA: the general anti-avoidance rule for income tax'. | Reasons for decision: All legislative references are to provisions of the ITAA 1997 unless otherwise indicated. | Question 1: Is Trust B 'a superannuation fund' for the purposes of subsection 166-245(2), which satisfies the condition in subsection 166-245(3)?