Private ruling: Income tax ~~ Tax losses ~~ Continuity of ownership test
Date of advice: 6 November 2015
Published: January 2016
Ruling period: December 200X to 30 June 20XX
Date scheme commenced: December 200X

Ruling: Q1: Does the taxpayer qualify as a widely held company at all times during the year of income ended 30 June 2015 for the purposes of applying Division 166 of the Income Tax Assessment Act (ITAA) 1997 to determine whether the taxpayer passes the Continuity of Ownership Test (COT) in respect of the recoupment of tax losses incurred during the years ended 30 June 200X to 30 June 20XX? | A1: Yes | Q2: In applying Division 166 to its shareholders that are trustees for Managed Investment Schemes, can the taxpayer apply section 166-225 to the stakes held by the unit holders of each trust, in recouping tax losses incurred in the years ended 30 June 200X to 30 June 20XX, in the year ended 30 June 2015? | A2: No | Q3: In applying Division 166 to its shareholder, Company E can the taxpayer apply the Nominee Stakes rule in section 166-235? | A3: No | Q4: Does the taxpayer pass the COT under section 165-12 for the purposes of recouping tax losses incurred in the years ended 30 June 200X to 30 June 20XX, in the year ended 30 June 20XX? | A4: No | Q5: Does the taxpayer pass the COT under section 165-12 for the purposes of recouping tax losses incurred in the years ended 30 June 20XX to 30 June 20XX, in the year ended 30 June 20XX? | A5: Yes

Relevant facts and circumstances: The taxpayer was listed on the Australian Stock Exchange (ASX) in 200X. Since the above listing, the taxpayer incurred tax losses during the income years ended 30 June 200X to 30 June 20XX. The following entities held shares of various percentages in the taxpayer during various times of the ownership test period: Trustees for Managed Investment Schemes • Company A as trustee for Trust A • Company B as trustee for Trust B • Company C as trustee for Trust C (for a part of the test period) • Company D as trustee for Trust C (for a part of the test period) Company E as custodian for Company S as trustee for a Superannuation Fund X and associated entities Trusts A, B and C were Managed Investment Schemes ("MIS") registered under the Corporations Act 2001 (Corp Act) . From December 200X to February 20XX, Company A held between X% and X% of the issued capital. In February 20XX it reduced its holding to X% and in August 20XX, it was no longer a shareholder. During this period, Company A was trustee for Trust A, a fixed trust with more than 20 members (unitholders). Its largest member held an underlying interest in the taxpayer of between 7.9% and 6.5%. From December 200X to February 20XX, Company B held between 22.4% and 14.0% of the issued capital. During February 20XX it reduced its holding to X% and in August 20XX, it was no longer a shareholder. During this period, Company B was trustee for Trust B, a fixed trust with more than 20 members (unitholders). Its largest member held an underlying interest in the taxpayer of between 6.9% and 4.3%. From December 200X to August 200X, Company C held between 15.8% and 13.0% of the issued capital. During this period, Company C was trustee for Trust C, a fixed trust with more than 20 members (unitholders). Its largest member held an underlying interest in the taxpayer of between 10.2% and 8.4%. From August 200X to February 20XX, Company D held between 13.0% and 8.3% of the issued capital. During February 20XX it reduced its holding to X% and in August 20XX, it was no longer a shareholder. During this period, Company D was trustee for Trust C, which was a fixed trust with more than 20 members (unitholders). Its largest member held an underlying interest in the taxpayer of between 8.4% and 5.4%. From December 200X to February 20XX, Company E held between 15.7% and 8.3% of the issued capital. During February 20XX it reduced its holding to X% and in August 20XX, it was no longer a shareholder. During this period, Company E was acting as custodian for Company S as trustee for a Superannuation Fund with a large number of members (beneficial owners), none of whom would have held an underlying interest in the taxpayer of 10% or more. In February 200X X and associated entities acquired X% of the issued capital. Since then this holding was reduced to X% in March 20XX. At all times since December 200X, all shares on issue were ordinary shares with standard voting, dividend and capital rights. All shares in the taxpayer carry equal voting, dividend and capital rights. The losses referred to in this ruling are tax losses to which Subdivision 166-A of the Income Tax Assessment Act 1997 applies. The taxpayer has not made the choice to apply Division 165 of the Income Tax Assessment Act 1997 pursuant to subsection 166-15(1) of the Income Tax Assessment Act 1997. The percentage of issued capital allocated to a Notional Shareholder (the Notional Shareholder) is the sum of all direct stakes of less than 10% in the taxpayer. The taxpayer has been listed on the ASX at all times until 30 June 20XX. It is accepted that a corporate change ended on a date in February 20XX pursuant to paragraphs 166-175(1)(d) and 166-175(2)(c), as the additional shares issued were greater than 10% of the existing share capital.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 165 | Income Tax Assessment Act 1997 Division 166 | Income Tax Assessment Act 1997 Division 165 Subdivision 165-A | Income Tax Assessment Act 1997 Division 166 Subdivision 166-D | Income Tax Assessment Act 1997 Division 166 Subdivision 166-E | Income Tax Assessment Act 1997 Division 165 section 165-12 | Income Tax Assessment Act 1997 Division 166 section 166-5 | Income Tax Assessment Act 1997 Division 166 subsection 166-15(1) | Income Tax Assessment Act 1997 Division 166 section 166-145 | Income Tax Assessment Act 1997 Division 166 section 166-270 | Income Tax Assessment Act 1997 Division 166 paragraph 166-175(1)(d) | Income Tax Assessment Act 1997 Division 166 paragraph 166-175(2)(c) | Income Tax Assessment Act 1997 Division 166 section 166-225 | Income Tax Assessment Act 1997 Division 166 section 166-230 | Income Tax Assessment Act 1997 Division 166 section 166-235 | Income Tax Assessment Act 1997 Division 166 section 166-245 | Income Tax Assessment Act 1997 section 995-1 | Income Tax Assessment Act 1997 subsection 995-1(1) | Income Tax Regulations Act 1997 Schedule 5 Question 1 | Summary | The taxpayer qualifies as a widely held company at all times during the year of income ended 30 June 20XX for the purposes of applying Division 166 of the ITAA 1997 to determine whether the taxpayer passes the COT in respect of the recoupment of tax losses incurred during the years ended 30 June 200X to 30 June 20XX. | Detailed reasoning | The definition of a widely held company in subsection 995-1(1) of the ITAA 1997 includes 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 as a stock exchange named in the regulations made for the purpose of this definition. ASX Limited is specified in Schedule 5 of the Income Tax Regulations Act 1997 that is named for the purpose of the definition of an approved stock exchange. The taxpayer has been listed on the ASX since December 200X and remained listed at all times during the income year ended 30 June 20XX. It will therefore meet the definition of a widely held company pursuant to subsection 995-1(1) of the ITAA 1997. This is for the purposes of applying Division 166 to determine whether the taxpayer passes the COT in respect of recouping tax losses incurred during the years ended 30 June 200X to 30 June 20XX, in the year ended 30 June 20XX. | Question 2 | Summary | In applying Division 166 to its shareholders that are trustees for Managed Investment Schemes, the taxpayer cannot apply section 166-225 to the stakes held by the unit holders of each trust, in recouping tax losses incurred in the years ended 30 June 200X to 30 June 20XX, in the year ended 30 June 20XX. | Detailed reasoning | Relevant Law | Section 166-225: Direct stakes of less than 10% in the tested company | Subsection 166-225(1) 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. | Subsection 166-225(2) states that 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) | Section 166-230: Indirect stakes of less than 10% in the tested company | Subsection 166-230(1) applies if an entity (the stakeholder) indirectly holds: | • a voting stake carrying rights to less than 10% of the voting power, or a dividend stake carrying rights to receive less than 10% of the rights to any dividend, or a capital stake carrying rights to receive less than 10% of any capital distributions in the tested company; and | • the stake in the tested company by holding another interest directly in an entity (the top interposed entity ) that is either not a company, or is a company, that is interposed between the stakeholder and the tested company. | If subsection 166-230(1) is satisfied, subsection 166-230(2) provides that the respective stake will be applied to the tested company as if the top interposed entity held the respective stake as a person, other than a company. | Meaning of voting, dividend and capital stakes | For the purpose of applying sections 166-225 and 166-230, section 166-235 provides the meaning of voting, dividend and capital stakes. | Meaning of voting stake | 166-235(1) | An entity holds a voting stake in a company if: | (a) the entity is the registered holder of shares in the company; and | (b) the shares carry rights to exercise voting power in the company. | 166-235(2) | An entity (the stakeholder ) also holds a voting stake in a company if: | (a) one or more other entities are interposed between the company and the stakeholder; and | (b) the stakeholder controls, or is able to control, voting power in the company indirectly through the interposed entity or entities. | Meaning of dividend stake | 166-235(3) | An entity holds a dividend stake in a company if: | (a) the entity is the registered holder of shares in the company; and | (b) the shares carry rights to all or any dividends that the company may pay. | 166-235(4) | An entity (the stakeholder ) also holds a dividend stake in a company if: | (a) one or more other entities are interposed between the company and the stakeholder; and | (b) the stakeholder has the right to receive, for its own benefit and indirectly through the interposed entity or entities, all or any dividends that the company may pay. | Meaning of capital stake | 166-235(5) | An entity holds a capital stake in a company if: | (a) the entity is the registered holder of shares in the company; and | (b) the shares carry rights to all or any of a distribution of capital of the company. | 166-235(6) | An entity (the stakeholder ) also holds a capital stake in a company if: | (a) one or more other entities are interposed between the company and the stakeholder; and | (b) the stakeholder has the right to receive, for its own benefit and indirectly through the interposed entity or entities, all or any of a distribution of capital of the company. | Application of the law: | Section 166-225: Direct stakes of less than 10% in the tested company | The taxpayer is the tested company. In applying section 166-225 to certain stakes in the taxpayer, voting stakes, dividend stakes and capital stakes held directly in the taxpayer of less than 10% can be attributed to a notional shareholder. That is an entity who is the registered holder of shares in the taxpayer and carries rights to vote, receive dividends or capital distributions will have a voting stake, dividend stake or a capital stake respectively, as defined in subsections 166-235(1), (3) and (5). | The taxpayer has stated that each share carries rights to vote, receive dividends and capital distributions. Therefore, for the purposes of this ruling, a reference to the taxpayer's stakes encompasses voting, dividend and capital distribution stakes. | Pursuant to subsection 166-225(2), the single notional entity is taken to be a person (other than a company), and is therefore regarded as if the notional shareholder had the relevant voting, dividend or capital stake. The persons who actually hold the power or rights are not taken to hold those rights. The taxpayer has applied the concessional tracing rule under section 166-225 to stakes of less than 10% held directly by its shareholders. As such it can and has collectively attributed the less than 10% direct stakes in the taxpayer to the Notional Shareholder . | Section 166-230: Indirect stakes of less than 10% in the tested company | In applying section 166-230, the top interposed entities that hold the direct voting, dividend and capital contribution stakes in the taxpayer are the following companies as trustees for trusts that are Managed Investment Schemes. | • Company A as trustee for Trust A | • Company B as trustee for Trust B | • Company C as trustee for Trust C (for a part of the test period) | • Company D as trustee for Trust C (for a part of the test period) | This is because each of the companies as trustees for the above trusts are the registered holder of shares in the taxpayer and which hold a voting, dividend and capital stake in the taxpayer. | The taxpayer has stated that each share carries rights to vote, receive dividends and capital distributions. Therefore, for the purposes of this question, a reference to the taxpayer's stakes encompasses voting, dividend and capital distribution stakes. | The unitholders of Trusts A, B and C hold indirect stakes in the taxpayer as defined by subsections 166-235(2), 166-235(4) and 166-235(6). | The unitholders indirectly hold the stakes in the taxpayer by holding another interest directly in the trusts, which are not companies and are interposed between the unitholder and the taxpayer. The unitholders control, or are able to control, voting power in the taxpayer indirectly through the trusts. They also have the right to receive, for their own benefit and indirectly through the trusts, all or any of a distribution of capital of the taxpayer and all or any dividends that the taxpayer may pay. | As such the unitholders of Trusts A, B and C, do not hold direct stakes in the taxpayer, as their stakes are not held directly in the taxpayer. | Pursuant to subsection 166-230(2), if the taxpayer chooses to apply the concessional tracing rule under section 166-230, then the tests are applied to the taxpayer as if, at the ownership test time, the companies as trustees for the trusts, control or are able to control the voting power in the taxpayer and have the rights to receive for their own benefit any dividends or capital distributions in respect of the indirect stakes of less than 10% held in the taxpayer by each of their unitholders. | Hence, the indirect stakes of less than 10% held in the taxpayer by the unitholders of the trusts (MIS) cannot be attributed to the Notional Shareholder pursuant to section 166-225, in recouping tax losses incurred in the years ended 30 June 200X to 30 June 20XX, in the year ended 30 June 20XX. | Question 3 | Summary | In applying Division 166 to its shareholder, Company E, the taxpayer cannot apply the Nominee Stakes rule in section 166-235. | Detailed reasoning | Subsection 166-235(7): Stakes held by nominees | For the purposes of sections 166-225 and 166-230, if: | (a) an entity (the nominee entity ) holds a voting stake, a dividend stake, or a capital stake, in a company; and | (b) the nominee entity is itself a company; and | (c) the nominee entity holds the stake as a nominee for more than one other entity; | Then, for each entity for whom a part of the stake is held by the nominee entity, that entity's part of the stake may be treated instead as a separate stake. | Company E held the relevant stakes in the taxpayer as nominee for only one entity, being Company S as trustee for a Superannuation Fund. As such, the taxpayer cannot apply the Nominee Stakes rule in subsection 166-235(7) in applying Division 166 in respect of its shareholder Company E. | Question 4 | Summary | The taxpayer does not pass the COT under section 165-12 for the purposes of recouping tax losses incurred in the years ended 30 June 200X to 30 June 20XX, in the year ended 30 June 20XX | Detailed Reasoning | Relevant Law: | Subdivision 165-A outlines the rules for deducting company tax losses of earlier income years. | Section 165-10 provides that a company cannot deduct a tax loss unless either: | (a) It meets the conditions in section 165-12 (which is about the company maintaining the same owners); or | (b) It meets the condition in section 165-13 (which is about the company satisfying the same business test). | Subsections 165-12(1) to (4) state that during the ownership test period , being the period from the start of the loss year to the end of the income year, there must be persons who had at all times during the ownership test period : | • more than 50% of the voting power in the company | • rights to more than 50% of the company's dividends and | • who had rights to more than 50% of the company's capital distributions. | Division 166 modifies the way the rules in Division 165 apply to a widely held company by making it easier for the company to apply the rules. More specifically, Division 166 contains concessional tracing rules making it unnecessary for the company to prove that it has maintained the same owners throughout a period, provided the company had the same owners at certain test times. In addition, the company is not required to trace through to the ultimate beneficial owners of voting, dividend and capital stakes in the company held by certain entities and small voting, dividend and capital stakes in the company. | Subdivision 166-A applies specifically to deducting tax losses for earlier income years. The test period for the purpose of Subdivision 166-A consists of the loss year, the income year and any intervening period (subsection 166-5(2)). | Subsection 166-5(3) states that the company is taken to have met the conditions in section 165-12 (which is about the company maintaining the same owners), if there is substantial continuity of ownership of the company 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) states that the company is taken to have failed to meet the conditions in section 165-12 if there is no substantial continuity of ownership of the company as between the start of the test period and: | (a) the end of an income year in that period; or | (b) the end of a corporate change in that period. | Paragraph 166-175(1)(d) states that there is a corporate change in a company if 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 | If paragraph 166-175(1)(d) applies, paragraph 166-172(2)(c) states that a corporate change ends when the offer period for the issue of shares ends. | Section 166-15 states that a company can choose to apply Subdivision 165-A for the income year without the modifications allowed by Subdivision 166-A. The choice must be made on or before the day the company lodges its income tax return for the income year or before a later day if the Commissioner allows. | Subdivision 166-D has the tests to work out whether a widely held company has maintained the same owners as between different times. Subdivision 166-E has concessional tracing rules which make it easier for a company to satisfy these tests. The ruling will now consider each of these Subdivisions. | Subdivision 166-D - Tests for finding out whether the widely held or eligible Division 166 company has maintained the same owners | Section 166-145 The ownership tests: Substantial Continuity of Ownership | 166-145 (1) There is substantial continuity of ownership of the company as between the start of the test period and another time in the test period if (and only if) the conditions in this section are met. | Voting power | 166-145 (2) There must be persons (none of them companies or trustees) who had more than 50% of the voting power in the company at the start of the test period. Also, those persons must have had more than 50% of the voting power in the company immediately after the other time in the test period. | Rights to Dividends | 166-145 (3) There must be persons (none of them companies) who had rights to more than 50% of the company's dividends at the start of the test period. Also, those persons must have had rights to more than 50% of the company's dividends immediately after the other time in the test period. | Rights to capital distributions | 166-145 (4) There must be 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. Also, those person's must have had rights to more than 50% of the company's capital distributions immediately after the other time in the test period. | Subsection 166-145 (5) states that to work out whether a condition in this section was satisfied at a time (the ownership test time ), the alternative test for that condition will need to be applied. The alternative tests are in subsections 165-150(2), 165-155(2) and 165-160(2). | The alternative tests | Subsection 165-150(2) Applying the alternative test: if it is the case, or it is reasonable to assume, that there are persons (none of them companies or trustees) who (between them) at a particular time control, or are able to control (whether directly, or indirectly through one or more interposed entities) the voting power in the company, those persons have more than 50% of the voting power in the company at that time. | Subsection 165-155(2) Applying the alternative test: if it is the case, or it is reasonable to assume, that there are persons (none of them companies) who (between them) at a particular time have the right to receive for their own benefit (whether directly or indirectly) more than 50% of any dividends that the company may pay, those persons have rights to more than 50% of the company's dividends at that time. | Subsection 165-160(2) Applying the alternative test: if it is the case, or it is reasonable to assume, that there are persons (none of them companies) who (between them) at a particular time have the right to receive for their own benefit (whether directly or indirectly) more than 50% of any distribution of capital of the company, those persons have rights to more than 50% of the company's capital distributions at that time. | Subdivision 166-E - Concessional Tracing Rules Subdivision 166-E lists special concessional rules that deem entities to hold the following stakes in a widely held company so that the company does not have to trace through to the beneficial owners of the stakes: | (a) Section 166-225 - direct stakes of less than 10% in the company; | (b) Section 166-230 - indirect stakes of less than 10% in the company; | (c) Section 160-240 - stakes of between 10% and 50% that are held by widely held companies; | (d) Section 166-245 - stakes that are held by complying superannuation funds, complying approved deposit funds, special companies and managed investment schemes; | (e) Section 166-255 - stakes in interposed foreign listed companies that are held as bearer shares; | (f) Section 166-260 - stakes in interposed foreign listed companies that are held by depository entities. | Section 166-225: Direct stakes of less than 10% in the tested company | Refer to Question 2 | Section 166-230: Indirect stakes of less than 10% in the tested company | Refer to Question 2 | Section 166-245: Stakes held by other entities | 166-245(1) modifies how the ownership tests in section 166-145 are applied to the tested company if certain entities directly or indirectly (through one or more interposed entities) holds a voting stake, a dividend stake or a capital stake in the company; and neither the entity nor another entity has, under section 166-225, 166-230 or 166-240, been taken to control voting power or have rights in respect of the stake. The relevant entities to which this section applies are superannuation funds, approved deposit funds, managed investment schemes, FHSA trusts, special companies and any other entity or entity of a kind prescribed by the regulations. Paragraph 166-245(1)(c) states that the entity must also satisfy the conditions in subsection 166-245(3). | Section 166-245(4) provides that if the entity has 10 members or fewer, the tests are applied to the tested company as if, at the ownership test time: | (a) if the stake is a voting stake - each member controls, or is able to control, an equal proportion of 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 - each member had the right to receive (whether directly or indirectly), for its own benefit, an equal proportion of any dividends the tested company may pay in respect of that stake at that time; and | (c) if the stake is a capital stake - each member had the right to receive (whether directly or indirectly), for its own benefit, an equal proportion of any distributions of capital of the tested company in respect of that stake at that time; and | (d) in any case - each member were a person (other than a company or a trustee). | Section 166-245(5) states that the ownership tests are applied as set out in subsection (6) if: | (a) the entity has more than 10 members; or | (b) under subsection (4): | (i) the proportion of the voting power in the company that each member controls, or is able to control, is less than 10% of the total voting power; or | (ii) the proportion of the dividends that the tested company may pay for the benefit of each member is less than 10% of the total dividends; or | (iii) the proportion of the distributions of capital that the tested company may pay for the benefit of each member is less than 10% of the total distributions. | Pursuant to section 166-245(6), the ownership tests 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). | Section 166-270 Single notional entity stakeholders taken to have minimum voting control, dividend rights and capital rights | Minimum control of voting power | 166-270(1) 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 had 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. | Minimum percentage of rights to dividends and capital | 166-270(2) 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 a percentage of rights to the dividends or distributions of capital of a company; and | (c) the percentage that the entity has rights to at the ownership test time is greater than the percentage (the lower percentage ) of the dividends or distributions of capital of the company that the entity had rights to at the start of the test period; | then the entity is taken to have rights to the lower percentage of the dividends or distributions of capital at the ownership test time. | Application of the concessional rules under Division 166 | As the taxpayer is a widely held company it can choose to apply Division 166 to the stakes held by its shareholders. If the taxpayer applies the relevant concessional tracing rules under Division 166, it is not required to trace through to the ultimate beneficial owners of small voting, dividend and capital stakes in the company or of stakes held by certain entities. | The test period for the purpose of Subdivision 166-A consists of the loss year, the income year and any intervening period. | It is accepted that a corporate change ended on a date in February 20XX pursuant to paragraphs 166-175(1)(d) and 166-175(2)(c). | Based on the information supplied, the taxpayer can apply the following concessional tracing rules to determine if it passes COT to utilise the losses incurred in the years ended 30 June 200X to 30 June 20XX, in the year ended 30 June 20XX: | Section 166-225 - direct stakes of less than 10%, and | Section 166-230 - indirect stakes of less than 10%; or | Section 166-245 - stakes that are held by complying superannuation funds, complying approved deposit funds, special companies and managed investment schemes | The application of each of the above concessional tracing rules is discussed below. | Section 166-225: Direct stakes of less than 10% in the tested company | The taxpayer is the tested company. In applying section 166-225 to certain stakes in the taxpayer, voting stakes, dividend stakes and capital stakes held directly in the taxpayer of less than 10% can be attributed to a notional shareholder. That is an entity who is the registered holder of shares in the taxpayer and carries rights to vote, receive dividends or capital distributions will have a voting stake, dividend stake or a capital stake respectively, as defined in subsections 166-235(1), (3) and (5). | Pursuant to subsection 166-225(2), the single notional entity is taken to be a person (other than a company), and is therefore regarded as if the notional shareholder had the relevant voting, dividend or capital stake. The persons who actually hold the power or rights are not taken to hold those rights for the purpose of the alternative test. The taxpayer has applied the concessional tracing rule under section 166-225 to stakes of less than 10% held directly by its shareholders. As such it can and has collectively attributed the less than 10% direct stakes in the taxpayer to the Notional Shareholder . | The minimum interests rule under section 166-270 restricts the total proportion of voting power in the taxpayer and the rights to the dividends or capital distributions. This means that the total proportion of voting power, dividend rights and capital rights attributed to the Notional Shareholder at an ownership test time that is after the start of the test period is restricted to the relevant proportion attributed at the beginning of the test period. | Section 166-230: Indirect stakes of less than 10% in the taxpayer | Subsection 166-230(1) applies if an entity (the stakeholder) indirectly holds: | • a voting stake that carries less than 10% of the voting power, or a dividend stake that carries less than 10% of the rights to receive any dividends or, a capital stake that carries less than 10% of the rights to receive any capital distributions in the tested company; and | • the stake in the tested company by holding another interest directly in an entity (the top interposed entity ) that is either a company, or not a company, that is interposed between the stakeholder and the tested company. | If subsection 166-230(1) is satisfied, subsection 166-230(2) provides that the respective stake will be applied to the tested company as if the top interposed entity held the respective stake as a person, other than a company. | The taxpayer is the tested company. In applying section 166-230, the top interposed entity is the entity that is taken to hold the voting, dividend or capital stakes as a person, not being a company, in the taxpayer. The following entities are considered to be top interposed entities for the purpose of applying section 166-230: | • Company A as trustee for Trust A | • Company B as trustee for Trust B | • Company C as trustee for Trust C (for a part of the test period) | • Company D as trustee for Trust C (for a part of the test period) | • Company E acting as custodian for Company S as trustee for a Superannuation Fund. | If the taxpayer chooses to apply the concessional tracing rule under section 166-230, then the tests are applied to the taxpayer as if at the ownership test time, the top interposed entities control or are able to control the voting power in the taxpayer and have the rights to receive for their own benefit any dividends or capital distributions in respect of the indirect stakes of less than 10% held in the taxpayer by each of their members/unitholders. Furthermore, the ownership test is applied to these stakes as if the interposed entity were a person that was not a company. Therefore no further tracing is required for the relevant stake. | Section 166-245: Stakes held by other entities | Section 166-245 treats some types of entities as persons, not being a company, if those entities meet certain conditions. The relevant entities to which this section applies are superannuation funds, approved deposit funds, managed investment schemes, FHSA trusts, special companies and any other entity or entity of a kind prescribed by the regulations. | The consequence above applies if a superannuation fund (that satisfies the conditions in subsection 165-245 (3)) or a managed investment scheme directly or indirectly holds a voting, dividend or a capital stake in the tested company, and neither the entity nor another entity has, under sections 166-225, 166-230 or 166-240, been taken to control voting power or have rights in respect of the stake. | Provided all the preconditions required by section 166-245 are met, the concessional rule afforded by this section can apply to the stakes held by: | • Company A as trustee for Trust A | • Company B as trustee for Trust B | • Company C as trustee for Trust C | • Company D as trustee for Trust C | • Company E acting as custodian for Company S as trustee for a Superannuation Fund. | This is also because the above entities are either: | • trustees for Managed Investment Schemes registered under the Corporations Act 2001 or, • trustees for superannuation funds, which have more than 10 members with an underlying interest in the taxpayer of less than 10%. | Pursuant to subsections 166-245(5) and (6), the stakes held by the entities listed above will be deemed to be a stake held by a person, other than a company or trustee, at the relevant test times up to 30 June 2011. This is because there was corporate change in February 20XX. | An issue of shares to new investors of more than 10% of the existing share capital, resulted in the end of a corporate change in February 20XX as defined by paragraphs 166-175(1)(d) and 166-172(2)(c). As a result of this share issue, X and related entities acquired X% of the issued capital in the taxpayer. | In applying one or more of the concessional rules in sections 166-225, 166-230 and 166-245, more than 50% of the shares in the taxpayer have been held collectively by the following entities at the end of each income year in the period from December 200X until before the date of the corporate change in February 20XX: | • Company A as trustee for Trust A | • Company B as trustee for Trust B , and | • The Notional Shareholder | Following the end of the corporate change, the stakes taken to be held at the relevant test times by Company A as trustee for Trust A and Company B as trustee for Trust B formed a part of the Notional Shareholder under section 166-225, as these stakes became direct stakes of less than 10%. However the minimum interests rule in section 166-270 resulted in the Notional Shareholder pursuant to section 166-225 being taken to have held less than 50% of the stakes in the taxpayer at the end of the corporate change. | As a result of the change in ownership of more than 50% during 20XX, the taxpayer does not pass the COT under section 165-12 for the purposes of recouping tax losses incurred in the years ended 30 June 200X to 30 June 20XX, in the year ended 30 June 20XX. | Question 5 | Summary | The taxpayer passes the COT under section 165-12 for the purposes of recouping tax losses incurred in the years ended 30 June 20XX to 30 June 20XX, in the year ended 30 June 20XX. | Detailed Reasoning | Relevant Law: | Refer to Questions 2 and 4. | Application of the concessional rules under Division 166 | As the taxpayer is a widely held company it can choose to apply Division 166 to the stakes held by its shareholders. If the taxpayer applies the relevant concessional tracing rules under Division 166, it is not required to trace through to the ultimate beneficial owners of small voting, dividend and capital stakes in the company or of stakes held by certain entities. | The test period for the purpose of Subdivision 166-A consists of the loss year, the income year and any intervening period. | Based on the information supplied, the taxpayer can apply the concessional tracing rule under section 166-225 to determine if it passes COT in order to utilise the losses incurred in the years ended 30 June 20XX to 30 June 20XX, in the year ended 30 June 20XX. The taxpayer is unable to choose to apply sections 166-230 and 166-245 as it does not have stakes that satisfy the requirements in these sections at the test times under this question. | Section 166-225: Direct stakes of less than 10% in the tested company | The taxpayer is the tested company. In applying section 166-225 to certain stakes in the taxpayer, voting stakes, dividend stakes and capital stakes held directly in the taxpayer of less than 10% can be attributed to a notional shareholder. That is an entity who is the registered holder of shares in the taxpayer and carries rights to vote, receive dividends or capital distributions will have a voting stake, dividend stake or a capital stake respectively, as defined in subsections 166-235(1), (3) and (5). | Pursuant to subsection 166-225(2), the single notional entity is taken to be a person (other than a company), and is therefore regarded as if the notional shareholder had the relevant voting, dividend or capital stake. The persons who actually hold the power or rights are not taken to hold those rights for the purpose of the alternative test. The taxpayer has applied the concessional tracing rule under section 166-225 to stakes of less than 10% held directly by its shareholders. As such it can and has collectively attributed the less than 10% direct stakes in the taxpayer to the Notional Shareholder . | The minimum interests rule under section 166-270 restricts the total proportion of voting power in the taxpayer and the rights to the dividends or capital distributions. This means that the total proportion of voting power, dividend rights and capital rights attributed to the Notional Shareholder at an ownership test time that is after the start of the test period is restricted to the relevant proportion attributed at the beginning of the test period. | The stakes held by X and related entities are taken to be zero for purpose of COT. This is because the Commissioner does not have sufficient information to determine if the stakes fall under this provision. | Due to lack of information the Commissioner is unable to apportion the percentage shareholding between X and their related entities. | The remaining X% was attributed to the Notional Shareholder being stakes of less than 10% held directly in the taxpayer. | As at the test times of 30 June 20XX, 30 June 20XX and 30 June 20XX, the voting, dividend and capital stakes attributed to the Notional Shareholder pursuant to section 166-225 was between 88.52% and 100%. | In applying the concessional rules in section 166-225, more than 50% of the shares in the taxpayer have been held by the Notional Shareholder during the relevant test times of the ownership test period between 1 July 20XX and 30 June 20XX for the 20XX and 20XX income year's tax losses. | As such, the taxpayer passes the COT under section 165-12 for the purposes of recouping tax losses incurred in the years ended 30 June 20XX to 30 June 20XX, in the year ended 30 June 20XX.