Private ruling: substantial continuity of ownership test
Published: August 2017
Ruling period: Income year ended 30 June 2016.
Date scheme commenced: 1 July 2012

Ruling: Q1: Does Company A satisfy the substantial continuity of ownership requirements in subsection 166-5(3) of the Income Tax Assessment Act 1997 (ITAA 1997) during the period 1 July 2012 to 30 June 2016? | A1: Yes.

Relevant facts and circumstances: Company A is an Australian public company listed on the Australian Stock Exchange (ASX) since January 2012. Company A only has ordinary shares on issue which all carry the same voting, dividend and capital rights. Company A has incurred losses for the 2013 to 2015 income years. Company A identified a number of test times during that period. During the period from 1 July 2012 to 18 December 2015 there was no shareholder that held more than 10 per cent of shares on issue. Following 19 December 2015 there was one holding that exceeded 10 per cent of the shares on issue.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 165 | Income Tax Assessment Act 1997 Division 166 | Income Tax Assessment Act 1997 section 165-12 | Income Tax Assessment Act 1997 subsection 166-3(2) | Income Tax Assessment Act 1997 subsection 166-5(3) | Income Tax Assessment Act 1997 section 165-145 | Income Tax Assessment Act 1997 section 166-225 | Income Tax Assessment Act 1997 section 166-230 | Income Tax Assessment Act 1997 section 166-235 | Income Tax Assessment Act 1997 section 166-270 | Income Tax Assessment Act 1997subsection 166-270(1) | Income Tax Assessment Act 1997 section 166-272 | Income Tax Assessment Act 1997 subsection 166-272(1) | Income Tax Assessment Act 1997 section 166-275 | Income Tax Assessment Act 1997 subsection 995-1

Reasons for decision: Summary: The continuity of ownership tests are found in Divisions 165 and 166. Division 165 Division 165 details the consequences of a change in ownership and its impact on the deductibility of tax losses of earlier income years. Section 165-12 provides the continuity of ownership test (COT) a company must satisfy in order to be able 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 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. 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 will apply for a condition unless subsection 165-12(6) requires that the alternative test applies. Subsection 165-12(6) stipulates that the alternative test applies if one or more other companies beneficially owned shares or interests in shares in the test company during the ownership test period. Division 166 Division 166 modifies the operation of Division 165 to make it easier for a widely held company, or an eligible Division 166 company to apply the rules of Division 165. Subsection 166-3(2) states: This Division makes it easier to apply the rules in Division 165 by: (a) 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 (b) making it unnecessary for the company to trace through to the ultimate beneficial owners of: (i) 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 (ii) small voting stakes, dividend stakes and capital stakes in the company. To be eligible to apply Division 166, a company must be a widely held company or an eligible Division 166 company. Definition of a 'widely held company' According to section 995-1, a 'widely held company' 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 Approved 'stock exchanges' are listed in Schedule 5 of the Income Tax Assessment Regulations 1997 and includes the 'Australian Stock Exchange ASX. Company A was a widely held company at all times during the income year ending 30 June 2016 because it has been listed on the official list of the ASX since January 2012. As such it meets the condition in paragraph 166-5(1)(a) such that Subdivision 166-A modifies the way the Subdivision 165-A applies to Company A. 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) 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, a company is taken to have failed to meet the conditions in section 165-12 if there is no substantial continuity of ownership at specific times in the test period. The meaning of the 'test period' as set out in subsection 166-5(2), is 'the period consisting of the loss year, the income year and any intervening period.' The meaning of 'corporate change' is set out in section 166-175 and includes 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; or As per paragraph 166-175(2)(c), a corporate change of this kind ends when the offer period for the issue of shares ends. Referring to the facts presented by Company A there has been a number of events involving corporate change in the testing period. Hence the test times for Company A as per subsection 166-5(3) are: Start of the test period: ● 1 July 2012 ● 1 July 2013 ● 1 July 2014 End of each income year in that period: ● 30 June 2013 ● 30 June 2014 ● 30 June 2015 ● 30 June 2016 Corporate change: ● There were a number of corporate changes during the period 1 July 2012 until 30 June 2016. Substantial continuity of ownership test Section 166-145 states that for a widely held company to have substantial continuity of ownership of a company 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 another time in the test period ● persons (none of them companies) who had rights to more than 50% of the dividends at the start of the test period and more than 50% of the dividends immediately after another time in the test period, and ● persons (none of them companies) who had rights to more than 50% of any capital distributions at the start of the test period and more than 50% of any capital distributions immediately after another time in the test period. 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. Concessional tracing rules Subdivision 166-E provides a number of concessional tracing rules to assist in determining whether the ownership tests are satisfied. Section 166-225 enables a tested company to aggregate all holdings in it which are less than 10% so as to form a single notional entity. Section 166-225(1) states: 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. Notional shareholder Section 166-225(2) states: 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. An entity will have 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 any or all of the dividends paid and a right to any or all capital distributions. An entity will have an indirect stake in a company where one or more entities are interposed between it and the company and the entity can control or is able to control voting power the company indirectly through the interposed entities and has a right to receive for its own benefit through the interposed entity or entities dividends paid by the company and distributions of capital made by the company. For the purpose of determining substantial continuity of ownership, Company A shares on issue at all times in the test period carried the same voting, dividend and capital rights. The substantial continuity of ownership analysis performed by Company A shows the stake attributed to a single notional entity under section 166-225 was at all times above 85.12%. Accordingly, as the single notional entity held more than 50% of the voting power, rights to divides and rights to capital distribution for the ownership test period, Company A is considered to have met the COT for the period from 1 July 2012 to 30 June 2016. Same share same interest rule Section 166-272 contains the “Same Share Test” integrity provision. Subsection 166-272(1) states: This 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 stakeholder ): (a) a top interposed entity mentioned in section 166-230 (which is about indirect stakes of less than 10%); (b) a widely help 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 Explanatory Memorandum to the Tax Laws Amendment (Loss Recoupment Rules and Other Measures) Bill 2005 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 the singe notional entity contained in section 166-225 and, as such, will not impact on the outcome of the Modified COT for Company A as 85.12% of shares in Company A were held by a single notional entity at all times during the test period. Minimum interest rule The minimum interest rule under section 166-270 restricts the total proportion of voting power, dividend rights or capital rights attributed to the 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 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. For Company A, the minimum interest rule caps the quantum of voting stakes of the relevant single entity at the quantum of the voting stake held by the single notional entity at the start of the relevant test period. As a result of the testing undertaken by Company A, the minimum interest of the single notional entity has never fallen below 85.12%. Thus the minimum interest rule will not have any implication on the outcome of Modified COT for Company A. Anti-detriment rule Section 166-275 provides that where a company fails the COT as a result of applying a tracing rule to a voting, divided 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 Company A's case, none of the tracing concessions work to the detriment of Company A and as such there is no detriment caused to Company A as a result of the application of the tracing rules.