Private ruling: Deduction of losses
Published: July 2012
Ruling period: 1 July 2011 to 30 June 2015
Date scheme commenced: 1 July 2008

Ruling: Q1: Is the company a "widely held company" (as defined under section 995-1 of the ITAA 1997) at all times from its listing date and at all times henceforth? | A1: Yes, the company has satisfied the definition of widely held company at all times since the listing date and will continue to be a widely held company provided it continues to satisfy the definition of that term. | Q2: For the purposes of determining a year of income commencing after the listing date whether, under Division 166 of the ITAA 1997, there has been substantial continuity of ownership as between the start of the test period and another time in the test period, will registered holders of shares which carry a less than 10% direct voting, dividend and capital stake in the company be taken together to constitute a single notional shareholder under section 166-225(2) of the ITAA 1997? | A2: Yes. | Q3: Has a "corporate change" ended (for the purposes of section 166-175 of the ITAA 1997) at any time prior to the date of completion of the off-market share buy-back? | A3: No, however a corporate change ended on that date. | Q4: Did (and will) the company maintain a "substantial continuity of ownership" (within the meaning of 166-145 of the ITAA 1997 from the start of all "test periods" (for the purposes of Division 166) commencing on or after the date of the IPO? | A4: Yes, the company has maintained a substantial continuity of ownership from the start of all test periods up until the date of completion of the off-market share buy-back. | Q5: Assuming it had enough assessable income in a particular year of income, would the company be able to recoup its Test Losses (which are tax losses) under section 36-17 of the ITAA 1997 by virtue of being taken to have satisfied the COT in section 165-12 of the ITAA 1997 (as modified by Division 166 of the ITAA 1997)? | A5: Yes provided the company continues to maintain a substantial continuity of ownership up until the end of any test period in order to deduct tax losses. | Q6: Assuming it has enough capital gains in a year of income, would the company be able to reduce the capital gains derived by it in that year by the Test Losses (which are capital Losses) at step 2 of the method statement contained in subsection 102-5(1) of the ITAA 1997 by virtue of being taken to have satisfied the COT in section 165-12 of the ITAA 1997 (taking into account subdivision 165-CA and as modified by Division 166 of the ITAA 1997? | A6: Yes provided the company continues to maintain a substantial continuity of ownership up until the end of any test period in order to apply capital losses. | Q7: Will the Commissioner seek to apply section 165-15, 165-180, 165-185 or 165-190 of the ITAA 1997? | A7: No.

Relevant facts and circumstances: The company is listed on the Australian Securities Exchange (ASX) and is incorporated and tax resident in Australia. The Company made an initial public offering (IPO) in a previous year and officially listed on the ASX in the same year. From the date of the IPO, all of the shares in the company have been listed on the ASX. The global financial crisis led to the company's financial performance declining, with the result that the company entered a period of sustained and significant loss making. The Test Losses relate predominantly to losses incurred in respect of traditional securities, foreign exchange realisation and disposal of investment assets (none of which are equity or loan interests in entities in which the company has ever held an associate inclusive direct or indirect interest in such entity of 10% or greater). Ownership of the company The company has undertaken an analysis of the immediate registered direct shareholdings held in it to ascertain the aggregated direct voting, dividend and capital stakes held in the company at each of the relevant financial years by those registered holders of shares which carry voting, dividend and capital stakes of less than 10% in the company. Subsequent to the IPO some key changes in the share capital of the company have occurred: · shares issued pursuant to a Dividend Reinvestment Plan (DRP) on two occasions; · on-market share buy-back within the 10/12 rule; · issue of new shares via a share placement; and · an off-market share buy-back of 66% of the shares on issue. Taking into account the effect of the share buy-back, the entity in whose favour the share placement was made (A company controlled by a private individual and their associates) holds as at the date of the ruling application a particular stake in the company. The company considers that, as of the date of completing the off-market buy-back, there had been an actual change in greater than 50% of underlying beneficial ownership in the company (disregarding the application of section 166-225 of the ITAA 1997) since the IPO. The company is not aware of any person or persons who began, or became able to control the voting power (directly or indirectly) in it at any time after the IPO where those persons did not control and were not able to control (directly or indirectly) the voting power at that date and in circumstances where that person or persons so began, or became able to control the voting power in the company for the purpose of: (a) getting some benefit or advantage in relation to how the tax law applies; or (b) getting such a benefit or advantage for someone else; or for purposes including that purpose; The company is not aware that at any time, any arrangements have been entered into that in any way (directly or indirectly) related to, affected or depended for their operation on: (a) a beneficial interest in the company's shares, or the value of that beneficial interest; or (b) a right carried by or relating to the company's shares; or (c) the exercise of a right referred to in paragraph (b) above, where that arrangement was entered into for the purpose, or for purposes including the purpose, of eliminating or reducing a liability of an entity to pay income tax for a financial year. The company is not aware of anything to suggest that at any time after the IPO, in respect of voting, dividend and capital stakes in it taken into account in calculating the interest in the company of the notional shareholder under section 166-225 of the lTAA 1997: (a) an entity (the controlling entity) directly or indirectly (through one or more interposed entities) held the power over some or all of the rights to voting, dividends or capital in the company in circumstances where it was "sufficiently influenced" by the controlling entity; (b) any natural person (together with his/her associates) owned shares (whether directly or indirectly through one or more interposed entities) in the company giving control of more than 25% of the voting power of the company; or (c) any trustee or company (together with its associates) owned shares (whether directly or indirectly through one or more interposed entities) in the company giving control of more than 50% of the voting power of the company. No election to disapply Division 166 has been made The company has not made any election or choice (nor will it) to disapply any relevant subdivision of Division 166 and to choose to apply the "normal" COT rules in Division 165. The year ended 30 June 2012 is unlikely to be a loss-recoupment year. The company is hopeful that the year ended 30 June 2013 will be a loss-recoupment year. Assumptions Forward looking assumptions In the Application for Private Ruling, the Commissioner has been asked to assume that at all times henceforth: (a) all of the company's shares (except shares that carry a right to a fixed rate of dividend) will remain listed for quotation in the official list of the ASX; and (b) registered holders of shares which carry a less than 10% direct voting, dividend and capital stake in the company will, together, be the registered holders of shares which carry a greater than 50% direct voting, dividend and capital stake in the company.

Relevant legislative provisions: Income Tax Assessment Act section 36-17 | Income Tax Assessment Act subsection 102-5(1) | Income Tax Assessment Act section 165-10 | Income Tax Assessment Act section 165-12 | Income Tax Assessment Act section 165-15 | Income Tax Assessment Act section 165-180 | Income Tax Assessment Act section 165-185 | Income Tax Assessment Act section 165-190 | Income Tax Assessment Act section 166-5(2) | Income Tax Assessment Act subsection 166-5(3) | Income Tax Assessment Act subsection 166-5(4) | Income Tax Assessment Act section 166-145 | Income Tax Assessment Act section 166-175 | Income Tax Assessment Act subsection 166-225(2) | Income Tax Assessment Act subsection 995-1(1)

Reasons for decision: Summary: The company is and has been a widely held company and will continue to do so provided it satisfies the definition of that term in the future. | Detailed Reasoning - Detailed reasoning: The term 'widely held company' is defined in subsection 995-1(1) of the ITAA 1997 as being: widely held company means (a) 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; or (b) a company with more than 50 members, other than a company where at least one of the following conditions is met during an income year: (i) no more than 20 persons held, or had the right to acquire or become the holders of, shares representing at least 75% of the value of the shares in the company (other than shares that only carry a right to a fixed rate of dividend); (ii) at least 75% of the voting power in the company was capable of being exercised by no more than 20 persons; (iii) at least 75% of the amount of any dividend paid by the company during the year was paid to no more than 20 persons; (iv) if no dividend was paid by the company during the year - the Commissioner is of the opinion that, if a dividend had been paid by the company during the year, at least 75% of the amount of the dividend would have been paid to no more than 20 persons. The shares in the company have been listed on the official list of the ASX. Therefore the company meets the test for a widely held company under paragraph (a) of the definition above. Whether the company will remain a widely held company pursuant to this definition will depend on whether the definition in the law remains in its present state and whether company will continue to satisfy this definition. As it is not possible to foretell what may occur in the future the Commissioner can only state that the company will continue to be regarded as a widely-held company for the duration of the ruling period provided the company continues to satisfy the terms of the definition. | Summary: Shareholders who hold less than a 10% direct stake in the company can be aggregated under subsection 166-225(2) of the ITAA 1997 to represent one notional shareholder. | Detailed Reasoning - Detailed reasoning: Under section 165-10 of the ITAA 1997, a company is unable to deduct tax losses unless it meets the tests of section 165-12 of the ITAA 1997 regarding the maintenance of the same owners (the continuity of ownership test). If a company is unable to satisfy this test, then it may still qualify for deduction of tax losses subject to satisfying the same-business test, set out in section 165-13 of the ITAA 1997. For the continuity of ownership test to be satisfied the company must have had persons who held more than 50% of the voting power in the company as well as more than 50% of the rights to dividends of the company as well as more than 50% of the rights to the capital distributions from the company at all times during the ownership test period. The ownership test period is defined in subsection 165-12(1) of the ITAA 1997 to be 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. Division 166 of the ITAA 1997 modifies the operation of Division 165 of the ITAA 1997 to make it easier for a widely-held company to apply the rules of Division 165 of the ITAA 1997. Under subsection 166-5(2) of the ITAA 1997 the test period for a widely-held company is defined to be the loss year, the income year and any intervening period. However for a widely-held company the law provides a concession in that it is only necessary for there to be a substantial continuity of ownership under subsectin 166-5(3) of the ITAA 1997. Under this provision the company will be taken to have met the test of 165-12 of the ITAA 1997 if there has been substantial continuity of ownership as between the start of the test period and the end of each income year in that test period and the end of each corporate change in that period, rather than continuously throughout the test period. Furthermore, subsection 166-5(4) of the ITAA 1997 provides that if there has not been a substantial continuity of ownership as referred to above then the company will have failed to meet the conditions in section 165-12 of the ITAA 1997 for the purpose of deducting tax losses. For there to have been a substantial continuity of ownership, the tests of section 166-145 of the ITAA 1997 have to be satisfied. This provision is set out below as far as is relevant. 166-145(I) 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. Note: Section 166-165, and Subdivision 166-E affect how this section is applied. | Detailed Reasoning - 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. Note: To work out who had more than 50% of the voting power, see section 165-150. | Detailed Reasoning - Rights to dividends: 166-145(3) There must be persons (none of them companies or trustees) 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. Note: To work out who had rights to more than 50% of the company's dividends, see section 165-155. | Detailed Reasoning - Rights to capital distributions: 166-145(4) There must be persons (none of them companies or trustees) who had rights to *more than 50% of the company's capital distributions at the start of the *test period. Also, those persons must have had rights to *more than 50% of the company's capital distributions immediately after the other time in the test period. Note: To work out who had rights to more than 50% of the company's capital distributions, see section 165-160. | Detailed Reasoning - When to apply the test: 166-145(5) To work out whether a condition in this section was satisfied at a time (the ownership test time ), apply the alternative test for that condition. Note: For the alternative test, see subsections 165-150(2), 165-155(2) and 165-160(2). While section 166-145 of the ITAA 1997 emphasises that persons other than companies or trustees must satisfy the 50 per cent threshold, a further concession is set out in section 166-225 of the ITAA 1997 in respect of direct shareholdings of less than 10 per cent in a tested company. This provision states: 166-225(1) This section modifies how the ownership tests in section 166-145 are applied to the tested company if: (a) a *voting stake that carries rights to less than 10% of the voting power in the company is held directly in the company; or (b) a *dividend stake that carries the right to receive less than 10% of any dividends tha the company may pay is held directly in the company; or (c) a *capital stake that carries the right to receive less than 10% of any distribution of capital of the company is held directly in the company. Note: Other rules might affect this provision: see sections166-270, 160-275 and 166-280. | Detailed Reasoning - Notional shareholder: 166-225(2) The tests 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 distribution of capital of the tested company in respect of each such *capital stake; and (c) were a person (other than a company). Note: The persons who actually control the voting power and have rights to dividends and capital are taken not to control that power or have those rights: see section 166-265. 166-225(3) To avoid doubt, the single notional entity mentioned in subsection (2) is a different single notional entity from the one mentioned in section 165-207 and the one mentioned in section s166-255. This provision enables a tested company to aggregate all holdings in it which are less than 10% so as to form a single notional shareholder which may or may not hold more than the necessary 50 per cent for the purposes of substantial continuity of ownership. The analysis performed by the company has indicated that there have been direct holdings of less than 10 per cent in the company as at the end of all relevant years of income and as at the date of completion of the off-market share buy-back. Aggregation of these holdings has produced a result of there being a single notional shareholder holding a greater than 50% stake in the company on each of those dates. | Summary: A corporate change has not ended at any time prior to the completion of the off-market share buy-back but a corporate change ended on that date. | Detailed Reasoning - Detailed reasoning: The meaning of the term "corporate change" is set out in section 166-75 of the ITAA 1997. | Detailed Reasoning - Meaning of corporate change: 166-175(1) There is a corporate change in a company if: (a) there is a *takeover bid for *shares in the company; or (b) there is a scheme of arrangement, involving more than 50% of the company's shares, that has been approved by a court; or (c) there is any other arrangement, involving the acquisition of more than 50% of the company's shares, that is regulated under the Corporations Act 2001 or a *foreign law; or (d) there is an issue of *shares in the company that results in an increase of 20% or more in: (i) the issued capital of the company ; or (ii) the number of the company's shares on issue; or (e) there is a corporate change in another company which beneficially owns one or more of the following stakes in the first company: (i) a *voting stake that carries rights to more than 50% of the voting power of the first company; (ii) a *dividend stake that carries rights to receive more than 50% of any dividends the first company may pay; (iii) a *capital stake in the company that carries rights to receive more than 50% of any distribution of capital of the first company; (whether the other company owns those stakes directly, or *indirectly through one or more interposed entities). | Detailed Reasoning - When a corporate change ends: 166-175(2) A *corporate change ends: (a) if paragraph (1)(a) applies (or paragraph (1)(e) applies because of paragraph (1)(a)) - at the latest time when a *bid period of the *takeover bid ends; and (b) if paragraph (1)(b) or (c) applies (or paragraph (1)(e) applies because of paragraph (1)(b) or (c)) - when the scheme of arrangement or other arrangement ends; and (c) if paragraph (1)(d) applies (or paragraph (1)(e) applies because of paragraph (1)(d)) - when the offer period for the issue of *shares ends. Referring to the facts presented by the applicant there have been a number of events involving the shares in the company over the years since it was incorporated. None of these events can be regarded as a corporate change for the purposes of section 166-175 of the ITAA 1997 with the exception of the off-market share buy-back. Pursuant to paragraph 166-175(1)(c) of the ITAA 1997 this share buy-back would meet the tests of involving greater than 50% of the shares on issue and of being regulated by the Corporations Act. The Commissioner finds that a corporate change as defined did not occur at any time prior to completion of the off-market share buy-back, however completion of this share buy-back was a corporate change for the purposes of paragraph 166-175(2)(b) of the ITAA 1997. This date is another occasion on which the substantial continuity of ownership needs to be tested. As the single notional entity (as discussed above) held greater than 50% of the direct voting, dividend and capital stakes in the company as at this time there was substantial continuity of ownership as at this time. | Summary: The substantial continuity of ownership tests have been satisfied from the start of all test periods up until the date of completion of the off-market share buy-back. | Detailed Reasoning - Detailed reasoning: The company has made tax losses in a number of years of income. It follows that a test period for each of these losses has commenced at the start of those years of income. Per the discussion above under Questions 2 and 3 the company has maintained a substantial continuity of ownership from the start of all of these test periods up until the date of the completion of the off-market share buy-back. | Summary: It will still be necessary to ascertain whether the company continues to satisfy the tests set out in the legislation before deducting any tax losses in future years. | Detailed Reasoning - Detailed reasoning: The company has advised that it is unlikely that the year ended 30 June 2012 will be a loss-recoupment year. The company has advised that it hopes "that portfolio changes and improved market conditions will result in income and capital gains being derived in a future year to allow these losses to be recouped." The Commissioner has been asked to assume that that at all times henceforth: (a) all of the company's shares (except shares that carry a right to a fixed rate of dividend) will remain listed for quotation in the official list of the ASX; and (b) registered holders of shares which carry a less than 10% direct voting, dividend and capital stake in the company will, together, be the registered holders of shares which carry a greater than 50% direct voting, dividend and capital stake in the company. While the Commissioner acknowledges the assertions made above, the Commissioner can only conclude with certainty that the company has satisfied the continuity of ownership test up until the date of completion of the off-market share buy-back. In the circumstances it will be necessary for the company to actually ascertain as at 30 June for each income year that concludes after this date, or at the end of any corporate change (as defined) that may occur after this date, whether there is substantial continuity of ownership. This is a necessary condition to be met by the company for it to be able to recoup tax losses in future years. | Summary: It will still be necessary to ascertain whether the company continues to satisfy the tests set out in the legislation before applying any capital losses in future years. | Detailed Reasoning - Detailed reasoning: The company has advised that it is unlikely that the year ended 30 June 2012 will be a loss-recoupment year. The company has advised that it hopes "that portfolio changes and improved market conditions will result in income and capital gains being derived in a future year to allow these losses to be recouped." The Commissioner has been asked to assume that that at all times henceforth: (a) all of the company's shares (except shares that carry a right to a fixed rate of dividend) will remain listed for quotation in the official list of the ASX; and (b) registered holders of shares which carry a less than 10% direct voting, dividend and capital stake in the company will, together, be the registered holders of shares which carry a greater than 50% direct voting, dividend and capital stake in the company. While the Commissioner acknowledges the assertions made above, the Commissioner can only conclude with certainty that the company has satisfied the continuity of ownership test up until the date of completion of the off-market share buy-back. In the circumstances it will be necessary for the company to actually ascertain as at 30 June for each income year that concludes after this date, or at the end of any corporate change (as defined) that may occur after this date, whether there is substantial continuity of ownership. This is a necessary condition to be met by the company for it to be able to apply capital losses in future years. | Summary: The Commissioner considers that these anti-avoidance provisions are not applicable to the facts. | Detailed Reasoning - Detailed reasoning: Section 165-15 of the ITAA 1997 imposes a further restriction on the deductibility of past year losses in cases where there has been a change in the control of the voting power which is associated with a purpose of gaining a tax advantage. It applies even if the company has met the conditions in section 165-12 or 165-13 of the ITAA 1997. This further restriction is set out in subsection 165-15(1) of the ITAA 1997 which applies where: · for some or all of the ownership test period - starting at the end of the loss year and finishing at the end of the income year (and including any intervening period), a person controlled, or was able to control, the voting power in the company · for some or all of the loss year, that person did not control, and was not able to control, that voting power, and · that person began to control, or became able to control, that voting power for the purpose of getting some advantage or benefit in relation to how the Act applies, either for that person or for someone else. This also applies if this is only one of a number of purposes. In each case, the control or ability to control the voting power may be direct or indirect through one or more interposed entities. In the present case there is no person or entity that was able to control the voting power in the company. Therefore this provision is not applicable. Sections 165-180, 165-185 and 165-190 of the ITAA 1997 are integrity measures aimed at counteracting attempts to establish technical compliance with the necessary ownership requirements on the face of it but arrangements are in place to avoid the operations of the ownership tests. Section 165-180 of the ITAA 1997 deals with arrangements affecting the beneficial ownership of shares and sections 165-185 and 165-190 of the ITAA 1997 deal with situations where the rights attaching to shares have been varied. The facts indicate that an arrangement or arrangements to which these provisions may be applied have not been entered into by the company or shareholders.

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