Private ruling: Continuity of ownership test
Date of advice: 18 December 2017
Published: May 2018
Ruling period: Income tax year ended 30 June 200A | Income tax year ended 30 June 200B | Income tax year ended 30 June 200C | Income tax year ended 30 June 200D | Income tax year ended 30 June 201E | Income tax year ended 30 June 201F | Income tax year ended 30 June 201G | Income tax year ended 30 June 201H | Income tax year ended 30 June 201I | Income tax year ended 31 March 201W | Income tax year ended 31 March 201X | Income tax year ended 31 March 201Y | Income tax year ending 31 March 201Z

Ruling: Q1: Is Company X eligible to apply the modified continuity of ownership test (COT) provisions contained in Subdivision 166-A of the Income Tax Assessment Act 1997 (ITAA 1997) for each of the following income years ended: (a) 30 June 200A; (b) 30 June 200B; (c) 30 June 200C; (d) 30 June 200D; (e) 30 June 201E; (f) 30 June 201F; (g) 30 June 201G; (h) 30 June 201H; (i) 30 June 201I; (j) 31 March 201W; (k) 31 March 201X; (l) 31 March 201Y; and (m) 31 March 201Z? | A1: Yes | Q2: If the answer to question 1 is ‘yes’, is Company X able to claim a deduction under Subdivision 165-A of the ITAA 1997 in the income years ended 31 March 201X and (to the extent it has not been wholly claimed) 31 March 201Y and 201Z for the aggregate of the tax loss amounts incurred by Company X in respect of the income years ended 30 June 200A to 31 March 201W? | A2: Yes | Q3: If the answer to question 2 is ‘no’, which (if any) of the tax loss amounts can Company X claim as a deduction under Subdivision 165-A of the ITAA 1997 in the income years ended 31 March 201X and (to the extent they are not wholly claimed) 31 March 201Y and 201Z? | A3: This question is not applicable as the answer to question 2 is ‘yes’

Relevant facts and circumstances: Company X was incorporated during the income year ended 30 June 200J. The initial constitution of Company X attached different rights to ordinary shares and A class shares. At all times during the test period Company X had more than 50 members. During the income year ended 30 June 200A, Company X issued A class shares which represented an increase of more than 20% of the shares on issue and an increase of more than 20% in the issued share capital. At all times during the income years ended 30 June 200A and 200B the top 20 shareholders in Company X: ● did not hold at least 75% of the value of the shares in the company; ● were not capable of exercising 75% or more of the voting power in the company; and ● did not, and were not entitled to, receive 75% or more of the dividends paid by the company. During the income year ended 30 June 200B, Company X listed on a stock exchange. During the income year ended 30 June 201E, Company X issued A class shares which represented an increase of more than 20% of the shares on issue and an increase of more than 20% in the issued share capital. There have been no other times during the test period where there has been an increase of more than 20% of the shares on issue or an increase of more than 20% in the issued share capital. At no time during the test period did shareholders holding more than 10% of the issued shares in Company X alone or cumulatively hold more than 50% of the issued shares in Company X. Company X has incurred tax losses in the income years ended 30 June 200A to 31 March 201W. Assumptions 1. For the period when both A class and ordinary shares were on issue, the total market value of the ordinary shares issued in Company X did not exceed 25% of the total market value of all of the company’s shares. 2. For the period when both A class and ordinary shares were on issue, the class of ordinary or common shares that represent the majority of Company X’s value were the A class shares. Therefore the ordinary shares were the ‘secondary share class’ as defined in Division 167 of the ITAA 1997. 3. There are no debt interests in applying section 167-20 of the ITAA 1997. 4. For the purposes of paragraph 167-20(1)(d) of the ITAA 1997, the market value of the ordinary shares did not exceed 10% of the total market value of all of Company X’s shares. 5. Any nominee companies have only held a direct or indirect stake in Company X of less than 10%, and therefore it should not be necessary to rely on the nominee rules in subsection 166-235(7) of the ITAA 1997. 6. There are no formal or informal arrangements between the minority shareholders whereby any minority shareholder of Company X is able to control or sufficiently influence Company X to act in accordance with their directions, instructions or wishes. 7. At any test time since 1 July 2005, there has not been: (a) more than 25% of the total voting power in Company X controlled (whether directly or indirectly through one or more interposed entities) by a natural person, together with his or her associates; or (b) more than 50% of the total voting power in Company X controlled (whether directly or indirectly through one or more interposed entities) by a trustee or company, together with its associates. 8. The modified continuity of ownership test in Subdivision 166-A has been satisfied by Company X since 31 March 201Y and will continue to be satisfied until the end of the ruling period. 9. Company X has and will not make a choice pursuant to section 166-15 of the ITAA 1997 that Subdivision 165-A of the ITAA 1997 is to apply to it for any of the income years to which the ruling relates without the modifications made by Subdivision 166-A of the ITAA 1997. 10. There are no facts or circumstances not set out in this ruling which, if known to the Commissioner, would result in the application of any of the specific anti-avoidance provisions of sections 165-180, 165-185 and 165-190 of the ITAA 1997 and Subdivision 175-A of the ITAA to Company X.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 165 | Income Tax Assessment Act 1997 Subdivision 165-A | Income Tax Assessment Act 1997 section 165-10 | Income Tax Assessment Act 1997 section 165-12 | Income Tax Assessment Act 1997 section 165-13 | Income Tax Assessment Act 1997 subsection 165-150(2) | Income Tax Assessment Act 1997 subsection 165-155(2) | Income Tax Assessment Act 1997 subsection 165-160(2) | 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 Subdivision 166-A | Income Tax Assessment Act 1997 subsection 166-5(1) | Income Tax Assessment Act 1997 subsection 166-5(2) | Income Tax Assessment Act 1997 subsection 166-5(3) | Income Tax Assessment Act 1997 section 166-15 | Income Tax Assessment Act 1997 section 166-145 | Income Tax Assessment Act 1997 subsection 166-145(2) | Income Tax Assessment Act 1997 subsection 166-145(3) | Income Tax Assessment Act 1997 subsection 166-145(4) | Income Tax Assessment Act 1997 subsection 166-145(5) | Income Tax Assessment Act 1997 subsection 166-175(1) | Income Tax Assessment Act 1997 paragraph 166-175(1)(d) | Income Tax Assessment Act 1997 paragraph 166-175(2)(c) | Income Tax Assessment Act 1997 Subdivision 166-E | 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 subsection 166-235(7) | Income Tax Assessment Act 1997 section 166-240 | Income Tax Assessment Act 1997 section 166-245 | Income Tax Assessment Act 1997 subsection 166-245(2) | Income Tax Assessment Act 1997 section 166-265 | Income Tax Assessment Act 1997 section 166-270 | Income Tax Assessment Act 1997 section 166-272 | Income Tax Assessment Act 1997 Division 167 | Income Tax Assessment Act 1997 Subdivision 167-A | Income Tax Assessment Act 1997 subsection 167-10(3) | Income Tax Assessment Act 1997 section 167-15 | Income Tax Assessment Act 1997 section 167-20 | Income Tax Assessment Act 1997 paragraph 167-20(1)(d) | Income Tax Assessment Act 1997 section 167-25 | Income Tax Assessment Act 1997 Subdivision 175-A | Income Tax Assessment Act 1997 subsection 995-1(1) | Income Tax Assessment Regulations 1997 Schedule 5

Reasons for decision: Summary: Company X is considered to be a ‘widely held company’, as defined, and therefore eligible to access the modifications in Subdivision 166-A of the ITAA 1997 when applying the COT in section 165-12. | Detailed Reasoning - Detailed reasoning: Subdivision 165-A provides the general rules governing the deductibility of tax losses of earlier income years made by a company. Pursuant to section 165-10, a company cannot deduct a tax loss unless it satisfies either: (i) the COT in section 165-12; or (ii) the same business test in section 165-13. Broadly, a company will satisfy the COT under section 165-12 if, at all times during the ‘ownership test period’ (i.e. from the start of the loss year to the end of the income year in which it seeks to deduct some or all of a tax loss), the same persons with the same interests either directly or indirectly 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. Broadly, Division 166 modifies the way the COT under Subdivision 165-A (including section 165-12) applies to certain companies by providing special concessional tracing rules which deem entities to hold voting, dividend or capital stakes attached to shares in the company so that the company does not have to trace through to the ultimate beneficial owners of the stakes, and by providing for testing of continuity of ownership at specific points in time rather than continuously throughout the ownership test period. Pursuant to subsection 166-5(1), Subdivision 166-A applies to a company that is: (a) a *widely held company at all times during the income year; or (b) an *eligible Division 166 company at all times during the income year; or (c) a widely held company for a part of the income year and an eligible Division 166 company for the rest of the income year. Subsection 995-1(1) defines a ‘widely held company’ to mean: (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. A list of approved stock exchanges is contained in Schedule 5 of the Income Tax Assessment Regulations 1997 . The stock exchange on which Company X is listed is included in that list. For the period 1 July 200K to the date on which Company X listed, Company X qualified as a ‘widely held company’ on the basis that it had: ● more than 50 members; and ● the top 20 shareholders: ● held shares representing less than 75% of the value of the shares in the company; ● were not capable of exercising 75% or more of the voting power in the company; and ● did not receive, and were not entitled to receive, 75% or more of the dividends paid by the company. For the period beginning on the date Company X listed to 31 March 201Y, Company X qualified as a ‘widely held company’ as it was listed for quotation on an ‘approved stock exchange’. Pursuant to assumption 8 of this ruling, Company X will continue to be listed for quotation on an approved stock exchange for the year ending 31 March 201Z. As a widely held company Company X is eligible to apply the modifications in Subdivision 166-A when applying the COT in section 165-12 for the period beginning 1 July 200K until 31 March 201Z. | Summary: Company X is able to claim a deduction under Subdivision 165-A for its aggregated tax loss amount in the income year ended 31 March 201X and, to the extent it is not wholly claimed in that year, the income year ended 31 March 201Y and the income year ending 31 March 201Z. | Detailed Reasoning - Detailed reasoning: Subsection 166-5(3) provides that a company (i.e. a widely held company or an eligible Division 166 company) is taken to have met the conditions in section 165-12 if there is ‘substantial continuity of ownership’ of the company as between the start of the ‘test period’ and both the end of each income year in that period and the end of each ‘corporate change’ in that period. Pursuant to subsection 166-5(2), the company’s test period is the period consisting of the loss year, the income year and any intervening period. A ‘corporate change’ is defined in subsection 166-175(1). Paragraph 166-175(1)(d) relevantly includes an issue of shares in the company that results in an increase of 20% or more in the issued share capital of the company, or the number of the company’s shares on issue. Paragraph 166-175(2)(c) states that a corporate change ends when the offer period for the issue of shares ends. Therefore, to satisfy the requirements of section 165-12, as modified by subsection 166-5(3), in respect of each of the tax losses made during each of the income years ended 30 June 200A to 31 March 201W, Company X must demonstrate that there was substantial continuity of ownership of Company X as between the start of the test period and at each of the test times (being at the end of each of the 200A and 201Z income years and at the end of each of the corporate changes during the 200A and 201E income years). Under section 166-145, there is substantial continuity of ownership of a company as between the start of the test period and another time in the test period if, at the start of the test period and immediately after the other time in the test period: ● the same persons (none of them companies or trustees) had more than 50% of the voting power in the company (subsection 166-145(2)); ● the same persons (none of them companies) had rights to more than 50% of the company's dividends (subsection 166-145(3)); and ● the same persons (none of them companies) had rights to more than 50% of the company's capital distributions (subsection 166-145(4)). In determining whether each of the conditions in section 166-145 is satisfied, subsection 166-145(5) requires the company to apply the alternative test for that condition (contained in subsections 165-150(2), 165-155(2) and 165-160(2)). | Detailed Reasoning - Concessional tracing rules: While section 166-145 emphasises that persons other than companies or trustees must satisfy the 50% threshold, further concessions are set out in Subdivision 166-E. Subdivision 166-E provides a number of concessional tracing rules to assist in determining whether the ownership tests are satisfied. Some of the concessional tracing rules applicable to Company X are those that attribute: 1. direct stakes of less than 10% in the company (section 166-225); 2. indirect stakes of less than 10% in the company (section 166-230); 3. stakes of between 10% and 50% that are held by widely held companies (section 166-240); and 4. stakes that are held by complying superannuation funds, complying approved deposit funds, special companies and managed investment schemes (section 166-245). 5. 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. | Detailed Reasoning - 1. Direct stakes of less than 10%: Section 166-225 contains a concessional rule whereby a direct stake of less than 10% is attributed to a single notional entity. This removes the need for widely held and eligible Division 166 companies (the ‘tested company’) to trace ownership interests of less than 10%. For all registered shareholdings carrying less than 10% of the voting power, the voting power is taken to be controlled by a single notional entity. The same rule applies in relation to rights to dividends and distributions of capital. The single notional entity is taken to be a person (other than a company), and is therefore regarded as an ultimate owner for the purpose of the alternative test in Division 165. The persons who actually hold the power or rights attributed to the single notional entity are taken not to hold those rights for the purposes of the alternative test (see section 166-265). This prevents double counting of the voting power and rights to dividends and capital. | Detailed Reasoning - 2. Indirect stakes of less than 10%: Section 166-230 contains a concessional tracing rule whereby an indirect stake of less than 10% is attributed to the top interposed entity. The top interposed entity (not necessarily a company) is interposed between the indirect stakeholder and the tested company and is the entity in which the stakeholder with a less than 10% interest has a direct interest. The top interposed entity is taken to be a person (other than a company), and is therefore regarded as an ultimate owner for the purpose of the alternative test in Division 165. 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 for the purposes of the alternative test (see section 166-265). The tested company need not, as a consequence, trace the beneficial owners of indirect interests in the company that carry less than 10% of the voting power and rights to dividends and capital. | Detailed Reasoning - 3. Stakes of between 10% and 50% that are held by widely held companies: Section 166-240 contains a concessional tracing rule relating to stakes held by widely held companies. Where a company is a widely held company for the whole of the income year in which the ownership test time occurs, section 166-240 treats it as the ultimate owner of a direct or indirect stake in the tested company where the stake is between 10% and 50% (inclusive). The widely held company is taken to be a person (other than a company), and is therefore regarded as an ultimate owner for the purpose of the alternative test in Division 165. 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 for the purposes of the alternative test (see section 166-265). This prevents double counting of the voting power and rights to dividends and capital. | Detailed Reasoning - 4. Stakes held by other entities: Section 166-245 contains a concessional tracing rule whereby some types of entities (listed in subsection 166-245(2) and which have not been taken to control voting power or have rights in respect of a stake under section 166-225, 166-230 or 166-240) or members of those entities (where the entities have 10 members or fewer) are treated as the ultimate owners of a direct or indirect stake in the tested company if they meet particular conditions. The entity (or its members, as applicable) is taken to be a person (other than a company or a trustee), and is regarded as the ultimate owner for the purpose of the alternative test in Division 165. 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 for the purposes of the alternative test (see section 166-265).This prevents double counting of the voting power and rights to dividends and capital. | Detailed Reasoning - Other rules: Other relevant tracing rules modifying how the ownership tests in section 166-145 are applied to stakes in the tested company are set out in: ● section 166-270 which restricts the total proportion of voting power, dividend rights and capital rights attributed to the single notional entity under section 166-225 at an ownership test time after the start of the test period to that which was attributed to it at the beginning of the test period (the ‘minimum interest rule’); and ● section 166-272 which, for the purpose of the modified COT test in Division 166, requires the tested company to only take into account interests held by a top interposed entity mentioned in section 166-230, a widely held company mentioned in section 166-235 and an entity mentioned in subsection 166-245(2) if they are the same interests held by the same persons throughout the test period (the ‘same share same interest’ rule). The same share same interest rule does not apply in respect of stakes attributed to a single notional entity. | Detailed Reasoning - Division 167 – shares with different rights: Division 167 modifies the continuity of ownership test in Divisions 165 and 166 for companies with shares that do not all carry the same rights to dividends, capital distributions or voting power. Under Subdivision 167-A, if a company is unable to determine whether it has satisfied a condition of the COT in respect of dividend or capital distributions because it has an ‘unequal share structure’ (defined in subsection 167-10(3)), the company can choose to reconsider the condition in up to 3 ways by order. These are: 1. by disregarding any debt interests (per section 167-15); 2. by disregarding any debt interests and secondary share classes (per section 167-20); and 3. by disregarding any debt interests and secondary share classes, and then treating the remaining shares as having fixed rights to dividends and capital distributions (per section 167-25). Company X had two share classes on offer during the income years ended 30 June 200A and 30 June 200B (A class and ordinary shares) which carried different rights to capital distributions. | Detailed Reasoning - Your circumstances: On the basis of the facts and circumstances set out in this ruling, and the assumptions upon which this ruling is based (including the assumption that none of the relevant specific anti-avoidance provisions apply), there is substantial continuity of ownership of Company X in accordance with section 166-145 at all times between 1 July 200J (the start of the test period) and 31 March 201Z (the end of the test period). This is because a person in the form of a single notional entity pursuant to the application of section 166-225 is attributed as having held in excess of 50% of the voting power in Company X and rights to in excess of 50% of Company X’s dividends and capital distributions as between the start of the test period and immediately after each of the other relevant test times during the test period. As there is substantial continuity of ownership of Company X as between the start of the test period and each of the other relevant test times (ending on 31 March 201Z), Company X (as a widely held company) is taken pursuant to subsection 166-5(3) to have met the conditions in section 165-12 and may (as a consequence) deduct its aggregated tax losses in the income year ended 31 March 201X and, to the extent it is not wholly claimed in that year, the income year ended 31 March 201Y and the income year ending 31 March 201Z.