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As a consequence of the arrangement described, will paragraph 166-170(8)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) be satisfied to assist the taxpayer company in meeting the continuity of ownership conditions, as modified by section 166-10 of the ITAA 1997, in respect of a proposed deduction for prior year tax losses in the income year ended 30 June 2002?

Yes, paragraph 166-170(8)(b) of the ITAA 1997, which outlines the second condition of the 'saving rule', will be satisfied for the purpose of assisting the taxpayer company to meet continuity of ownership conditions in respect of the proposed deduction to be claimed for prior year tax losses in the income year ended 30 June 2002.

The taxpayer is a resident member of a multi-national corporate group ('group') whose ultimate holding company is a non-resident listed public company. While the taxpayer's immediate holding company is a resident, the group structure interposes other non-resident companies between the taxpayer's resident immediate holding company and the non-resident ultimate holding company. All interests interposed between the ultimate holding company and the taxpayer are 100% equity interests.

In the income year ended 30 June 2002, the group proposes to carry out an offshore reorganisation, with the non-resident ultimate holding company transferring its interest in one non-resident subsidiary company to a second non-resident subsidiary company (that interest includes the indirect interest in the taxpayer). Otherwise, the group structure will remain intact, with the taxpayer retaining the same resident immediate holding company and non-resident ultimate holding company.

The taxpayer incurred losses in the income year ended 30 June 2000. It now intends to recoup some of those losses in the income year ended 30 June 2002 subject to meeting the 'substantial continuity of ownership' conditions in section 166-145 of the ITAA 1997.

As the taxpayer is the 100% subsidiary of a listed public company, Division 166 of the ITAA 1997 will apply in preference to Division 165 of the ITAA 1997 (the taxpayer not having elected to apply Subdivision 165-A of the ITAA 1997). Subdivision 166-CA of the ITAA 1997 ensures that the operation of Subdivision 165-CD of the ITAA 1997 extends to 100% subsidiaries of listed public companies, albeit in slightly modified form.

The proposed reorganisation in the income year ended 30 June 2002 will trigger the operation of Subdivision 165-CD of the ITAA 1997 because: • There will be a change of ownership and hence an 'alteration time' within section 165-115L of the ITAA 1997, • The taxpayer will be a 'loss company' within section 165-115R of the ITAA 1997, and • There will be 'relevant equity interests' under section 165-115X of the ITAA 1997 in the taxpayer at the alteration time.

Accordingly, Subdivision 165-CD of the ITAA 1997 will cause adjustments to be made, immediately before the alteration time, to the reduced cost base of the immediate holding company's interest in the taxpayer and to the reduced cost base of the other interests in resident companies interposed between the taxpayer's immediate holding company and the ultimate holding company. These adjustments will eliminate loss duplication that otherwise would occur.

Therefore, following the group reorganisation, the taxpayer will be able to satisfy the second condition of the saving rule in paragraph 166-170(8)(b) of the ITAA 1997 because the operation of Subdivision 165-CD of the ITAA 1997 will preclude any losses on equity interests interposed between the ultimate holding company and the taxpayer that otherwise would duplicate the tax losses of the taxpayer. Paragraph 2.26 of the explanatory memorandum to the New Business Tax System (Miscellaneous) Bill (No. 2) 2000 provides support for this view: 'An equity interest whose cost base (sic-this should refer to "reduced cost base") has been adjusted by the inter-entity measures (discussed at Chapter 1) is to be excluded for the purposes of providing the required proof...' (Note this refers to proof as stated in paragraph 2.25, that less than 50% of the tax loss or whatever has resulted or is reflected in increased losses or reduced gains on any direct and indirect equity interest in the company that were disposed of during the relevant test period.)'...A loss on the disposal of such an interest that reflects the loss in the company will effectively be prevented under those measures.' Note: This decision does not consider the application of paragraph 166-170(8)(a) of the ITAA 1997 which also must be satisfied before the 'saving rule' can assist the taxpayer to meet the 'substantial continuity of ownership' conditions of section 166-145 of the ITAA 1997.