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Will the transfer of 50% of the shares of a loss company by the trustee of a deceased estate to a beneficiary of the estate cause the loss company to fail the ownership conditions in Division 165 of the Income Tax Assessment Act 1997 (ITAA 1997)?

No. The transfer of the shares of the loss company will not cause the loss company to fail the test in Division 165 of the ITAA 1997 as a transfer of shares to the beneficiary of a deceased estate is taken as continuing the beneficial ownership of the shares under paragraph 165-205(b) of the ITAA 1997

An individual held 2 of the 4 shares on issue in a loss company, while an associate and another person each held one share. The individual died and their 50% shareholding was subsequently transferred by the trustee of the estate to the associate in their capacity as a beneficiary of the estate. The associate has held both shares since that time and has since acquired the fourth share. The company is now in a position to recoup prior year losses.

Paragraph 165-205(b) of the ITAA 1997 provides that shares a person owned beneficially at the time of death are taken to continue to be owned by that person after they die if the shares are then owned by someone who received them as a beneficiary of the their estate.

In this case, the associated received the deceased's shares in the loss company in their capacity as a beneficiary of the estate, and has continued to hold those shares. It follows that whilst the associate remains the beneficial owner of those shares, paragraph 165-205(b) of the ITAA 1997 provides that the deceased will be taken to continue to be the beneficial owner of that 50% shareholding in the loss company which, together with the original 25% shareholding of the associate, will enable the company to satisfy the continuity of ownership test in Division 165 of the ITAA 1997.