Continuity of ownership and test time for same business test.

Can a company have recourse to the 'same business test' under Section 165-13 of the Income Tax Assessment Act 1997 (ITAA 1997) where the time that the 'ownership test period' has been failed cannot be reasonably established?

No. For the purpose of having recourse to the 'same business test' it is necessary that the end of a 'continuity period' be known. Where this cannot be established a company can have no recourse to the 'same business test'. A company that has not been able to provide sufficient information (including a reliable statistical methodology) to objectively show that it would be 'reasonable to assume' that it satisfied the 'continuity of ownership test' in respect of any relevant period relating to the 'ownership test period' will not have recourse to the 'same business test'.

Aust Co was a wholly owned subsidiary of a publicly owned foreign company ('Foreign Co.') for only part of the 'ownership test period'.

Aust Co made revenue losses during the period in which it was owned by the Foreign Co. Aust Co has approached the Foreign Co to ascertain whether there has been a greater than 50% change in the beneficial ownership of the shares in Foreign Co. The following information was sought: • Details of shareholders. • Details of the persons to whom dividend and capital distributions were made.

Foreign Co's records are incomplete. The following issues arise from the incomplete information: • Details of only 30% of its shareholders are available as at the beginning of the loss year. • Most of the shareholder entities identified are pension and /or mutual fund managers. • Payments of dividends are conducted through clearing houses. These clearing houses only record which brokers hold the shares. • There is no requirement for brokers to disclose the identify of shareholders on behalf of whom they hold shares.

Complete shareholder records are not available for the reasons noted above. Therefore, Aust Co has extrapolated the information available on the assumption that it is a fair representation of the entire shareholder population.

Aust Co was not a 'listed public company', as defined in subsection 995-1(1) of the ITAA 1997, at all times during the 'test period' as required by subsection 166-5(1) of the ITAA 1997. Neither was it a '100% subsidiary', as defined in section 975-505 of the ITAA 1997, of a single 'listed public company', at all times during the 'test period' as required by subsection 166-10(2) of the ITAA 1997.

Accordingly, the tests in Division 166 of the ITAA 1997, where relevant to the deduction of tax losses of prior income years, are not available to Aust Co. Aust Co is subject to Division 165 of the ITAA 1997.

Because 'one or more companies' beneficially owned shares or interests in shares in Aust Co then, pursuant to subsection 165-12(6) of the ITAA 1997, the 'alternative test' in subsections 165-150(2), 165-155(2) and 165-160(2) of Subdivision 165-D of the ITAA 1997 apply.

The expression "it is reasonable to assume" in each of subsections 165-150(2), 165-155(2) and 165-160(2) of the ITAA 1997 is devoid of a 'Commissioner discretion'. According to the Explanatory Memorandum to the Income Tax Assessment Bill 1996 it needs to be applied on an objective basis. The previous ATO policy relating to paragraph 80A(1)(b) of the Income Tax Assessment Act 1936 ) is therefore obsolete.

On this basis, we believe that there was insufficient information provided to objectively show that "it is reasonable to assume" that Aust Co satisfies the 'alternative test' in each of subsections 165-150(2), 165-155(2) and 165-160(2) of the ITAA 1997.

For the purposes of section 165-12 and Subdivision 165-D of the ITAA 1997, Aust Co has been unable to show that there has been continuity of ownership in respect of the 'ownership test period' (as that expression is defined in subsection 165-12(1). This is not saying that Aust Co has failed the 'continuity of ownership test'. Rather, it simply means that there is insufficient evidence to objectively determine the question either way .

Aust Co has not satisfied the tests contemplated by paragraph 165-10(a) of the ITAA 1997 and, left at that, could not deduct the tax loss claimed to have been incurred. However paragraph 165-10(b) provides that if the 'same business test' would be satisfied, Aust Co could deduct that tax loss.

Recourse to the 'same business test' is enabled by section 165-13 of the ITAA 1997. There must be a 'continuity period' as defined in subsection 165-13(2). The 'test time' for the purposes of that test' is the time when that 'continuity period' ends.

Aust Co has not been able to provide sufficient information (including a reliable statistical methodology) to objectively show that it would be 'reasonable to assume' that it satisfied the 'continuity of ownership test' in respect of any relevant period relating to the 'ownership test period'.

Therefore, without an identifiable 'continuity period' there can be no 'test time' for the purposes of the 'same business test' .

In the 2002 Federal Budget the Treasurer announced that the Government will amend Divisions 165 and 166 of the ITAA 1997 in order to ensure that companies are not prevented from accessing the 'same business test' because they are unable to determine a precise date on which the 'continuity of ownership test' was failed. The measure is to apply from the 1997/98 income year.