Issue
Does Subdivision 245-G of Schedule 2C to the Income Tax Assessment Act 1936 (ITAA 1936) apply to a company that is 75% owned by the debtor company and 25% by unrelated persons at the time of forgiveness?
Decision
No. They are not under common ownership as required by Subdivision 245-G of Schedule 2C to the ITAA 1936.
Facts
Debtor Company has a net forgiven amount for the purposes of subsection 245-85(2) of Schedule 2C to the ITAA 1936 to be applied as a result of a forgiveness of a debt on 1 January 2003.
At the time of forgiveness and on the last day of the year of income that immediately preceded the relevant forgiveness year of income, Company R was 75% owned by Debtor Company and 25% owned by persons unrelated to Debtor Company.
Reasons for Decision
Section 245-10 of Schedule 2C to the ITAA 1936 provides that Schedule 2C applies where the forgiveness of a commercial debt occurs after 27 June 1996.
For subdivision 245-G of Schedule 2C to the ITAA 1936 to apply to Company R in respect of the relevant debt, paragraph 245-225(1)(c) of Schedule 2C provides that it must form part of a group of related companies.
To constitute related companies under subsection 245-225(2) of Schedule 2C to the ITAA 1936, Debtor Company and Company R must be under 'common ownership' at the relevant times referred to in paragraphs (a) and (b) thereof.
Effective from 24 October 2002 section 245-250 of Schedule 2C to the ITAA 1936 provides that in determining whether two companies are under common ownership the definition of 'under common ownership' in subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) is determinative.
Note. Prior to 24 October 2002, for assessments for the 1998/99 and later income years, section 245-250 of Schedule 2C to the ITAA 1936 mistakenly stated that common ownership was determined in accordance with (non-existent) section 138-25 of the ITAA 1997. Instead the reference should have been to subsection 138-15(2) of the ITAA 1997
As Debtor Company and Company R are not owned by the same individuals in the same proportions they must be members of the same wholly-owned group to be under common ownership to satisfy that definition in subsection 995-1(1) of the ITAA 1997.
Subsection 995-1(1) of the ITAA 1997 provides that wholly-owned group has the meaning given in section 975-500 of the ITAA 1997.
Debtor company and Company R are not members of the same wholly-owned group as they do not meet the 100% subsidiary tests in section 975-505 of the ITAA 1997 because Company R is 25% owned by persons unrelated to Debtor company.
Accordingly, Subdivision 245-G of Schedule 2C to the ITAA 1936 has no application to Company R in respect of the relevant debt forgiveness.