Issue
Does Subdivision 165-F of the Income Tax Assessment Act 1997 (ITAA 1997) apply in determining whether a company satisfies the continuity of ownership test (COT) in respect of the loss in the trial year where: • the subsidiary member has incurred a tax loss that is available for transfer to the head company of a consolidated group under Subdivision 707-A of the ITAA 1997; • a non-fixed trust or non-fixed trusts hold fixed entitlements to a 50% or greater share of the income or capital of the head company of the consolidated group?
Decision
Yes. Subdivision 165-F of the ITAA 1997 is applicable in determining if the subsidiary member satisfies the COT in respect of the loss in the trial year.
Facts
Company A becomes a member of a consolidated group at a particular time (the joining time). At the joining time, a tax loss is available for transfer, under Subdivision 707-A of the ITAA 1997, from Company A to Head Co (the head company of the consolidated group).
Head Co holds fixed entitlements to all of the income and capital of Company A at all times during the ownership test period.
Trust B is a non-fixed trust that holds fixed entitlements to a 50% or greater share of the income of Head Co at all times during the ownership test period.
Reasons for Decision
Subsection 707-120(1) of the ITAA 1997 provides that a loss is transferred from a joining entity to the head company of a consolidated group to the extent that the loss could have been utilised by the joining entity for an income year consisting of the trial year, assuming: • that the entity had sufficient income or gains to utilise the loss; and • that the joining entity had not become a member of the consolidated group.
The trial year is defined in subsection 707-120(2) of the ITAA 1997. It consists of the period generally starting 12 months before the joining time and ending just after the joining time. Paragraph 707-110(2)(a) provides that an entity utilises a tax loss to the extent that it is deducted from an amount of the entity's assessable or exempt income.
Subdivision 165-A of the ITAA 1997 contains the conditions for determining if a company is able to deduct a tax loss under Division 36 of the ITAA 1997. Section 165-10 of the ITAA 1997 provides that a company cannot deduct a tax loss unless it meets the conditions in section 165-12 of the ITAA 1997 (that is, it satisfies the COT) or it meets the condition in section 165-13 of the ITAA 1997 (that is, it satisfies the same business test).
Subdivision 165-F of the ITAA 1997 contains special provisions relating to situations where fixed entitlements to a share of the income or capital of a company are held by one or more non-fixed trusts. Section 165-215 of the ITAA 1997 provides that a company that does not meet the conditions in the COT in respect of a loss is nevertheless taken to satisfy the COT, if it meets the conditions contained in that section. These conditions relate broadly to situations where non-fixed trusts (other than family trusts) hold, directly or indirectly, fixed entitlements to a 50% or greater share of the income or capital of the company.
As Trust B indirectly holds fixed entitlements to a 50% or greater share of the income of Company A, Subdivision 165-F of the ITAA 1997 is applicable when determining whether Company A satisfies the COT in respect of the loss in the trial year.