Issue
Can a family trust, which is deemed to be a notional entity under section 165-207 of the Income Tax Assessment Act 1997 (ITAA 1997) for company loss recoupment purposes, be a 'continuing shareholder' for the purposes of section 175-10 of the ITAA 1997?
Decision
Yes. A 'continuing shareholder' for the purposes of section 175-10 of the ITAA 1997 can include a family trust that is deemed to be a notional entity under section 165-207 of the ITAA 1997.
Facts
Company A has a tax loss available to it from an earlier income year (the loss year) which it is now seeking to deduct.
Company A derives an amount of assessable income in the income year that it would not have derived if the tax loss had not been available for deduction.
The trustees of trust B and C collectively own shares that carry more than 50% of the voting power in company A, and rights to more than 50% of the dividends and capital distributions of company A, during the whole (or the relevant part) of the loss year and during the whole of the income year.
Both trust B and C have made family trust elections (FTEs) pursuant to section 272-80 of Schedule 2F to the Income Tax Assessment Act 1936 (ITAA 1936). The FTEs are in force for all relevant income years.
For the purposes of the company loss recoupment rules, company A meets the conditions of the continuity of ownership test (COT) in section 165-12 of the ITAA 1997.
Reasons for Decision
Subsection 175-10(3) of the ITAA 1997 provides: 175-10(3) The continuing shareholders are: (a) all of the persons who had *more than 50% of the voting power in the company during the whole (or the relevant part) of the *loss year and during the whole of the income year; and (b) all of the persons who had rights to *more than 50% of the company's dividends during the whole (or the relevant part) of the loss year and during the whole of the income year; and (c) all of the persons who had rights to *more than 50% of the company's capital distributions during the whole (or the relevant part) of the loss year and during the whole of the income year. To find out who they were, apply whichever tests are applied in order to determine whether the company can deduct the *tax loss (or the part of the tax loss) in the first place. See section 165-12 (which is about the company maintaining the same owners). Division 167 has special rules for working out rights to voting power, dividends and capital distributions in a company whose shares do not all carry the same rights to those matters. * denotes a term defined in section 995-1 of the ITAA 1997
Therefore the COT in section 165-12 of the ITAA 1997 is used to establish who are the 'continuing shareholders' under subsection 175-10(3) of the ITAA 1997. The COT is expanded upon by the rules in Subdivision 165-D of the ITAA 1997, including section 165-207 of the ITAA 1997.
The trustees of trust B and C, both of which have made FTEs that are in force for all relevant income years, each own shares in company A. Therefore, two single notional entities that are persons (being neither companies nor trustees) are taken to own those shares in company A beneficially, in accordance with section 165-207 of the ITAA 1997.
The two single notional entities (representing trust B and C) collectively have more than 50% of the voting power in company A, and rights to more than 50% of the dividends and capital distributions of company A, during the whole (or the relevant part) of the loss year and during the whole of the income year.
Accordingly, the Commissioner will consider each single notional entity under section 165-207 of the ITAA 1997 to be a 'continuing shareholder' for the purposes of section 175-10 of the ITAA 1997.
Amendment History
Date of Amendment Part Comment 12 May 2017 Reason for Decision Update to include the new note referencing Division 167 at the end of subsection 175-10(3).
Date of Amendment | Part | Comment
12 May 2017 | Reason for Decision | Update to include the new note referencing Division 167 at the end of subsection 175-10(3).