Part B Ownership and same business test - company and listed widely held trust only
1 Whether continuity of majority ownership test passed
If the entity has deducted, applied (or, if applicable, transferred in or transferred out) in the 2008–09 income year a loss, including a foreign loss component of a tax loss, incurred in any of the listed years, print X in the appropriate boxes to indicate whether the entity has satisfied the continuity of majority ownership test in respect of that loss.
The aim of item 1 is to find out if:
- the continuity of majority ownership test at section 165-12 of the ITAA 1997 - if the entity is a company, or
- the 50% stake test at Subdivision 269-C of Schedule 2F to the ITAA 1936 - if the entity is a listed widely held trust
has been satisfied in respect of a loss if a loss in any of the periods listed at item 1 is applied by being claimed as a deduction - if the entity is a company or listed widely held trust.
Company only
A tax loss of an earlier income year is not deductible, and a net capital loss cannot be applied, unless a company has maintained the same owners as prescribed in section 165-12 of the ITAA 1997 (see also section 165-96External Link of the ITAA 1997 for applying net capital losses of earlier years).
For more information on the rules for arrangements affecting beneficial ownership, see section 165-180External Link of the ITAA 1997.
The following conditions apply:
- Where tax losses are sought to be deducted, or net capital losses are sought to be applied, in an income year ending after 21 September 1999, majority ownership must be maintained from the start of the loss year to the end of the income year.
- There must be persons who, at all times during the ownership test period, beneficially owned (between them) shares carrying (between them) the right to
- exercise more than 50% of the voting power in the company
- receive more than 50% of the company's dividends, and
- receive more than 50% of the company's capital distributions. See sections 165-150External Link to 165-160External Link of the ITAA 1997.
- It is reasonable to assume that there are persons (none of them companies) who between them have beneficial interests (directly, or indirectly through one or more interposed entities) in shares in the company carrying (between them) a majority of the voting power, and rights to dividend and capital distributions at all times during the ownership test period. See sections 165-150External Link to 165-160External Link of the ITAA 1997.
- Where tax losses are claimed in an income year ending after 21 September 1999, the company must meet the 'same share and interest' requirement, except where the 'saving' rule applies. See section 165-165External Link and subsection 165-12(7)External Link of the ITAA 1997.
- A modified version of the above rules applies to widely held companies and eligible Division 166 companies - see Division 166External Link of the ITAA 1997.
If the company fails to meet a condition of section 165-12 of the ITAA 1997, the company must satisfy the conditions relating to carrying on the same business under section 165-13 of the ITAA 1997.
For more information on the same business test, see Taxation Ruling TR 1999/9 Income tax: the operation of sections 165-13 and 165-210, paragraph 165-35(b), section 165-126 and section 165-132.
Note
- Even if the company satisfies the ownership tests of section 165-12 of the ITAA 1997 or if not, then the same business test of section 165-13 of the ITAA 1997, it cannot deduct earlier income year tax losses unless it satisfies the control test at section 165-15 of the ITAA 1997.
- Anti-avoidance provisions are at Subdivisions 175-A and 175-B of the ITAA 1997.
For more information, see the information on R Tax losses deducted item 7 in the Company tax return instructions 2009.
Listed widely held trust only
A tax loss for a listed widely held trust may not be deductible if abnormal trading in the units of the trust has occurred during the period from the beginning of the loss year until the end of the income year. Abnormal trading is defined in Subdivision 269-B of Schedule 2F to the ITAA 1936. If abnormal trading has occurred the trust must meet the 50% stake test in Subdivision 269-C of Schedule 2F to the ITAA 1936. If the trust cannot meet the 50% stake test it must satisfy the same business test in Subdivision 269-F of Schedule 2F to the ITAA 1936.
Note: If deductions for bad debts are involved, then section 266-135 of Schedule 2F to the ITAA 1936 may apply.
Completing item 1 of part B
Print X in the Yes boxes at A to F (as applicable) if, during the 2008–09 income year, the entity seeks to utilise a loss of the relevant year and the entity has passed:
- the continuity of majority ownership test - if the entity is a company, or
- the 50% stake test - if the entity is a listed widely held trust in respect of the loss of that particular year.
Print X in the No boxes at A to F (as applicable) for each year in respect of which the entity seeks to deduct a loss if the continuity of majority ownership test or the 50% stake test - as applicable - has not been satisfied in respect of that loss and the entity is required to satisfy the same business test.
If there was no loss deducted (or, if applicable, not transferred in or transferred out) in respect of a particular year, leave the boxes next to that year blank.
Note: Examples for part B item 1
Although examples 3 and 4 are for companies, the examples, notes and comments apply equally to listed widely held trusts - which must satisfy the 50% stake test.
Example 3
A company had incurred tax losses in earlier income years. The company deducted all of these tax losses in respect of the 2008–09 income year. At the beginning of the 2008–09 income year, the company had undeducted losses from the 2003–04, 2005–06, 2006–07 and 2007–08 income years. The continuity of majority ownership test was failed during the 2005–06 income year, but all other tests for allowing the tax losses to be applied have been passed by the company.
On these facts, for the tax losses of the 2005–06 income year and earlier income years, the company has not passed the continuity of majority ownership test.
Complete part B item 1 as follows:
|
Year of loss |
Label |
Yes |
No |
|---|---|---|---|
|
2008–09 |
A |
- |
- |
|
2007–08 |
B |
X |
- |
|
2006–07 |
C |
X |
- |
|
2005–06 |
D |
- |
X |
|
2004–05 |
E |
- |
- |
|
2003–04 and earlier income years |
F |
- |
X |
The above example shows that:
- there was no deduction for a tax loss incurred in the 2004–05 income year
- the company passed the continuity of majority ownership test for the tax losses of the 2006–07 and 2007–08 income years
- the company failed the continuity of majority ownership test for the tax losses of the 2003–04 and the 2005–06 income years.
A company that incurred a tax loss in the 2003–04 income year subsequently undergoes a change in majority ownership in the 2004–05 income year. The company satisfies the same business test in respect of the 2003–04 tax loss.
The company incurs a further tax loss in the 2005–06 income year and satisfies the continuity of majority ownership test in respect of this 2005–06 tax loss.
In the 2008–09 income year the company deducts the tax losses incurred in the 2003–04 and 2005–06 income years.
Print X in the Yes box at D 2005–06 and X in the No box at F 2003–04 and earlier income years.
End of example2 Amount of losses deducted for which the continuity of majority ownership test is not passed but the same business test is satisfied - excludes film losses
Show at item 2 the total amount of losses, including a foreign loss component of a tax loss, applied during the 2008–09 income year - if the entity is either a company or a listed widely held trust - and for which the same business test must be satisfied.
Note: In addition to those companies with either tax losses or net capital losses that have not passed the continuity of majority ownership test, this item also applies to listed widely held trusts with tax losses that have not passed the 50% stake test.
Same business test: company and listed widely held trust
Company
Under the same business test, the company must carry on the same business throughout the income year that it carried on immediately before the disqualifying change of ownership. The test is not satisfied if at any time during the income year the relevant entity did not carry on the same business as it did immediately before the change in the ownership of the entity or it derives assessable income from:
- a business of a kind that it did not carry on before the disqualifying event, or
- a transaction of a kind that it did not enter into in the course of its business operations before the disqualifying event.
'Same' means 'identical' and not merely 'similar'. The term 'same business' is to be read as referring to the same business, in the sense of the identical business. However, the term does not mean identical in all respects.
A company may expand or contract its activities without necessarily ceasing to carry on the same business. The organic growth of a business does not necessarily cause the business to fail the same business test provided the business retains its identity. But, if through a process of evolution, a business changes its essential character, the entity may fail the test. Application of the same business test is a question of fact and is usually determined by a process of weighing up various relevant factors.
For more information, see sections 165-13External Link and 165-210External Link of the ITAA 1997 and Taxation Ruling TR 1999/9.
Listed widely held trust
A listed widely held trust must carry on the same business as it carried on before the first abnormal trading in its units - that caused the failure of the 50% stake test - occurred.
For application of the same business test for a listed widely held trust, see company.
For more information, see section 266-125External Link and Subdivision 269-F of Schedule 2FExternal Link to the ITAA 1936.
The principles outlined in Taxation Ruling TR 1999/9 may be of assistance.
Tax losses
Show at G the amount of tax losses, including a foreign loss component of a tax loss, deducted by the entity that do not meet the continuity of majority ownership test but satisfy the same business test.
Net capital losses
Show at H the amount of net capital losses applied by a company that do not meet the continuity of majority ownership test but satisfy the same business test.
Example 5
A company had the following losses:
|
Year |
Tax loss |
Net capital loss |
|---|---|---|
|
2002–03 |
$1,000 |
- |
|
2003–04 |
$2,000 |
- |
|
2004–05 |
- |
$500 |
|
2005–06 |
$1,600 |
$800 |
|
2006–07 |
- |
- |
|
2007–08 |
$10,000 |
$2,000 |
|
2008–09 |
- |
- |
|
TOTALS |
$14,600 |
$3,300 |
There was a change in the underlying beneficial ownership of the company in the 2006–07 income year.
The company passed the same business test and all other tests in relation to the losses incurred prior to that year and passed the continuity of majority ownership test and all other tests in relation to the 2007–08 losses.
Tax losses
All tax losses incurred in the 2002–03, 2003–04 and 2005–06 income years were deducted in the 2008–09 income year, as well as $6,000 of the 2007–08 tax loss.
Net capital losses
All of the 2004–05 net capital loss and $600 of the 2005–06 net capital loss were applied in the 2008–09 income year.
Of all of the above losses, which are being applied in the 2008–09 income year, those which are subject to the same business test being satisfied by the company are as follows:
|
Year |
Amount |
|---|---|
|
2002–03 |
$1,000 |
|
2003–04 |
$2,000 |
|
2005–06 |
$1,600 |
|
TOTAL |
$4,600 |
|
Year |
Amount |
|---|---|
|
2004–05 |
$500 |
|
2005–06 |
$600 |
|
TOTAL |
$1,100 |
Complete part B item 2 as follows:
The 2007–08 tax loss of $6,000 was deducted by the company on the basis that the company had satisfied the continuity of majority ownership test. Therefore, this amount is not shown at G Tax losses.
As $200 of the 2005–06 net capital loss was not applied during the 2008–09 income year, that amount of $200 is not shown at H Net capital losses for the 2008–09 income year even though the same business test would need to be passed in a later income year in order for the company to be able to apply that net capital loss in a later income year.
End of example3 Losses carried forward for which the same business test must be satisfied before they can be deducted in later years - excludes film losses
Note: Item 3 asks for information about the tax losses and net capital losses for which the entity must satisfy the same business test in subsequent years for the entity to be able to utilise those losses.
Company and listed widely held trust
For more information on the same business test see the information on part B item 2.
Tax losses
Show at I the total amount of tax losses, including a foreign loss component of a tax loss, carried forward to later income years for which the same business test must be satisfied for the entity to deduct those tax losses in later income years.
Net capital losses
Show at J the total amount of net capital losses carried forward to later income years for which the same business test must be satisfied for the company to apply those net capital losses in later income years.
Example 6
As at the end of the 2008–09 income year, the company had the following losses available:
|
Year |
Tax loss |
Net capital loss |
|---|---|---|
|
2002–03 |
$1,500 |
- |
|
2003–04 |
$3,000 |
- |
|
2004–05 |
- |
$700 |
|
2005–06 |
$1,900 |
$900 |
|
2006–07 |
- |
- |
|
2007–08 |
$1,000 |
$1,500 |
|
2008–09 |
- |
- |
|
TOTALS |
$7,400 |
$3,100 |
A change in the underlying beneficial interests in the company took place during the 2006–07 income year. As a result, the company must satisfy the same business test for the tax losses of the following income years:
- 2002–03 ($1,500)
- 2003–04 ($3,000)
- 2005–06 ($1,900).
It must also satisfy the same business test in respect of the net capital losses for the following income years:
- 2004–05 ($700)
- 2005–06 ($900).
The 2007–08 tax loss ($1,000) and the net capital loss ($1,500) are not affected.
The company completes part B item 3 as follows: