ATO Interpretative Decision
ATO ID 2007/107
Income Tax
Company tax losses: is a 'corporate change' under section 166-175 of the ITAA 1997 taken not to have happened because of the effect of section 703-75 of the ITAA 1997FOI status: may be released
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Where an interposed holding company becomes the owner of another company during an income year, causing a prima facie corporate change under section 166-175 of the Income Tax Assessment Act 1997 (ITAA 1997), is the effect of section 703-75 of the ITAA 1997 that the corporate change is taken not to have happened?
Decision
Yes. The effect of section 703-75 of the ITAA 1997 is that the reorganisation which causes the interposed holding company to become the owner of the other company is taken not to give rise to a corporate change under section 166-175 of the ITAA 1997.
Facts
Company X has a tax loss for an earlier income year.
Company X is the head company of a consolidated group.
During an income year in which the tax loss is sought to be deducted, there is a reorganisation under which an interposed holding company (Holding Company) acquires 100% of the shares in Company X. Just after that and in exchange for the shares in Company X, Holding Company issues an identical number of shares in itself to the former shareholders of Company X. The former shareholders of Company X become the shareholders of Holding Company.
Holding Company makes a choice under subsection 124-380(5) of the ITAA 1997 that the consolidated group is to continue in existence.
As a result of the reorganisation, Holding Company becomes the head company of the consolidated group.
Reasons for Decision
The acquisition by Holding Company of 100% of the shares in Company X, and the issuing by Holding Company of an identical number of shares, gives rise to a prima facie 'corporate change' under section 166-175 of the ITAA 1997. Under paragraph 166-5(3)(b) of the ITAA 1997, a company must apply the test for substantial continuity of ownership at the end of each corporate change in the relevant test period. This means that there is an additional testing time.
A company that makes a choice under subsection 124-380(5) of the ITAA 1997 to interpose a new head company of the consolidated group is affected by sections 703-65 to 703-80 of the ITAA 1997. Under subsection 703-75(1) of the ITAA 1997, everything that happened in relation to the original head company (Company X) before the time of the reorganisation is taken to have happened in relation to the interposed company (Holding Company) instead of in relation to the original head company (Company X).
Under subsection 703-75(3) of the ITAA 1997, subsection 703-75(1) of the ITAA 1997 has this effect for the head company core purposes. Subsection 701-1(2) of the ITAA 1997 defines the 'head company core purposes' as including 'working out the amount of the head company's liability (if any) for income tax'.
The ability of Holding Company (the new head company) to recoup the tax loss under Division 166 of the ITAA 1997 will affect the calculation of Holding Company's liability for income tax. This is one of the head company core purposes.
Section 166-175 of the ITAA 1997 affects the ability to recoup tax losses, because if a corporate change occurs, it will require Holding Company to apply the test for substantial continuity of ownership at an additional time. If Holding Company is not able to satisfy the test at that time, it may not be able to deduct the tax loss which is relevant to that test period.
The effect of subsection 703-75(1) of the ITAA 1997 is that nothing has happened in respect of the shares in Holding Company. The shares are taken to have been owned, just before and just after the reorganisation, by the shareholders of Company X who became the shareholders of Holding Company.
The corporate change is thus taken not to have happened.
Date of decision: 2 March 2007Year of income: Year ended 30 September 2008
Legislative References:
Income Tax Assessment Act 1997
subsection 124-380(5)
Division 166
paragraph 166-5(3)(b)
section 166-175
subsection 701-1(2)
section 703-65
section 703-75
subsection 703-75(1)
subsection 703-75(3)
section 703-80
ATO ID 2007/106
Keywords
Consolidated group
Head company
Consolidation - continuity of ownership test
Tax loss
ISSN: 1445-2782