Income Tax Assessment Act 1997

CHAPTER 3 - SPECIALIST LIABILITY RULES

PART 3-5 - CORPORATE TAXPAYERS AND CORPORATE DISTRIBUTIONS

Division 165 - Income tax consequences of changing ownership or control of a company

Subdivision 165-CD - Reductions after alterations in ownership or control of loss company

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Guide to Subdivision 165-CD

SECTION 165-115H How this Subdivision applies

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165-115H(1)
This Subdivision provides for certain taxation consequences for an entity (not an individual) that had a significant equity or debt interest in a loss company immediately before an alteration time occurred in respect of the company.

165-115H(2)

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The following flowchart explains how to work out whether this Subdivision applies to an entity.

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165-115H(3)
If this Subdivision applies to an entity, reductions are made to:

(a) the reduced cost base of the entity ' s equity or debt (see subsection 165-115ZA(3) ); or

(b) any deduction to which the entity is entitled in respect of the disposal of the equity or debt (see subsection 165-115ZA(4) ); or

(c) deductions in respect of, and the cost of, any of the equity or debt that is trading stock (see subsection 165-115ZA(5) ).

Example:

The following is an example of how this Subdivision operates:

Facts: Alpha Co acquired 80% of the shares in Beta Co on 5 May 1998 for $1,000.
Gamma Co owns 20% of the shares in Beta Co.
On 6 February 2000, Alpha Co disposed of its shares for $600.
At the beginning of the 1999-2000 income year, Beta Co had an unapplied net capital loss of $500 from the 1998-99 income year. This loss was fully reflected in the market value of shares in Beta Co.
Alpha Co and Gamma Co are not associated in any way.

Result:

Step 1: An alteration time occurred in respect of Beta Co as a result of the change in ownership that occurred when Alpha Co sold its shares.

Step 2: Beta Co was a loss company at the alteration time because it had an unapplied net capital loss from an earlier income year.

Step 3: Alpha Co had a relevant equity interest in Beta Co immediately before the alteration time because it had a controlling stake and significant interest (80% equity interest). Gamma Co did not have a relevant equity interest in Beta Co because it did not have a controlling stake.

Step 4: Because Alpha Co had a relevant equity interest in Beta Co, the reduced cost bases of its shares in Beta Co are reduced by 80% of Beta Co ' s net capital loss:
80% × $500 = $400
Alpha Co does not make a capital gain on the disposal of its shares in Beta Co because the capital proceeds ($600) are less than the cost bases ($1,000).
Nor did Alpha Co make a capital loss on the disposal of its shares in Beta Co because the capital proceeds ($600) are not less than the reduced cost bases as further reduced by this Subdivision ($600).
The net capital loss in Beta Co is not duplicated on the sale of Alpha Co ' s shares in Beta Co.

Step 5: There are no notice requirements in this simple case. If Gamma Co and Alpha Co were associates (so that Gamma Co had a relevant equity interest in Beta Co), Alpha Co would need to provide the following information to Gamma Co:
(a) the alteration time: 6 February 2000;
(b) Beta Co ' s overall loss at the alteration time: $500;
(c) details of the overall loss: a net capital loss of $500 for the 1998-99 income year.

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TABLE OF SECTIONS

**TABLE OF SECTIONS**
Operative provisions
165-115J	Object of Subdivision
165-115K	Application and interpretation
165-115L	Alteration time - alteration in ownership of company
165-115M	Alteration time - alteration in control of company
165-115N	Alteration time - declaration by liquidator or administrator
165-115P	Notional alteration time - disposal of interests in company within 12 months before alteration time
165-115Q	Notional alteration time - disposal of interests in company earlier than 12 months before alteration time
165-115R	When company is a loss company at first or only alteration time in income year
165-115S	When company is a loss company at second or later alteration time in income year
165-115T	Reduction of certain amounts included in company ' s overall loss at alteration time
165-115U	Adjusted unrealised loss
165-115V	Notional losses
165-115W	Calculation of trading stock decrease
165-115X	Relevant equity interest
165-115Y	Relevant debt interest
165-115Z	What constitutes a controlling stake in a company
165-115ZA	Reductions and other consequences if entity has relevant equity interest or relevant debt interest in loss company immediately before alteration time
165-115ZB	Adjustment amounts for the purposes of section 165-115ZA
165-115ZC	Notices to be given
165-115ZD	Adjustment (or further adjustment) for interest realised at a loss after global method has been used

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Facts:	Alpha Co acquired 80% of the shares in Beta Co on 5 May 1998 for $1,000. Gamma Co owns 20% of the shares in Beta Co. On 6 February 2000, Alpha Co disposed of its shares for $600. At the beginning of the 1999-2000 income year, Beta Co had an unapplied net capital loss of $500 from the 1998-99 income year. This loss was fully reflected in the market value of shares in Beta Co. Alpha Co and Gamma Co are not associated in any way.
Result:
Step 1:	An alteration time occurred in respect of Beta Co as a result of the change in ownership that occurred when Alpha Co sold its shares.
Step 2:	Beta Co was a loss company at the alteration time because it had an unapplied net capital loss from an earlier income year.
Step 3:	Alpha Co had a relevant equity interest in Beta Co immediately before the alteration time because it had a controlling stake and significant interest (80% equity interest). Gamma Co did not have a relevant equity interest in Beta Co because it did not have a controlling stake.
Step 4:	Because Alpha Co had a relevant equity interest in Beta Co, the reduced cost bases of its shares in Beta Co are reduced by 80% of Beta Co ' s net capital loss: 80% × $500 = $400 Alpha Co does not make a capital gain on the disposal of its shares in Beta Co because the capital proceeds ($600) are less than the cost bases ($1,000). Nor did Alpha Co make a capital loss on the disposal of its shares in Beta Co because the capital proceeds ($600) are not less than the reduced cost bases as further reduced by this Subdivision ($600). The net capital loss in Beta Co is not duplicated on the sale of Alpha Co ' s shares in Beta Co.
Step 5:	There are no notice requirements in this simple case. If Gamma Co and Alpha Co were associates (so that Gamma Co had a relevant equity interest in Beta Co), Alpha Co would need to provide the following information to Gamma Co: (a) the alteration time: 6 February 2000; (b) Beta Co ' s overall loss at the alteration time: $500; (c) details of the overall loss: a net capital loss of $500 for the 1998-99 income year.