Company Tax Losses: Continuity of Ownership Test

Q&A Tax
Question :

ABC Co is an investment and trading company. In the 2016/17 income year, ABC Co incurred tax losses of $150,000. In the 2017/18 income year, the company had a taxable income of $30,000. In preparing ABC Co’s 2017/18 income tax return, the company’s accountant is seeking to deduct part of the $150,000 of carrying forward losses against all of the taxable income. 

The share capital of ABC Co comprised 100 ordinary shares. Each share carried equal rights to vote, dividends and capital distributions. The shareholdings as of 30 June 2016 were: 

 • A — 40 shares   

• B — 30 shares  

• C — 15 shares  

• The D Family Trust —15 shares (None of A, B and C is the beneficiary of the trust) 

On 31 December 2017, A sold 25 shares to D Family Trust.  

On 28 February 2018, A sold the remaining 15 shares to D Family Trust. 

On 31 March 2018, C sold 15 shares to D Family Trust. 

There were no more shareholding changes to 30 June 2018.  

Advise ABC Co as to whether it passed COT in income year 2017/18? 

 

Answer :

Both sales of shares from A to D Family trust on 31 December 2017 and 28 February 2018 did not cause a COT breach because the same persons collectively held more than 50% of the rights to vote, dividends and capital distribution both before and after the sale (ITAA97 s 165-12).  

On 31 March 2018, after the sales, B maintains a 30% shareholding, however, the D Family trust increased its shareholding to 70% and neither A nor C held shares. Before this date, B and the trust did not collectively hold more than 50% of the rights to vote, dividends and capital distributions.  

Therefore, the COT was breached on 31 March 2018  (ITAA97 s 165-207). 

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