Improvementstothecompanyloss

recoupmentrules

ConsultationPaper
July2011

CommonwealthofAustralia2011
ISBN9780642747259

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CONSULTATIONPROCESS

Requestforfeedbackandcomments
The Government seeks your feedback and comments on the issues outlined in this consultation
paper.TheinformationobtainedthroughthisprocesswillinformtheGovernmentsapproachonthe
wayforward.

While submissions may be lodged electronically, by post or by facsimile, electronic lodgement is

preferred.Foraccessibilityreasons,pleaseemailresponsesinaWordorRTFformat.Anadditional
PDFversionmayalsobesubmitted.

Allinformation(includingnameandaddressdetails)containedinsubmissionswillbemadeavailable
to the public on the Treasury website, unless you indicate that you would like all or part of your
submissiontoremaininconfidence.Automaticallygeneratedconfidentialitystatementsinemailsdo
not suffice for this purpose. Respondents who would like part of their submission to remain
inconfidence should provide this information marked as such in a separate attachment. A request
made under the Freedom of Information Act 1982 (Commonwealth) for a submission marked
confidentialtobemadeavailablewillbedeterminedinaccordancewiththatAct.

Closingdateforsubmissions:26August2011

Email: companylosses@treasury.gov.au

Mail: TheGeneralManager
BusinessTaxDivision
TheTreasury
LangtonCrescent
PARKESACT2600

Enquiries: Enquiries can be initially directed to TeresaBostle (Ph 02 6263 3005) or

TonyRegan(Ph0262633334)

iii

CONTENTS

1. BACKGROUND................................................................................................................................1

2. OUTLINEOFTHECURRENTLAW..........................................................................................................1
2.1 Continuityofownershiptest...................................................................................................................1
2.2 Samebusinesstest..................................................................................................................................2
2.3 Lossintegrityrules..................................................................................................................................2

3. OUTLINEOFIMPROVEMENTSTOTHECOMPANYLOSSRECOUPMENTRULES..................................................2

4. MODIFICATIONSTOTHECONTINUITYOFOWNERSHIPTEST.......................................................................3

5. EXTENSIONOFTHECONCESSIONALTRACINGRULESUNDERTHEMODIFIEDCONTINUITYOFOWNERSHIP
TEST.............................................................................................................................................4
5.1 Holdingcompanyinterposedbetweenadirectstakeholderandthetestedcompany..........................5
5.2 Demergerbyatopinterposedentity......................................................................................................6
5.3 Entityinterposedbetweenasuperannuationfundandthetestedcompany........................................7
5.4 Bearerdepositoryreceipts......................................................................................................................9

6. APPLYINGTHEMODIFIEDCONTINUITYOFOWNERSHIPTESTFOLLOWINGANISSUEOFNEWSHARES.................10

7. LOSSINTEGRITYRULESLOWVALUEASSETEXCLUSION........................................................................10

8. APPLICATIONDATE........................................................................................................................11

iv


1. BACKGROUND
1. Aspartofthe201112Budget,theGovernmentannouncedthatitwillimprovetheoperation
of the company loss recoupment rules by simplifying the continuity of ownership test in
certaincircumstancesandremovingsomeminortechnicaldefects.

2. This consultation paper forms the basis for consultation on these proposals and sets out, in
broadterms,thewaytheymaybeimplemented.Thepurposeofthisconsultationpaperisto
provide interested parties with an opportunity to comment on the policy design of the
proposals.

3. It is expected that there will be a further opportunity to comment on exposure draft

legislation.

4. AlllegislativereferencesinthispaperaretotheIncomeTaxAssessmentAct1997.

2. OUTLINEOFTHECURRENTLAW
5. Underthecompanylossrecoupmentrules,acompanyisabletodeductprioryearlosses,or
apply net capital losses, only if it satisfies the continuity of ownership test or the same
businesstest(section16510).

2.1 CONTINUITYOFOWNERSHIPTEST
6. Thecontinuityofownershiptestissatisfiedifthesamepersonshavemorethan50percentof
thevotingpower,rightstodividendsandrightstocapitaldistributionsatalltimesduringthe
ownership test period (section 16512). The ownership test period is generally the period
between the start of the income year in which the loss was incurred (the loss year) and the
endoftheyearinwhichthelossissoughttoberecouped(theclaimyear).

7. Generally,acompanymusttraceownershipthroughtotheultimatebeneficialownersofthe
sharesinthecompanytodeterminewhetherthecontinuityofownershiptestissatisfied.

8. To reduce compliance costs, these rules are modified for widely held companies and certain
other types of companies (Division 166). Under the modified continuity of ownership test,
broadly:

ownership is tested at certain points in time (rather than throughout the whole of the
ownershiptestperiod);and

concessionaltracingrulesapplysothatitisnotnecessarytotraceownershipthroughtothe
ultimatebeneficialownersofthesharesinthetestcompanyinsomecircumstances.

1

2.2 SAMEBUSINESSTEST
9. Thesamebusinesstestissatisfiedifthecompanyiscarryingonthesamebusinessintheclaim
yearasitcarriedonimmediatelybeforethetesttime(section16513).Forthesepurposes,the
testtimeisgenerallythetimethatthecompanyfailedthecontinuityofownershiptest.

2.3 LOSSINTEGRITYRULES
10. Ifachangeoccursintheownershiporcontrolofacompanythathasanunrealisednetloss,
thelossintegrityrulesapplytopreventthecompany,totheextentoftheunrealisednetloss,
havingcapitallossestakenintoaccount,ordeductingtaxlosses,inrespectofCapitalGainsTax
(CGT) events that happen to CGT assets that it owned at the time of the change, unless it
satisfiesthesamebusinesstest(Subdivision165CC).ForthepurposeofapplyingSubdivision
165CC, a company may choose to disregard CGT assets acquired for less than $10,000
(subsection165115A(1B)).

11. Similarly, when an alteration takes place in the ownership or control of a company, and
significant equity and debt interests that nonindividual entities have in the company are
realised, multiple recognition of the companies losses are prevented by the rules in
Subdivision165CD. To apply Subdivision 165CD, the company must work out its adjusted
unrealisedloss(section165115U).Thisrequiresthecompanytoworkoutitsnotionallossesin
respectofCGTassetsthatitownedattherelevanttime(section165115V).Forthepurposeof
workingoutitsnotionallosses,CGTassetsacquiredbythecompanyforlessthan$10,000are
disregarded(subsections165115GC(6)and165115V(2)).

3. OUTLINEOFIMPROVEMENTSTOTHECOMPANYLOSSRECOUPMENT
RULES

12. Theoperationofthecompanylossrecoupmentruleswillbeimprovedby:

modifying the ordinary continuity of ownership test so that, where shares are held by a
complying superannuation fund, a complying approved deposit fund, a first home savers
account trust, a special company or a managed investment scheme, the company is not
requiredtotraceownershipthroughthatentity;

extending the concessional tracing rules under the modified continuity of ownership test
wheredirectandindirectstakeholdershavealessthan10percentstakeinthelosscompany
sothattheyapplywhere:

anentityisinterposedbetweenrelevantdirectstakeholdersandthelosscompany;

an entity that is interposed between relevant stakeholders and the loss company
demergessharesinthelosscompanyorinterestsinanotherentityinterposedbetween
itselfandthelosscompany;or

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 aforeignlistedcompanythatisinterposedbetweenastakeholderandthelosscompany
issuesbearerdepositoryreceipts;

extending the concessional tracing rules under the modified continuity of ownership test so
that they apply where an entity is interposed between the loss company and a relevant
stakeholderthatisacomplyingsuperannuationfund,aforeignsuperannuationfundregulated
underaforeignlaw,acomplyingapproveddepositfund,afirsthomesaversaccounttrusts,a
specialcompanyoramanagedinvestmentscheme;and

clarifying that, for the purpose of applying the modified continuity of ownership test when a
corporatechangehappensbecausenewshareshavebeenissuedinacompany,thecorporate
changeendswhenallofthenewsharesareissued.

13. Finally, the loss integrity rules will be modified so that, for the purpose of applying the low
value asset exclusions, all membership interests in an entity, which are owned by the test
companyattherelevanttimes,willbetreatedasasingleasset.

4. MODIFICATIONSTOTHECONTINUITYOFOWNERSHIPTEST
14. Forthepurposeofapplyingthecontinuityofownershiptest,thetestsforfindingoutwhether
acompanyhasmaintainedthesameownersarecontainedinSubdivision165D.

15. A company satisfies the continuity of ownership test if it satisfies the primary test or the
alternative test in respect of voting power, rights to dividends and rights to capital
distributionsduringtheownershiptestperiod(sections165150,165155and165160).

16. The primary test is satisfied if there are persons who, at a particular time, beneficially own
betweenthemsharesthatcarrytherightto:

exercisemorethan50percentofthevotingpowerinthecompany;

receivemorethan50percentofanydividendsthatthecompanymaypay;and

receivemorethan50percentofanydistributionofcapitalofthecompany.

17. The alternative test is satisfied if, broadly, it is the case, or it is reasonable to assume, that
therearepersons(noneofwhomarecompaniesor,inthecaseofvotingpower,companiesor
trustees)whoataparticulartimedirectlyorindirectly:

control,orareabletocontrol,morethan50percentofthevotingpowerinthecompany;

havetherighttoreceivefortheirownbenefitmorethan50percentofanydividendsthatthe
companymaypay;and

have the right to receive for their own benefit more than 50 per cent of any distribution of
capitalofthecompany.

18. For the purpose of applying these tests, shares held by, broadly, government entities,
nonprofit companies and charitable bodies are taken to be beneficially owned by a person
who is not a company, and in the case of charitable bodies that are a trust, is neither a
company nor a trustee (section165202). As a result, it is not necessary to trace through
sharesheldbytheseentitiestodetermineultimatebeneficialownership.

PROPOSEDCHANGES
19. Itisproposedtoamendsection165202,orinsertanadditionalsubsectionthathasthesame
effect,sothatitcoverssharesheldbyanentitythatis:

acomplyingsuperannuationfund;

aforeignsuperannuationfundregulatedunderaforeignlaw;

acomplyingapproveddepositfund;

afirsthomesaversaccounttrust;

aspecialcompany(asdefinedinsubsection9951)(1);

a managed investment scheme registered under the Corporations Act 2001, or recognised
underanequivalentforeignlawasanentitywithsimilarstatus;or

anentityprescribedbytheIncomeTaxAssessmentRegulations1997.

20. However,theconcessionaltracingruleswillnotapplytoentitieswithlessthan10members,
mirroringtheintegrityrulesinsection166245.

21. Asaresult,itwillgenerallynotbenecessarytotracethroughthesharesheldbytheseentities
todetermineultimatebeneficialownership.

22. The scope of this exception is consistent with the scope of a similar exception that applies
underthemodifiedcontinuityofownershiptest(seesubsections166245(2)and(3)).

5. EXTENSIONOFTHECONCESSIONALTRACINGRULESUNDERTHE
MODIFIEDCONTINUITYOFOWNERSHIPTEST

23. Toreducecompliancecosts,theoperationofthecontinuityofownershiptestwillbemodified
for widely held companies and eligible Division166 companies (together known as tested
companies)seekingtodeducttaxlossesorapplynetcapitallosses.

24. A primary benefit of the modified continuity of ownership test is that concessional tracing
rules apply so that it is not necessary to trace ownership through to the ultimate beneficial
ownersofthesharesinthetestedcompanywhere,broadly:

4
 directstakesoflessthan10percentareheldinthetestedcompany(section166225);

indirectstakesoflessthan10percentareheldinthetestedcompany(section166230);

stakes between 10 per cent and 50 per cent in the tested company are held directly or
indirectlybyawidelyheldcompany(section166240);

stakesinthetestedcompanyarehelddirectlyorindirectlybyasuperannuationfundorcertain
othertypesofentities(section166245);

bearersharesareheldinforeignlistedcompaniesthatholdstakes,directlyorindirectly,inthe
testedcompany(section166255);or

depository entities hold stakes in foreign listed companies that hold stakes, directly or
indirectly,inthetestedcompany(section166260).

25. The proposed improvements to the modified continuity of ownership test will extend the
circumstancesinwhichtheseconcessionaltracingrulesapply.

5.1 HOLDINGCOMPANYINTERPOSEDBETWEENADIRECTSTAKEHOLDERANDTHETESTED
COMPANY

26. Whereastakeholderhasadirectstakeinthetestedcompanythatcarriesrightstolessthan
10percentofthevotingpower,dividendsandcapitaldistributions,itisnotnecessarytotrace
through to the ultimate beneficial owners (section 166225). This is achieved by treating all
directstakesoflessthan10percentasbeingheldbyasinglenotionalentitythatisaperson.

27. Asimilarconcessionapplieswhereastakeholderhasanindirectstakeinthetestedcompany
that carries rights to less than 10 per cent of the voting power, dividends and capital
distributions(section166230).Inthesecircumstances,theownershiptracingrulesareapplied
asthoughthetopinterposedentityisasingleperson.

28. A problem arises if, during the test period, a holding company is interposed between the
tested company and a less than 10 per cent direct stakeholder. In these circumstances, the
stake will be attributed to the interposed company under section 166230 from that time
onwards, rather than the single notional entity to whom the stake was initially attributed to
under section 166225. Consequently, the tested company may fail the continuity of
ownership test, even though the interposition of the holding company does not change the
ultimatebeneficialownershipofthetestedcompany.

PROPOSEDCHANGES
29. Itisproposedtoamendsection166225where:

a new entity (the interposed entity) acquires all the shares or other interests in the tested
company;

anentitythatwas,beforetheinterposition,alessthan10percentdirectstakeholderacquires,
directlyorindirectly,allthesharesorotherinterestsintheinterposedentity;

 the new interposed entity has the same classes of shares or other interests as the tested
company;

ifthenewinterposedentityisacompanythesharesarenotredeemableshares;and

in any case each stakeholder holds the same proportion of total voting stakes, dividend
stakesorcapitalstakesin thenewinterposedentityimmediatelyaftertheacquisitionasthe
stakeholderheldinthetestedcompanyimmediatelybeforetheacquisition.

30. In these circumstances, section166225 will apply as if, during the test period, the new
interposed entity is a person (other than a company) who is the same single notional entity
undersubsection166225(2),orthenewinterposedentityistakentohaveheldthestakeof
thesinglenotionalentityatallrelevanttimes.

31. As a result, the same single notional entity will be taken to hold the stakes in the tested
company before and after the entity is interposed between the direct stakeholder and the
tested company. Therefore, the interposition of a holding company between the tested
companyandalessthan10percentdirectstakeholderwillnot,ofitself,causeafailureofthe
continuityofownershiptest.

5.2 DEMERGERBYATOPINTERPOSEDENTITY
32. Whereastakeholderhasanindirectstakeoflessthan10percentinthetestcompany,itisnot
necessarytotracethroughtotheultimatebeneficialownersofthestakeinthetestcompany.
Instead, the indirect stake of less than 10 per cent is attributed to the top interposed entity
(section166230).

33. If the top interposed entity demerges shares in the tested company, or interests in another
entityinterposedbetweenitselfandthetestedcompany,thelegalownerofthe10percent
indirectstakechanges.Asaresult,theconcessionaltracingrulesceasetoapplyastheindirect
stakeiseitherattributedtoadifferenttopinterposedentity,orisastakethatishelddirectly,
fromthattimeonwards(even thoughnochange inthe ultimatebeneficial ownershipofthe
stakearisesasaconsequenceofthedemerger).

34. Ifthetestedcompanyappliestheordinarycontinuityofownershiptest,itwillneedtotrace
ownership through to the ultimate beneficial owners and, all other things being equal, will
continuetopassthecontinuityofownershiptest.However,itwillinappropriatelyloseaccess
tothecompliancecostbenefitsthatariseundertheconcessionaltracingrulesforwidelyheld
companiesandeligibleDivision166companies.

PROPOSEDCHANGES
35. It is proposed to amend section 166230 so that it will continue to apply where the top
interposedentitydemerges.

36. Thatis,itisproposedtoamendsection166230where:

thetopinterposedentityisacompanyoratrust;

6
 ademerger(asdefinedinsubsection9951(1))happenstoademergergroup,ofwhichthetop
interposedentityistheheadentity(asdefinedinsubsection9951(1));

asaconsequenceofthedemerger,oneormoreentitiesthatpreviouslyheldanindirectstake
inthetestedcompanycontinuestoholdanindirectstake,orbeginstoholdadirectstake,in
thetestedcompany;

thedemergedentitieshavethesameclassesofsharesorotherinterestsasthetopinterposed
entity;

if the top interposed entity demerges shares in the tested company or another company
interposedbetweenitselfandthetestedcompany,thesharesarenotredeemableshares;and

each stakeholder holds the same proportion of total voting stakes, dividend stakes or capital
stakesinthedemergedentitiesimmediatelyafterthedemergerasthestakeholderheldinthe
topinterposedentityimmediatelybeforethedemerger.

37. Inthesecircumstances,section166230willapplyasif,atthetimestheentitythatholdsoris
takentoholdthedemergedsharesorotherinterestsisalsotakentohaveheldthatstake,the
topinterposedentityatalltimesheld,oristakentohaveheld,astakeinthetestedcompany.

38. Asaresult,thesameentitywillbetakentoholdthestakesinthetestedcompanybeforeand
afterthedemergerbythetopinterposedentity.

5.3 ENTITYINTERPOSEDBETWEENASUPERANNUATIONFUNDANDTHETESTEDCOMPANY
39. Concessional tracing rules also apply where a stake is held directly or indirectly by certain
specifiedentities(section166245).Thespecifiedentitiesare,broadly:

acomplyingsuperannuationfund;

aforeignsuperannuationfundthatisregulatedunderaforeignlaw;

acomplyingapproveddepositfund;

afirsthomesaversaccounttrust;

aspecialcompanythatis,broadly,amutualaffiliatecompany,amutualinsurancecompany,
anAustraliantradeunionorasportingclub;or

amanagedinvestmentscheme.

40. In these circumstances, if the specified entity has more than 10 members, the tracing rules
applyasifthespecifiedentitywereaperson(otherthanacompanyoratrustee)whoheldthe
relevantstakesinthetestedcompany.

41. Ifthespecifiedentityhas10orfewermembers,eachofthemembersistakentoholdanequal
proportionofthespecifiedentitysvoting,dividendandcapitalstakesinthetestedcompany.
Each member is also treated as a person (other than a company or a trustee), regardless of
whetherthememberisactuallyanindividual.

42. If applying the rule for a specified entity with 10 or fewer members leads to each of those
membersbeingattributedwithlessthan10percentofthevoting,dividendandcapitalstakes
inthetestedcompany,thetracingrulesapplyasifthespecifiedentitywereaperson(other
thanacompanyoratrustee)whoheldtherelevantstakesinthetestedcompany.

43. However, these concessional tracing rules cease to apply if a holding company is interposed
between the specified entity and the tested company (even though the ultimate beneficial
owners of the tested company remain the same following the interposition of the holding
company).Thisisbecausesuchaninterpositionwillinfringethesamesharesameinterestrule
insubsection166272(2),whichrequiresthattheonlysharesinthetestedcompanythatare
takenintoaccountareexactlythesamesharesandareheldbythesamepersons.Theshares
inthetestedcompanywereheldatthebeginningofthetestedcompanystestperiodbythe
specifiedentity,andatsomepointinthetestperiodtheystarttobeheldbytheinterposed
holdingcompany.Toovercomethisproblem,thetestedcompanymustrelyonthesavingrule
insubsection166272(8).

44. Thesavingruleinsubsection166272(8)requiresthetestedcompanytodeterminewhether
lessthan50percentoftheloss(orotherattribute)hasbeenduplicatedbystakeholdersinthe
testedcompany.Thisgivesrisetoadditionalcompliancecostsforwidelyheldcompaniesand
eligibleDivision166companies.

45. Ifaholdingcompanyisinterposedbetweenthetestedcompanyandaspecifiedentity,then
the stakeholder will continue to hold an indirect stake in the tested company. In these
circumstances,section166245shouldapplytomodifytheownershiptests.

PROPOSEDCHANGES
46. Itisproposedtoamendsection166245where:

a new entity (the interposed entity) acquires all the shares or other interests in the tested
company;

a specified entity acquires, directly or indirectly, all the shares or other interests in the
interposedentity;

the new interposed entity has the same classes of shares or other interests as the tested
company;

ifthenewinterposedentityisacompanythesharesarenotredeemableshares;and

in any other case the specified entity holds the same proportion of total voting stakes,
dividendstakesorcapitalstakesinthenewinterposedentityimmediatelyaftertheacquisition
asitheldinthetestedcompanyimmediatelybeforetheacquisition.

47. In these circumstances, the condition in paragraph166245(1)(a) (which requires a specified

entitytodirectlyorindirectlyholdarelevantstakeinthetestedcompany)willcontinuetobe
satisfied for the purposes of applying section166245 to the specified entity, without
infringingthesamesharesameinterestruleinsubsection166272(2)andthusnothavingto
satisfythesavingruleinsubsection166272(8).

8
48. Asaresult,theinterpositionofthenewentitybetweenthetestedcompanyandthespecified
entitywillnot,ofitself,causeafailureofthecontinuityofownershiptest.

5.4 BEARERDEPOSITORYRECEIPTS
49. Bearersharesarenegotiableinstrumentswhichaccordownershipofsharesinacompanyto
the person who possesses the bearer share certificate. The owners of bearer shares are not
recorded in the share register. Rather, the transfer of bearer shares occurs through the
physical handover of the share certificate. Accordingly, it is not ordinarily practicable for a
companytotraceownershipthroughbearershares.

50. Consequently,aconcessionaltracingruleappliestobearersharescarryingvoting,dividendor
capitalstakesof50percentormoreinaforeignlistedcompanythathasadirectorindirect
stakeinthetestedcompany,providedthatcertainconditionsaresatisfied(section166255).If
thetracingruleapplies,asinglenotionalentity(beingapersonotherthanacompany)istaken
to control the voting power in, and have the right to receive any dividends or capital
distributionsfromthetestedcompany,thatarecarriedbythebearershares.

51. Due to regulatory requirements relating to the transfer of shares that apply in the
Netherlands,sharesinaNetherlandsparentcompanyareoftenheldbyastichting(whichhas
somelegalfeaturesofanAustraliancompanyandsomelegalfeaturesofanAustraliantrust).
InexchangeforeachshareintheNetherlandsparentcompany,thestichtingissuesabearer
depository receipt. The bearer depository receipt represents an economic and beneficial
interestintheNetherlandsparentcompanyandiseffectivelyequivalenttotheownershipofa
share.Thebearerdepositoryreceiptsarelistedforquotationintheofficiallistofanapproved
stockexchange.

52. Bearer depository receipts are essentially equivalent to bearer shares. However, the
concessional tracing rules do not apply to bearer depository receipts because they do not
satisfytheconditionsinsection166255.

PROPOSEDCHANGES
53. It is proposed to modify section 166255 so that bearer depository receipts issued by an
interposedforeignentitythatarelistedforquotationintheofficiallistofanapprovedstock
exchangeareeligibleforthesameconcessionaltracingrulesasbearershares.

54. That is, it is proposed to amend section166255 so that the following paragraphs refer to
bearerdepositoryreceipts(inadditiontobearershares):

paragraph166255(1)(e);

paragraph166255(1)(f);

subsection166255(2)(beforeparagraph(a));

paragraph166255(2)(a);and

paragraph166255(2)(b).

6. APPLYINGTHEMODIFIEDCONTINUITYOFOWNERSHIPTEST
FOLLOWINGANISSUEOFNEWSHARES

55. Under the modified continuity of ownership test, widely held companies and eligible
Division166companiesmustmaintainsubstantialcontinuityofownershipbetweenthestart
ofthetestperiodand:

theendofeachincomeyearinthetestperiod;or

theendofeachcorporatechangeinthetestperiod(subsection1665(3)).

56. A corporate change can occur in a number of ways (section 166175). One way that a
corporatechangecanhappenisifthecompanyissuesnewsharesresultinginanincreaseof
20percent or more in either the issued share capital of the company or the number of the
companyssharesonissue(paragraph166175(1)(d)).

57. Currently, when a corporate change is brought about by the issue of shares, the corporate
changeendswhentheofferperiodfortheissueofsharesends(paragraph166175(2)(c)).In
somecircumstancesallthenewsharesmaynothavebeenissuedbeforetheendoftheoffer
period. If the test is applied before all the new shares are issued, all changes in ownership
arisingfromtheissueofthenewsharesmaynotbecaptured.

58. Itislikelythatacompanywillhaveasignificantchangeofownershipwhenacorporatechange
happens. Therefore, the modified continuity of ownership test is applied at that time to
determinewhetheritcausesafailureofthecontinuityofownershiptest.Consequently,ifthe
corporatechangehappensbecauseofanissueofshares,itisclearthatallofthenewshares
thatareissuedneedtobetakenintoaccountwhenapplyingthecontinuityofownershiptest.

PROPOSEDCHANGES
59. Itisproposedtoamendparagraph166175(2)(c)toclarifythat,whereacorporatechangeis
broughtaboutbytheissueofshares,thecorporatechangeendswhenallofthenewshares
areissued.

7. LOSSINTEGRITYRULESLOWVALUEASSETEXCLUSION
60. Ifachangeoccursintheownershiporcontrolofacompanythathasanunrealisednetloss,
thelossintegrityrulesapplytopreventthecompany,totheextentoftheunrealisednetloss,
havingcapitallossestakenintoaccount,ordeductingtaxlosses,inrespectofCGTeventsthat
happen to CGT assets that it owned at the time of the change, unless it satisfies the same
business test (Subdivision165CC). For the purposes of applying Subdivision 165CC, a
company may choose to disregard CGT assets acquired for less than $10,000
(subsection165115A(1B)).

10
61. Similarly, when an alteration takes place in the ownership or control of a company, and
significantequityanddebtintereststhatentities(notbeingindividuals)haveinthecompany
are realised, multiple recognition of the companys losses are prevented by the rules in
Subdivision 165CD. To apply Subdivision 165CD, the company must work out its adjusted
unrealisedloss(section165115U).Thisrequiresthecompanytoworkoutitsnotionallossesin
respectofCGTassetsthatitownedattherelevanttime(section165115V).Forthepurposeof
workingoutitsnotionallosses,CGTassetsacquiredbythecompanyforlessthan$10,000are
disregarded(subsections165115GC(6)and165115V(2)).

62. WhereacompanyownsCGTassetsthataremembershipinterestsinanotherentity(suchas
shares in a company or units in a unit trust), there is some doubt as to whether each
membership interest is treated as a separate asset for the purposes of applying the loss
integrity rules. If this is the case then the effectiveness of the loss integrity provisions is
compromised.

PROPOSEDCHANGES
63. Itisproposedtoamendsubsections165115A(1B),165115GC(6)and165115V(2)sothatall
membershipinterests(asdefinedinsubsection9951(1)inanentitywhichareownedbythe
testcompanyattherelevanttimearetreatedasasingleassetforthepurposesofapplyingthe
$10,000thresholdtest.

8. APPLICATIONDATE
64. Theproposedamendmentswillapplytotaxlossesthatacompanyseekstodeduct,andnet
capitallossesthatacompanyseekstoapply,inthe201112incomeyearorinalaterincome
year.

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