Commonality of shareholding for groups of companies and tax losses

Section IC 3(3) of the Income Tax Act 2007 has been amended retrospectively to ensure that the commonality of shareholding rules are not applied in a similar manner to the shareholder continuity rules.

Section IC 3(3) of the 2007 Act contained an unintended legislative change, in that a company had to satisfy certain shareholding requirements from the time a tax loss component arose until the tax loss component was used to offset tax losses against another company in the same group. This represented an unintended change in outcome when compared with the corresponding provisions in section IG 1(2) of the 2004 Act.

In section IG 1(2) of the Income Tax Act 2004, a group of shareholders was required to have at least a 66% common shareholding interest in both companies for each tax year, from the tax year the tax loss arose until the loss is offset. Provided there was at least the 66% common interest between the two companies for each year, it did not matter if the group of shareholders was different in one year from another due to transfers of shareholding.

However, in the 2007 Act section IC 3(3) required the lowest common shareholding after a change in shareholding to be taken into account in determining whether the 66% common shareholding threshold was breached in tax years before that change in shareholding.

Section IC 3(3) has been retrospectively amended to restore the effect of section IG 1(2) of the 2004 Act.