Private ruling: Tax losses - business continuity test
Date of advice: 10 October 2025
Published: 24 November 2025
Ruling period: Income year ended 30 June 20XX

Ruling: Q1: Will the Company satisfy the same business test in section 165-210 of the Income Tax Assessment Act 1997 ('ITAA 1997') during the income year ended 30 June 2026, and consequently, satisfy the business continuity test in section 165-13? | A1: Yes

Relevant facts and circumstances: The Company is a private company that was incorporated on X XX XXXX. The Company is an Australian resident for tax purposes. Since XXXX, the Company has carried on two businesses. The X Business began trading in XXXX and the X Business in XXXX. The two businesses have operated under the same ABN since XXXX. The Company's tax returns for the income years ended 30 June 20XX to 30 June 20XX returned the following tax losses: Table 1: losses in company tax returns Income year ended Tax loss 30 June 20XX $X 30 June 20XX $X 30 June 20XX $X Management accounts for the income years ended 30 June 20XX to 30 June 20XX showed the following: Table 2: management accounts Income year ended Management accounts net income (loss) X Business X Business 30 June 20XX ($X) $X 30 June 20XX ($X) $X 30 June 20XX ($X) $X On X XX XXXX, the Company sold the X Business to an unrelated third party. After the sale of the X Business, one of the shareholders of the Company intends to purchase all of the remaining shares in the Company. This will result in the Remaining Shareholder owning 100% of the shares in the Company. The Remaining Shareholder intends to continue running the X Business upon purchasing the remaining shares in the Company. The only change that the Remaining Shareholder will make to the business is downsizing its business premises. Apart from cash and inventory, the main asset of the X Business is its brand, which will remain the same. The goodwill attached to the brand will continue generating income both before and after the Remaining Shareholder purchases the remaining shares in the Company. The activities of the X Business that are conducted to generate revenue will remain the same both before and after the Remaining Shareholder purchases the remaining shares in the Company. There will be no new activities that would result in the identity of the business changing.

Relevant legislative provisions: ITAA 1997 section 36-17 | ITAA 1997 section 36-25 | ITAA 1997 section 165-10 | ITAA 1997 section 165-12 | ITAA 1997 section 165-13 | ITAA 1997 section 165-210 | ITAA 1997 section 165-211 | ITAA 1997 section 960-115 | ITAA 1997 section 995-1

Reasons for decision: Summary: The business that is carried on by the Company during the business continuity test period and the test time is the same and the Company will satisfy the same business test in section 165-210. | Detailed Reasoning - Deduction of prior year tax losses by companies: Section 36-17 outlines how corporate tax entities may deduct prior year tax losses in a later year of income. Where a corporate tax entity has no net exempt income, and where the entity's total assessable income for the later income year exceeds the entity's total deductions (except tax losses), the entity can choose how much of a prior year tax loss it deducts from this excess. Where the entity has net exempt income, it must first follow a two step process outlined in subsections 36-17(3) and (4). The definition of corporate tax entity in section 960-115 includes companies. The ability for a company to deduct prior year tax losses is also limited by section 36-25. Section 36-25 sets out special rules relating to tax losses of companies, with item 2 of table 2 in section 36-25 stating the following: It [the company] cannot do so [deduct a tax loss] unless: • the same people owned the company during the loss year, the income year and any intervening year; and • no person controlled the company's voting power at any time during the income year who did not also control it during the whole of the loss year and any intervening year; or the company has satisfied the business continuity test. Item 2 of table 2 in section 36-25 refers to Subdivision 165-A. Section 165-10 provides that a company cannot deduct a tax loss unless either: (a) it meets the conditions in section 165-12 (which is about the company maintaining the same owners); or (b) it meets the condition in section 165-13 (which is about the company satisfying the business continuity test). | Detailed Reasoning - Continuity of majority ownership test: Broadly, a company meets the conditions in section 165-12 if it maintains the same owners during the ownership test period. Section 165-12 provides the following: (1) In determining whether section 165-10 prevents a company from deducting a tax loss, the ownership test period is the period from the start of the loss year to the end of the income year. (2) There must be persons who had more than 50% of the voting power in the company at all times during the ownership test period. (3) There must be persons who had rights to more than 50% of the company's dividends at all times during the ownership test period. (4) There must be persons who had rights to more than 50% of the company's capital distributions at all times during the ownership test period. Before the intended purchase of the remaining shares in the Company by the Remaining Shareholder, the Company will have met the continuity of majority ownership test in section 165-12. However, upon the Remaining Shareholder purchasing the remaining shares in the Company, the Company will fail the continuity of majority ownership test. Accordingly, it will be necessary to consider the conditions in section 165-13. | Detailed Reasoning - Business continuity test: Subsection 165-13(2) provides that the company must satisfy the 'business continuity test' for the income year (the business continuity test period). The test is applied to the business the company carried on immediately before the test time shown in the table to subsection 165-13(2): Table 3: business continuity test | Detailed Reasoning - The test time is:: 1 It is practicable to show there is a period that meets these conditions: (a) the period starts at the start of the * ownership test period or, if the company came into being during the * loss year, at the time the company came into being; (b) the company would meet the conditions in subsections 165 - 12(2), (3) and (4) if the period were the ownership test period for the purposes of this Act The latest time that it is practicable to show is in the period 2 Item 1 does not apply and the company was in being throughout the * loss year The start of the loss year 3 Item 1 does not apply and the company came into being during the * loss year The end of the loss year Section 995-1 provides that 'business continuity test' has the meaning given by Subdivision 165-E. Section 165-210 in Subdivision 165-E provides that a company satisfies the business continuity test if throughout the business continuity test period it carries on the same business as it carried on immediately before the test time. However, a company won't satisfy the business continuity test under section 165-210 if: (a) during the business continuity test period, the company derives assessable income from a business of a kind that it did not carry on, or a transaction of a kind that it had not entered into in the course of its business operations, before the test time (paragraphs 165-210(2)(a) and (b)); and (b) before the test time, the company started to carry on a business it had not previously carried on or entered into a transaction of a kind that it had not previously entered into in the course of its business operations for the purposes of being taken to have carried on the same business or transaction during the business continuity test period (paragraphs 165-210(3)(a) and (b)). Also in Subdivision 165-E, subsection 165-211(1) provides that a company satisfies the business continuity test in relation to a tax loss for an income year starting on or after 1 July 2015 if throughout the business continuity test period it carries on a business (its current business ) that is similar to the business it carried on immediately before the test time (its former business ). Without limiting the matters that may be taken into account in ascertaining whether the company's current business is similar to its former business, subsection 165-211(2) provides that the following matters must be taken into account: (a) the extent to which the assets (including goodwill) that are used in its current business to generate assessable income throughout the business continuity test period were also used in its former business to generate assessable income; (b) the extent to which the activities and operations from which its current business generated assessable income throughout the business continuity test period were also the activities and operations from which its former business generated assessable income; (c) the identity of its current business and the identity of its former business; (d) the extent to which any changes to its former business result from development or commercialisation of assets, products, processes, services or marketing or organisational methods of the former business. Subsection 165-211(3) provides that the company does not satisfy the business continuity test under section 165-211 if, before the test time, it: (a) started to carry on a business it had not previously carried on; or (b) in the course of its business operations, entered into a transaction of a kind that it had not previously entered into; and did so for the purpose, or for the purposes including the purpose, of being taken to have carried on throughout the business continuity test period a business that is similar to the business it carried on immediately before the test time. | Detailed Reasoning - Business continuity test period and test time: In determining whether the Company satisfies the business continuity test, section 165-13 first requires the business continuity test period and the test time to be established. In accordance with subsection 165-13(2), the business continuity test period is the income year in which the Company wishes to deduct tax losses. This will be income year ended 30 June 2026. Where it is practicable to show that a company meets the conditions in subsections 165-12(2), (3), and (4), in accordance with the table in subsection 165-13(3), the test time will be the latest time that it is practicable to show that the company meets the conditions in subsections 165-12(2), (3), and (4). Applied here, subsections 165-12(2), (3), and (4) are currently met because, at all times during the ownership test period. On the current facts, the Company will fail continuity of majority ownership test when the Remaining Shareholder purchases the remaining shares in the Company. The test time for the purposes of subsection 165-13(2) will therefore be the date on which the Remaining Shareholder purchases the remaining shares in the Company. | Detailed Reasoning - The same business test: Whether the Company satisfies the same business test in section 165-210 requires an examination and comparison of its business during the business continuity test period with its business immediately before the test time to determine if the positive and negative tests in section 165-210 are met. Taxation Ruling TR 1999/9 Income tax: the operation of sections 165-13 and 165-210, paragraph 165-24(b), section 165-26 and section 165-132 ('TR 1999/9') outlines the Commissioner's view on the application of the same business test. While sections 165-13 and 165-210 have been amended since the publication of TR 1999/9, Commissioner's view in TR 1999/9 remains relevant in determining what the same business test means and whether the same business is being carried on. Paragraph 30 of TR 1999/9 states that for a company to satisfy the same business test, the company must be able to show that it carried on at all times during the period of recoupment [the business continuity test period] the same business as the business that the company carried on at the change-over [the test time]. Paragraph 31 of TR 1999/9 cites Gibbs J's decision in Avondale Motors (Parts) Pty Ltd v Federal Commissioner of Taxation . [1] In considering section 80E of the Income Tax Assessment Act 1936 , the predecessor to section 165-210, Gibbs J said that 'it seems to me natural to read the section as referring to the same business, in the sense of the identical business'. [2] This is in contrast to a business of the same kind or of a similar kind. Taking TR 1999/9 into consideration, the positive and negative tests in section 165-210 are discussed below. Will the Company be carrying on the same business throughout the business continuity test period as it carried on immediately before the test time? The X Business will be the only business that the Company carries on immediately before the test time. This is because the X business was sold on X XX XXXX and as at the date of this Ruling, the test time is yet to occur (being when the Remaining Shareholder purchases the remaining shares in the Company). The Remaining Shareholder intends to make no changes to the activities of the X Business after purchasing the remaining shares in the Company. The name and goodwill of the business will remain the same. The X Business will continue generating revenue in the same manner as it is currently doing, and there will be no new activities. The only change that the Remaining Shareholder will make to the business is downsizing its business premises. It is not clear whether downsizing the business' premises will result in a contraction of its activities. However, as noted in subparagraph 60(d) of TR 1999/99, a contraction of a taxpayer's business activities may not, in itself, result in a change in the identity of the business carried on by the taxpayer. As there are no other changes to the business or the activities of the business, any contraction in the activities of the business that may result from downsizing its business premises, without more, will not result in the Company carrying on a business that is not the same in the business continuity test period. A change in the location of its business premises will not change the identity or character of the business. Its brand will remain the same. Accordingly, for the purposes of subsection 165-210(1), the Company will be carrying on the same business during the business continuity test period as it did immediately before the test time. Will the Company derive assessable income from a business or transaction of a kind it had not entered into before the test time? After the purchase of the remaining shares in the Company by the Remaining Shareholder, it is intended for the Company to continue carrying on the X Business. The brand and goodwill of the X Business will remain the same and will continue to be used to generate income through the same transactions it is currently entering into. While the business premises will be downsized, there will be no changes to the type of activities that the business will be carrying on or the type of transactions it will be entering. Accordingly, the negative tests found in paragraphs 165-210(2)(a) and (b) will not prevent the Company from satisfying the business continuity test in section 165-210. Did the Company carry on a business or enter into a transaction of a kind that it had not previously entered into in the course of its business operations for the purposes of being taken to have carried on the same business or transaction during the business continuity test period? The Company has been carrying on the X Business since XXXX. There is nothing in the facts to suggest that the Company began carrying on a business that it had not previously carried on for the purposes of being taken to have carried on the same business during the business continuity test period. Similarly, there is nothing in the facts to suggest that the Company entered into a transaction of a kind that it had not previously entered into in the course of its business operations for the purposes of being taken to have entered into the same transactions during the business continuity test period. Accordingly, the tests in paragraphs 165-210(3)(a) and (b) will not prevent the Company from satisfying the business continuity test in section 165-210. | Detailed Reasoning - Conclusion: The Company will be carrying on the same business in the business continuity test period as it was just before the test time for the purposes of section 165-210. Consequently, the business continuity test in section 165-13 will be satisfied. | Detailed Reasoning - Question: 2 | Summary: As the answer to Question 1 is yes, it is unnecessary to consider and answer Question 2. [1] (1971) 124 CLR 97; 71 ATC 4101. [2] Ibid, 106.