Private ruling: Same business test
Date of advice: 15 September 2015
Published: September 2015
Ruling period: Year ending 30 June 2016 | Year ending 30 June 2017 | Year ending 30 June 2018 | Year ending 30 June 2019
Date scheme commenced: 1 July 2015

Ruling: Q1: Will the change to the provision of services following the upgrade of the system cause the company to fail the same business test due to the application of the requirements in subsections 165-210(1), 165-210(2) and 165-210(3)? | A1: No.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. Background 1. Shortly after incorporation, the company began operating a business. The company is part of a group of companies, but is not in a tax consolidated group. 2. The company charges its customers for its services. 3. The company incurred tax losses during various income tax years. The utilisation of those losses is subject to the company satisfying the same business test at the relevant test times. Current services 4. The company developed the system in-house. One of the key tasks of the system is to account for all goods delivered. The system has reduced the administration burden on the group staff and improved integrity and processing times. 5. Services have been provided by the company internally and on behalf of its customers in the past. 6. The company has competitors that provide similar services to its customers. Catalyst for change 7. A number of customers have approached the group to help facilitate additional services. 8. Customers have standard contracts that require them to keep their information confidential. They must not breach those contracts by handing information to other parties. Proposed upgrade to the system and change to the provision of services 9. The upgrade to the system will change the way in which the service are undertaken by improving the efficiency of the process. 10. Customers will enter their information into the system. 11. It is estimated that the cost of the upgrade to the system will be approximately $X (less than 0.4% of the group's annual capital expenditure). 12. The company does not expect all customers to take up the new services as some of them already have their own services in place. 13. The company expects that additional revenues of up to $Y per year (0.1% of total revenues) will be generated from the services, but revenues will increase slowly. If all customers took up the services, estimated revenues would be approximately $Z (0.3% of total revenues). 14. Additional staff are not expected to be hired as a result of offering the additional services. Any additional tasks will be incorporated as part of usual tasks undertaken by existing staff. 15. No existing contracts will be altered as a result of the new services. 16. There will be no impact on the company's ability to service existing customers, nor to accept new customers requiring the same service. 17. There will be no impact on the way that the company carries out its day to day business. Assumption Other than for the proposed change to the provision of X services, it is assumed that the requirements in subsections 165-210(1), 165-210(2) and 165-210(3) are otherwise met in relation to the same business test period and at all relevant test times.


Reasons for decision: Summary: A company cannot deduct a tax loss of an earlier income year unless it either has the same owners and the same control throughout the period from the start of the loss year to the end of the income year, or it satisfies the same business test. The company incurred tax losses in prior income tax years but does not satisfy the same ownership and control test and therefore must satisfy the same business test in order for it to be able to deduct those tax losses. The same business test has the meaning given in section 165-210. To satisfy the same business test, certain conditions must be satisfied including: 1. the company carries on the same business as it carried on immediately before the test time (subsection 165-10(1)) - same business test 2. the company does not derive assessable income from a business of a kind during the same business test period that it did not carry on before the test time (paragraph 165-210(2)(a)) - new business test 3. the company does not derive assessable income from a transaction of a kind during the same business test period that it had not entered into in the course of its business operations before the test time (paragraph 165-210(2)(b)) - new transaction test , or 4. before the test time, the company started to carry on a business it had previously not carried on, or in the course of its business operations entered into a transaction of a kind that it had previously not entered into, and did so for the purpose, or for purposes including the purpose, of being taken to have carried on throughout the same business test period the same business as it carried on immediately before the test time (subsection 165-10(3)) - anti-avoidance test . Each of those tests will now be considered in the context of the services that the company proposes to undertake. Note: for present purposes, the change-over will be the start of the loss year and the period of recoupment will be the income year in which the company seeks to deduct the tax losses. | Detailed Reasoning - 1. Same business test: A company is treated as carrying on one overall business at the change-over and during the period of recoupment, irrespective of whether those activities constitute or are treated by the company as constituting separate or distinct activities, enterprises, divisions or undertakings carried on by the company (paragraph 12 of Taxation Ruling TR 1999/9 Income tax: the operation of sections 165-13 and 165-210, paragraph 165-35(b), section 165-126 and section 165-132 ). The meaning of the word 'same' in the phrase 'same business as' imports identity and not merely similarity; the phrase 'same business as' is to be read as referring to the same business, in the sense of the identical business. However, this does not mean identical in all respects: what is required is the continuation of the actual business carried on immediately before the change-over. The organic growth of a business through the adoption of new compatible operations will not ordinarily cause it to fail the same business test provided the business retains its identity (paragraph 13 of TR 1999/9). The company satisfies the same business test in subsection 165-210(1) for the following reasons: • Since incorporation, the company has been engaged in the business and following the proposed upgrade of the system and the additional services it will provide, the company will continue to carry on its business. That is, the identity of the company's business will not change. • The company has provided services in the past and due to a need arising from its customers, proposes to provide additional services. That is, the provision of additional services will constitute the organic growth of the company's business and will represent a mere change in the process by which the company will carry on its business. • No new customers are expected to result from the additional services. Rather, existing customers will have better access to nomination and communication services and will also ensure that their information remains commercially confidential. • The capital expenditure and revenue expected to be derived will be comparatively minimal and will not change the nature of the business that the company has been, and will be, operating. | Detailed Reasoning - 2. New business test: In the new business test there is a reference to 'business of a kind' that the company did not carry on before the change-over. 'The word 'business' refers to each kind of enterprise or undertaking comprised in the overall business carried on by the company at the change-over and during the period of recoupment. A taxpayer must not engage in an undertaking or enterprise of a kind in which it did not engage before the change-over and still benefit from accumulated losses (paragraph 14 of TR 1999/9). However, the new business test allows a company to expand or develop during the period of recoupment within the same fields of endeavour as it was engaged in before the change-over provided the effect of the expansion or development is not such as to cause it to fail the same business test (paragraph 72 of TR 1999/9). The company satisfies the new business test in paragraph 165-210(2)(a) for the following reasons: • The company provided services to its customers before the test times and therefore it will not be entering into a business or enterprise of a kind that it had not already be conducting. • The catalyst for providing the additional services resulted from a need of the company's customers as the market has evolved over time. • The company could have provided the additional services to its customers if the need had arisen at the test times. • The provision of the additional services to the company's customers will be an expansion or development in the same field of endeavour and will represent organic growth of the company business. • The provision of additional services will only change the existing process to ensure that each customer entity's information remains confidential - the upgrade to the system will merely automate a process that is partially manual and will result in a more efficient process. • The additional services will only be used by existing customers and suppliers. • The provision of the additional services by the company will not result in any additional staff being employed by the company - existing staff will incorporate the tasks required to implement the additional services into their day-to day activities. • The amount of income that will be derived from the additional services and the cost of upgrading the system to provide those services will not be significant and therefore will not represent the emergence of a new business undertaking in the company. • No existing contracts will need to be altered as a result of the additional services that will be provided. | Detailed Reasoning - 3. New transaction test: The new transaction test is directed to preventing the injection of income into a loss company that has satisfied the same business test and the new business test. The new transaction test includes all transactions entered into in the course of the company's business operations and not merely those that are 'isolated' or 'independent'. Generally, the new transaction test is not failed by transactions of a type that could have been entered into ordinarily and naturally in the course of the business operations carried on by the company before the change-over. However, a transaction entered into during the period of recoupment and which is outside of the business operations before the change-over, or which is extraordinary or unnatural when judged by the course of business operations before the change-over, is usually a transaction of a different kind from the transactions actually entered into by the company before the change-over (paragraph 15 of TR 1999/9). A transaction from which income is derived in the year of recoupment, which could have been entered into before the change-over in the course of the company's business operations, and which is neither extraordinary nor unnatural in the context of the business carried on by the company at the change-over, is generally a transaction of the same kind as transactions actually entered into by the company before the change-over (paragraph 16 of TR 1999/9). The company satisfies the new transaction test in paragraph 165-210(2)(b) for the following reasons: • The company could have provided the proposed additional services to its customers before the change-over had the need from those customers arisen at that time. • The proposed additional services are a natural and non-extraordinary consequence of accommodating a need of the company's existing customer base. • The proposed additional services will not be isolated or independent transactions - the services will be integrated into the day-to-day activities of the company and its customers. | Detailed Reasoning - 4. Anti-avoidance test: The anti-avoidance provisions apply where the purpose or one of the purposes, of the company in commencing to carry on the business or entering into the transaction was the purpose of enabling the company to take into account prior year losses. This is so notwithstanding that, where there is more than one purpose, the tax avoidance purpose was not the dominant purpose of the company in commencing to carry on the business or enter into the transaction. The company satisfies the anti-avoidance test in subsection 165-210(3) for the following reasons: • The company was approached by its customers to provide the additional services. That is, the purpose in providing those services will be to meet a commercial need, rather than for a tax motive. • The company has been already providing services to its customers before the test times. Consequently, it will not be starting to carry on a business or entering into a transaction before the test times that it had not been already been engaging in. • The amount of income that will be derived from the proposed services will be negligible in comparison with the total revenue that the company receives and therefore will have a minor impact on the recoupment of the prior year income tax losses. That is, the purpose of providing the additional services is clearly not one of injecting income into the company to take advantage of its prior income year tax losses. | Detailed Reasoning - Conclusion: The company satisfies the four tests under subsections 165-210(1), 165-210(2) and 165-210(3) as the proposed services will not constitute a change to the business that it carries on. Accordingly, the same business test will be satisfied and the company will be able to deduct tax losses of earlier income years. Notwithstanding that the company satisfies the same business test, the legal maxim of de minimus non curat lex will most likely apply to disregard the derivation of the additional income from the proposed additional services as they are trifling or negligible in nature - 0.1% to 0.3% of the company's total revenue (paragraphs 89 and 90 of TR 1999/9).