Private ruling: Business continuity test
Date of advice: 18 February 2020
Published: March 2020
Ruling period: Year ended 30 June 2020
Date scheme commenced: 1 July 2019

Ruling: Q1: Will the acquisition of the Y business and the acquisition of the Z business cause Company A to fail the business continuity test in sections 165-13 and 165-210 of the Income Tax Assessment Act 1997 in the year ending 30 June 2020. | A1: No

Relevant facts and circumstances: Immediately before it failed the continuity of ownership test, Company A carried on a particular business. Company A continues to carry on the particular business. Company A has carried forward losses. Company A acquired the Y business. Company A acquired the Z business.


Reasons for decision: Summary: Legislative references are to the Income Tax Assessment Act 1997 unless stated otherwise. According to section 165-10 a company cannot deduct a tax loss unless either it meets the conditions of 'continuity of ownership' in section 165-12 ( COT ) or it meets the conditions of the 'business continuity test' in section 165-13. Company A will only be entitled to deduct its carried forward tax losses incurred prior to the COT failure if it meets the conditions of the 'business continuity test' in section 165-13. The 'business continuity test' is satisfied by a company meeting the conditions of the 'same business test' in section 165-210 ( SBT ) or the 'similar business test' in section 165-211. In this case, a substantial amount of the tax losses were incurred in income years ending prior to 1 July 2015 and any losses Company A seeks to deduct in the year ended 30 June 2020 will have been incurred in an income year ending prior to 1 July 2015. Therefore, in this case the only relevant 'business continuity test' is the SBT. The 'similar business test' in section 165-211 is not considered by this ruling. | Detailed Reasoning - SBT: A company satisfies the SBT if throughout the 'business continuity test period' it carries on the same business as it carried on immediately before the test time (subsection 165-210(1)). The company does not satisfy the SBT if at any time during the 'business continuity test period' it derives assessable income from: · a business of a kind that it did not carry on before the 'test time' (paragraph 165-210(2)(a)) or · a transaction of a kind that it had not entered into in the course of its business operations before the 'test time' (paragraph 165-210(2)(b)). Subsections 165-210(3) and 165-210(4) contain integrity rules. The 'test time' is worked out according to the table in subsection 165-13(2). In this case item 1 of the table in subsection 165-13(2) is the relevant item, which sets out that the 'test time' is the latest time that it is practicable to show that the company satisfies COT during the 'ownership test period'. The 'business continuity test period' in this case is from immediately before the test time to 30 June 2020. 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 (TR 1999/9) sets out the Commissioner's view on the SBT. | Detailed Reasoning - Subsection 165-210(1) - same business test: For the purposes of subsection 165-210(1), a company is treated as carrying on one overall business at the test time and during the same business test period where the reference to business is a reference to all the activities carried on by the company at the test time 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 TR 1999/9). Paragraph 13 of TR 1999/9 states: In the same business test, 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. Nevertheless, it is not sufficient that the business carried on after the change-over meets some industry wide definition of a business of the same kind; nor would it be sufficient for there to be mere continuance of business operations from immediately before the change-over into the period of recoupment, if the business had so changed that it could no longer be described as the same business. The analysis of whether the same business continues after the change-over may give rise to questions of degree and ultimately depends on the facts of the case. In making the analysis it needs to be acknowledged that a company may expand or contract its activities without necessarily ceasing to carry on the same business. 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; nor would discarding, in the ordinary way, portions of its old operations. But, if through a process of evolution a business changes its essential character, or there is a sudden and dramatic change in the business brought about by either the acquisition or the loss of activities on a considerable scale, a company may fail the test. Paragraph 60(d) of TR 1999/9 states: (d) An expansion or contraction of the taxpayer's business activities may not, in itself, result in a change in the identity of the business carried on by the taxpayer: Gibbs J in Avondale Motors. However, the expansion or contraction of activities may result in a change in the identity or character of the business, taking into account the nature and extent of the expansion or contraction. In particular, the organic growth of a business through the adoption of new compatible operations in the ordinary way and, similarly, the discarding of old operations in that way, may not cause a taxpayer to fail the same business test, but a sudden and dramatic change brought about by the loss or acquisition of business operations on a considerable scale is likely to do so: Walton J in Rolls-Royce (Motors) Ltd v. Bamford. On a weighing up of the facts and circumstances, the Commissioner formed the view that the identity of Company A did not change as a result of the acquisition of Y business and Z business. The Commissioner accepts that the acquisition of businesses will result in the organic growth of the overall business of Company A and there has been no dramatic or sudden change to the business operations of Company A as a result of the acquisitions. | Detailed Reasoning - Paragraph 165-210(2)(a) - new business test: Paragraph 14 of TR 1999/9 states: ... 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. In the new business test the word 'business' has a different meaning from the word 'business' in the same business test; it 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. The new business test puts a limit on the type of expansion the company may undertake if it is to retain the benefit of accumulated losses; for the taxpayer may 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 72 of TR 1999/9 states: Generally speaking, the new business test permits 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 expansion or development is not such as to cause it to fail the same business test. Cases where such failure occurs tend to be where the injection of income is occurring or could occur and, thus, not appropriate cases for the protection of sections 165-13 and 165-210 or equivalent provisions. After considering of the facts, the Commissioner accepts that the overall expansion of the overall business Company A, as a result of the acquisition of Y business and Z business is in the same fields of endeavour that Company A was engaged in before the test time. In these circumstances, the new business test will not apply to the acquisitions. TR 1999/9 relevantly states at paragraphs 15 to 17: 15. ... The new transactions test is directed to preventing the injection of income into a loss company that has satisfied the SBT and the new business test. The new transactions test includes all transactions entered into in the course of the company's business operations and not merely those that are 'isolated' or 'independent'. However, generally speaking, the new transactions 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. Conversely, 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. 16. ... 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. 17. In the new transactions test, 'transaction' refers to any operation or dealing from which income directly or indirectly flows or arises, and a company enters into a transaction for the purposes of the new transactions test if it engages or participates in it. The new transactions test is intended to extend to every means by which a company may derive income, including transactions of a passive or investment character. The words 'business operations' refer to everything that a company undertakes or does; together, the business operations constitute the business, meaning the overall business, of the company. The Commissioner accepts Company's A purpose for acquiring the Y business and the Z business is to increase its market share, create operational synergies and optimise costs. The Commissioner is satisfied that the acquisitions are not extraordinary or unnatural. In these circumstances, the new transaction test will not be applied. | Detailed Reasoning - Integrity Rules: Subsection 165-210(3) provides: The company also does not satisfy the *business continuity test under this section 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 purposes including the purpose, of being taken to have carried on throughout the *business continuity test period the same business as it carried on immediately before the test time. Subsection 165-210(4) provides: So far as the *business continuity test under this section is applied for the purpose of Subdivision 165-B (which is about working out the taxable income and *tax loss for the income year of change of ownership or control), the company also does not satisfy the test if, at any time during the *business continuity test period, it incurs expenditure: (a) in carrying on a *business of a kind that it did not carry on before the *test time; or (b) as a result of a transaction of a kind that it had not entered into in the course of its business operations before the test time In respect of the integrity rules paragraph 19 of TR 1999/9 relevantly states: ... 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 Commissioner is satisfied that there is no evidence of the transaction being motivated by tax avoidance and the integrity rules will not apply. | Detailed Reasoning - Conclusion: The acquisition of Y business and Z business will not cause Company A to lose the identity of its business carried on immediately before the test time. The acquisitions are mere expansions of the business undertakings of the kind carried on by Company A prior to the test time. The acquisitions will not fall under the new business test, the new transaction test, or the integrity rules. In these circumstances, the acquisitions will not cause Company A to fail the SBT.