Private ruling: Same Business Test
Published: July 2012
Ruling period: 2013 income year | 2014 income year
Date scheme commenced: 1 January 2012

Ruling: Q1: For the purposes of section 165-13 of the Income Tax Assessment Act 1997 (ITAA 1997), will B Pty Ltd satisfy the same business test (SBT) under Subdivision 165-E of the ITAA 1997 so that it can deduct tax losses of earlier income years from assessable capital gains expected to be made in its 2013 or 2014 income years? | A1: Yes, but B Pty Ltd will need to actually ascertain at the end of each income year that it meets the same business test in order to recoup its tax losses.

Relevant facts and circumstances: B Pty Ltd (B) is an Australian resident company for Australian income tax purposes. B has a substituted accounting period. B is an 'eligible Division 166 company' as defined under section 995-1 of the ITAA 1997. B was owned indirectly by Y Ltd (Y). B carried on a manufacturing business and operated two sites in its business. B incurred tax losses from its manufacturing activities. B decided to cease manufacturing and sell its de-commissioned plant and real estate, due to unprofitability. After manufacturing ended, B undertook various activities to prepare these assets for re-sale. In early 2010, B sold its de-commissioned plant to C, an unrelated third party. In 2010, there was a takeover by C Ltd such that B failed the continuity of ownership test (COT) in section 165-12 of the ITAA 1997. B maintained substantial continuity of ownership, under section 166-5 of the ITAA 1997, up until the takeover by C Ltd. In 2010, B made a capital gain on the sale of Site 1 to D, an unrelated third party. B expects to sell Site 2 in either 2012 or 2013, and to make a capital gain on the sale. The business of B will remain unchanged through to 31 December 2013.

Relevant legislative provisions: Income tax Assessment Act 1997 section 165-13 | Income tax Assessment Act 1997 Subdivision 165-E | Income tax Assessment Act 1997 Division 166 | Income tax Assessment Act 1997 section 166-272

Reasons for decision: Summary: Due to a change in its ownership, B failed the COT in section 165-12 of the ITAA 1997 and therefore must satisfy the SBT under section 165-13 of the ITAA 1997 to deduct its prior year tax losses and capital loss. Section 166-215 of the ITAA 1997 provides concessional tracing rules for an 'eligible Division 166 company' to satisfy the ownership tests in Subdivision 166-D of the ITAA 1997 so that the company does not have to trace through to the beneficial owners of the stakes. Relevant shareholding details showed that B maintained substantial continuity of ownership up until the COT failure in 2010 through stakes of less than 10% indirectly held in B, the loss company, as per section 166-230 of the ITAA 1997. Section 166-5 of the ITAA 1997 provides as follows, | Detailed Reasoning - 'Satisfies the same business test: 166-5(5) However, if the company satisfies the *same business test for the income year (the same business test period), it is taken to have satisfied the condition in section 165-13.' To determine the times to compare the business conducted by the company, for the purposes of the SBT, section 166-5(6) of the ITAA 1997 provides as follows | Detailed Reasoning - 166-5(6): Apply the *same business test to the *business that the company carried on immediately before the earlier of the following times (the test time): (a) the end of the first income year; (b) the first time in the test period that a *corporate change in the company *ends; for which there is no *substantial continuity of ownership of the company as between the start of the *test period and that time. Therefore, for its tax losses, B must compare the business carried on immediately before the COT failure in 2010 against the business it carried on during the year ended 31 December 2012 (the same business test period) or against the business it carried on during the year ended 31 December 2013, depending on when Site 2 is sold. The taxpayer's business in both 2012 and 2013 will be the sale of its remaining property for the purpose of re-sale at a profit, as its earlier business of manufacturing ceased prior to this date. Subsection 165-210(1) of the ITAA 1997 can be met because there was a business before the COT failure in 2010, as described above, and that same business is expected to be carried on after the takeover in both the 2012 and 2013 years. Subsection 165-210(2) of the ITAA 1997 does not apply because B has not undertaken a business of a kind that it did not carry on before the takeover, nor has it earned assessable income from a transaction of a kind that it had not entered into in the course of its business operations before the takeover. Also, subsection 165-210(3) of the ITAA 1997 does not apply as no new business was started. Therefore, it is considered that B can meet the SBT and to be eligible to deduct its tax losses. However, it will be necessary for B to actually ascertain at the end of each income year whether it meets the same business test in order to recoup its tax losses.

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