Private ruling: Modified same business test
Published: June 2012
Ruling period: 1 July 2011 to 30 June 2013
Date scheme commenced: The Company is a company incorporated in Australia and is a resident of Australia for income tax purposes.

Ruling: Q1: Will the receipt of the Government grant, of itself, cause the Company to fail the same business test, as set out at section 165-210 and modified by section 707-120 and section 707-125 of the Income Tax Assessment Act 1997 (ITAA 1997), and accordingly prevent the transfer of carry forward losses of the Company to the Taxpayer Group? | A1: No. | Q2: Will the creation of the enforceable right to receive a Government grant by the Company, of itself, cause the Company to fail the same business test, as set out at section 165-210 and modified by section 707-120 and section 707-125 of the Income Tax Assessment Act 1997 (ITAA 1997), and accordingly prevent the transfer of carry forward losses of the Company to the Taxpayer Group? | A2: No.

Relevant facts and circumstances: The Company is a company incorporated in Australia and is a resident of Australia for income tax purposes. The Taxpayer is a company incorporated in Australia and is a resident of Australia for income tax purposes. The Taxpayer is the head company of a tax consolidated group (Taxpayer Group). The Taxpayer Group will be purchasing all of the issued shares in the Company. At completion of the purchase, the Company will join the Taxpayer Group. As the Company has carry forward tax losses, the Taxpayer will seek to have those losses transferred to it under subdivision 707-A of the ITAA 1997. During the 'trial year' prior to joining the Taxpayer Group, the Company will receive a substantial Government grant under a new scheme, and prior to actual receipt an enforceable right to receive the Government grant. The Company has received other Government grants, credits and assistance in the past, though of comparatively small amount. The Company will not be required to undertake any changes to its business activities as a condition of the receipt of the Government grant and the use of the funds is at the discretion of the recipient.

Relevant legislative provisions: Income Tax Assessment Act 1997 165-13 | Income Tax Assessment Act 1997 165-210 | Income Tax Assessment Act 1997 707-120 | Income Tax Assessment Act 1997 707-125 | Income Tax Assessment Act 1997 707-135

Reasons for decision: Summary: The following reasoning applies to both question 1 and 2. Any reference to 'Government grant' includes a reference to the enforceable right to receive the Government grant. In order for the Company losses to be transferred to the Taxpayer Group, the Company must satisfy the "same business test" (SBT) as set out at section 165-210 and modified by sections 707-120, 707-125, and 707-135 of the ITAA 1997. For these purposes: · the 'trial year', as defined at subsection 707-120(2), is the 12 month period ending just after the time the Company joins the Taxpayer Group; and · the 'test time', as defined at section 707-125(2)(b) and 707-135(2)(b), is each of the times just before the end of each income year ended 30 June 2009, 30 June 2010, and 30 June 2011. In summary, in accordance with the modified SBT, the Company must satisfy all of the following 4 tests for each year of Company losses: 1. the positive test, that at all times throughout the trial year the Company must carry on the 'same business' that it carried on immediately before the test time (Positive Test): subsection 165-210(1) ITAA 1997; 2. the first negative test, that the Company must not have derived at any time during the trial year assessable income from a 'business of a kind' that it did not carry on before the test time (New Business Test): paragraph 165-210(2)(a) ITAA 1997; 3. the second negative test, that the Company must not have derived at any time during the trial year assessable income from a 'transaction of a kind' that it had not entered into in the course of its business operations before the test time (New Transaction Test): paragraph 165-210(2)(b) ITAA 1997; and 4. the anti-avoidance test, which looks to see whether the Company started to carry on business activities or entered into transactions before the test time for the purpose of satisfying the SBT during the trial year (Anti-avoidance Test): subsection 165-210(3) ITAA 1997. The Commissioner's views in relation to the SBT are outlined in Taxation Ruling TR 1999/9 and its application to consolidated groups is outlined in TR 2007/2. | Detailed Reasoning - 1. Positive test: At all material times the business of the Company has been and continues to be the [production and sale of mainly two different types of commodity]. The receipt of the Government grant has arisen as an incident of operating as a producer and seller of the commodity and will not involve any material change in the nature or operation of the business during the trial year. The receipt of the Government grant is an incident of a new scheme which relevantly applies to the existing business activities of the Company. The qualification requirements for the Government grant only had regard to previous activities of the Company. The Company will not be required to undertake any changes to its business activities as a condition of the receipt of the Government grant and the use of the funds is at the discretion of the recipient. The activities of the Company have always involved both compliance with [other] obligations and the receipt of Government grants. While not core activities these activities flow from the nature of operation as a producer and seller of this commodity. On that basis the receipt of the Government grant, or the creation of the Enforceable Right, will not, of itself, cause the Company to fail the Positive Test in subsection 165-210(1) of the ITAA 1997 for the trial year. | Detailed Reasoning - 2. New business test: The receipt of the Government grant will constitute assessable income for the Company during the trial year, however it is not considered to be derived from a 'business' as that term is taken to mean for the purposes of the New Business Test, or if from a 'business' it is not from a business 'of a kind' that it did not carry on before the test times. As stated above the business of the Company is the production and sale of mainly two different types of commodity. The receipt of the Government grant is an incident of operating that business in a changing Government scheme and its eligibility is based on the previous activities of the Company. On that basis receipt of the Government grant or the creation of the Enforceable Right will not, of itself, cause the Company to fail the New Business Test in paragraph 165-210(2)(a) of the ITAA 1997 for the trial year. | Detailed Reasoning - 3. New transaction test: As the Government grant will constitute assessable income for the Company during the trial year, the receipt of the Government grant or the creation of the Enforceable Right are transactions of relevance for the purposes of the New Transactions Test. However these transactions are considered to be entered into in the ordinary course of operation of the production and sale of the commodity and in the course of its continuing operation as such in a new Government scheme that has also given rise to eligibility for financial assistance. Had the new Government scheme and the financial assistance arisen prior to 30 June 2009 the Company would have qualified for the assistance at that time also. The Government grant represents the Government's policy to support a safe, reliable and economically viable supply system for that commodity by providing assistance to those commodity producers. The receipt of the Government grant is a transaction which could have been entered into ordinarily and naturally in the course of the Company business operations prior to 30 June 2009 had the Government's scheme been implemented earlier. It is not considered to be an extraordinary or unnatural transaction when judged against the Company business operations before and after 30 June 2009, notwithstanding the size of the payment. Government regulation has always been part of the operating environment for the Company and the Government grant is considered to be an incident of the increasing regulatory burden on these commodity producers. It is also relevant that the Company had received government grants, credits and assistance in relation to its ordinary business operations in the period prior to 30 June 2009 and in the subsequent years though of comparatively small amounts. This tends to a conclusion that the Government grant is not a new transaction for the Company but a transaction 'of a kind' which has been, or could have normally been, entered into by the Company prior to the test times. On that basis receipt of the Government grant or the creation of the Enforceable Right will not, of itself, cause the Company to fail the New Transaction Test in paragraph 165-210(2)(b) of the ITAA 1997 for the trial year. | Detailed Reasoning - 4. Anti-avoidance test: In the present circumstances the receipt of the Government grant or the creation of the enforceable Right of themselves have arisen after the test times, and the timing of the Government scheme and the timing of receipt of the Government grant was not in the control of the Company. None of Company businesses or transactions that have been started or entered into prior to the test times would be taken to have been so started or entered into for a purpose of ensuring that Company would pass the SBT in the trial year. Receipt of the Government grant or the creation of the Enforceable Right will not, of itself, cause the Company to fail the Anti-avoidance Test in subsection 165-210(3) of the ITAA 1997 for the trial year. | Detailed Reasoning - Conclusion: For these reasons neither the receipt of the Government grant, nor the creation of an Enforceable Right to receive the Government grant will, of itself, cause the Company to fail the SBT in section 165-210 and modified by sections 707-120 and 707-125 of the ITAA 1997.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.