Private ruling: Business continuity test
Date of advice: 2 March 2026
Published: 28 April 2026
Ruling period: 1 July 20XX to 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Would the Proposed Business Activities cause Company X to fail the business continuity test in sections 165-13 and 165-210 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes | Q2: If the answer to question 1 is yes, would the Proposed Business Activities cause Company X to fail the business continuity test in sections 165-13 and 165-211 of the ITAA 1997? | A2: No

Relevant facts and circumstances: 1. Company X is an Australian private company. All shares on issue are ordinary shares. 2. Company X carries on a horticultural production enterprise, with an emphasis on viticulture, vinification and the agistment of land for sheep grazing ( Existing Business ). The Existing Business has been carried out on a freehold rural property. 3. From 1 July 20XX through 30 June 20XX ( Historical Loss Period ), Company X incurred tax losses. 4. From 1 July 20XX to X MM 20XX there were changes to minority shareholdings in Company X, however the majority shareholdings during this period were held by Company Y and Company Z. On X MM 20XX, Company Y transferred its shares to Company Z and Entity W. On X MM 20XX, the remaining minority shareholders transferred their shares to Company Z. 5. Throughout the Historical Loss Period the Existing Business comprised: a) Farming produce b) Bulk and bottled wine sales c) Grape sales to wholesale purchasers d) Maintaining and managing the land e) Agistment, and f) Ancillary income sources, incidental to the core business. 6. Assets used by Company X in the Existing Business comprised multi-purpose sheds, vineyard plantings, irrigation systems, storage, ancillary plant and equipment, access roads, fencing, land and water licences. 7. The Australian wine industry continues to face considerable difficulty. There remains an oversupply of grapes and wine across Australia, exports of wine have not recovered from foreign barriers and global competition is exceedingly strong. These adverse market conditions have forced many growers to reduce the size of their vineyards, and consider other agricultural uses on the land. 8. Company X has recently undertaken works to remove low-quality vines from the land used in the Existing Business (representing approximately X% of the land). This leaves around X hectares of vineyard. The remainder of the property includes the land used for agistment, as well as dams, buildings, and roads. 9. Company X is considering using this cleared land for other agricultural activities, including cultivating an alternative crop (the Proposed Business Activities ). Company X may also use the land for additional sheep agistment. 10. New assets are not required to undertake the Proposed Business Activities as the existing main agricultural equipment can be used for all cropping activities or pasture improvement for agistment. The Existing Business and Proposed Business Activities will use a combination of equipment currently owned by Company X, and contractors who provide their own specialist equipment (e.g. harvesting machinery). 11. Staff that manage the Existing Business will manage crop maintenance. No additional staffing expenses are expected. 12. Company X would seek to sell the any crops to new customers, including at the farmers' markets, wholesale suppliers and manufacturers. The crops would generally be sold in bulk to intermediaries at prevailing market prices and having regard to their quality rather than any branding or marketing efforts. 13. Company X's internal budget modelling for the 20XX financial year shows the impact of adding a crop could improve business profits by $X. This would be via gross sales of $X (representing approximately X% of gross sales) less direct costs of $X. No other impact on income or expenses is forecast. 14. Except to the extent outlined in paragraphs 8 to 12 relating to the Proposed Business Activities, there will be no change to the Existing Business.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 36-25 | Income Tax Assessment Act 1997 Subdivision 165-A | Income Tax Assessment Act 1997 section 165-10 | Income Tax Assessment Act 1997 section 165-12 | Income Tax Assessment Act 1997 subsection 165-12(2) | Income Tax Assessment Act 1997 subsection 165-12(3) | Income Tax Assessment Act 1997 subsection 165-12(4) | Income Tax Assessment Act 1997 section 165-13 | Income Tax Assessment Act 1997 subsection 165-13(2) | Income Tax Assessment Act 1997 section 165-210 | Income Tax Assessment Act 1997 subsection 165-210(1) | Income Tax Assessment Act 1997 subsection 165-210(2) | Income Tax Assessment Act 1997 section 165-211 | Income Tax Assessment Act 1997 subsection 165-211(1) | Income Tax Assessment Act 1997 subsection 165-211(2) | Income Tax Assessment Act 1997 paragraph 165-211(2)(a) | Income Tax Assessment Act 1997 paragraph 165-211(2)(b) | Income Tax Assessment Act 1997 paragraph 165-211(2)(c) | Income Tax Assessment Act 1997 paragraph 165-211(2)(d)

Reasons for decision: Summary: The Proposed Business Activities would cause Company X to fail the business continuity test in sections 165-13 and 165-210 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Section 36-25 of the ITAA 1997 sets out special rules about tax losses. For tax losses of companies, item 2 in table 2 of section 36-25 refers to the relevant tests in Subdivision 165-A of the ITAA 1997. Specifically, section 165-10 of the ITAA 1997 provides that a company cannot deduct a tax loss unless it either meets the conditions in section 165-12 of the ITAA 1997 (which is about the company maintaining the same owners) or it meets the conditions in section 165-13 of the ITAA 1997 (which is about the company satisfying the business continuity test). In this case, when Company Z and Entity W acquired Company Y's and the minority shareholder's shares on X MM 20XX, this caused Company X to fail the continuity of ownership test in section 165-12 of the ITAA 1997. Accordingly, it will be necessary to consider the requirements of the business continuity test in section 165-13 of the ITAA 1997. Subsection 165-13(2) of the ITAA 1997 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 in subsection 165-13(2). Item 1 of the table in subsection 165-13(2) states that, where practicable, the test time is the latest time that the company can show that it has satisfied the continuity of ownership tests in subsections 165-12(2), (3) and (4) (regarding the company maintaining the same owners). Subsection 165-210(1) of the ITAA 1997 states 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 (the Same Business Test). However, a company won't satisfy the Same Business Test under subsection 165-210(1) if, at any time during the business continuity test period, it derives assessable income from either a business of a kind that it did not carry on before the test time, or a transaction of a kind that it had not entered into in the course of its business operations before the test time (per subsection 165-210(2)). The latest time Company X can show that these continuity of ownership tests were met is just prior to the share transactions on X MM 20XX. Therefore, this is the test time for the purposes of the Same Business Test and will require Company X to compare the business carried on just prior to the share transactions on X MM 20XX with the business it is carrying on throughout the income year it seeks to recoup part or all its tax losses. 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) provides extensive commentary on how the Commissioner will apply the Same Business Test, including (but not limited to) the following relevant principles: • To satisfy the Same Business Test, the company must be able to show that, during the business continuity test period, it carried on the same business as the business that the company carried on at the test time (paragraph 30 of TR 1999/9). • In Avondale Motors (Parts) Pty Ltd v Federal Commissioner of Taxation [1971] HCA 17, Gibbs J held that the 'same business' means an 'identical business' rather than a business of the same or similar kind (paragraph 31 of TR 1999/9). • Whether a company is carrying on the same business or a new business is a question of fact (paragraph 33 of TR 1999/9). • When identifying the business carried on by the company immediately before the test time, it is relevant to consider all of the activities of the company, though those activities must be considered as a whole, so as to consider the overall business of the company at that time (paragraph 34-37 of TR 1999/9). • An identical business does not mean that the business of the taxpayer during the business continuity test period must be identical in every respect to the business carried out immediately before the test time. A business may be the same, even though there have been some changes in the way in which it is carried on, provided the identity of the business is not changed (paragraph 38 of TR 1999/9). • Mere expansion or contraction of the taxpayer's business may not result in a change in the identity of the business carried on by the taxpayer. However, expansion or reduction in business activities is likely to result in a change in the identity of the taxpayer if carried out to a sufficient extreme or results in sudden and drastic change. A mere expansion of business activities is distinct from the evolution of a business (paragraphs 39-43 of TR 1999/9). • There are various relevant factors to take into account in determining whether the Same Business Test is satisfied by a taxpayer. A single factor or matter might be so important that it determines the issue but, usually, it is a combination of factors, appropriately weighted, that decides whether the same business is carried on. A factor that in isolation has little weight, may in combination with other factors have great weight and, conversely, something that is significant when it appears with other changes, may have no importance when it appears alone (paragraph 59 of TR 1999/9). • It is not only changes that must be weighed; due regard must be given to what remains the same. In determining whether the Same Business Test is satisfied, significant weight is given to changes after the change-over in the income producing product or service of the taxpayer, how it is produced, acquired or provided and/or changes in the market for that product or service. But even these are a question of fact and degree often to be decided in the context where some expansion or contraction would be expected (paragraph 59 of TR 1999/9). • 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. 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 (paragraph 60(d) of TR 1999/9). • The commencement or acquisition, by merger or otherwise, of new undertakings (including going concerns and similar or complementary undertakings) may cause a company to fail the Same Business Test, e.g. if the result is to alter the character of the overall business (paragraph 60(f) of TR 1999/9). • Other factors relevant to the issue of whether the same business is being carried on after the change-over include the name of the taxpayer, the location of the business, the existence of a period or periods of dormancy, and the circumstances accounting for the inactivity and in which activity is resumed (paragraph 60(g) of TR 1999/9). • The question of whether an undertaking of a new kind has been commenced is a question of fact. If activities different in kind from those carried on before the change-over are carried on after the change-over with some degree of system, repetition and continuity it is likely a new undertaking has been commenced. The new business test is intended to limit the expansion available under the Same Business Test. Where a taxpayer acquires or commences a new undertaking and amalgamates it in its overall business, the question posed by the legislation is whether the amalgamated business is the same business as the business carried on by the taxpayer immediately before the change-over and whether the new undertaking was of the same kind as the undertakings of that business (paragraphs 69-71 or TR 1999/9). • 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 effects are not such as to cause it to fail the Same Business Test (paragraph 72 of TR 1999/9). • The new transactions test can be difficult to interpret; however, a purposive approach would regard it as applying to all transactions entered into in the course of the taxpayer's business operations and not merely those that are 'isolated' or 'independent'. Transactions that could have been entered into in the course of business operations before the change-over consistently with its ordinary course, are usually transactions of the same kind as those that actually had been entered into (paragraph 81 of TR 1999/9). • Derivation of an amount that is so trifling as to be negligible does not cause a taxpayer to fail the new business test or the new transactions test. Whether an amount is trifling requires consideration of the amount of the losses involved in the case, and the absolute size of the amount in question (paragraph 90 of TR 1999/9). At paragraph 61, TR 1999/9 provides a list of matters that would be relevant to consider in assessing whether a taxpayer passes the Same Business Test, noting it is not intended as a checklist or to be exhaustive. These matters broadly include changes in: • The nature of products or activities undertaken by the taxpayer and changes in the way in which the business is carried out. • The customer base and mix of customers. • Turnover or gross assets attributable to sales to particular customer bases. • The methods of generating income. • The taxpayer's capital and working capital. • Goodwill. • The location where the taxpayer carries on business and where customers are located. • The trade names, trademarks, patents, royalty arrangements or other intellectual property rights of the taxpayer. • The number of persons employed by the taxpayer or who are contracted by the taxpayer. • The directors and/or management of the taxpayer. Where Company X ceases to solely carry on the Existing Business, and in addition carries on the Proposed Business Activities during a recoupment income year, it will no longer be carrying on the same business for the purposes of subsection 165-210(1) of the ITAA 1997. While the business in a recoupment year does not need to be identical in every respect to the business carried out immediately before the test time, the Proposed Business Activities are not a continuation of the Existing Business. This can be distinguished from organic growth of a business or the addition of directly compatible and complementary operations. In Fielder Downs (WA) Pty Ltd v Federal Commissioner of Taxation (1979) 45 FLR 242, Campbell J held that a taxpayer that formerly ran a business of growing and selling seed and grain was no longer running the same business when in the recoupment year the taxpayer was grazing cattle on the same property. A distinction was recognised in the character between the two businesses. This was notwithstanding that both businesses operated from the same property and that the latter business was said to have evolved from the original business. The area of vines removed by Company X represent approximately X% of the property. The forecast sales and profit that Company X has modelled around the Proposed Business Activities are not immaterial when compared to the Existing Business. The output of the Proposed Business Activities, while utilising existing resources, will be sold into new markets to new customers unrelated to the Existing Business. The transactions of the Proposed Business Activities are not of the same kind as those that may have occurred in the Existing Business. For completeness, where Company X uses the cleared land to extend their existing sheep agistment, this will satisfy the Same Business Test. It is accepted that sheep agistment forms part of the Existing Business of Company X. The expansion of this aspect of business operations and the contraction of the vineyard on the scale proposed does not change the identity of the business carried on by Company X. Agistment represented a small but consistent source of income in the Existing Business and it is expected to utilise existing resources. | Summary: The Proposed Business Activities would not cause Company X to fail the business continuity test in sections 165-13 and 165-211 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: The business continuity test introduced by the Treasury Laws Amendment (2017 Enterprise Incentives No 1) Act 2019 retained the existing same business test in section 165-210, and introduced the similar business test (Similar Business Test) in section 165-211 of the ITAA 1997. Under the Similar Business Test, tax losses from carrying on a business may also be offset against income derived from carrying on a similar business following a change in ownership or control. The Similar Business Test operates in a way that is comparable to the Same Business Test but removes the negative limbs. This removal allows a company to engage in new business activities and transactions that evolve from their pre-existing business. Subsection 165-211(1) of the ITAA 1997 states that a company also 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 that is similar to the business it carried on immediately before the test time. As per question one, the test time is just prior to the share transactions on X January 20XX, and will require Company X to compare the business carried on at this time with the business it is carrying on throughout the income year it seeks to recoup part or all of its tax losses. Without limiting the matters that may be taken into account, subsection 165-211(2) of the ITAA 1997 provides the following factors that must be taken into account in ascertaining whether the company's current business is similar to its former business: • 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 (paragraph 165-211(2)(a)). • 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 (paragraph 165-211(2)(b)). • The identity of its current business and the identity of its former business (paragraph 165-211(2)(c)). • 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 (paragraph 165-211(2)(d)). Law Companion Ruling LCR 2019/1 The business continuity test - carrying on a similar business (LCR 2019/1) provides guidance on how the Commissioner will apply the Similar Business Test, including the following: • The overall business must satisfy the Similar Business Test. The focus remains on the identity of the business as well as the continuity of business activities and use of assets to generate assessable income. If substantial new business activities or transactions do not evolve from, and complement, the business then it will be more difficult to satisfy the Similar Business Test (paragraph 7 of LCR 2019/1). • The four factors in subsection 165-211(2) of the ITAA 1997 must be taken into account require a comparison between the essential characteristics of the business, but they do not limit consideration of any other matters and the weight given to each factor is fact dependent (paragraph 8 of LCR 2019/1). • The first three factors are concerned with aspects of the business that have continued. The continuing use of certain business assets to generate assessable income rather than other assets; the extent to which the current activities and operations from which assessable income is generated were also those from which assessable income was generated previously; and where new activities have not resulted in the identity of the business changing, may all be relevant to the question of whether the Similar Business Test is passed (paragraphs 9-12 of LCR 2019/1). • The fourth factor assesses the nature of any changes that have happened. As the Similar Business Test is designed to encourage businesses to innovate, such changes will not, in themselves, cause a business to be considered dissimilar. Where changes do not result from such development or commercialisation, the business is less likely to satisfy the Similar Business Test (paragraph 13 of LCR 2019/1). Where Company X ceases to solely carry on the Existing Business, and in addition carries on the Proposed Business Activities during a recoupment income year, it will meet the requirements of the Similar Business Test in section 165-211 of the ITAA 1997. However, losses incurred prior to X July 20XX will not be eligible for recoupment under the Similar Business Test. Company X's main asset is its freehold rural property, and it is the use of this asset that generates assessable income. While Company X has other assets (including existing plant and equipment, and some goodwill), the substantial value of the company is in its real property. Company X has removed around X% of low-quality vines and will instead use this cleared land for other agricultural activities including cultivating a crop. Company X has determined this alternative is a more productive use of its main asset. While the Proposed Business Activities will represent about X% of turnover in the 20XX financial year, there should be no impact on other income or expenditure, resulting in no material change to the existing wine business. The existing plant and equipment, and employees will be used to cultivate and process any additional crop. It is not anticipated that a crop will affect the goodwill or operations of the wine business, and it is not expected to create any new branding.