Private ruling: Whether the company passes the same business test
Date of advice: 16 June 2016
Published: July 2016
Ruling period: Year ending 30 June 2016 | Year ending 30 June 2017 | Year ending 30 June 2018 | Year ending 30 June 2019 | Year ending 30 June 2020 | Year ending 30 June 2021
Date scheme commenced: 1 July 2015

Ruling: Q1: Will the company pass the same business test under section 165-210 of the Income Tax Assessment Act 1997 if the sale of the shares occurs? | A1: Yes.

Relevant facts and circumstances: The company is involved in certain business activities. There are a number of shareholders in the company. Some of the shareholders want the remaining shareholders to buy their shares in the company. If the purchase goes ahead the company will fail the continuity of ownership test. The shareholders and the directors of the company have not changed since its incorporation. The company has conducted the same business activities since it was incorporated. The company has one project in progress. It expects to make a profit from the project. The company has carry-forward losses. Once the carry-forward losses have been used the directors will wind up the company. If the profit from the project in progress is less than expected and there are still losses within the company, it will undertake another project of the same type it has carried on in the past in order to utilise the remaining losses and then the company will be wound up.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 165-12 | Income Tax Assessment Act 1997 Section 165-13 | Income Tax Assessment Act 1997 Section 165-210

Reasons for decision: Summary: Where a loss company fails the continuity of ownership test (COT) under section 165-12 of the Income Tax Assessment Act 1997 (ITAA 1997), section 165-13 of the ITAA 1997 provides that it can still recoup its tax losses if it passes the same business test (SBT) contained under section 165-210 of the ITAA 1997. The company will fail the COT. We will now address whether the company passes the SBT in order for the company to recoup its prior year losses. | Detailed Reasoning - Small Business Test: Subsection 165-210(1) of the ITAA 1997 states a company satisfies the same business test if throughout the same business test period it carries on the same business as it carried on immediately before the test time. The same business test period is defined as the income year for which the company is seeking to recoup the loss. | Detailed Reasoning - Test time: Section 165-13 of the ITAA 1997 provides for the following default test times to be used when applying the small business test in relation to prior year losses. (a) Where practicable the test time will be the latest time that the company can show that is has satisfied the COT (b) Where it not practicable for the company to show that it has satisfied the COT for any period since incurring the loss: (i) The test time is the start of the loss year if the company existed for the whole of the loss year (ii) The test time is the end of the loss year if the company came into being during the loss year. | Detailed Reasoning - Negative limbs: Subsection 165-210(2) of the ITAA 1997 states the company does not satisfy the same business test if, at any time during the same business test period, it derives assessable income from: (a) a business of a kind that it did not carry on before the test time; or (b) a transaction of a kind that it had not entered into in the course of its business operations before the test time. Subsection 165-210(3) of the ITAA 1997 states the company also does not satisfy the same business test 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 same business test period the same business as it carried on immediately before the test time. In this case the company has operated a business undertaking the same activities since it was incorporated. It does not conduct any other activities. It is currently involved in a project. It is expected that a profit will be made in future years from that project. You have stated the company will fail the COT upon the sale of the shares. The test time is the latest time that the company can show that it has satisfied the COT and in this case was the day before the proposed share sale, therefore the test time will be the day before the shares are to be sold. The company will satisfy the positive limb of the same business test if throughout the 2016-17 financial year (same business test period) and any subsequent financial years it carries on the same business it carried on immediately before the test time. The company will fail the negative limbs if during the same business test period it derives assessable income from a business it did not conduct before the test time or from a transaction of a kind that it had not entered into in the course of its business operations before the test time. You have advised that the only activities the company will undertake in the future will be the current project and possibly another project of the same type it has carried on in the past if the profit from the current project is less than expected and there are still losses within the company. If these are the only activities the company undertakes before being wound up then the company will pass the same business test.