Private ruling: Company losses - same business test
Date of advice: 9 November 2017
Published: March 2018
Ruling period: Year ended 30 June 2014 | Year ended 30 June 2015 | Year ended 30 June 2016 | Year ended 30 June 2017
Date scheme commenced: 1 July 2013

Ruling: Q1: Do you satisfy the same business test (SBT)? | A1: Yes

Relevant facts and circumstances: You were incorporated in the XXXX income year. You are a company which carries on the business of a retail outlet. You have carried on the same business in the same location since inception to the present date. You traded in your own name (Store 1). You took over an informal lease of a vacated store in a nearby store (approximately XX kms away from Store 1) in the XXXX income year (Store 2). The second store traded under a different name The active company director travelled between the two stores to oversee both shops. A manager was employed in both shops. Marketing of Store 2 was undertaking through Social media. No goodwill was purchased or considered generated. The company incurred a book & tax loss of $XX, XXX in the XXXX income year. It is calculated Store 2 contributed $XX of this loss. The company incurred a book loss $XX,XXX (tax loss $XX,XX ) in the XXXX income year. It is calculated Store 2 contributed $XX.XXX of this loss. Store 2 contributed approximately XX% of the loss in XXXX and XX% in XXXX. Store 2 was closed in the XXXX income year so the active director could direct their energy into running one store. Old equipment was scrapped; useful equipment was transferred to store 1. Store 2's turnover was well under XX% of the total company sales revenue for both of the two loss years. In the XXXX income year the company returned to a book profit of $XX,XXX (Taxable income $XX,XXX before use of losses) The second shareholder transferred their XXX Ord shares (out of XXX Ord shares on issue) to the current & remaining shareholder in the XXXX income year. This caused the company to fail the continuity of ownership test (COT) in XXXX Store 2 shared with Store 1 the director and company resources such as materials, systems, financials and bank accounts.

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

Reasons for decision: Summary: A company cannot deduct a tax loss unless it satisfies either the continuity of ownership test (COT) under section 165-12 of the Income Tax Assessment Act 1997 (ITAA 1997), or the SBT under section 165-13 of the ITAA 1997 and does not fail the tainted change of control test under section 165-15 of the ITAA 1997. A company satisfies the SBT if, throughout the SBT period (the whole of the income year when the loss is sought to be recouped) the company carries on the same business as it carried on immediately before the test time (subsection 165-210(1) of the ITAA 1997). Taxation Ruling TR 1999/9 provides the Commissioner’s view on the application of the SBT and provides guidelines to assist with determining whether the SBT is satisfied. To satisfy the SBT you must be able to show that you carried on the same business, in the sense of the identical business, at all times during the income year as the business you carried on before the change in ownership occurred (paragraph 38 of TR 1999/9 ). However, this does not mean that the business carried on by you during the income year must be identical in every respect with the business that was carried on immediately before the change of control and ownership. 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 has not changed. An expansion or contraction of a 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 SBT, 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. In Case Y45; AAT Case 7,272 (1991) 22 ATR 3395; 91 ATC 426 Dr Grbich of the Administrative Appeals Tribunal determined that the taxpayer did not satisfy the SBT as the taxpayer had ceased to carry on part of its business that comprised an agency for selling an agricultural machine, notwithstanding that the taxpayer continued its agricultural consulting business at all times. This decision indicates that the discontinuance, whether by way of cessation or sale, of a significant part of the business carried on by a taxpayer is likely to result in the taxpayer not being able to satisfy the SBT. The basis of the decision by Dr Grbich was the profits of the taxpayer for the agricultural machine were an important part of the taxpayer company’s income generating activities in its early years, even allowing for the fact that most of the taxpayer’s resources were deployed in building up its investment and management advisory service. This was more than a mere change in the process by which the taxpayer ran its business. There was a substantial structural change in the nature of the taxpayer’s income earning activities. In your case the Commissioner does not consider a significant change in your income earning structure and character occurred when you closed store 2. You satisfy the SBT. You continued to carry on the same business which you carried on prior to the closure of Store 2.