Private ruling: Company losses and the same business test
Date of advice: 18 August 2015
Published: August 2015
Ruling period: Year ended 30 June 20XX | Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Does your business satisfy the same business test (SBT) for the years ended 30 June 20XX and 20XX? | A1: No.

Relevant facts and circumstances: Company A has owned 100% of your shares since your incorporation. Company B and Trust C each owned 50% of the shares in Company A when it was incorporated. In the year ended 30 June 20XX Trust C transferred its shareholding in Company A to Trust D. Later in the year ended 30 June 20XX Trust D acquired Company B's 50% shareholding in Company A. Initially your business was basically segmented into two separate operations: 1. a retail/wholesale arm, and 2. a distribution arm. Following Trust D becoming the sole shareholder of Company B you sold your retail/wholesale operations. After the sale you did not supply to end users as a wholesaler/retailer, becoming more of a distributor. You have carry forward losses from the relevant years.

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). In your case you failed the continuity of ownership test when 50% of your shares were transferred from Trust C to Trust D. As such, for you to be able to claim the losses incurred in the relevant years you must satisfy the SBT. 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 considers a significant change in your income earning structure and character occurred when you disposed of your retail/wholesale operations, such that you do not satisfy the SBT in the years ended 30 June 20XX and 20XX. While you did not change your business as a supplier of your products you no longer carry on the same business that was carried on before the disposal. Before the test time you acted as a retailer/wholesaler (selling directly to end users) and as a distributor. Since the sale you have primarily acted as a distributor and have ceased selling directly to end users. The retail/wholesale arm of your business comprised a major segment of your operations. Your activities since your change of ownership represent a change of business.