Private ruling: same business test
Published: May 2014
Ruling period: 2013 to 2018 income years
Date scheme commenced: During the 2013 income year

Ruling: Q1: Will the proposed acquisition of the Company B tax consolidated group cause the Company A tax consolidated group to fail the same business test under section 165-210 of the Income Tax Assessment Act 1997 ? Answer No

Relevant facts and circumstances: Company A is the head company of a tax consolidated group ( Company A ). Company A is a business services provider to customers in a variety of business sectors in Australia. The Company A is wholly owned by a foreign incorporated company. In 2013, there was a majority change of ownership of the Company A. The Company A does not currently anticipate any major changes in ownership of the group for the relevant period. The Company A has carried forward tax losses from the 2012 income year. The Company A has also incurred tax losses in the 2013 income year. Company A Group anticipates it will start utilising its carried forward tax losses in the 2014 income year. Company B is the head company of a tax consolidated group ( Company B ). Company B is wholly owned by the same foreign incorporated company that owns Company A. Company B also provides substantially the same business services as Company A. Company B has carried forward tax losses for the 2012 income year and is forecasted to continue to make losses throughout the relevant period. Proposed acquisition Company A proposes to acquire 100% of the shares in Company B in the recent year ( proposed acquisition ). The proposed acquisition of Company B is intended to create operational, brand and internal management synergies, increase operational efficiencies and optimise costs. The business of Company A has and will remain the same throughout the test period. There have been no major changes or prospective changes envisaged to occur in the business activities of Company A for the test period or in the market segments in which the Company A provides these services. As a result of the proposed acquisition of Company B, Company A will expand one of its business activities. Prior to the proposed acquisition, income derived from this particular business activity had been a relatively small component of Company A's overall business. Subsequent to the proposed acquisition, the income to be derived from this particular business activity will remain a relatively small component of Company A's expanded business. Company A and Company B operates the same type of business service. There has not been a change in the nature of the businesses nor has there been any change to the types of transactions or activities ordinarily carried on before the test time. There has been and will not be any periods of dormancy of the Company A as a whole during the test period. It is not anticipated that any activities carried on as at the test time by the Company A will be discontinued subsequent to the proposed acquisition of Company B. There have been and will not be any changes to Company A's marketing and contracting methods throughout the relevant period. Company B uses the same market and contracting methods as Company A. Company A will continue to provide business services to its current key customers and customers from the same business sectors during the test period. Company A's turnover has remained and is forecasted to remain relatively consistent year on year. Company A Group does not anticipate a significant increase in the plant and equipment required to perform Company B's operations subsequent to the proposed acquisition. Company A's acquired goodwill is anticipated to increase upon the acquisition of Company B due to the transaction being reflected as a business combination for accounting purposes. Company A and Company B has operated from and subsequent to the proposed acquisition will continue to operate from the same locations. Company A and Company has continued to use the same brand and trade name before and after the change of majority ownership in 2013 and will continue to use the same brand and trade name subsequent to the proposed acquisition of Company B. At all times during the test period, there has not been and is not anticipated to be any change to the trade name of the Company A. Company A also does not hold and is not anticipated to hold any patents, royalty arrangements or any other intellectual property rights throughout the test period. Throughout the test period, the employee numbers are and will be fairly consistent with minor fluctuation which is explained by the proposed acquisition of Company B. During the test period, there is and will continue to be a 50% continuity of senior executive management, and key directors. Company A has received lease incentive payments in 2013 for the lease of a new site. As all of Company A's business premises are leased the entering of lease agreements is a regular and usual business activity. In addition, Company A has derived lease incentive income in the years prior to 2013. Assumptions Company A will not derive any income from a business, undertaking or enterprise of a kind that it did not carry on before the majority change of ownership in 2013. Company A will not discontinue any business, undertaking or enterprise of a kind that it carried on before the majority change of ownership in 2013. Company A will not enter into a transaction of a kind that it had not entered into in the course of its business operations before the majority change of ownership in 2013, other than the proposed acquisition of Company B.

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 paragraph 165-10(b) | Income Tax Assessment Act 1997 section 165-12 | Income Tax Assessment Act 1997 section 165-13 | Income Tax Assessment Act 1997 section 165-210 | Income Tax Assessment Act 1997 subsection 165-210(1)) | Income Tax Assessment Act 1997 paragraph 165-210(2)(a) | Income Tax Assessment Act 1997 paragraph 165-210(2)(b) | Income Tax Assessment Act 1997 subsection 165-210(3) | Income Tax Assessment Act 1997 subsection 701-1(1)

Reasons for decision: Summary: Company A satisfies the same business test in section 165-210 because throughout the test period it carried on and will carry on the same business as it carried on immediately before the test time in 2013, and did not derive any assessable income from a business of a kind carried on before the test time or a transaction of a kind that it had not entered into in the course of its ordinary business operations before the test time. | Detailed Reasoning - Detailed reasoning: Section 36-25 lists special rules that apply to the deduction of tax losses by companies. The special rules listed in section 36-25 include the provisions in Subdivision 165-A (Item 2). Subdivision 165-A contains the general rules governing the deduction of tax losses of earlier income years. Pursuant to section 165-10, Company A cannot deduct a tax loss unless either: (a) it meets the conditions in section 165-12 (which is about the company maintaining the same owners); or (b) it meets the condition in section 165-13 (which is about the company satisfying the same business test). On the facts, paragraph 165-10(b) is of relevance in this case. The conditions to be satisfied under the same business test are contained in section 165-210. Broadly, Company A satisfies the same business test if throughout the same business test period (the income year in which the tax loss is deducted): • it carried on the same business as it carried on immediately before the appropriate test time (subsection 165-210(1)) ( same business test ); • it did not carry on any business other than a business of a kind carried on before the test time as part of the overall business (paragraph 165-210(2)(a)) (the new business test ); • it only derived assessable income from transactions of a kind that it entered into in the course of the business operations before the test time (paragraph 165-210(2)(b)) ( new transactions test ); and • the provisions in subsection 165-210(3) do not apply ( anti-avoidance test ). The relevant 'test time' is the time at which the majority change of ownership of Company A occurred ( test time ). Accordingly, Company A will only be entitled to claim a deduction for prior year tax losses if it satisfies the conditions in section 165-210 at all times during the same business test period, i.e. each income year in which the tax loss is deducted ( test period ). | Detailed Reasoning - Same business test: subsection 165-210(1) - the primary test: The same business test is the primary, positive test: it looks to whether the business of Company A in the test period (period of recoupment) is actually the same business that was carried on at the test time. The Commissioner's view on the operation of sections 165-13 and 165-210 is set out in 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 . Whether Company A carried on the same business is a question of fact. The issue of fact to be determined in applying the same business test is to identify the business carried on by Company A immediately before the test time, and determine whether Company A carried on the same business at all times during the test period. In identifying the business of Company A, it is relevant to examine every activity carried on by Company A, although those activities must be considered as a whole. In the test period, Company A will be the head company of a tax consolidated group. The Commissioner's views on how the same business test applies in the context of determining whether deductions are available to the head company of a consolidated group in respect of prior year tax losses are set out in Taxation Ruling TR 2007/2 Income tax: application of the same business test to consolidated and MEC groups - principally, the interaction between section 165-210 and section 707-1 of the Income Tax Assessment Act 1997 . In the context of consolidated groups, paragraph 14 of Taxation Ruling TR 2007/2 states that the principles set out in TR 1999/9 in respect of the application of the same business test to a single company apply equally to the head company of a consolidated group. Under the single entity rule at subsection 701-1(1), subsidiary members of a consolidated group are taken for the purposes of the same business test to be parts of the head company. Therefore, when determining the one overall business carried on by Company A, as the head company, it is necessary to have regard to the activities of the subsidiary members of the group. Applying the principles in TR 1999/9 to a consolidated group, the one overall business of Company A is to be identified by examining all of the activities, enterprises or undertakings carried on: • at the appropriate test time by all those entities that were members of the consolidated group at that time, and • by all entities during that part of the same business test period when they were members of the consolidated group. Determining whether Company A has carried on the same business at all times throughout the test period as the business carried on immediately before the test time means drawing an inference of fact having regard to all the circumstances. The same business test does not mean that the business carried on by Company A during the test period must be identical in every aspect with the business that it carried on 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 (emphasis added). The mere expansion or contraction of the business may not necessarily result in a change in the identity of Company A's business. Significant expansion or contraction of the business is to be contrasted with organic growth or evolution of the business in the ordinary way. If Company A expands or develops its business by a process of organic growth, it does not necessarily follow that the essential character of its business is changed. In this case, Company A proposes to expand its services business by acquiring all of the shares in Company B. On the facts, the proposed acquisition of Company B could not reasonably amount to a sudden or dramatic expansion of a significant part of Company A's business or an evolution of business activities on such a considerable scale that results in the change to the identity of Company A's business, and therefore, Company A carries on the same business as it carried on immediately before the test time throughout the test period. As discussed above, in addition to the same business condition in subsection 165-210(1), Company A must also satisfy the conditions in subsection 165-210(2), namely the new business test and new transactions test. The new business test and new transactions test are secondary, cumulative, negative tests that look to whether the component undertakings, enterprises or transactions of the overall business are the same in kind as previously. The tests are intended to prevent the injection of income into the company while leaving appropriate scope for the development and expansion of the company's business. The new business test and new transactions test are considered below. | Detailed Reasoning - New business test: paragraph 165-210(2)(a): Section 165-210 will not be satisfied if, at any time during the same business test period, Company A derives 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)). In the new business test the word 'business' has a different meaning from the word 'business' in the same business test. It is a reference to each of the different kinds or types of activities (if there is more than one kind or type of activity) comprised in the one business that is referred to in the same business test and is carried on by Company A at the test time. The content of the word 'kind' in the new business test is to be derived from the course of Company A's business operations before the test time. The new business test puts a limit on the type of expansion that the group may undertake if it is to maintain the benefit of accumulated losses. In order for Company A, to benefit from accumulated losses, it must not derive assessable income from an enterprise or undertaking of a kind that it did not carry on before the test time. 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 test time are carried on after the test time with some degree of system, repetition and continuity and are distinguishable from the other activities of the taxpayer, it is likely that a new undertaking different in kind from the old undertakings of the taxpayer has been commenced. Company A did not, on the facts and circumstances, derive any assessable income from a new business, undertaking or enterprise that it did not carry on before the test time and therefore, the new business test in paragraph 165-210(2)(a) is satisfied. | Detailed Reasoning - New transactions test: paragraph 165-210(2)(b): Section 165-210 will not be satisfied if, at any time during the same business test period, Company A derives 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 transactions test: paragraph 165-210(2)(b)). As in the new business test, the content of the word 'kind' in the new transactions test is to be derived from the course of Company A's business operations before the test time. The new transactions test refers to all transactions entered into in the course of the taxpayer's business operations, regardless of whether they were transactions entered into as part or regular conduct of the business carried on by the taxpayer or were transactions which were independent or isolated transactions when judged by reference to the business carried on by the taxpayer (paragraphs 78 to 81 of TR 1999/9). Sheppard J expressed the view in J Hammond Investment v. FC of T (1977) 31 FLR 349; (1977) 7ATR 633; 77ATC 4311 that the new transactions test is not intended to refer to the daily transactions involved in carrying on a business but to transactions of an isolated and independent kind, which transactions have nevertheless arisen in the course of the taxpayer's business operations. On the facts, Company A did not derive any 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 and therefore, the new transactions test in paragraph 165-210(2)(b) is satisfied. | Detailed Reasoning - Anti-avoidance test: subsection 165-210(3): Subsection 165-210(3) is an anti-avoidance test designed to prevent a company satisfying the same business test where the company commenced to carry on new business or entered into a new kind of transaction prior to the test time, in anticipation of obtaining a deduction for a prior year loss. Section 165-210 will not be satisfied if: • before the test time, Company A commenced to carry on a business it had not previously carried on, or entered into, in the course of its business operations, a transaction of a kind it had not previously entered into; and • Company A did so for the purpose (or for purposes that included the purpose) of satisfying the same business test in relation to obtaining a deduction for a prior year tax loss (anti-avoidance test: subsection 165-210(3)). In the context of the anti-avoidance test, the word 'business' has the same meaning as it has for the purpose of the applying the new business test; and 'transaction', 'entered into', and 'business operations' have the same meanings they have in the new transactions test. On the facts, the anti-avoidance test in subsection 165-210(3) does not apply. | Detailed Reasoning - Conclusion: Company A satisfies the same business test in section 165-210 because throughout the test period it carried and will continue to carry on the same business as it carried on immediately before the test time and did not derive assessable income from a business it did not carry on before the test time or a transaction of kind it had not entered into in the course of its business operations before the test time.

Reasons for decision: All legislative references are to the Income Tax Assessment Act 1997 .