Private ruling: deductibility of prior year losses
Published: March 2013
Ruling period: Year ended 30 June 2002 | Year ended 30 June 2003 | Year ended 30 June 2004 | Year ended 30 June 2005 | Year ended 30 June 2006 | Year ended 30 June 2007 | Year ended 30 June 2008 | Year ended 30 June 2009 | Year ended 30 June 2010 | Year ended 30 June 2011 | Year ended 30 June 2012 | Year ended 30 June 2013
Date scheme commenced: On or after 1 November 2001

Ruling: Q1: Do you meet the conditions of the same business test thereby allowing you to deduct prior year losses pursuant to section 165-13 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes

Relevant facts and circumstances: You were incorporated in the 200X calendar year. You operate in the mining industry. In 200X, you paid for an option to purchase an asset from a syndicate. The agreement required you to pay a royalty up to 20YY. During the 200Z income year, you incurred expenditure and derived a loss for the period. In 200Z, 100% of your shares were transferred to a company. You incurred expenditure for the 200V income year which was financed by a loan from a company. In 2009W a company transferred 100% of your shares to the current shareholders. The agreement included the transfer of various assets to you. You continued to incur expenditure subsequent to the acquisition of the taxpayer by the new owners. During the 20TT income year you derived income. The new owners were required to lend money to you as the income did not cover expenditure incurred. You derived no income for the 20UU income year. The short term contract you entered into during 20TT was not renewed. You entered into another agreement with an entity and derived income from this agreement during the 20YY income year. In 20UU, you paid royalties in accordance with the original agreement. In 20UU, you entered into two agreements to sell assets. You received a deposit in 20UU in relation to the original agreement and no further consideration as the sale agreement was terminated in 20YY. No income has been derived from the second agreement. In 20SS, you paid an amount in consideration for the termination of the original agreement dated in 200X). In 20SS you sold your assets to a company. Following this sale you received a letter from a company requesting 10% of the proceeds derived in 20SS pursuant to the terms of the 200W agreement. The prior year losses declared in your income tax returns represent the expenditure on the assets (which were the subject of the sale).

Relevant legislative provisions: section 36-15 of the ITAA 1997 | section 165-10 of the ITAA 1997 | section 165-12 of the ITAA 1997 | section 165-13 of the ITAA 1997 | section 165-210 of the ITAA 1997

Reasons for decision: Summary: Section 36-15 of the ITAA 1997 deals with how to deduct tax losses and division 165 of the ITAA 1997 provides specific rules for corporate taxpayers. The rules for determining whether or not a company can deduct tax losses incurred in an earlier year are found in subdivision 165A of the ITAA 1997. Section 165-10 of the ITAA 1997 states that a company cannot deduct prior year losses unless it meets either of two tests. These tests are: · continuity of ownership test - section 165-12 of the ITAA 1997; and · same business test - section 165-13 of the ITAA 1997. | Detailed Reasoning - Continuity of Ownership Test: For a loss to be deductible in an income year the same persons must hold more than 50% of the voting power, more than 50% of the rights to dividends and more than 50% of the rights to capital distributions of a company on a continuous basis from the start of the loss year to the end of the income year in which the losses can be recouped (the 'ownership test period'). In your case, you have stated that the share ownership has changed a number of occasions in the company. Therefore, you do not meet the continuity of ownership test. As a result, we will determine your eligibility to deduct prior year losses under the same business test. | Detailed Reasoning - Same Business Test: If a company fails the continuity of ownership test it must be able to satisfy the same business test in order to deduct losses. To satisfy the same business test a company must maintain the same business without entering into any new business or conducting additional business after the change in ownership. The requirements to meet the same business test are specified in section 165-210 of the ITAA 1997, involving the company carrying on the same business throughout the same business test period as it carried on before the test time. In the same business test, the meaning of the word 'same' in the phrase 'same business as' imports identity and not merely similarity; the phrase 'same business as' is to be read as referring to the same business, in the sense of the identical business. However, this does not mean identical in all respects: what is required is the continuation of the actual business carried on immediately before the change-over (Taxation Ruling TR 1999/9). The tests relating to the same business test are set out in section 165-210 of the ITAA 1997. Broadly speaking, the test will be satisfied where the company, at all time during the year in which it claims a deduction for a prior year loss: (a) carried on the same business that it carried on immediately before the change in the beneficial ownership of shares by reason of which it ceased to satisfy the continuing ownership and control requirements; (b) did not carry on any business (meaning a particular undertaking or enterprise) other than a business of a kind carried on before the disqualifying change as part of the overall business; (c) only derived income from transactions of a kind that it had entered into in the course of the overall business before the change of ownership; and (d) the anti-avoidance provisions in subsection 165-210(3) do not apply to the company. | Detailed Reasoning - The same business test: This test comprises a positive requirement that the company carries on at all time during the period of recoupment the same business as the business which it carried on at the change-over. Whether the same business is carried on is a question of fact. In Avondale Motors ( Parts) Pty Ltd v. F C of T (1971) 124 CLR 97; 2 ATR 312; 71 ATC 4101, Gibbs J said: The question whether a company has commenced a new business or has continued an old business under different conditions is simply one of fact. In determining whether the same business test is satisfied, significant weight will be given to changes after the change-over in 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. In your case, you are carrying on a specific type of business in the mining industry. On the basis of the information provided, it is considered that the business of the company at the present time is the same business that was carried on at the change-over. Accordingly, you have satisfied this requirement. | Detailed Reasoning - The new business test: The new business test requires that the taxpayer did not, at any time during the period of recoupment, derive income from a business of a kind that it did not carry on before the change over. 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 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. The new business test is intended to limit the expansion available under the same business test. That is, the taxpayer cannot add to its operations a business, that is, an undertaking or enterprise, of a kind it had not carried on before the change over. This test ensures that even if a company satisfies the same business test in respect of the whole of the business activities carried on by the company during the period of recoupment, the company will not be able to obtain the benefit of Subdivision 165A of the ITAA 1997 if the company derives income from carrying on, during the period of recoupment, activities of a different kind to the activities comprised by the one business carried on at the change-over. In your case, there is no evidence that you started a new business. On the basis of information provided, you have satisfied this requirement. | Detailed Reasoning - The new transactions test: The new transactions test requires that the taxpayer company did not, at any time during the period of recoupment, derive income from a transaction of a kind that it had not entered into in the course of its business operations before the change over. 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). As 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. In the new transactions test the term 'transaction' has a broad meaning. Refer to paragraph 82 of TR 1999/9: 'transaction' refers to every means or event by which the taxpayer derives income , for the word appears in association with the expression 'business operations' as the last of a descending hierarchy of tests that examines, first, the overall business of the company, then its component undertakings or enterprises and, finally, the individual acts by which the business is carried on. The new transactions test is concerned to ensure that a company deducts losses from income from transactions of the same kind as the operations by which it generated income before the change-over. The new transactions test is intended to extend to every means by which a company may derive income, including transactions of a passive or investment character. In your case, you are carrying on a specific type of business in the mining industry. On the basis of information provided, you have satisfied this requirement. | Detailed Reasoning - The anti- avoidance test: Subsection 165-210(3) of the ITAA 1997 contains provisions which are designed to prevent a taxpayer company satisfying the section 165-210 of the ITAA 1997 test where the company commenced to carry on new business or entered into a new kind of transaction prior to the change over in anticipation of obtaining a deduction for prior year losses. The anti avoidance test will be failed by a taxpayer where: (a) before the test time, the taxpayer commenced to carry on a business which it had not previously carried on; or entered into, in the course of its business operations, a transaction of a kind which it had not previously entered into; and (b) the taxpayer commenced to carry on the business or entered into the transaction for the purpose of satisfying the requirement of the section 165-210 of the ITAA 1997 test in relation to a prior year loss. In your case, there is no evidence that you commenced to carry on a business which you had not previously carried on or entered into, in the course of your business operations, a transaction of a kind which it had not previously entered into. On the basis of information provided, you have satisfied this requirement. | Detailed Reasoning - Conclusion: As all the required conditions have been met, you satisfy the same business test as per section 165-210 of the ITAA 1997 thereby allowing you to deduct prior year losses pursuant to section 165-13 of the ITAA 1997.