Private ruling: Carried forward losses
Date of advice: 1 December 2016
Published: April 2017
Ruling period: 1 July 20XX to 30 June 20YY
Date scheme commenced: 1 July 20XX

Ruling: Q1: Does the entity satisfy the same business test under section 165-210 of the Income Tax Assessment Act 1997? | A1: Yes | Q2: Is the entity eligible to recoup carried forward tax losses in the 30 June 20ZZ and future years where there has been no change in the business activity being conducted by the company? | A2: 

Relevant facts and circumstances: 1. The entity is an Australian Resident company. 2. The entity does not satisfy the continuity of ownership test.

Relevant legislative provisions: Division 165 of the Income Tax Assessment Act 1997

Reasons for decision: Summary: The entity satisfies the same business test in section 165-210 of the Income Tax Assessment Act 1997 (ITAA 1997). | Detailed Reasoning - Detailed reasoning: Division 165 of the ITAA 1997 sets out the provisions in relation to the utilisation of tax losses by a company. Section 165-10 of the ITAA 1997 sets out the two tests that must be satisfied in order for a company to utilise its tax losses: ● The Continuity of Ownership (COT) test in section 165-12 of the ITAA 1997; or ● The Same Business Test in section 165-13 of the ITAA 1997. Section 165-12 of the ITAA 1997 states a company will satisfy the COT where at all times during the ownership test period (being the period from the start of the income year the loss was made to the end of the income year the loss was utilised), the company maintained the same owners who had more than 50% of the voting power, rights to dividends and rights to capital distributions in the company. The acquisition of the entity caused a substantial change and the ownership test was failed. Accordingly, the entity is required to satisfy the same business test in Subdivision165-E in order to be able to deduct the tax losses. | Detailed Reasoning - Subdivision 165-E - The same business test: Section 165-210 provides the required conditions that need to be met for the same business test to be satisfied: 165-210(1) 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. 165-210(2) However, 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. 165-210(3) 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. The ATO's view on the same business test is stated in Taxation Ruling 1999/9 Income tax: the operation of sections 165-13 and 165-210, paragraph 165-35(b), section 165-126 and section 165-132 (TR 1999/9). Paragraph 24 of TR 1999/9 states that there are three tests: (i) the same business test; (ii) the new business test; and (iii) the new transactions test. Paragraph 11 of TR 1999/9 describes the three tests which are included under subsections 165-210(1) and 165-210(2) of the ITAA 1997: Subsections 165-210(1) and 165-210(2) include three tests, each of which must be satisfied by a company in order for the company to meet the requirements of section 165-13 and section 165-210 and thereby not be prevented by section 165-10 from deducting prior year losses. The first test is in subsection 165-210(1) and comprises a positive requirement that the company carry on at all times during the period of recoupment the same business as the business that it carried on at the change-over. The second and third tests are in subsection 165-210(2) and they comprise the respective negative requirements that the taxpayer does not carry on certain businesses and does not enter into certain transactions during the period of recoupment. Subsection 165-210(1) of the ITAA 1997 is the first test comprising a positive requirement that the company must be able to show that it carried on, at all times during the 'same business test period', the same business as the business that the company carried on at the 'test time'. | Detailed Reasoning - Application to the facts: As previously stated the entity failed the continuity of ownership test during the year ending 30 June 20YY. The entity satisfies the same business test if throughout the 20YY income year it carried on the same business as it carried on immediately before the COT was failed. The company has grown significantly since it was acquired. However, as TR 1999/9 explains below at Paragraph 13, expansion in itself will not cause the test to be failed: …In making the analysis it needs to be acknowledged that a company may expand or contract its activities without necessarily ceasing to carry on the same business. The organic growth of a business through the adoption of new compatible operations will not ordinarily cause it to fail the same business test provided the business retains its identity; nor would discarding, in the ordinary way, portions of its old operations. But, if through a process of evolution a business changes its essential character, or there is a sudden and dramatic change in the business brought about by either the acquisition or the loss of activities on a considerable scale, a company may fail the test. The leading authority on the application of the same business test is Avondale Motors (Parts) Pty Ltd v. FC of T (1971) 124 CLR 97; 45 ALJR 280;(1971) 2 ATR 312; 71 ATC 4101 ( Avondale Motors ). Paragraph 31 of TR 1999/9 states: Avondale Motors, a judgment of Gibbs J sitting as a single justice of the High Court, is the leading authority on the application of section 80E of the ITAA 1936. In Avondale Motors, Gibbs J held that the reference to 'same business' in section 80E required that the taxpayer carry on the 'identical business' at all times during the period of recoupment rather than a business of the same kind or of a similar kind. Gibbs J said: 'The meaning of the phrase "same as", like that of any other ambiguous expression depends on the context in which it appears. In my opinion in the context of the section the words "same as" import identity and not merely similarity and this is so even though the legislature might have expressed the same meaning by a different form of words. It seems to me natural to read the section as referring to the same business, in the sense of the identical business, and this view is supported by a consideration of the purposes of the section…' | Detailed Reasoning - Identifying the business: Paragraph 34 of TR 1999/9 states that in identifying the business it is relevant to examine every activity of the business, although those activities must be considered as a whole. However, it is not correct to single out certain activities as the heart or core of the business, and identify it merely by reference to those activities. | Detailed Reasoning - Summary of how to determine whether the same business test is satisfied: Paragraph 59 of TR 1999/9 states: There are various relevant factors to take into account in determining whether the same business test is satisfied by a taxpayer. A single factor or matter might be so important that it determines the issue but, usually, it is a combination of factors, appropriately weighted, that decides whether the same business is carried on during the period of recoupment. A factor that in isolation has little weight, may in combination with other factors have great weight and, conversely, something that is significant when it appears with other changes, may have no importance when it appears alone. Nor is it only changes that must be weighed: answering the question of whether the business carried on in the year of recoupment is the same business carried on at change-over requires one to have due regard to what remains the same. In determining whether the same business test is satisfied, significant weight is given to changes after the change-over in the 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. But even these are a question of fact and degree often to be decided in the context where some expansion or contraction would be expected. The entity carries on the same overall business. | Detailed Reasoning - The new business test: For the purposes of paragraph165-210(2)(a) of the ITAA 1997, a company does not satisfy the same business test, if at any time during the 'same business test period', it derives income from a business of a kind it did not carry on before the 'test time'… While the business has expanded significantly the overall business has not changed throughout the periods being considered and any changes that have occurred or will occur will not alter the nature or identity of the business. It is not considered that the entity will be deriving income in the 20YY income year from a business of a kind it had not carried on before the test period. | Detailed Reasoning - The new transactions test: For the purposes of paragraph 165-210(2)(b) of the ITAA 1997, a company does not satisfy the same business test, if at any time during the 'same business test period', it derives income from a transaction of a kind it had not entered into in the course of its business operations before the 'test time'. The entity provided the following information concerning its transactions during the test time: July 20XX (prior to the test period) XYZ transactions X% private customers Y% corporate customers $XX,XXX,XXX turnover In September 20XX XYXY transactions XY% private customers Z% corporate customers $XX,XXX,XXX turnover Jan 20YY (after test period) YZYZ transactions YZ% private customers Y% corporate customers $XX,XXX,XXX turnover Therefore the entity will not be deriving income in the 20YY income year from a transaction of a kind it had not entered into in the course of its business operations before the test period. | Detailed Reasoning - The anti-avoidance test: TR 1999/9 describes subsection 165-210(3) of the ITAA 1997 as the anti-avoidance test. Paragraph 91 of TR 1999/9 states: Subsection 165-210(3) is a provision designed to prevent a taxpayer company satisfying the 80E test, the 50D test, the 63C test, or the 80F test, respectively, where the company commenced to carry on new businesses or entered into a new kind of transaction prior to the change-over, in anticipation of obtaining a deduction for a prior year loss, a current year loss or a bad debt respectively. Those provisions are referred to as the 'anti-avoidance test'. The applicant has stated that the share acquisition was a commercial arm's length transaction between unrelated parties and that the anti-avoidance provisions do not apply. | Detailed Reasoning - Conclusion:: The business carried on by the entity immediately before the COT was failed is the same overall business carried on after the entity was acquired. The same business test is satisfied because although the business has expanded there have been no changes in the business of the entity nor did the entity enter into any transaction of a kind it had not previously entered into. The entity satisfies the same business test in subsection 165-210(1) of the ITAA 1997. Accordingly, paragraph 165-210(3) of the ITAA 1997 does not apply. | Detailed Reasoning - Question 2: Is the taxpayer eligible to recoup carried forward tax losses in the 30 June 20YY and future years where there has been no change in the business activity being conducted by the company? | Detailed Reasoning - Answer: Yes, provided all the tests for recouping carried forward losses are met.