Private ruling: Application of the business continuity test
Date of advice: 5 March 2021
Published: April 2021
Ruling period: Year ended 31 December XXXX

Ruling: Q1: Will Company A satisfy the Business Continuity Test ("BCT") under Subdivision 165-E of the Income Tax Assessment Act 1997 ("ITAA 1997") such that it can deduct tax losses incurred in prior years in the income year XXXX? | A1: Yes.

Relevant facts and circumstances: Background Company A (Company A or Applicant) was a publicly listed Australian company on the Australian Securities Exchange ("ASX"). Company A is the head company of the Company A tax consolidated group ("Company A group"). The Applicant was removed from the Official List of the ASX following a takeover by Company B. Company A jointly owns and manages Company C in partnership (50/50) with Company B. The Taxpayer's key asset is its investment in Company C. Company C is the main operating entity. The Takeover - Continuity of Ownership Test failure Company B submitted a takeover bid in respect of the Applicant and, on XXX, the Applicant's board of directors unanimously recommended that the Applicant's shareholders accept the offer. Consequently, all of the ordinary shares of the Applicant were acquired by Company B (the "Takeover"). Company B first achieved a majority interest in the Applicant when they acquired Majority interest of the Applicant's shares on XXX. Consequently, the Applicant failed the Continuity of Ownership Test ("COT") on that date (the "Test time" or "COT failure"). Tax Losses Company A incurred income tax and capital losses over prior income years. As Company A total assessable for the year ended XXX is more than its total deductions (except tax losses), it could deduct from that excess prior year losses. Profile of the Applicant immediately before the COT Failure The Applicant's key assets consisted of the following: • Its 50% equity interest in Company C; • An interest-bearing, subordinated loan to Company C; and • Cash of XX. The Applicant's main income items for the period XXX were: • Interest income received in respect of the loan to Company C; • An unreleased foreign exchange gain • Management fees charged to Company C The Applicant's main expense items for the period XXX were: • A loss in respect of Company C; • Remuneration expenses; • Takeover costs; • Administration and overhead expenses, and • Intercompany loan repayments. The Applicant had no external debt. The Applicant had XX employees located in Australia. The Applicant had its registered office located in XXX. Profile of the Applicant after COT failure Company A lodged its income tax return for the year ended XX reporting profit of XXX. As at 31 December XXX, the Applicant's key assets were the same as that immediately prior the COT Failure on XXX, in particular: • The Applicant retained its 50% interest in Company C, and • An interest-bearing, subordinated loan to Company C of $XXX. The Applicant's main income items in the period XXX were: • Interest income received in respect of the loan to Company C, • An unrealised foreign exchange gain in respect of the loan to Company C, and • No Management fees were charged. The Applicant's main expense items in the period XXX were: • Remuneration expenses, and • Administration and overhead expenses. The Applicant had no external debt. As a consequence of the Takeover: • The Applicant's board comprised of new members • The Applicant had no employees or management staff • The Applicant's registered office was relocated • The Applicant was delisted from the ASX on XXX Other information about the business operation as provided by the Applicant on XXX: • The customer mix of Company C remained undisturbed following the takeover of Company A • Company C continued to contract with many customers spread across various geographical region, • The branding of Company A did not change after COT failure • Customers continued to contract with Company C directly rather than through Company A or Company B. Company A had income and capital tax losses for the year ended XXX of $XXX and $XXX respectively. Operating profit for the year ended 31 December XXXX reported by Company A was $XXX.

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 Section 165-12 | Income Tax Assessment Act 1997 Section 165-13 | Income Tax Assessment Act 1997 Subsection 165-13(2) | Income Tax Assessment Act 1997 Subdivision 165-E | Income Tax Assessment Act 1997 Section 165-210 | Income Tax Assessment Act 1997 Subsection 165-210(1) | Income Tax Assessment Act 1997 Subsection 165-210(2) | 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)

Reasons for decision: Summary: Yes, Company A satisfies the BCT pursuant to sections 165-13 and 165-210 of the ITAA 1997 and can claim prior year losses for the year ended 31 December XXX. | Detailed Reasoning - Detailed Reasoning: All legislative references are to the Income Tax Assessment Act 1997 unless stated otherwise. Section 36-25 sets out the special rules for deducting tax losses. Item 2 in table 2 of section 36-25 refers to the relevant tests for companies in Subdivision 165-A. Section 165-10 of Subdivision 165-A provides that a company cannot deduct a tax loss unless either it meets the continuity of ownership test ("COT") in section 165-12 (which is about the company maintaining the same owners) or business continuity test ("BCT") in section 165-13. Company A failed COT on XXX when Company B first achieved a majority interest in the Applicant. Company A had income and capital tax losses for the year ended XXX of $XXX and $XXX respectively. Operating profit for the year ended 31 December XXXX reported by Company A was $XXX. Since Company A failed the COT on XXX, to claim prior year losses against the profit in the period XXXX, it must satisfy the BCT. To apply the business continuity test, it is necessary to identify and characterise the business Company A carried on immediately before the 'test time' and then compare it to the business it carried on throughout the 'business continuity test period' ("BCT period") (subsection 165-210(1)). The 'BCT period ' is the income year in which a company seeks to deduct a tax loss, which in the current case is the year ended 31 December 2XXX (section 165-13). Under item 1 of the table in subsection 165-13(2), the ' test time ' is the latest time when the company would have satisfied the continuity of ownership test. In this case, this is XXX, which is when Company A failed COT in section 165-12. To satisfy the BCT in the present case, Company A must satisfy the conditions in section 165-210. | Detailed Reasoning - Positive limb: • Subsection 165-210(1) - the company carries on the same business as it carried on immediately before the test time throughout the BCT period - same business test | Detailed Reasoning - Negative Limbs: • Paragraph 165-210(2)(a) - the company does not derive assessable income from a business of a kind during the BCT period that it did not carry on before the test time - new business test Paragraph 165-210(2)(b) - the company does not derive assessable income from a transaction of a kind during the BCT period that it had not entered into in the course of its business operations before the test time - new transaction test | Detailed Reasoning - Integrity rule: • Subsection 165-210(3) - before the test time, the company started to carry on a business it had not previously carried on, or 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 BCT period the same business as it carried on immediately before the test time- anti-avoidance test. Each of the above tests must be satisfied by Company A in order to meet the requirements of section 165-13 and section 165-210. | Detailed Reasoning - Application of the same business test to an income tax consolidated group: As Company A is the head company of the Company A group, we note that 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 701-1 of the Income Tax Assessment Act 1997 ("TR 2007/2") states: 14. Under the single entity rule of subsection 701-1(1), subsidiary members of a consolidated group are taken for the purposes of the same business test (section 165-210) (among other purposes), to be parts of the head company. In this context, 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. 15. When determining the one overall business carried on by the head company of a consolidated group for the purposes of subsection 165-210(1) it is necessary to have regard to the activities of the subsidiary members of the group. Applying the principles of TR 1999/9, one overall business of the head company 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. 16. When applying the new business test and new transactions test to the head company (subsection 165-210(2)), regard must be had to the enterprises, undertakings and transactions that were carried on or entered into before the test time by entities while they were members of the consolidated group. These activities are then compared with the enterprises, undertakings and transactions carried on or entered into by all entities while they are members of the consolidated group during the same business test period. This comparison determines whether the enterprises, undertakings and transactions before the test time and during the same business test period are different in kind. 17. In relation to the new business and new transactions tests, it is not necessary that a business carried on or a transaction entered into during the same business test period by an entity in the group be of a kind carried on by that same entity before the test time. In accordance with the operation of the single entity rule, where an entity within the group undertook a business or transaction of that kind before the test time when that entity was a member of the consolidated group, the new business or new transactions test will be satisfied. 18. Activities, undertakings and enterprises taking place within a consolidated group (not involving the derivation of income through dealings outside the group) will be relevant for characterising the business of the head company. This will be the case notwithstanding the fact that individual transactions between group members will not be recognised as happening under the same business test because of the single entity rule which treats group members as parts of the head company for the purpose of determining its income tax liability... Therefore, all subsidiaries of the Company A group will be treated as a single entity under section 701-1(1) when determining whether the BCT has been satisfied by the Applicant. | Detailed Reasoning - Positive limb - Same business test ("SBT"): Taxation Ruling TR 1999/9 Income Tax: the operation of section 165-13 and 165-210, paragraph 165-35(b), section 165-126 and section 165-132 ("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 identical business, at all times during the income year as the business you carried on before the change in ownership occurred rather than a business of the same kind or similar. Paragraph 13 of TR 1999/9 states: 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. Nevertheless, it is not sufficient that the business carried on after the change-over meets some industry wide definition of a business of the same kind; nor would it be sufficient for there to be mere continuance of business operations from immediately before the change-over into the period of recoupment, if the business had so changed that it could no longer be described as the same business. (emphasis added) Paragraph 8 of the TR 1999/9 states that the expression 'same business' in subsection 165-210(1) means the business of the company as an entirety, or its 'overall business'. Paragraph 38 explains that applying the same business test: "...does not mean that the business carried on by the taxpayer during the year of recoupment must be identical in every respect with the business that was carried on immediately before the change-over. 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." In this case, the reason for the COT failure was the change of ownership of Company A following the Takeover by Company B on XXX, the test time. The Applicant's key asset before XXXX were 50% equity interest in Company C in partnership with Company B and an interest-bearing loan. Company A group had mainly an administrative function and was based in XXX with XX employees. The main income of Company A group came from interest income in respect of the loan to Company C, foreign exchange gains and management fees. The main operating function of the business was carried out by Company C. There has been no material change in the activities carried out by this entity following the test time and during the BCT period. Following the Takeover, Company A group continues to own 50% in Company C in partnership with Company B. The main change that has occurred relates to the change in the ownership of Company A rather than in the business activities. There has been no change or impact on the identity of the business. Following the COT failure on the XXXX and throughout the BCT period, the Applicant continued to operate the same business and retained its 50% equity interest in Company C as its key business asset. The Applicant's main income items for the period XXX continued to be from interest income in respect of the loan to Company C and foreign exchange gains. There has been no material change to the underlying business activities of Company C itself when comparing the business activities at the test time and after during the business test period. There have been no changes to the products produced. Customers continued to contract with Company C directly rather than through Company A or Company B. Since Company C is the contracting entity in terms of the business operations, the ultimate ownership structure would not impact how customers entered into business arrangements with Company C. Therefore, Company A group did not change its principal business activities or the core strategy and focus of the Applicant. The main changes that occurred as a consequence of the Takeover are: • The Applicant ceased to have management or employees in Australia: • The Applicant's registered Office was relocated. • The Applicant was delisted from ASX on XXX. • One of the subsidiaries of Company A group was deregistered with ASIC on XXX and removed from the group. However, it was a dormant entity. Paragraph 59 explains that the decision on whether or not the same business is carried on after the change would depend on a combination of factors, appropriately weighted. Paragraphs 60 and 61 of TR 1999/9 provide a list of factors to consider whether the same business test is satisfied. In this case, however, there has been no change to the Applicant's principal business activities throughout the BCT period as compared to the test time. The Applicant's principal business activity at the test time and throughout the BCT period was its investment in Company C, through its 50% equity investment and this was the Applicant's only business operation. Further, there was also no material change in the underlying operations of Company C. The investment in Company C was the Applicant's key asset and main income stream at the test time and following the Takeover throughout the BCT period. Therefore, although there have been some changes between the test time and the BCT period, those changes did not change the identity or character of the business in such a way that the Applicant would fail the SBT under subsection 165-210(1). | Detailed Reasoning - Negative limbs: In order to deduct its tax losses, a company must not satisfy either paragraph 165-210(2)(a) or 165-210(2)(b) of the ITAA 1997. | Detailed Reasoning - New business test - paragraph 165-210(2)(a): The new business test provides that a company will fail the BCT if, at any time during the BCT period, it derives assessable income from a 'business of a kind' that it did not carry on before the test time. Paragraph 14 of Taxation Ruling TR 1999/9 states: ... In the new business test there is a reference to 'business of a kind' that the company did not carry on before the change-over. In the new business test the word 'business' has a different meaning from the word 'business' in the same business test; it refers to each kind of enterprise or undertaking comprised in the overall business carried on by the company at the change-over and during the period of recoupment. The new business test puts a limit on the type of expansion the company may undertake if it is to retain the benefit of accumulated losses; for the taxpayer may not engage in an undertaking or enterprise of a kind in which it did not engage before the change-over and still benefit from accumulated losses. Paragraph 72 of Taxation Ruling TR 1999/9 states: Generally speaking, the new business test permits a company to expand or develop during the period of recoupment within the same fields of endeavour as it was engaged in before the change-over, provided the effect of expansion or development is not such as to cause it to fail the same business test. Cases where such failure occurs tend to be where the injection of income is occurring or could occur and, thus, not appropriate cases for the protection of sections 165-13 and 165-210 or equivalent provisions. Company A did not enter into any new businesses, undertakings or activities that it did not carry on before the change-over time. The income that Company A derived in the BCT period was from the same sources being interest on the loan to Company C and foreign exchange gains as before the test time. Therefore, Company A did not carry on any new business according to paragraph 165-210(2)(a). | Detailed Reasoning - New transactions test - paragraph 165-210(2)(b): The new transaction test provides that a company will fail the BCT if, at any time during the BCT period, it derives assessable income from a "transaction of a kind", which the company had not entered into in the course of its business operations before the test time. Taxation Ruling TR 1999/9 states at paragraphs: 15. ... The new transactions test is directed to preventing the injection of income into a loss company that has satisfied the SBT and the new business test. The new transactions test includes all transactions entered into in the course of the company's business operations and not merely those that are 'isolated' or 'independent'. However, generally speaking, the new transactions test is not failed by transactions of a type that could have been entered into ordinarily and naturally in the course of the business operations carried on by the company before the change-over. Conversely, a transaction entered into during the period of recoupment and which is outside of the business operations before the change-over, or which is extraordinary or unnatural when judged by the course of business operations before the change-over, is usually a transaction of a different kind from the transactions actually entered into by the company before the change-over. 16. ... A transaction from which income is derived in the year of recoupment, which could have been entered into before the change-over in the course of the company's business operations, and which is neither extraordinary nor unnatural in the context of the business carried on by the company at the change-over, is generally a transaction of the same kind as transactions actually entered into by the company before the change-over. 17. In the new transactions test, 'transaction' refers to any operation or dealing from which income directly or indirectly flows or arises, and a company enters into a transaction for the purposes of the new transactions test if it engages or participates in it. 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. The words 'business operations' refer to everything that a company undertakes or does; together, the business operations constitute the business, meaning the overall business, of the company. Although Company A sold its shares to Company B it was not done with the purpose of injecting income into the loss company. The purpose was to rationalise and reorganise in a more efficient way the business that was already in existence by simplifying the administrative structure. Company A's main asset is its equity interest of 50% in Company C, which it had in partnership with Company B before and after the test time has remained throughout the test time and BCT period. The only transaction that Company A entered following the Takeover was the deregistration of one of its subsidiaries. However, this transaction has no effect on Company A's income since the subsidiary was not producing any income and was not holding any major assets. Therefore, the Applicant did not derive assessable income from a transaction of a kind, which it had not entered into in the course of its business operation before the test time and would not satisfy the new transaction test in paragraph 165-210(2)(b). | Detailed Reasoning - Integrity rule - Anti-avoidance test: In respect of the integrity rule in subsection 165-210(3), paragraph 19 of Taxation Ruling TR 1999/9 states: ... The anti-avoidance provisions apply where the purpose, or one of the purposes, of the company in commencing to carry on the business or entering into the transaction was the purpose of enabling the company to take into account prior year losses. This is so notwithstanding that, where there is more than one purpose, the tax avoidance purpose was not the dominant purpose of the company in commencing to carry on the business or enter into the transaction. There is no evidence to suggests that Company A group started a new business or entered into a new transaction prior to the test time for the purpose of satisfying the BCT. | Detailed Reasoning - Conclusion: Having regards to the facts and circumstances discussed above, Company A satisfies the BCT pursuant to sections 165-13 and 165-210 and can claim prior year losses in the year ended 31 December XXXX. For completeness, the similar business test in section 165-211 is not relevant to the present facts. This is because the tax losses that are to be used for the year ended 31 December XXXX were incurred before 1 July 2015.

Question: Will Company A satisfy the BCT under Subdivision 165-E of the ITAA 1997 such that it can deduct tax losses incurred in prior income years in the income year ending XXX?