Private ruling: Modified business continuity test
Date of advice: 2 March 2026
Published: 4 May 2026
Ruling period: 1 January 20XX to 31 December 20XX
Date scheme commenced: 1 January 20XX

Ruling: Q1: Will Company A satisfy the modified business continuity test (BCT) in section 707-125 of the Income Tax Assessment Act 1997 in relation to tax losses it is seeking to transfer upon it joining the Company B Tax Consolidated Group? | A1: No.

Relevant facts and circumstances: Background information 1. In 20XX, a privately owned foreign company (Foreign Co) entered the Australian market by purchasing Company B, an Australian manufacturer in the XXX industry. On XX XX 20XX, Foreign Co then acquired 100% of the Company XXX group but did not form a consolidated group at the time.Later, the shares in Company A were transferred to Company B, resulting in the deconsolidation of Company A's XXX group. Proposed group restructure 2. Company B intends to consolidate its acquired Australian entities with an effective consolidation date of X January 20XX Business activities of the Company A XX group up until change in ownership 3. Prior to 20XX, the principal business activities of Company A's XX group was manufacturing for the XX industry. The Company A XX group operated under a brand name; used the Enterprise Resource Planning and Payroll systems (ERP Systems) that were hosted by the wider Company A group; had a stable and identifiable customer pool; had consistent expenses and assets typical of its business type; stable senior management and employees; and a stable and identifiable competitor pool. 4. The Company A XX group incurred losses between 1 January 20XX and 31 December 20XX. Business activities of the Company A XX group following its acquisition by Foreign Co Company Branding 5. Once acquired by Foreign Co, the Company A brand name changed. It was stated that the change was not to present itself as a different business but to align it with the group that acquired it. ERP and Payroll Migration 6. Once acquired by Foreign Co, the Company A XX group had a limited amount of time to change its ERP Systems before losing access to the legacy ERP Systems hosted by its former group. To manage this change, it was stated that Foreign Co group transitioned the assets and liabilities of the Company A XX group and recorded them in Company B's balance sheet and ERP System. Since Company A did not have an ERP, its employees were issued new employment contracts by Company B. The new agreements were issued on Company B's letterhead and no reference was made to the employer being Company A. Workers compensation insurance and payroll tax was also paid by Company B for these employees. 7. Company B entered into agreements with customers that were historically customers of Company A, and those customers were sent Company B's bank details for future payments. 8. Once management had time to develop a strategy to deal with the loss of the legacy ERP System and obtain access to Company B's ERP, a services agreement between Company A and Company B was prepared in 20XX, with a retrospective commencement date to reflect an 'Agency Relationship' between the two entities. The intention of the agreement was to formalise the commercial intention of the parties going forward, in which Company B can act as agent for and on behalf of Company A. Company Customers 9. Once acquired by Foreign Co, Company A's significant prior customers have not changed, however they now purchase Company B branded products from Company B. They contract with and pay Company B for the goods. 10. Company A has not sold any goods in the year ending 31 December 20XX. Company Expenses 11. Once acquired by Foreign Co, Company A's expenses have remained 'materially the same', however, Company B now issues all purchase orders to suppliers (i.e. no purchase orders are issued by Company A). 12. Company A has not incurred any expenses in the year ending 31 December 20XX. Company Directors 13. The directors of Company A changed post its acquisition by Foreign Co. Company Assets 14. The assets that were owned by Company A now belong to Company B. The transfer of these assets was executed through intercompany journal entries and supported by updated asset registers. Company Management 15. All of Company A's pre management personnel left the company in the 20XX calendar year, or earlier. 16. No replacement management personnel have been employed by Company A. Company Employees 17. After Company A was acquired by Foreign Co, the internal payroll was migrated to the Company B Payroll and employees were issued new employment contracts on Company B letterhead. The agreements were not stated as being 'on behalf of Company A' and no reference was made to the employer being Company A. At the end of the 20XX calendar year, Company A had XX employees. By the end of the 20XX calendar year, these employees were either employed by Company B or had left the group. 18. In the 20XX calendar year, Company A employed no staff. Services Agreement 19. In the 20XX calendar year, a 'Services Agreement' between Company B and Company A was prepared. It is stated to be made effective retrospectively.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 165-10 | Income Tax Assessment Act 1997 section 165-11 | 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 section 165-210 | Income Tax Assessment Act 1997 section 165-211 | Income Tax Assessment Act 1997 subsection 165-211(2) | Income Tax Assessment Act 1997 subsection 165-211(3) | Income Tax Assessment Act 1997 Subdivision 707-A | Income Tax Assessment Act 1997 section 707-115 | Income Tax Assessment Act 1997 subsection 707-120(1) | Income Tax Assessment Act 1997 subsection 707-120(1A) | Income Tax Assessment Act 1997 subsection 707-120(2) | Income Tax Assessment Act 1997 subsection 707-120(3) | Income Tax Assessment Act 1997 section 707-125 | Income Tax Assessment Act 1997 subsection 707-125(1) | Income Tax Assessment Act 1997 subsection 707-125(2) | Income Tax Assessment Act 1997 subparagraph 707-125(2)(a)(ii) | Income Tax Assessment Act 1997 section 995-1

Reasons for decision: Summary: All legislative references are to the Income Tax Assessment Act 1997 unless otherwise stated. Subdivision 707-A provides that a loss made by an entity before the time it becomes a member of a consolidated group is transferred to the head company of the group at that time, if the entity could have utilised the loss, had the entity not become a member of the group. Section 707-115 provides that Subdivision 707-A - Transfer of losses to head company -applies to a loss of any sort, if the following conditions are met: (a) an entity (the joining entity ) becomes a member of a consolidated group (the joined group ) at a time (the joining time ) in an income year (the joining year ); and (b) the loss was made by the joining entity for an income year ending before the joining time. | Detailed Reasoning - Note 1:: If the joining entity had a loss transferred to it by a previous operation of this Subdivision (when the entity was the head company of a consolidated group), this Subdivision operates later as if the joining entity had made the loss. See section 707-140 . | Detailed Reasoning - Note 2:: Section 707-405 may affect the income year for which the joining entity is treated as having made the loss, if the joining entity made the loss and the loss is referable to part of an income year. On the facts, Subdivision 707-A will apply to the losses Company A made prior to XX December 20XX, because the conditions in subsection 707-115 are met. That is; • The joining entity is: Company A and its wholly owned subsidiaries. • The joined group is: Company B. • The joining time : 1 January 20XX. • The joining year : Company B has a SAP with year ending 31 December, so the joining time of XX January 20XX falls within the 20XX income year. Note 1 to section 707-115 is not relevant in the circumstances, as the joining entity has not had a loss transferred to it by a previous operation of the Subdivision. Note 2 to section 707-115 is not relevant because: • both the joining entity and the joined group have the same substituted accounting periods, and • the joining time is the first day of a new substituted accounting period. There are therefore no income years less than 12 months to consider. | Detailed Reasoning - Transfer of loss from joining entity to head entity: Section 707-120 contains the test for the transfer of losses from a joining entity to the head company of a tax consolidated group. Section 707-120 provides: | Detailed Reasoning - 707-120(1): Subject to subsection (1A), the loss is transferred at the joining time from the joining entity to the head company of the joined group (even if they are the same entity). | Detailed Reasoning - 707-120(1A): The loss is transferred under subsection (1) only to the extent (if any) that the loss could have been utilised by the joining entity for an income year consisting of the trial year if: (a) at the joining time, the joining entity had not become a member of the joined group (but had been a wholly-owned subsidiary of the head company if the joining entity is not the head company); and (b) the amount of the loss that could be utilised for the trial year were not limited by the joining entity's income or gains for the trial year. Subsection 707-120(1A) clarifies that the 'income year' in question is the same as the 'trial year'. Subsection 707-120(2) sets out the meaning of the 'trial year': | Detailed Reasoning - 707-120(2): The trial year is the period: (a) starting at the latest of these times: (i) the time 12 months before the joining time; (ii) the time the joining entity came into existence; (iii) the time the joining entity last ceased to be a subsidiary member of a consolidated group, if the joining entity had been a member of a consolidated group before the joining time but was not a member of a consolidated group just before the joining time; and (b) ending just after the joining time. In Company A's circumstances, the trial year will be the period that starts 12 months before the joining time and ending just after the joining time, as paragraphs 707-120(2)(a)(ii) and (iii) are not applicable. Accordingly, the trial year runs from 1 January 20XX and ends just after the joining time (1 January 20XX). This is the 20XX calendar year and the 20XX financial year for both the joining and joined entities. Subsection 707-120(3) provides that, when working out whether the joining entity carried on, throughout the trial year (or a period including the trial year): (a) the same business as the business it carried on at a particular time; or (b) a similar business to the business it carried on at that time; assume that the entity carried on at and just after the joining time the same business that it carried on just before the joining time. Subsection 707-120(4) is not relevant as there are no losses made during any income year which coincides with the trial year. Broadly, this means that the tax loss must satisfy the general loss recoupment rules before it can be transferred to the head company of the joined group at the joining time. | Detailed Reasoning - General loss recoupment rules: The general loss recoupment rules that need to be considered when determining whether the joining entity could have utilised a loss (had it not become a member of a consolidated group) are set out under Division 165. Section 165-10 provides that a company cannot deduct a tax loss unless it can satisfy: • the continuity of ownership test under section 165-12, or • pursuant to section 165-13, the business continuity test (being either the same business test at section 165-210, or alternatively, the similar business test at section 165-211). These tests are modified to operate in a concessional way under Subdivision 166-A, for widely held or eligible Division 166 companies. Broadly, subsection 995-1 provides that: • a widely held company means a company whose shares (except shares that carry a right to a fixed rate of dividend) are listed for quotation in the official list of an approved stock exchange, and • an eligible Division 166 company means a company where more than 50% of the voting power, rights to dividends or rights to capital distributions are held by certain entities, including a widely held entity. During the 20XX calendar year, Company A is not considered a widely held company or an eligible Division 166 company. Accordingly, the tests are not modified under Division 166 for Company A. | Detailed Reasoning - Continuity of ownership test: Broadly, a company passes the continuity of ownership test (COT) outlined in section 165-12 if it does not undergo a substantial change in its ownership or control during the period starting at the beginning of the loss year and ending at the end of the year when the company wants to use the loss. Specifically, to meet the conditions in subsections 165-12(2), (3) and (4), during the ownership test period , (which runs from the start of the loss year to the end of the income year): • there must have been persons who had more than 50% of the voting power in the company at all times during the ownership test period; (subsection 165-12(2)) • there must be persons who had rights to more than 50% of the company's dividends at all times (subsection 165-12(3)); and • there must be persons who had rights to more than 50% of the company's capital distributions at all times (subsection 165-12(4)). Section 165-13 provides that if a company fails to meet a condition in subsection 165-12(2), (3) or (4), or it is not 'practicable to show that the company meets the conditions in those subsections', then it may still be able to deduct a tax loss if it meets the condition in that section. Relevantly, the Explanatory Memorandum to Taxation Laws Amendment Bill (No. 5) 2003 provides some guidance about when it may be 'impracticable' for a company to show that it fails the COT. It states: 4.17 Impracticability may arise where the necessary information on the beneficial ownership of shares does not exist or where the information cannot reasonably be obtained. The Applicant states that it is not practicable to determine beneficial ownership of Company A prior to when it was 100% acquired in 20XX by Foreign Co. Accordingly, the conditions in section 165-12 cannot be met, and Company A must satisfy the business continuity test in section 165-13 in order to be able to transfer losses to the joined entity. | Detailed Reasoning - Business continuity test (BCT): Where a loss company fails the COT in section 165-12, or it is impracticable to show that it meets those conditions, subsection 165-13(2) provides: (2) The company must satisfy the business continuity test for the income year (the business continuity test period). Apply the test to the business the company carried on immediately before the time (the test time ) shown in the relevant item of the table. Table 1: Test Time for business continuity test period | Detailed Reasoning - The test time is:: 1 It is practicable to show there is a period that meets these conditions: (a) the period starts at the start of the *ownership test period or, if the company came into being during the *loss year, at the time the company came into being; (b) the company would meet the conditions in subsections 165-12(2), (3) and (4) if the period were the ownership test period for the purposes of this Act The latest time that it is practicable to show is in the period 2 Item 1 does not apply and the company was in being throughout the *loss year The start of the loss year 3 Item 1 does not apply and the company came into being during the *loss year The end of the loss year In Company A's circumstances, it is not practicable to show that it has maintained the same ultimate owners for the ownership test period (recalling that the ownership period is defined in subsection 165-12(1) as the period from the start of the loss year to the end of the income year, 1 January 20XX to 31 December 20XX). Company A must apply the BCT to the business Company A carried on immediately before the test time, which the table shows is the start of the loss year (1 January 20XX for the purposes of the first loss year in question). Next, it is necessary to determine the business continuity test period . This term is defined in section 995-1 as having the meaning given by various sections in the ITAA 1997. The relevant section in relation to loss transfer on consolidation is section 707-125, which at subsection 707-125(2), modifies the application of section 165-13 detailed above. | Detailed Reasoning - Modified business continuity test period for tax consolidated groups: Subsection 707-125(1) operates if certain conditions are met, specifically if; (a) the joining entity made the loss for an income year starting after 30 June 1999; and (b) section 165-13 or subsection 165-15(2) or (3) or 166-5(5) or (6) is relevant to working out (under section 707-120) whether the loss is transferred from the joining entity Company A satisfies both these conditions as the relevant losses were made after 30 June 1999, and it has been established that section 165-13 is relevant to working out whether the loss will be transferred. In subsection 707-125(2), the business continuity test period is described as consisting of: a) the period (the business continuity test period ) consisting of: i) the trial year; and ii) the income year that included the test time worked out for section 165-13 for the joining entity (disregarding paragraph (b) of this subsection), if that income year stared before the trial year; and b) the time (the test time ) just before the end of the income year for which the loss was made by the joining entity. Where the loss is transferred from the joining entity to the head entity, the assumption at subsection 707-120(3) also applies. Effectively, subsection 707-120(3) means that any change in Company A's business activities at and just after the joining time of 1 January 20XX is not relevant for transfer testing. As a result, it is the business activities just before the joining time of 1 January 20XX that are ultimately relevant for transfer testing purposes. Accordingly, the relevant business continuity test period consists of the 20XX calendar year (the trial year) and the test time worked out under subsection 165-13(2), which is just before the start of each loss year. The 'business continuity test period' will be each of the relevant years. The reader is then directed to Subdivision 165-E for the business continuity test. | Detailed Reasoning - Business continuity test: Section 165-13 has the effect that a company may still use its tax losses despite failing the COT provided it carries on the same business (section 165-210) or a similar business (section 165-211). On the facts, the relevant business continuity test would be whether Company A carried on a similar business under section 165-211. Relevantly it provides: A company also satisfies the business continuity test in relation to: (a) a tax loss for an income year starting on or after 1 July 2015; | Detailed Reasoning - ...: if throughout the business continuity test period it carries on a business (its current business ) that is similar to the business it carried on immediately before the test time (its former business ). Subsection 165-211(2) outlines what matters to consider when making the comparison: | Detailed Reasoning - 165-211(2): Without limiting the matters that may be taken into account in ascertaining whether the company's current business is similar to its former business, the following must be taken into account: (a) the extent to which the assets (including goodwill) that are used in its current business to generate assessable income throughout the business continuity test period were also used in its former business to generate assessable income; (b) the extent to which the activities and operations from which its current business generated assessable income throughout the business continuity test period were also the activities and operations from which its former business generated assessable income; (c) the identity of its current business and the identity of its former business; (d) the extent to which any changes to its former business result from development or commercialisation of assets, products, processes, services or marketing or organisational methods of the former business. | Detailed Reasoning - 165-211(3): However, the company does not satisfy the business continuity test under this section if, before the test time, it: (a) started to carry on a business it had not previously carried n; 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 business continuity test period a business that is similar to the business it carried on immediately before the test time. The Law Companion Ruling 2019/1 The Business Continuity Test (LCR 2019/1) explains how the similar business test operates: 6. The similar business test operates in a way that is comparable to the same business test, but removes the negative limbs which apply as part of that test. These negative limbs deny access to losses where activities or transactions are new and of a different kind to those entered into or carried on before a change in ownership or control. Removal of negative limbs will allow companies and listed widely held trusts to engage in new business activities and transactions that evolve from their pre-existing business, without losing access to their unutilised losses, encouraging innovation. 7.It is still the case, however, that the overall business must satisfy the similar business test. The meaning of 'similar' depends on the context in which the term arises. In the context of the similar business test, 'similar' does not mean similar 'kind' or 'type' of business. The focus remains on the identity of a business, as well as continuity of business activities and use of assets to generate assessable income... 8. For the purpose of determining whether a business remains sufficiently similar, the four factors that must be taken into account require a comparison between the essential characteristics of the business before and after the relevant change in ownership or control.These four factors do not limit consideration of any other matter that may be relevant to this determination. The weight to be given to each factor will depend on the facts and circumstances of each case. 9. The first factor considers the extent to which the assets used to generate assessable income throughout the business continuity test period were the assets used in the business carried on at the test time. Where the same assets of the business are being used as at the test time to generate assessable income, albeit that they may be producing a different result or effect due to the development or commercialisation of some of those assets, this factor would indicate that the business remains similar to that previously carried on. 10. The continuing use of certain business assets to generate assessable income rather than other assets may be more relevant to the question of whether the similar business test is passed. For example, goodwill, which is the combined result of using the business' tangible, intangible and human assets in such a way that attracts custom to the business, will be more relevant than other assets, such as generic office premises, equipment and stationery, because it is closely linked to the identity of a particular business. If the goodwill that was used throughout the business continuity test period is replaced by new goodwill it will be necessary to consider the extent to which other assets of the business have continued to be used and the amount of weight that should be given to that in comparison to other factors. 11. The second factor compares the extent to which the current activities and operations from which assessable income is generated were also those from which assessable income was generated previously.Where the business operator maintains the income generating activities and operations that were previously being undertaken, despite doing them in a different or more efficient way due to business improvements, this factor would indicate that the business remains similar to that previously carried on. 12. The third factor compares the current identity of the business with that of the business carried on before the test time.Where new activities have not resulted in the identity of the business changing, this factor would indicate that the business remains relevantly similar to that previously carried on. 13. The fourth factor requires an assessment of the extent to which the changes to the business resulted from the development or commercialisation of assets, products, processes, services or marketing or organisational methods of the business.As the similar business test is designed to encourage businesses to innovate, such changes will not, in themselves, cause a business to be considered dissimilar. Where changes to the business do not result from such development or commercialisation, the business is less likely to satisfy the similar business test. 14. The first three factors are concerned with the aspects of the business that have continued, while the fourth factor assesses the nature of any changes that have happened. Where those changes are due to an evolution or development of the business, the business is more likely to be similar to that previously carried on. 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) provides guidance regarding the same business test rather than the similar business test, however the ruling still has effect and provides relevant general guidance. TR 1999/9 stresses the importance of the business's identity. For example, at paragraph 38 it provides: Change of Activities 38. To satisfy the same business test, a taxpayer must be able to show that it carried on the same business, in the sense of the identical business, at all times during the period of recoupment, as the business it carried on at the change-over. However, this does not mean that the business carried on by the taxpayer during the period of recoupment must be identical in every respect with the business that was carried. 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 terms of the business needing to continue, paragraph 47 provides: 47. The existence of a period of 'dormancy' often raises an issue as to whether the business is truly still in existence, though greatly reduced in scale, or has actually ceased altogether. If, before the end of the period of recoupment, the taxpayer completely ceases to carry on the business it carried on immediately before the change-over, it necessarily fails the same business test. Any other business it thereafter carries on must be a new business that it has commenced after the cessation of the old business and, therefore, a different business from the business carried on before the change-over. Paragraph 57 of TR 1999/9 provides that for the purpose of applying the same business test, the business activities carried on by one company is not identified by reference to the business carried on by related, or commonly owned, companies. In Case K2; 22 CTBR (NS) Case 40, the Board of Review said: 'It should also be mentioned that we can take no account of the fact, if it be a fact, that the overall business had remained the same in so far as it was being carried on within a "group" of companies.' The Board of Review in Case N109; 25 CTBR (NS) Case 63 expressed a similar view and followed the general principle that each company is a separate entity for taxation purposes (see also Phillimore J in Kodak Ltd v. Clark and Kitto J in Hobart Bridge Co Ltd (in liq) v. FC of T). Accordingly, the business of a company is identified, for the purpose of applying the same business test, by reference to the business activities carried on by that company and not by reference to the business activities carried on by a commonly owned or controlled group of companies to which that company belongs. Further, paragraph 59 provides: 59. There are various relevant factors to taken 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. 60. Subject to the foregoing observations, the reported decisions on the application of the 80E test may be said to provide the following guidelines in determining whether a taxpayer has satisfied the same business test: ... (b) The business carried on by the taxpayer is not characterised by reference to business activities or transactions that the taxpayer intended to carry on or enter into before the change-over, or that the taxpayer had power or expressed the intent to carry on or enter into under its constituent documents before the changeover, if the evidence discloses the taxpayer did not, in fact, carry on those activities or enter into those transactions at or before the change-over (see Fielder Downs). Last, paragraph 61 details factors which would be relevant to consider, and how they should be weighed, in applying the same business test: (i) Changes in the goodwill of the taxpayer. Goodwill is an important indicator. Even businesses selling virtually identical products to an identical market may be sharply differentiated by goodwill and, conversely, undertakings that might otherwise be thought of as distinct businesses, may form part of the one business because they share the same goodwill. Where goodwill remains the same, other changes, even if fairly substantial, are likely to amount to no more than a variation in the way in which the same business is being carried on, whereas a complete change of goodwill is very likely to support a conclusion that the same business is no longer being carried on, even if the means by which the business is carried on have hardly altered... ... (k) Changes in the trade names, trade marks, patents, royalty arrangements or other intellectual property rights of the taxpayer. A business of manufacturing may acquire new patents as a result of research that merely leads to innovation within the same business, as would be the case of a manufacturer of compact disc players that patented a new digital to analogue converter. Or the patent may be in respect of an innovation so profound that it transforms the business of the manufacturer. A change of trade name is commonly associated with a change in goodwill and may well point to a change in business, particularly if the trade name was associated with the new owners before they acquired the taxpayer. In other cases, it may only be a marketing ploy. A wholesale change of intellectual property rights would normally be associated with a change in business, whereas minor changes are almost always found in manufacturers with research and development programmes. Example 15 touches on the role of agency in the context of the same business test. A resident company, xx, carries on the business of mining xx and refining ore xx in xx, and incurs substantial losses. It fails the continuity of ownership test and enters into a joint venture agreement with another company, xx. The companies establish an incorporated joint venture vehicle (Operator) that manages day to day operations of the business as their agent. Operator is granted exclusive possession of the mine sites through a sublease from the loss incurring company, who retains the mining leases. The example continues at paragraph 174: ...Operator acquires other assets and is responsible for the purchase or construction of new assets to be used in the conduct of the joint venture business. Some employees of xx are transferred to Operator, and Operator assumes responsibility for hiring future employees. 175. In accordance with the terms of an operating agreement, the day to day management of the business operations carried on at the mine sites and the refinery is assumed by Operator. xx and xx are entitled to equal representation and voting rights on a xx Committee that has the power to make decisions in relation to the executive management of the business operations carried on by Operator. 176. Under this joint venture arrangement, xx and xx share equally in the output of the business by each purchasing half of the output from Operator at a price approximating the cost of its production. Under a distribution agreement between the joint venture and xx, xx markets and sells the output of the joint venture in previously serviced markets, as well as in wider global markets, on behalf of the joint venture. 177. In relation to the tax losses incurred prior to the change-over, xx fails both the same business test and the new transactions test for the income years ending after xx enters into the joint venture arrangement with xx. 178. Immediately before the change-over, xx carried on the business of mining and refining xx in xx. After xx enters into the joint venture arrangement with xx, xx merely shares executive management with xx of the business carried on by the Operator as agent for and on behalf of the joint venture parties. This is not the same business as the business carried on by xx immediately before the change-over. 179. Under the joint venture arrangement, xx derives income from the sale of its joint venture share of the output of the business in xx under the distribution agreement with xx. This constitutes the derivation of assessable income from a transaction of a kind that xx had not entered into in the course of its business operations before the change-over. xx may not have failed the new transactions test, with respect to sale of its share of the output, if xx had not entered into the distribution agreement with xx. | Detailed Reasoning - Services Agreement: The Applicant has stated that Company B has been carrying out business activities on behalf of, or as agent for, Company A, pursuant to the Services Agreement. Halsbury's Laws of Australia [1] provides that the traditional (common law) view of 'agency' connotes an authority to create a legal relationship between a principal and third parties. It continues that the crucial element of such a relationship is the representative capacity in which the agent acts, in respect of the principal. Relevantly: Whether agency is constituted depends not on the terminology adopted by the parties, but on the true nature of the agreement or the exact circumstances of the relationship between the alleged principal and agent. This is because persons cannot by the mere device of labelling either confer a particular legal character on a relationship that it does not possess or deny it a character that it does possess. If the substance of the agreement contemplates the alleged agent acting on his or her own behalf and not on behalf of a principal, then although he or she may be described in the agreement as an agent, the relation of agency will not arise. An independent contractor as such is not an agent but may often be an agent in particular transactions. It follows that the fact that the parties adopt the terminology of agency is not decisive, and cannot be given effect if that would contradict the effect of the agreement as a whole. If the relationship of the parties is capable of being either one of service or agency, however, then the parties can remove that ambiguity by the terms of the agreement itself. A court will, for this purpose, give proper weight to the parties' choice of agency as a label, although it is not bound by that description. It is open to a court to find a relationship of agency even in the face of a specific clause purporting to deny it. In Lilyvale Hotel Pty Ltd v Federal Commissioner of Taxation [2009] FCAFC 21 ( Lilyvale ), the Full Federal Court ruled on the operation of the same business test in an agency situation. In that case, during the loss creation years, the Appellant owned a hotel which was operated and managed by another company in its group under a management agreement. When the Appellant sold the hotel, they did so by advertising it as having 'vacant possession' (i.e. without any existing management), necessitating the termination of the management agreement. From the completion of the sale until 30 June 2003 (a period of one calendar year), the Appellant company continued to operate and manage the hotel, without any management agreement in place. It then claimed a deduction for past losses, which was disallowed on the basis that the Appellant did not satisfy the same business test (it being common ground that the Appellant company could not satisfy the COT test). The Appellant's argument was that the activities of its agent in operating the hotel under the management agreement prior to its sale could be attributed to itself, so that, both before and after the change in its ownership, it was engaged in conducting a hotel business. It was accepted by the primary judge that: the services provided to the customers of the hotel were identical to the services provided before the sale and there was nothing in the presentation of the hotel, the services it provided or the price of its services which suggested any change of ownership; the staffing generally was unchanged and the hotel retained its focus on the Japanese market. This is what Mr Tang had referred to as a policy of "seamless transition." [2] Further, it was accepted that a 'guest in the hotel or indeed the hotel's employees, would not have discerned any material difference between the way the hotel was operated and managed before and after August 20xx until about the time when the name of the hotel was changed to the Shangri-La.' [3] The Commissioner argued that because its agent managed the hotel prior to its sale but not afterwards, the appellant did not carry on the same business before the share sale as it did afterwards. However, the Full Federal Court found that this was a case where changes in the way in which the business was carried on did not render it a different business. They stated: [T]he fact that at one stage the appellant conducted its hotel business without the intervention of a hotel management group and at another did so with the assistance of such a hotel management group is a distinction without a difference. In our opinion, the appellant correctly described the business which it carried on as that of " owning and operating ... [ a ] hotel to derive revenue from its guests and profits from its operation". The execution of the management of the hotel at different times in different ways had no bearing upon the identification of the business which the appellant carried on. [4] | Detailed Reasoning - Agency Agreement: As mentioned above, 'agency' connotes authority to create a legal relationship between a principal and third parties. Whether agency is properly constituted depends on the true nature of the agreement, rather than the terminology adopted by the parties. Accordingly, in construing the Services Agreement between Company A and Company B, all the relevant facts must be looked at objectively to identify whether agency is properly constituted. The Commissioner concludes that on the facts, agency has not been properly constituted. As the Commissioner has concluded that agency has not been properly constituted, it is necessary to determine whether Company B can pass the similar business test without an agency relationship with Company A. | Detailed Reasoning - Does the business pass the business continuity test?: Paragraph 57 of TR 1999/9 provides that for the purpose of applying the same business test, the business activities carried on by one company is not identified by reference to the business carried on by related, or commonly owned, companies. This is considered similarly applicable to the similar business test. In Case K2; 22 CTBR (NS) Case 40, the Board of Review said: 'It should also be mentioned that we can take no account of the fact, if it be a fact, that the overall business had remained the same in so far as it was being carried on within a "group" of companies.' Accordingly, in assessing the relevant factors, each business is identified, for the purpose of applying the similar business test, by reference to the business activities carried on by Company A, and not by reference to the business activities carried on by the controlled group of companies to which it belongs. As mentioned above, LCR 2019/1 provides the Commissioner's view on the factors relevant to applying, and how to apply, the similar business test. After assessing the factors, the Commissioner considers that the business carried on immediately before the test time and throughout the business continuity test periods were not sufficiently similar for Company A to pass the modified business continuity test in section 707-125. Accordingly, the losses incurred by Company A prior to being acquired by Foreign Co, cannot be transferred to Company B as head company of the (to be formed) tax consolidated group. [1] LexisNexis, Halsbury's Laws of Australia , 1 Nature and Formation - Agency, 'Meaning of Agency' [15-5] (at 5 Feb 2026). [2] Lilyvale , paragraph 27. [3] Lilyvale , paragraph 28. [4] Lilyvale , paragraph 46.