Private ruling: Modified same business test
Published: June 2012
Ruling period: 1 July 2011 to 30 June 2017
Date scheme commenced: 1 July 2011

Ruling: Q1: Will X Co breach the anti-avoidance rule pursuant to subsection 165-210(3) of the ITAA 1997? No.


Relevant legislative provisions: Subdivision 707-A of the Income Tax Assessment Act 1997 Section 707-120 of the Income Tax Assessment Act 1997 | Subsection 707-120(1) of the Income Tax Assessment Act 1997 | Paragraph 707-120(2)(a) of the Income Tax Assessment Act 1997 | Paragraph 707-120(2)(b) of the Income Tax Assessment Act 1997 Subsection 707-120(3) of the Income Tax Assessment Act 1997 | Section 707-125 of the Income Tax Assessment Act 1997 | Subsection 707-125(1) of the Income Tax Assessment Act 1997 | Subsection 707-125(4) of the Income Tax Assessment Act 1997 | Subsection 707-140(1) of the Income Tax Assessment Act 1997 | Subsection 707-140(2) of the Income Tax Assessment Act 1997 | Subdivision 707-B of the Income Tax Assessment Act 1997 Section 707-205 of the Income Tax Assessment Act 1997 | Subsection 707-205(2) of the Income Tax Assessment Act 1997 | Section 707-210 of the Income Tax Assessment Act 1997 | Subsection 707-210(1A) of the Income Tax Assessment Act 1997 | Paragraph 707-210(1A)(a) of the Income Tax Assessment Act 1997 | Paragraph 707-210(1A)(a) of the Income Tax Assessment Act 1997 | Subdivision 707-C of the Income Tax Assessment Act 1997 Division 165 of the Income Tax Assessment Act 1997 | Section 166-5 of the Income Tax Assessment Act 1997 | Subsection 166-5(6) of the Income Tax Assessment Act 1997 | Section 165-10 of the Income Tax Assessment Act 1997 | Section 165-12 of the Income Tax Assessment Act 1997 | Section 165-13 of the Income Tax Assessment Act 1997 | Subsection 165-13(1) of the Income Tax Assessment Act 1997 | Section 165-15 of the Income Tax Assessment Act 1997 | Subsection 165-15(1) of the Income Tax Assessment Act 1997 | Section 165-210 of the Income Tax Assessment Act 1997 | Subsection 165-210(2) of the Income Tax Assessment Act 1997 | Subsection 165-210(2)(a) of the Income Tax Assessment Act 1997 | Subsection 165-210(2)(b) of the Income Tax Assessment Act 1997 | Subsection 165-210(3) of the Income Tax Assessment Act 1997 | Division 166 of the Income Tax Assessment Act 1997 | Subdivision 166-A of the Income Tax Assessment Act 1997 Section 995-1 of the Income Tax Assessment Act 1997 | Will the modified same business test (SBT) under section 707-125 of the Income Tax Assessment Act 1997 be satisfied in order for the losses of X Co to be transferred and utilised by Y Co under subdivision 707-A of the ITAA 1997 for the income years ended 30 June 20XX, 30 June 20XX and 30 June 20XX? Summary | Yes. In respect of the tax losses incurred by X Co in the income years ended 30 June 20XX, 30 June 20XX and 30 June 20XX, X Co satisfied the modified SBT under section 707-125 of the ITAA 1997 such that it was able to transfer the losses to Y Co as the head company of the consolidated group at joining time. | Detailed reasoning | General discussion of relevant Law | Transfer of Loss from Joining Entity | Subdivision 707-A of the ITAA 1997 contains certain transfer tests that provide for the transfer of a loss from an entity (the joining entity) joining a consolidated group, to the head company of the group and prevent the utilisation by any entity of a loss made by the joining entity, if that entity could not have utilised the loss but for it becoming a member of the group. | Unutilised tax losses cannot be transferred unless the joining entity: | § satisfies either the continuity of ownership test (the COT) in section 165-12 of the ITAA 1997 or the same business test (the SBT) in section 165-13 of the ITAA 1997 as modified by the provisions of section 707-125 of the ITAA 1997, and | § does not fail the tainted change of control test in section 165-15 of the ITAA 1997 | Subdivision 707-A of the ITAA 1997 is applied to each tax loss that the joining entity seeks to transfer, separately, and not the total amount of all the tax losses carried forward at the joining time. | Subsection 707-125(1) provides that: | This section operates 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 subsection 707-120(1)) whether the loss is transferred from the joining entity. | As provided by Section 707-120: | (1) At the joining time, the loss is transferred from the joining entity to the * head company of the joined group (even if they are the same entity), 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. | (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. | (3) When working out whether the joining entity carried on the same business throughout the *trial year (or a period including the trial year) as it carried on at a particular 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. | (4) If the loss was made by the joining entity for an income year all or part of which occurs in the *trial year, the transfer of the loss under subsection (1) is not prevented by the fact that the loss was made for that income year. | That is, a tax loss is transferred to the extent that the loss could be utilised by the joining entity for an income year consisting of the trial year and effectively, any change in the joining entities business activities at and just after joining time is not relevant for 'transfer' testing. To determine whether the loss can be utilised for a trial year, it is necessary to consider Division 165. | Section 165-10 provides that: | A company 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). | Subsection 165-15(1) provides that: | Even if a company meets the conditions in section 165-12 or 165-13, it cannot deduct the *tax loss if: | (a) for some or all of the part of the *ownership test period that started at the end of the *loss year, a person controlled, or was able to control, the voting power in the company (whether directly, or indirectly through one or more interposed entities); and | (b) for some or all of the *loss year, that person did not control, and was not able to control, that voting power (directly, or indirectly in that way); and | (c) that person began to control, or became able to control, that voting power (directly, or indirectly in that way) for the purpose of: | (i) getting some benefit or advantage in relation to how this Act applies; or (ii) getting such a benefit or advantage for someone else; or for purposes including that purpose. | Subsection 165-13(1) provides that: | This section sets out the condition that a company must meet to be able to deduct the tax loss if: | (a) the company fails to meet a condition in subsection 165-12(2), (3) or (4); or | (b) it is not practicable to show that the company meets the conditions in those subsections. | To determine the appropriate modified SBT to apply in accordance with section 707-125 of the ITAA 1997 it is necessary to consider whether section 165-13, 165-15 or subdivision 166-A would apply to the joining entity. | Subdivision 166-A | The modified SBT in subsection 707-125(4) is applicable if Subdivision 166-A would apply to the joining entity for an income year consisting of the trial year. | As provided by section 166-5, Subdivision 166-A modifies the way Subdivision 165-A applies to a company that is: | (a) a widely held company at all times during the income year; or | (b) an eligible Division 166 company at all times during the income year; or | (c) a widely held company for a part of the income year and an eligible Division 166 company for the rest of the income year. | Section 995-1 defines a widely held company as: | (a) a company, *shares in which (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; or | (b) a company with more than 50 members, other than a company where at least one of the following conditions is met during an income year: | (i) no more than 20 persons held, or had the right to acquire or become the holders of, shares representing at least 75% of the value of the shares in the company (other than shares that only carry a right to a fixed rate of dividend); | (ii) at least 75% of the voting power in the company was capable of being exercised by no more than 20 persons; | (iii) at least 75% of the amount of any dividend paid by the company during the year was paid to no more than 20 persons; | (iv) if no dividend was paid by the company during the year - the Commissioner is of the opinion that, if a dividend had been paid by the company during the year, at least 75% of the amount of the dividend would have been paid to no more than 20 persons. | Modified SBT | As provided by subsection 707-125(4), it is necessary to: | work out whether the loss is transferred on the basis that: | (a) subsection 166-5(5) treated the joining entity as having satisfied the condition in section 165-13 if the joining entity satisfied the * same business test for the period (the same business test period) consisting of: | (i) the trial year; and | (ii) the income year described in subsection (5) of this section, if that income year started before the trial year; and | (b) subsection 166-5(6) required the same business test to be applied to the * business that the joining entity carried on at the time (the test time) just before the end of the income year for which the loss was made by the joining entity. | Same business test (SBT) | The SBT is set out in Section 165-210, and comprises a positive test and two negative tests, as follows: | (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. | (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. | Taxation Ruling TR 1999/9 (TR 1999/9) explains the Commissioner's views and some case law concerning the application of the SBT. | Positive Test - Carries on the Same Business | What constitutes the same business was considered by the High Court in Avondale Motors (Parts) Pty Ltd v FCT 71 ATC 4101 (Avondale Motors). In this case, the High Court held that the reference to the same business was a reference to the identical business. As provided by Gibbs J: | 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… | However, Gibbs J also stated: | It does not, of course, follow that a business will not be the same because there have been some changes in the way in which it is carried on; some cases under sec. 80E may give rise to questions of degree which do not arise in the present case. | In Laycock v Freeman, Hardy and Willis Ltd (1938) 22 TC 288, Sir Wilfred Greene, M.R. stated: | The successor may succeed to a business with, let me say, 50 shops. He may choose to shut up some of those shops. He may make alterations in the goods that he sells. All sorts of alterations of that kind may take place. He may change his supplier. He may cut out a particular class of customer or a particular area… Changes of that kind may or may not be so substantial as to make it right to say, as a matter of fact…that the business is not the same as the one to which he succeeded. The differences may be so substantial as to justify a finding to that effect. | TR 1999/9 at paragraph 59 summarises that although various factors are relevant, a single factor or matter might be so important that it determines the issue. But usually, a combination of factors will be decisive. | Paragraph 60 of TR 1999/9 summarises reported cases on the application of section 165-210 of the ITAA 1997 (the 80E test) and provides guidelines to determine whether a taxpayer has satisfied the same business test. | Paragraph 60(c) of TR 1999/9 provides that: | There is a distinction between a change of business and a mere change in the process by which [the business] is carried on (see Avondale Motors and Case Y45; AAT Case, 272). The second kind of change does not, of itself, result in a taxpayer not satisfying the same business test. However, when a change in the taxpayer's business operations or processes affects the identification of the taxpayer's business by going beyond a mere change in the way in which the business is carried on, it is likely to result in a change in the business itself, e.g., Gordon & Blair Ltd v. IRC. | In J Hammond Investments Pty Ltd v. FC of T (1977) 31 FLR 349; (1977) 7 ATR 633; 77 ATC 4311 (J Hammond Investments) the central issue was the degree of specificity with which the company's business was defined and, in particular, whether a company which had formerly invested in a diverse array of business ventures satisfied the SBT even though its mode of investment had changed. That is, was the mode of investment central to the definition of the taxpayer's business or peripheral to it? | In J Hammond Investments the loss company was a venture capitalist, providing capital and managerial support to existing businesses. In this activity the company had invested in a bakery, property development and a furniture/furnishings business. Historically, these investments had been made by way of the acquisition of shares in special purpose entities. However, in a new venture dealing in artificial marble, the taxpayer entered into a partnership arrangement with two other entities. | The Commissioner argued that this change in the mode by which the company entered into an investment signalled a change in the nature of the business, because the company had changed its business from investing in businesses by acquiring shares in companies to one of investing in businesses by joining a partnership. Adopting a stance of legal formalism, the Commissioner submitted that the nature of a partnership meant that the taxpayer was compelled to actively participate in the business venture, rather than maintain the aloof approach it had formerly adopted in making its other investments. Accordingly, the Commissioner argued that the SBT was not satisfied. | In rejecting the Commissioner's argument, Sheppard J held (at 7 ATR 633 at 639) that: | …the totality of the evidence points to the fact that the real nature of the taxpayer's business was investment in businesses, ventures and enterprises of various kinds. The form of the investment, although, down to the date when the partnership agreement was entered into, it had always been by the taking up of shares, was an inconsequential matter... The agreement evidencing that partnership contained provisions to which I have referred making it clear that the taxpayer and ASH were in a rather special position and left them, practically speaking, in a similar situation to that in which they found themselves in relation to the other ventures in respect of which they had taken up shares in other companies. | Sheppard J also stated: | I think it relevant…to look at the conduct of the taxpayer as described in the evidence of Mr Scheinberg. It is plain that he was not concerned with legal structures but merely with the investing of money in sound business ventures managed by persons who had capacities in particular fields. | Further, paragraph 60(d) of TR 1999/9 provides that: | An expansion or contraction of the taxpayer's business activities may not, in itself, result in a change in the identity of the business carried on by the taxpayer: Gibbs J in Avondale Motors. However, the expansion or contraction of activities may result in a change in the identity or character of the business, taking into account the nature and extent of the expansion or contraction. In particular, the organic growth of a business through the adoption of new compatible operations in the ordinary way and, similarly, the discarding of old operations in that way, may not cause a taxpayer to fail the same business test, but a sudden and dramatic change brought about by the loss or acquisition of business operations on a considerable scale is likely to do so: Walton J in Rolls-Royce (Motors) Ltd v. Bamford. | Accordingly, whether changes to a business cause that business not to be the same business is a question of fact and degree, having regard to all the relevant circumstances. A company will still be considered to carry on the same business despite changes being made to that business, provided that those changes are not so substantial that the business undertaken after those changes is not the same one as that which was previously carried on. | In Lilyvale Hotel Pty Ltd v. FC of T (2009) 75 ATR 253 (Lilyvale) the full Federal Court considered whether the taxpayer satisfied the same business test where there was a change in the management of the hotel. Before the sale of the shares Enterprises Australia carried on the business of managing the hotel and the taxpayer's involvement in the business was so distant from the day-to-day activities of the hotel that it could not be said to be conducting a hotel business. However, after the sale of the shares Enterprises Australia was no longer involved with the hotel, rather, the taxpayer had stepped into the shoes of Enterprises Australia as the manager of the hotel. | In Lilyvale , the full Federal Court held that: | The 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. | Following the decision in Lilyvale , the Commissioner issued Decision Impact Statement NSD 1993/2008 which states that: | The joint judgment acknowledges the authority of Avondale Motors and the general principle that the same business test requires a continuing identity (as opposed to similarity) of the taxpayer's business which is to be determined by an evaluation of all relevant facts.. It does not follow that changes to the manner in which a taxpayer's business is carried on will necessarily manifest a change in the actual business carried on by a taxpayer. | Paragraph 61 of TR 1999/9 outlines matters relevant to consider in this regard, and includes at paragraph 61(h): | Changes in the taxpayer's capital and working capital (for example, the manner and source of finance). This is a good example of a factor that is unlikely, of itself, to lead to a different business being carried on (except, perhaps, on some occasions in relation to a finance company), but which is not uncommonly the result of a different business being carried on. The nature of some changes in working capital may assist one to conclude other factors have caused a change of business; conversely, the absence of any important changes might help deprive other matters of their apparent significance. | Paragraph 60(g) of TR 1999/9 provides that: | Other factors relevant to the issue of whether the same business is being carried on after the change-over include the name of the taxpayer, the location of the business, the existence of a period or periods of dormancy, and the circumstances accounting for the inactivity and in which activity is resumed: Avondale Motors; Yarmouth Industrial Leasing v. The Queen. And, also, the extent to which there is continuity of, or change in, custom and goodwill: Tryka Ltd v. Newall; Wadsworth Morton Ltd v. Jenkinson. | Other factors to be considered | Paragraph 61 of TR 1999/9 provides an illustration of factors to be considered and how they are to be weighed in applying the same business test. Each of the matters is said to be relevant to consider although not necessarily significant in itself. Factors that may be relevant include but are not limited to: | § Product and product market | § Mix of clients | § Method of selling product | § Capital or working capital | § Changes in turnover or assets | § Location of business activities or customers | § Number of employees | § Directors and/or management | § Trading name | Negative test - subsection 165-210(2) of the ITAA 1997- 'new business' and 'new transactions' | The second element of the test requires that the company: | § has not, at any time during the test-period, derived assessable income from a business of a kind which it did not carry on before the test-time | § has not, at any time during the test-period, derived 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 | Paragraphs 165-210(2)(a) and (b) of the ITAA 1997 (known as the new business test and the new transactions test respectively) allow a business to expand and develop, provided the activities by which it produces its income remain of the same kind. In the 'new business' and the 'new transactions' tests the word 'business' becomes more specific and refers to each of the different kinds or types of activities that form the overall business. | The meaning of 'of the same kind' is derived from the business operations before the test time. A business or transaction that is entered into during the test-period, and: | § which is outside the course of business operations carried on before the test-time, or | § which is extraordinary or unnatural when judged by the course of business operations before the test-time, or | § which otherwise could not have been entered into in the course of business operations before the test-time, | § is a business or transaction of a different 'kind' from those actually entered into before the test-time. | Paragraphs 70-72 of TR 1999/9 explain that the 'new business' test is intended to limit the expansion available under the same business test. 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 test-time. | In the 'new transactions' test, where a new transaction is considered 'of a different kind' from the transactions at the test time the test will not be satisfied. 'Transaction', in this reference incorporates every means or event by which income is derived. The test looks at all transactions, not merely those that are 'isolated' or 'independent' (TR 1999/9 para.80). Derivation of small, insignificant amounts of income will not cause the company to fail the new business test or the new transactions test. | Applying the tests involves: | § identifying the nature of the business before the test-time, and | § the kinds of business operations, undertakings and transactions entered into (during the course of that business), | § from the test-time, to the point in the past where the business can no longer be described as 'the business carried on before the test-time' (TR 1999/9 para.88). | Application of the law to your circumstances | To determine whether the loss could have been utilised by X Co for a trial year, it is necessary to consider Division 165 and whether the conditions in sections 165-12 of the ITAA 1997 (regarding the company maintaining the same owners) or 165-13 of the ITAA 1997 (regarding the company satisfying the same business test) have been met. | As a result of the Scheme of Arrangement, Y Co will acquire 100% of the shares on issue in X Co and the COT will be breached in the trial year which as outlined above will end just after the joining time due to a change in ownership of at least 50%. The conditions in section 165-12 of the ITAA 1997 will not be satisfied and it will be necessary to consider section 165-13 of the ITAA 1997 to determine whether the loss could have been utilised by X Co for a trial year. As a result, the requirements of subsection 707-120(1) are satisfied and section 707-125 operates to determine whether X Co carried forward tax losses can be transferred to Y Co. | To determine the appropriate modified SBT to apply in accordance with subsection 707-125 it is necessary to consider whether sections 165-13, 165-15 or subdivision 166-A would apply to X Co as the joining entity. | Subdivision 166-A does apply to X Co because it currently meets the definition of a widely held company as its shares are listed on the ASX. Further, it is assumed that X Co will remain listed on the ASX as at the acquisition date. Therefore, X Co will be a widely held company at all times during the income year consisting of the trial year as the trial year will end just after Y Co acquires X Co (the joining entity). Consequently, it is necessary to apply the modified SBT as outlined in subsection 707-125(4). | Section 165-15 does not apply to X Co (the joining entity) because the only change in control of X Co's voting power will occur when Y Co acquires 100% of the shares in X Co. Prior to this point in time, from the start of the 30 June 20XX income year, no person controlled or was able to control the voting power in X Co. | Section 165-13 also applies to X Co (the joining entity) because, as discussed above, when Y Co acquires 100% of the shares in X Co the COT will be breached. However, as subdivision 166-A applies to X Co (the joining entity) and subdivision 166-A is more specific, it is necessary to apply the modified SBT as outlined in subsection 707-125(4). | SBT - Test time | As outlined above, the trial year is defined in paragraph 707-120(2)(a) and starts at the latest of 12 months before the joining time, the time the joining entity came into existence or the time the joining entity last ceased to be a subsidiary member of a tax consolidated group. X Co came into existence on certain date some years ago and is not currently a member of a tax consolidated group. Therefore, the trial year should start 12 months before the 100% acquisition by Y Co. | Paragraph 707-120(2)(b) provides that the trial year ends just after the joining time. However, this is modified by Subsection 707-120(3) which provides when working out that the joining entity carried on the same business throughout the trial year 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. Accordingly, changes in business activities at and just after the joining time are ignored in applying the SBT. | The test time worked out for Section 166-5(6) of the ITAA 1997 is essentially the point in time at which COT is breached. | Therefore, it is necessary to consider whether X Co was carrying on the same business at the following times: | § the income year starting 12 months before Y Co acquires 100% of the shares in X Co and ending just before Y Co acquires 100% of the shares in X Co (trial year or SBT period); | § the income year that X Co fails COT (if that income year starts before the trial year); and | § the end of each income year in which the X Co losses were made (test time). | As outlined above, X Co incurred losses in the years ended 30 June 20XX, 30 June 20XX and 30 June 20XX. If Y Co acquired 100% of the shares in X Co and elects to form a tax consolidated group with X Co on the acquisition date, the business of X Co must be the same at 30 June 20XX, 30 June 20XX, 30 June 20XX and during the 12 months ending just before the acquisition date. | Same business test (SBT) | As at 30 June 20XX, 30 June 20XX, 30 June 20XX and during period from 1 July 20XX through to the date of this PBR application X Co carried on an investment business. In this regard, X Co's investment portfolio has consisted of different percentages of particular types of investments. Whilst X Co's portfolio of investments has changed throughout the test periods, and the manner in which those investments are held has varied (due to changes in market conditions and investment policy), the essential nature of X Co's business has remained the same. That is, X Co s business has at all relevant times consisted of an investment portfolio. | The various changes to the way in which X Co s investment business was undertaken during the relevant periods is further analysed below in the context of the SBT and paragraphs 60 and 61 of TR 1999/9 which illustrates factors to be considered when applying the SBT. | Mode of Investment | As at 30 June 20XX, 30 June 20XX, 30 June 20XX and during the period from 1 July 20XX through to the date of this PBR application X Co invested directly and indirectly in underlying investments. | Whilst the structure and instruments through which X Co has invested in the underlying investments has changed over time due to changes in global market conditions and in line with the investment policies of the company, X Co has for the relevant periods carried on a business of investing (directly and indirectly) in a portfolio of investments. In accordance with the decision in J Hammond Investments the changes in the mode or form of investment investments, alone, should not result in a change in the identity of X Co's business and therefore will not cause X Co to breach the SBT. | Composition of the Investment Portfolio (Products) | In accordance with the Commissioner's view in paragraph 60(d) of TR 1999/9 and the Avondale Motors case, an expansion or contraction of X Co's business activities may not result in a change of business carried on. | During the 20XX/20XX financial year, there has been a significant increase in cash investments held by X Co as compared with other investments. | This increase in cash investments held by X Co should not indicate a change in X Co's business. Rather, X Co has realised various underlying investments with the intention of reinvesting in other underlying investments (as part of X Co portfolio). This is part of X Co reassessing and rebalancing its investment portfolio and is an ordinary incident of its investment activities. | Therefore, the changes in the composition of X Co's investment portfolio, and in particular the recent increase in cash investments held by X Co will not result in a change in the identity of X Co's business. Rather the change in the composition of X Co's investment portfolio is an ordinary incident of its business and represents organic growth or contraction of the business through the adoption of new compatible operations in the ordinary way. | Commencement of other activities | X Co's business since 30 June 20XX has been one of investing directly and indirectly in a portfolio of investments. The Commissioner has not identified that since that income year X Co has commenced any other activities other than those consistent with its investment objective. | Market/mix of customers/method of selling | As a listed company X Co has a wide range of investors therefore a change in investors would not indicate a change in business. W Group acquired xx% of X Co in the recent financial year and the share buy-backs would also have changed the constitution of X Co's shareholders. However, this acquisition by W Group did not coincide with a change in the custom of X Co. That is following the buy-back and placement X Co remained a listed company with a spread of investors. Furthermore, we note that there was a change of manager. The relationship with W Group and the change of management is discussed further below. At all times the fundamental business of X Co did not change as a result of the change in shareholdings and management agreements. | Changes in the turnover or gross assets | There have been significant changes in X Co's turnover throughout the relevant test times. This volatility is a product of X Co's business and a result of net changes in the fair value of financial assets recognised in the profit and loss statement and not as a result of any changes in the business of X Co. The gross assets of X Co throughout the relevant test times have been relatively more consistent and changes in the constitution of the assets have been addressed above. Furthermore, a mere contraction of the business of X Co will not constitute a change in business. | External management arrangements | During the relevant period a management agreement was terminated and a strategic alliance was formed with W Group which included investment services, though this will not constitute a change in business. As supported by the decision of the Full Federal Court in Lilyvale , the execution of the management of X Co's investment portfolio at different times in different ways will not necessarily result in a change in the actual business carried on by X Co. Consideration must be given to all relevant facts. Further, while the management of X Co's business has changed over time, X Co's practice of appointing managers to assist in managing its investments has remained the same. The removal and appointment of external managers to act as agents to invest and manage X Co's investment portfolio has not resulted in the derivation of income by X Co from a business other than of investing in a portfolio of investments. | Changes in directors | Changes to X Co Board have occurred recently. The changes were made following the share buy-back to reflect the decrease in the size of X Co. As outlined in TR 1999/9 the changes in the Board follow a change in ownership (i.e. the investment by W group in X Co) and should have little significance in this case as the business of X Co following the changes in the Board continued to be investing in a portfolio of investments. | Capital management | During the 20XX/20XX financial year as a result of off market share buy backs there was a change to the capital structure of X Co. As part of X Co's ongoing capital management program they also undertook on-market buy-backs. | X Co's business did not change as a result of the changes to X Co's capital structure. | The share buy-backs were undertaken merely as part of X Co's capital management strategy and for the benefit of shareholders and are not indicative of any change in the core business of X Co. | Hedging | X Co has at times entered into various forms of hedging contracts including foreign exchange hedging contracts and options, in order to manage capital risk and protect against adverse foreign currency movements on its investment portfolio. Managing capital risk has always been part of X Co's business of investing and managing a portfolio of investments. While the process of managing capital risk has changed over time in accordance with the economic environment, X Co's business has not changed. Mere changes in the process by which [the business] is carried on does not, of itself, result in a taxpayer not satisfying the same business test. Therefore, mere changes in the process by which X Co has managed its capital risk should not constitute a change in X Co's business and should not cause X Co to breach the SBT. | Change of Name | During the year ended 30 June 20XX, X Co changed its name due to certain circumstances, rather than any changes to the underlying business conducted by X Co and did not coincide with a change in goodwill. | Changes in location/s of business and/or customers | Throughout the relevant test periods X Co has invested in a portfolio of investments. At times the underlying investments may have involved more investments in certain geographical locations over others. Similarly to the discussion above in relation to the change of weighting of investments between cash and other certain types of investments the change in weighting of investments between jurisdictions does not result in a change in the business of X Co. At all times throughout the relevant test periods X Co has remained listed on the ASX therefore the location of its customers has remained consistent. | Number of employees | At all times during the relevant test periods X Co has used managers to assist in managing its investment portfolio and undertake certain financial and administrative services. The services provided by the managers have not significantly changed during the period. There have not been significant changes in the number of persons employed by X Co throughout the relevant periods. Therefore, this factor would not indicate a change in X Co's business. | The above is not a checklist and is not exhaustive. However, on the balance of factors and having regard to all of the matters outlined above it is considered that X Co's business has not changed during the relevant test periods. | New business test | X Co has not entered into any new undertakings or enterprises since 30 June 20XX. Rather X Co's business since then has involved investing directly and indirectly in a portfolio of investments. At all times since 30 June 20XX, X Co has held interests indirectly in a variety of assets consistent with X Co's investment objective. | There have been no changes to X Co's fundamental business. Strategic reviews and reviews of the investment portfolio carried out during the relevant periods may have resulted in a repositioning of the weighting of investments or investments in new underlying investments. A review of the underlying investments indicates that they are all international consistent with X Co's investment strategy and the principal activities of X Co. Therefore, while X Co has entered into new undertakings since 30 June 20XX, these new undertakings have been of the same kind as existing undertakings of X Co s business. | As a result, X Co will not breach the New Business Test. | New transactions test | During the relevant test periods X Co has not entered into transactions of a different character to the transactions that X Co has previously entered into. | When W Group acquired xx% of issued capital in X Co, X Co acquired a select portfolio of high quality investments of an equivalent nature and value from W Group. This was a new transaction for X Co. However, this transaction was consistent with X Co's historical business of investing directly and indirectly in a portfolio of investments and consistent with X Co's investment strategy. Therefore, this transaction was not of a different character to transactions that X Co had previously entered into and X Co will not fail the new transactions test. | Having reviewed the facts provided and an analysis of the changes identified in X Co business for the relevant periods, the Commissioner is satisfied that the modified same business test under section 707-125 of the ITAA 1997 has been passed for the income years ended 30 June 20XX, 30 June 20XX and 30 June 20XX. | Will Subdivision 707-B of the ITAA 1997 apply to the transferred losses? | Summary | No. Subdivision 707-B of the ITAA 1997 will not apply to the transferred losses. | Detailed reasoning | General discussion of relevant Law | To determine whether a head company can utilise tax losses transferred to it under subsection 707-120(1), the head company is required to apply modified versions of the general COT in accordance with subdivision 707-B of the ITAA 1997. | Subsection 707-120(1) provides that when an entity becomes a member of a consolidated group, its unused carry forward tax losses are transferred to the head company if the joining entity satisfies modified versions of the general COT or SBT in respect of those losses. | Section 707-205 modifies Divisions 165 and 166 for the purposes of working out whether a company can utilise a loss of any sort that is made because of a transfer under Subdivision 707-A. | A transfer of a loss under subdivision 707-A of the ITAA 1997 from a company to a head company is a COT transfer if the conditions in paragraphs 707-210(1A) (a) and (b) are satisfied. | Subsection 707-210(1A) defines a COT transfer as a transfer that occurs because: | (a) the transferor meets the conditions in section 165-12; and | (b) the conditions in one or more of paragraphs 165-15(1)(a), (b) and (c) do not exist in relation to the transferor. | If the loss was transferred to the head company not as a result of the joining entity having satisfied the conditions in section 165-12 (ie. COT) that is they were transferred due to SBT, the general COT is applied directly to the head company to work out whether the head company can use the loss. | Further subsection 707-140(1) provides that: | To the extent that the loss is transferred under section 707-120 from the joining entity to the * head company of the joined group, this Act operates (except so far as the contrary intention appears) for the purposes of income years ending after the transfer as if: (a) the head company had made the loss for the income year in which the transfer occurs; and | (b) the joining entity had not made the loss for the income year for which the joining entity actually made the loss. | Under subsection 707-140(2) of the ITAA 1997 the head company is not prevented from utilising a transferred loss for the income year in which the transfer occurs. | The effect of the transfer of the joining entity's unused carry forward losses to the head company is that the head company is then treated as having made the loss itself for the income year in which the transfer occurs. Subsection 707-205(2) of the ITAA 1997 modifies the loss year so that it starts at the time when the loss was transferred to the head company. This ensures that things that happened to the head company before the loss was transferred to it are not taken into account in applying the COT to determine whether the head company can use the loss. | Application of the law to your circumstances | Once X Co's losses are transferred to Y Co they are treated as the losses of Y Co. The ability of Y Co to use the transferred losses is then determined by applying the loss recoupment tests to Y Co. | Therefore, as X Co losses are transferred to Y Co under section 707-120, the tax laws operate as if Y Co had made the loss for the income year in which the transfer occurs. Therefore, Y Co can rely on the COT going forward in order to utilise these transferred losses in future income years subject to the operation of section 707-210 and the available fraction rules in subdivision 707-C and the ownership test period for the purposes of any future COT testing would start at the time of the transfer. | X Co's losses will be transferred to Y Co in accordance with the modified SBT pursuant to section 707-125. Therefore, none of the losses transferred to Y Co from X Co were made by Y Co because of a COT transfer. As a result section 707-210 will not apply to the X Co losses transferred to Y Co and Y Co will be able to utilise the losses provided it satisfies the COT going forward and subject to the operation of the available fraction rules in Subdivision 707-C of the ITAA 97. | Will X Co breach the anti-avoidance rule pursuant to section 165-210(3) of the ITAA 1997? | Summary | No. X Co will not breach the anti-avoidance rule pursuant to section 165-210(3) of the ITAA 1997. | Detailed reasoning | Subsection 165-210(3) provides that: | (1) 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. | Subsection 165-210(3) is designed to counter certain arrangements designed to exploit the SBT. It is directed at situations such as where a company changes the nature of its business before a change of ownership, so that this business is the same as the business which it is intended to carry on after the change of ownership. In such situations section 165-210(3) provides that the SBT will not be satisfied. | In TR 1999/9 the Commissioner states the word business in subsection 165-210(3) is clearly intended to have the same meaning as it has for the purpose of applying the new business test , and is a reference to each of the kinds or types of activities carried on by the company as part of the one business carried on at the change-over. Similarly, the reference to a taxpayer entering into in the course of its business operations a transaction of a kind has the same meaning as the corresponding provision in the new transactions test. | Example 14 of TR 1999/9 sets out a scenario where a company is incorporated to acquire, subdivide and sell a particular large parcel of land for residential use. There is a change of ownership and then the company derives a large fee by undertaking to develop another site by constructing thereon an office building. In this case, the Commissioner considers the company has changed the character of its business from a land developer to that of a land developer and construction company. The Commissioner goes onto say that if, shortly before the change in ownership, the company's directors resolve that the company's intention is to acquire further sites and develop them and the decision is carried into effect before the change in ownership, the company has commenced a new business before the change in ownership and, if there was a purpose of enabling the company to take into account the carry forward losses, the company would fail the anti-avoidance test. However, if nothing is done before the change in ownership to carry into effect this decision, the business carried on before the change in ownership is subdividing broad acres and carrying into effect the decision thereafter would cause the company to fail the SBT. | Application of the law to your circumstances | As outlined above, X Co will satisfy the modified SBT pursuant to section 707-125. Any changes in X Co's business, new business or new transactions entered into would likely result in a breach of the modified SBT therefore there would be no need to apply the anti-avoidance rule in such a situation. We note that X Co does not intend to change its business up until the date of 100% acquisition by Y Co. X Co is currently undergoing a review of its investment portfolio however, this review is being undertaken in the ordinary course of X Co's business and X Co intends to continue its focus on investment in alternative assets. Further, this PBR is based on the assumption that the business of X Co will remain unchanged from the date of this application through to the 100% acquisition of X Co by Y Co. Therefore, in accordance with this assumption, during the income year starting 12 months before Y Co acquires 100% of the shares in X Co and ending just after Y Co acquired 100% of the shares in X Co, X Co will not: | § start to carry on a business that it had not previously carried on; or | § enter into transactions of a kind that it had not previously entered into. | Furthermore, X Co is not currently aware of the proposed 100% acquisition by Y Co. Therefore, any decisions that it makes in relation to its business could not be done for the purpose of satisfying the SBT. Consequently, X Co should not breach the anti-avoidance rule pursuant to subsection 165-210(3).


Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Question 1: Will the modified same business test (SBT) under section 707-125 of the Income Tax Assessment Act 1997 (ITAA 1997) be satisfied in order for the losses of X Co to be transferred and utilised by Y Co under subdivision 707-A of the ITAA 1997? | Relevant facts and circumstances | Upon the acquisition of 100% of the shares in X Co, Y Co would elect to form a consolidated group for income tax purposes.: As at 30 June 20XX, Y Co has carried forward revenue losses and carried forward capital losses, which were generated in the income years ended 30 June 20XX, 30 June 20XX and 30 June 20XX. | The COT will be satisfied in relation to X Co's carry forward tax losses pursuant to Division 165-A and 165-B (as modified by Division 166) of the ITAA 97 from 1 July 20XX through to the time of the 100% acquisition of X Co by Y Co (the acquisition date). | During the period 30 June 20XX to the date of this PBR application, X Co has not derived assessable income from transactions of a different character than previously entered into. | The business of X Co as at the date of this PBR application will remain the same through to the acquisition date. Further, X Co will not enter into a new business or any new transactions of a different kind from the existing undertakings or enterprises of X Co. | As a result of the Scheme of Arrangement, Y Co will acquire 100% of the shares on issue in X Co and the COT will be breached pursuant to Subdivision 165-A and Section 707-120 of the ITAA 97. | X Co's carried forward losses at the time of the 100% acquisition will not be cancelled by Y Co on consolidation under section 707-145 of the ITAA 97. | Overview of X Co's Business | X Co is a listed investment company. | X Co has not actively participated in the management of the underlying investments. Rather X Co's activities have been focussed around the management of its own investment portfolio. | X Co has invested directly and indirectly in the funds in various ways. | Whilst the structures and instruments through which X Co has invested in the underlying investments have changed over time, X Co has always carried on a business of investing. | X Co's various investments have been realised from time-to-time and the proceeds reinvested in other investments, resulting in X Co holding varying levels of cash on its balance sheet at different times. This is an ordinary incident of X Co's investment business and the re-assessment and re-balancing of its investment portfolio. | The underlying investments are consistent with X Co's investment strategy. | X Co has appointed various managers to assist in managing its investments. While the managers have changed over time, X Co's practice of appointing managers to assist in managing its investments has remained the same. | There have not been any significant changes in the goodwill of X Co throughout the relevant test periods. | X Co has at times entered into various forms of hedging contracts including foreign exchange hedging contracts and options, in order to protect against adverse foreign currency movements. | Consistent with the description of X Co s business (above), X Co issued a Prospectus which described X Co's investment business. | Events relevant to the business which was carried on by X Co throughout the relevant SBT periods are below. | 20XX/ 200XX Financial Year | Throughout the 20XX/20XX financial year X Co's business continued to be comprised of the direct and indirect investment in and management of a portfolio of investments. | X Co began an on-market share buyback program. | X Co was required to change its name as a result of the termination of a management agreement however, the underlying business conducted by X Co remained the same. | A strategic review was carried out for the purpose of repositioning X Co for the future and X Co then appointed another manager. | Consequently throughout the 20XX/20XX income year X Co reduced its investment in Z portfolio and reinvested capital into a new portfolio of investments. However, the nature of the new investments into which X Co invested was the same as the Z portfolio. | X Co continued an on-market share buy-back program. | Circumstances and events (as relevant to defining X Co's business) which occurred during the 20XX/20XX income year were: | X Co's investment portfolio continued to be transitioned from the Z portfolio to the new portfolio. | The investment portfolio was predominantly denominated in US dollars, and remained relatively unhedged against movements in the AU dollar throughout the year. | X Co continued with its on-market share buyback program. | X Co's business has remained unchanged during the 20XX/20XX financial year. Circumstances and events (as relevant to defining X Co s business) which occurred during the 20XX/20XX income year were: | X Co entered into a strategic alliance with W Group. W Group participated in a xx% private placement in X Co. It also involved W Group acquiring xx% of current issued capital, in exchange for the acquisition of a select portfolio of high quality investments of an equivalent nature and value and W Group providing specialist investment services to X Co on a competitive basis. | X Co s investment portfolio had experienced changes. A realisation of investments occurred as part of X Co's capital management and was an incident of X Co's investment business. | X Co has acquired shares under its on-market share buyback program and is undertaking an off-market share buyback program. | X Co was finalising a review of its investment portfolio.