Private ruling: Same business test
Date of advice: 15 November 2018
Published: February 2019
Ruling period: The year ended 20xx

Ruling: Q1: Will the acquisition of the remaining shares in Company B by Company A, resulting in Company B joining the Company A Consolidated Group, cause a failure of the same business test (SBT) in sections 165-13 and 165-210 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No

Relevant facts and circumstances: 1. Company A is the head company of the Company A Consolidated Group. 2. Company A failed the continuity of ownership test (COT). 3. Company A has carried forward tax losses. These tax losses are subject to the same business test. 4. Company B is an incorporated joint venture between Company A and Company C. 5. Company A will acquire the remaining shares held by Company C in Company B, which will result in Company B becoming a subsidiary member and joining Company A. 6. The personnel that carry out the business activities of Company B are employed by Company A.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 165-13 | Income Tax Assessment Act 1997 section 165-210

Reasons for decision: Summary: The acquisition will not change the nature and character of Company A’s business as it will merely mildly increase the size of Company A through organic growth. Therefore, Company A will not fail the same business test in section 165-13 of the ITAA 1997 merely because the business of Company B will join Company A when Company A acquires the remaining shares in Company B from Company C that it does not currently own. | Detailed Reasoning - Detailed reasoning: Where a loss company fails the continuity of ownership test (COT) in section 165-12, section 165-13 provides that it can still recoup its tax losses if it passes the same business test (SBT) contained in section 165-210. To apply the same business test, it is necessary to identify and characterise the business Company A carried on immediately before the ‘test time’ and then compare it to the business Company A carried on throughout the ‘same business test period’. Relevantly, subsection 165-13(2) states: The company must satisfy the same business test for the income year (the same business 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. … Item 1 of the table contained in subsection 165-13(2) states – | 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 is practicable to show is in the period Therefore, subsection 165-13(2) requires a company to apply the same business test to the business the company carried on immediately before the ‘test time’. The company must satisfy the same business test for the ‘same business test period’. Section 995-1 states same business test has the meaning given by Subdivision 165-E. The same business test consists of four elements, specified in section 165-210: | Detailed Reasoning - 165-210(1): A company satisfies the same business test if throughout the same business test period it carries on the same business as it carried on immediately before the test time. | Detailed Reasoning - 165-210(2): However, the company does not satisfy the same business test if, at any time during the same business test period, it derives assessable income from: (a) a business of a kind that it did not carry on before the test time; or (b) a transaction of a kind that it had not entered into in the course of its business operations before the *test time. | Detailed Reasoning - 165-210(3): The company also does not satisfy the same business test if, before the test time, it: (a) started to carry on a business it had not previously carried on; or (b) in the course of its business operations, entered into a transaction of a kind that it had not previously entered into; and did so for the purpose, or for purposes including the purpose, of being taken to have carried on throughout the same business test period the same business as it carried on immediately before the test time. […] Subsection 165-210(1) requires an examination of the company’s entire business, and is colloquially referred to as the ‘positive limb’. Subsection 165-210(2) focuses on the company deriving assessable income from new businesses and new transactions, and is colloquially referred to as the ‘negative limbs’ (or the ‘new business test’ and the ‘new transactions test’ individually). Subsection 165-210(3) is an integrity rule. | Detailed Reasoning - Positive limb: A company is treated as carrying on one overall business at the test time and during the same business test period (the income year in which it seeks to deduct some or all of a tax loss), irrespective of whether those activities constitute or are treated by the company as constituting separate or distinct activities, enterprises, divisions or undertakings carried on by the company (paragraph 12 of Taxation Ruling TR 1999/9 Income tax: the operation of sections 165-13 and 165-210, paragraph 165-35(b), section 165-126 and section 165-132 (TR 1999/9)). Paragraph 13 of TR 1999/9 states: In the same business test, the meaning of the word 'same' in the phrase 'same business as' imports identity and not merely similarity; the phrase 'same business as' is to be read as referring to the same business, in the sense of the identical business. However, this does not mean identical in all respects: what is required is the continuation of the actual business carried on immediately before the change-over. Nevertheless, it is not sufficient that the business carried on after the change-over meets some industry wide definition of a business of the same kind; nor would it be sufficient for there to be mere continuance of business operations from immediately before the change-over into the period of recoupment, if the business had so changed that it could no longer be described as the same business. The analysis of whether the same business continues after the change-over may give rise to questions of degree and ultimately depends on the facts of the case. In making the analysis it needs to be acknowledged that a company may expand or contract its activities without necessarily ceasing to carry on the same business. The organic growth of a business through the adoption of new compatible operations will not ordinarily cause it to fail the same business test provided the business retains its identity; nor would discarding, in the ordinary way, portions of its old operations. But, if through a process of evolution a business changes its essential character, or there is a sudden and dramatic change in the business brought about by either the acquisition or the loss of activities on a considerable scale, a company may fail the test. | Detailed Reasoning - Negative limbs: In order to deduct its tax losses, a company must not satisfy either paragraph 165-210(2)(a) or (b). New business test Paragraph 14 of TR 1999/9 states: … In the new business test there is a reference to 'business of a kind' that the company did not carry on before the change-over. In the new business test the word 'business' has a different meaning from the word 'business' in the same business test; it refers to each kind of enterprise or undertaking comprised in the overall business carried on by the company at the change-over and during the period of recoupment. The new business test puts a limit on the type of expansion the company may undertake if it is to retain the benefit of accumulated losses; for the taxpayer may not engage in an undertaking or enterprise of a kind in which it did not engage before the change-over and still benefit from accumulated losses. Paragraph 72 of TR 1999/9 states: Generally speaking, the new business test permits a company to expand or develop during the period of recoupment within the same fields of endeavour as it was engaged in before the change-over, provided the effect of expansion or development is not such as to cause it to fail the same business test. Cases where such failure occurs tend to be where the injection of income is occurring or could occur and, thus, not appropriate cases for the protection of sections 165-13 and 165-210 or equivalent provisions. New transactions test TR 1999/9 relevantly states at paragraphs 15 to 17: 15. … The new transactions test is directed to preventing the injection of income into a loss company that has satisfied the SBT and the new business test. The new transactions test includes all transactions entered into in the course of the company’s business operations and not merely those that are ‘isolated’ or ‘independent’. However, generally speaking, the new transactions test is not failed by transactions of a type that could have been entered into ordinarily and naturally in the course of the business operations carried on by the company before the change-over. Conversely, a transaction entered into during the period of recoupment and which is outside of the business operations before the change-over, or which is extraordinary or unnatural when judged by the course of business operations before the change-over, is usually a transaction of a different kind from the transactions actually entered into by the company before the change-over. 16. … A transaction from which income is derived in the year of recoupment, which could have been entered into before the change-over in the course of the company’s business operations, and which is neither extraordinary nor unnatural in the context of the business carried on by the company at the change-over, is generally a transaction of the same kind as transactions actually entered into by the company before the change-over. 17. In the new transactions test, ‘transaction’ refers to any operation or dealing from which income directly or indirectly flows or arises, and a company enters into a transaction for the purposes of the new transactions test if it engages or participates in it. The new transactions test is intended to extend to every means by which a company may derive income, including transactions of a passive or investment character. The words ‘business operations’ refer to everything that a company undertakes or does; together, the business operations constitute the business, meaning the overall business, of the company. | Detailed Reasoning - Integrity rule: In respect of the integrity rule in subsection 165-210(3), paragraph 19 of TR 1999/9 relevantly states: … The anti-avoidance provisions apply where the purpose, or one of the purposes, of the company in commencing to carry on the business or entering into the transaction was the purpose of enabling the company to take into account prior year losses. This is so notwithstanding that, where there is more than one purpose, the tax avoidance purpose was not the dominant purpose of the company in commencing to carry on the business or enter into the transaction. | Detailed Reasoning - Application of the same business test to an income tax consolidated group: As a result of the single entity rule in subsection 701-1(1), subsidiary members of a tax consolidated group are taken to be parts of the head company for the purposes of the SBT. Taxation Ruling TR 2007/2 Income tax: application of the same business test to consolidated and MEC groups – principally, the interaction between section 165-210 and section 701-1 of the Income Tax Assessment Act 1997 (TR 2007/2) states at paragraphs 14 to 18: 14. Under the single entity rule of subsection 701-1(1), subsidiary members of a consolidated group are taken for the purposes of the same business test (section 165-210) (among other purposes), to be parts of the head company. In this context, the principles set out in TR 1999/9 in respect of the application of the same business test to a single company apply equally to the head company of a consolidated group. 15. When determining the one overall business carried on by the head company of a consolidated group for the purposes of subsection 165-210(1) it is necessary to have regard to the activities of the subsidiary members of the group. Applying the principles of TR 1999/9, one overall business of the head company is to be identified by examining all of the activities, enterprises or undertakings carried on: ● at the appropriate test time by all those entities that were members of the consolidated group at that time; and ● by all entities during that part of the same business test period when they were members of the consolidated group. 16. When applying the new business test and new transactions test to the head company (subsection 165-210(2)), regard must be had to the enterprises, undertakings and transactions that were carried on or entered into before the test time by entities while they were members of the consolidated group. These activities are then compared with the enterprises, undertakings and transactions carried on or entered into by all entities while they are members of the consolidated group during the same business test period. This comparison determines whether the enterprises, undertakings and transactions before the test time and during the same business test period are different in kind. 17. In relation to the new business and new transactions tests, it is not necessary that a business carried on or a transaction entered into during the same business test period by an entity in the group be of a kind carried on by that same entity before the test time. In accordance with the operation of the single entity rule, where an entity within the group undertook a business or transaction of that kind before the test time when that entity was a member of the consolidated group, the new business or new transactions test will be satisfied. 18. Activities, undertakings and enterprises taking place within a consolidated group (not involving the derivation of income through dealings outside the group) will be relevant for characterising the business of the head company. This will be the case notwithstanding the fact that individual transactions between group members will not be recognised as happening under the same business test because of the single entity rule which treats group members as parts of the head company for the purpose of determining its income tax liability… | Detailed Reasoning - Application to Company A: In this case, the ‘test time’ is the date on which Company A failed the continuity of ownership test in section 165-12 of the ITAA 1997. The ‘same business test period’ is the income year in which a company seeks to deduct a tax loss or apply a net capital loss. Company A was in a particular business before they failed the COT. When Company A acquires the remaining shares held by Company C in Company B, resulting in Company B becoming a subsidiary member and joining Company A during the relevant income year, the acquisition would mildly increase the size of Company A; however, this is considered organic growth of the business, and this acquisition alone will not change the nature and character of Company A’s business. | Detailed Reasoning - Conclusion: Having regards to the facts and circumstances, Company A will not fail the same business test in section 165-13 of the ITAA 1997 merely because the business of Company B will join Company A because Company A acquires the remaining shares in Company B from Company C that it does not currently own. This acquisition will not change the nature and character of Company A’s business as it will merely mildly increase the size of Company A through organic growth.