Private ruling: Same business test
Published: March 2014
Ruling period: Substituted Accounting Period, year ended 31 December 20XX | Substituted Accounting Period, year ended 31 December 20YY
Date scheme commenced: 1 January 2005

Ruling: Q1: For the purposes of section 165-13 of the Income Tax Assessment Act 1997 (ITAA 1997), will B Pty Ltd satisfy the same business test (SBT) under Subdivision 165-E of the ITAA 1997 so that it can deduct tax losses of earlier income years from assessable capital gains expected to be made in its relevant income years? | A1: Yes, but B Pty Ltd will need to actually ascertain at the end of each income year that it meets the same business test in order to recoup its tax losses.

Relevant facts and circumstances: B Pty Ltd (B) is an Australian resident company for Australian income tax purposes. B is an 'eligible Division 166 company' as defined under section 995-1 of the ITAA 1997. B was owned indirectly by Y Ltd (Y). B carried on a manufacturing business and operated X sites in its business. B incurred tax losses from its manufacturing activities. B decided to cease manufacturing and sell its de-commissioned plant and real estate, due to unprofitability. After manufacturing ended, B undertook various activities to prepare these assets for re-sale at a profit. B sold its de-commissioned plant to C, an unrelated third party. In the same year there was a takeover by TC Ltd such that B failed the continuity of ownership test (COT) in section 165-12 of the ITAA 1997. B maintained substantial continuity of ownership, under section 166-5 of the ITAA 1997, up until the takeover by TC Ltd. B made a capital gain on the sale of Site 1 to D, an unrelated third party. A contract for the sale of Site 2 did not proceed for reasons outside of B's control. B continues to negotiate with interested parties for the sale of Site 2. B expects to sell Site 2 in either 20XX or 20YY, and to make a capital gain on the sale. The business of B will remain unchanged through to 31 December 20YY.

Relevant legislative provisions: Income Tax Assessment Act 1997, Subdivision 165-A | Income Tax Assessment Act 1997, Section 165-13 | Income Tax Assessment Act 1997, Subdivision 165-E | Income Tax Assessment Act 1997, Section 165-210 | Income Tax Assessment Act 1997, Subsection 166-5(3) | Income Tax Assessment Act 1997, Subsection 166-5(5) | Income Tax Assessment Act 1997, Subsection 166-5(6)

Reasons for decision: Summary: Due to a change in its ownership, B failed the continuity of ownership test (COT) in section 165-12 of the ITAA 1997 and therefore must satisfy the same business test (SBT) under section 165-13 of the ITAA 1997 to deduct its prior year tax losses and capital loss. Section 166-215 of the ITAA 1997 provides concessional tracing rules for an 'eligible Division 166 company' to satisfy the ownership tests in Subdivision 166-D of the ITAA 1997 so that the company does not have to trace through to the beneficial owners of the stakes. Relevant shareholding details showed that B maintained substantial continuity of ownership up until the COT failure in 20ZZ through stakes of less than X% indirectly held in B, the loss company, as per section 166-230 of the ITAA 1997. Section 166-5 of the ITAA 1997 provides as follows, 'Satisfies the same business test 166-5(5) However, if the company satisfies the *same business test for the income year (the same business test period), it is taken to have satisfied the condition in section 165-13.' To determine the times to compare the business conducted by the company, for the purposes of the SBT, section 166-5(6) of the ITAA 1997 provides as follows 166-5(6) Apply the *same business test to the *business that the company carried on immediately before the earlier of the following times (the test time): (a) the end of the first income year; (b) the first time in the test period that a *corporate change in the company *ends; for which there is no *substantial continuity of ownership of the company as between the start of the *test period and that time. Therefore, B must compare the business carried on immediately before the COT failure in 20ZZ against the business it carried on during the year ended 31 December 20XX year or against the business it carried on during the year ended 31 December 20YY (the same business test period), depending on when Site 2 is sold. It is considered that the applicant's business has been the sale of its remaining plant and property for the purpose of re-sale at a profit. Subsection 165-210(1) of the ITAA 1997 can be met because there was a business before the COT failure and that same business is expected to be carried on after the takeover in both the relevant years. Subsection 165-210(2) of the ITAA 1997 does not apply because B has not undertaken a business of a kind that it did not carry on before the takeover, nor has it earned assessable income from a transaction of a kind that it had not entered into in the course of its business operations before the takeover. Also, subsection 165-210(3) of the ITAA 1997 does not apply as no new business was started. Therefore, it is considered that B can meet the SBT and to be eligible to deduct its tax losses. However, it will be necessary for B to actually ascertain at the end of each income year whether it meets the same business test in order to recoup its tax losses.