Law Companion Ruling LCR 2019/1
Date of effect: 1 July 2015

What this ruling is about: 1. The 'business continuity test' [1] introduced by the Treasury Laws Amendment (2017 Enterprise Incentives No. 1) Act 2019 retains the existing 'same business test' [2] and introduces the 'similar business test'. [3] Under the similar business test, companies and listed widely held trusts will be able to utilise tax losses made from carrying on a business against income derived from carrying on a similar business following a change in ownership or control. 2. This Ruling provides guidance on what carrying on a similar business means.


Ruling: 1. The 'business continuity test' [1] introduced by the Treasury Laws Amendment (2017 Enterprise Incentives No. 1) Act 2019 retains the existing 'same business test' [2] and introduces the 'similar business test'. [3] Under the similar business test, companies and listed widely held trusts will be able to utilise tax losses made from carrying on a business against income derived from carrying on a similar business following a change in ownership or control. 2. This Ruling provides guidance on what carrying on a similar business means.

Examples: Example 1: company engages in development or commercialisation 15. ToUrDoor Pty Ltd is an established courier company that operates under the brand name 'ToUrDoor'. Its customer base consists primarily of office businesses. ToUrDoor Pty Ltd delivers documents and parcels using its fleet of bicycles, and emphasises its reliable, fast and affordable services. Customers can request a courier service through the ToUrDoor website or app, or by calling their direct telephone number. The bicycles are fitted with GPS tracking and weatherproof, hard-case boxes at the rear. Although the business has been moderately successful, more recently it has been less profitable and made tax losses. 16. In an attempt to increase the efficiency of its couriers, the company invests in reviewing its fleet of bicycles, including researching potential new bike designs and the use of lightweight materials. To acquire new funds in order to fund this research, ToUrDoor Pty Ltd gained a new equity investor, causing it to fail the continuity of ownership test. 17. The company develops a new bicycle design with a built-in insulated box, which keeps the contents of the box insulated. Whereas previously the box was a separate compartment attached to the rear of the bicycle, it is now built into the side of the bicycle. ToUrDoor Pty Ltd applies for a patent for the design. Overall, the improved design results in cost savings for the company, because it reduces the time taken to complete the deliveries. 18. ToUrDoor Pty Ltd sees an opportunity to deliver food using the new bicycle design. Further changes are made to the design to accommodate the storage of food and beverages. This new design opened up a new client base as restaurants and café owners can now make a booking with ToUrDoor, through the existing booking platforms, to have their food delivered to customers. ToUrDoor Pty Ltd charges the restaurant and café owners a comparable fee in the same way it charges for its document and parcel courier service. 19. ToUrDoor Pty Ltd satisfies the similar business test because: | Example 2: company changes income generating activities and the identity of the business 20. This example is based on the facts at paragraph 15 . 21. Unlike in Example 1, ToUrDoor Pty Ltd in this instance notices that there is a growing demand for food delivery. Following a change in its ownership (causing it to fail the continuity of ownership test), the company purchases insulated boxes that can be carried by the courier like a backpack. The food delivery service proves to be profitable and generates a large majority of the company's assessable income. The business becomes predominantly about food delivery, and the delivery of documents and parcels (while still part of the business) becomes an ancillary activity. 22. ToUrDoor Pty Ltd does not satisfy the similar business test because of the change in the activities from which it generates most of its assessable income (food delivery, as compared to the delivery of documents and parcels) (factor two). There is also a change in the identity of the business, from a courier business to a delivery business with a focus on food (factor three), that did not stem from ToUrDoor Pty Ltd's development of assets, processes or services (factor four). The business is not sufficiently similar for the purposes of the test. | Example 3: physical clothing retailer shop moves to an exclusively online platform 23. Kool Rags Pty Ltd is a clothing retailer which carries its own line of casual wear under the brand name 'Rags'. The clothes are manufactured offshore and sold through the company's physical stores in Melbourne and Sydney. Goods are stored in warehouses in both cities, before they are transported to the physical stores when stock needs to be replenished. It originally had a website which contained photographs of clothes and store locations. 24. A majority of the shares in Kool Rags Pty Ltd is acquired by a large retail group, causing it to fail the continuity of ownership test. Over a period of five years, the company transitions to a purely online clothing retailer in response to changing shopping trends and the greater functionality of technology. The company makes a number of changes to increase its online sales, including: 25. Kool Rags Pty Ltd satisfies the similar business test because: | Example 4: fast food restaurant completely changes its food offering and operates under a new brand name 26. Mad Cow Ltd owns and operates a fast food restaurant under the name 'MuBurger' on the Gold Coast. The restaurant sells an affordable range of burger varieties, fries, soft drinks and milkshakes. The 'MuBurger' logo contains a cartoon cow, and the restaurant layout is fitted out with distinctive black and white furnishings. The company had once operated a small chain of 'MuBurger' fast food restaurants, all with the same logo, branding, layout, and product mix. However, the company has suffered from a downturn in profitability and has made substantial tax losses. 27. The majority shareholder of Mad Cow Ltd sells their shares, causing it to fail the continuity of ownership test. Mad Cow Ltd then decides to rebrand the business. As part of the rebranding process, it: 28. Under the new brand name 'Healthy Food Artists', the menu has a focus on full, hearty meals and the company markets itself as a family restaurant providing high quality steaks, ribs, and gourmet burgers sourced from prime Queensland beef for a premium price. 29. Mad Cow Ltd does not satisfy the similar business test because: | Example 5: gold mining business to mixed mining business 30. Mammon Ltd is a gold mining company that operates a site in New South Wales. The company had previously carried out exploration activities which revealed that the gold ore also contained traces of copper. Mammon Ltd applied for, and was granted, a mining tenement, which permits the company to extract, process and refine gold and copper from the ore. 31. As part of the process for extracting gold, the copper in the ore is either wasted or it can be recovered provided that further systems are installed. As copper prices were low and there was little demand for the product, the company did not consider it commercially viable to install the necessary systems to process copper concentrate. As such, Mammon Ltd's business activity involved extracting the gold and selling the refined product to customers worldwide. 32. Mammon Ltd incurs large tax losses due to a recent drop in gold prices and the majority shareholder sells their shares, causing it to fail the continuity of ownership test. After this change in ownership, there is a sharp increase in copper prices and Mammon Ltd decides to start processing copper concentrate from the extracted gold ore for sale. The company invests in new equipment to process the copper concentrate from the ore, as well as hiring trained staff. 33. The company commences selling the copper, although the assessable income generated from the sale of copper is insignificant compared to the revenue Mammon Ltd derives from selling gold. Mammon Ltd would satisfy the similar business test because: 34. This example illustrates, in particular, the effect of removing the negative limbs of the same business test. Although the activity of processing and selling copper has not previously been carried on by Mammon Ltd, this new business activity will not alone cause the failure of the business continuity test if the company otherwise satisfies the similar business test. Commissioner of Taxation 22 May 2019 © AUSTRALIAN TAXATION OFFICE FOR THE COMMONWEALTH OF AUSTRALIA You are free to copy, adapt, modify, transmit and distribute this material as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products). Previously released in draft format as LCR 2017/D6



What this Ruling is about | Example 1 - company engages in development or commercialisation to fill gap in the market | Example 3 - physical clothing retailer shop moves to an online platform | Example 4 - fast food restaurant operates under a new brand name | This Ruling describes how the Commissioner will apply the amendments made by Schedule 1 to the Treasury Laws Amendment (2017 Enterprise Incentives No. 1) Act 2019 . | If you rely on this Ruling in good faith, you will not have to pay any shortfall tax, penalties or interest in respect of matters covered by the Ruling if it does not correctly state how a relevant provision applies to you. | Date of effect: 3. The similar business test broadly applies to: | 4. For listed widely held trusts, which are subject to Subdivision 266-D of Schedule 2F to the ITAA 1936, the similar business test applies to: | 5. Where losses are transferred from a joining entity to the head company of an income tax consolidated group in an income year that commences on or after 1 July 2015, the head company can only apply the similar business test to a tax loss or net capital loss that was originally incurred by the joining entity for an income year starting on or after 1 July 2015. [8] | 6. The similar business test operates in a way that is comparable to the same business test [9] , but removes the negative limbs which apply as part of that test. [10] 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 the 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. [11] 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. [12] Accordingly, it will be more difficult to satisfy the similar business test if substantial new business activities and transactions do not evolve from, and complement, the business carried on before the test time. In contrast, where a company develops a new product or function from the business activities already carried on, and this development opens up a new business opportunity or allows the company to fill an existing gap in the market, the business as a whole is likely to satisfy the similar business test. | 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. [13] 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. [14] 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 [15] , 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. [16] 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. [17] 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. [18] 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.


Related rulings: TR 1999/9 TR 1999/16 TR 2007/2
Legislative references: ITAA 1936 ITAA 1936 63E(5A) ITAA 1936 Sch 2F Subdiv 266-D ITAA 1936 Sch 2F Div 268 ITAA 1936 Sch 2F Subdiv 269-F ITAA 1936 Sch 2F 269-100 ITAA 1936 Sch 2F 269-100(3)(a) ITAA 1936 Sch 2F 269-100(3)(b) ITAA 1936 Sch 2F 269-105 ITAA 1936 Sch 2F 269-105(3)(a) ITAA 1936 Sch 2F 269-105(3)(b) ITAA 1936 Sch 2F 269-105(3)(c) ITAA 1936 Sch 2F 269-105(3)(d) ITAA 1997 ITAA 1997 65-40 ITAA 1997 165-210 ITAA 1997 165-210(2)(a) ITAA 1997 165-210(2)(b) ITAA 1997 165-211 ITAA 1997 165-211(1) ITAA 1997 165-211(2)(a) ITAA 1997 165-211(2)(b) ITAA 1997 165-211(2)(c) ITAA 1997 165-211(2)(d) ITAA 1997 Subdiv 165-B ITAA 1997 Subdiv 165-CB ITAA 1997 Subdiv 165-CC ITAA 1997 Subdiv 165-E ITAA 1997 707-140(1A) Treasury Laws Amendment (2017 Enterprise Incentives No. 1) Act 2019 Sch 1