ato logo
Search Suggestion:

Part C Ownership test and same business test

Last updated 29 July 2003

Note: All head companies that are required to complete another part of the Consolidated groups losses schedule 2003 are also required to complete the relevant details requested in this part.

1 For each joining company that transferred a same business test tax loss or same business test net capital loss to the head company, determine the year of income in which the joining company first failed the continuity of ownership or control tests. Against each of the listed years, show the total amount of losses which first failed the continuity of ownership or control test in that year.

Note:

  • Do not include transferred film losses or foreign source losses at item 1.
  • Do not include losses transferred by a joining company which satisfied the continuity of ownership and control transfer tests at item 1.
  • Do not include losses transferred by a joining trust at item 1.

The aim of item 1 is to find out (in respect of companies which transferred losses to a head company of a consolidated group because a same business transfer test was satisfied):

  • the period of time between the year of failure of the continuity of ownership or control transfer tests and the trial year, and
  • the losses that failed the continuity of ownership or control tests at the joining time and/ or in the trial year.

When a company joins a consolidated group any unused carry forward losses are transferred to the head company if the losses could have been used by the joining entity, assuming sufficient income or gains in the 'trial year', which generally commences 12 months prior to joining the consolidated group and ends immediately after the joining time. In certain circumstances, the trial year may be a shorter period than 12 months. Refer to subsection 707-120(2) of ITAA 1997.

Whether the losses could have been used by the joining company in the trial year is determined by applying modified versions of the usual tests for deducting and applying losses. A joining company with a carry forward tax loss or net capital loss will need to satisfy a same business test unless the company satisfies the following continuity of ownership test conditions (and the control test):

  • There must be persons who beneficially owned (between them) shares carrying (between them) the right to exercise more than 50% of the voting power in the company, and rights to receive more than 50% of the company's dividends and rights to receive more than 50% of the company's capital distributions at all times during the ownership test period. Refer to sections 165-150 to 165-160 of ITAA 1997.
  • It is reasonable to assume that there are persons (none of them companies or trustees) who between them have beneficial interests (directly, or indirectly through one or more interposed entities) in shares in the company carrying (between them) a majority of the voting power, and rights to dividend and capital distributions at all times during the ownership test period. Refer to sections 165-150 to 165-160 of ITAA 1997.
  • Where tax losses are claimed in an income year ending after 21 September 1999, the company must meet the 'same share and interest' requirement, except where the 'saving' rule applies. Refer to section 165-165 and subsection 165-12(7) of ITAA 1997.
  • A modified version of the above rules can apply to a listed public company and its 100% subsidiaries. Refer to Division 166 of ITAA 1997.

Anti-avoidance provisions are found at Subdivisions 175-A and 175-B of ITAA 1997.

Same business test losses-companies only

The following table shows how the same business test applies for companies joining a consolidated group. Refer to subsections 707-120(1) and (3) and subsections 707-125(1) to (3) of ITAA 1997.

Same business transfer tests for companies

In these circumstances:

Test the joining entity's business at these points:

  1. The loss was made by the joining entity for an income year starting after 30 June 1999

 

  • just before the end of the income year in which the loss was made
  • the income year in which the joining entity first fails the ownership or control tests if that income year started before the trial year, and
  • the trial year.
 
  1. The loss was made by the joining entity for an income year starting before 1 July 1999
 
  • Just before the ownership or control tests were first failed, and
  • the trial year.
 

Where a loss is transferred as a result of satisfying the same business test, it may only be transferred again if-in addition to satisfying the usual transfer tests-the entity transferring the loss carried on the same business at these times:

  • just before the end of the income year in which the loss was previously transferred to it, and
  • during the trial year.

Refer to subsection 707-135(2) of ITAA 1997.

Under the same business test the company must carry on the same business at all the times indicated in the preceding table-that is, throughout the trial year and year of ownership change (if applicable) and other relevant time. The test is not satisfied if at any time the company did not carry on the same business as it did at another required time or it derives assessable income from:

  • a business of a kind that it did not carry on before the relevant time, or
  • a transaction of a kind that it did not enter into in the course of its business operations before the relevant time.

'Same' means 'identical' and not merely 'similar'. The term 'same business' is to be read as referring to the same business, in the sense of the identical business. However, the term does not mean identical in all respects. A company may expand or contract its activities without necessarily ceasing to carry on the same business. The organic growth of a business does not necessarily cause the business to fail the same business test provided the business retains its identity. However, if through a process of evolution a business changes its essential character, the entity would fail the test. Application of the same business test is a question of fact and is usually determined by a process of weighing up various relevant factors.

For more information refer to sections 165-13 and 165-210 of ITAA 1997 and Taxation Ruling TR 1999/9.

Year ownership test failed 2002-2003

Show at label J the total amount of tax losses and net capital losses of joining companies which first failed the continuity of ownership or control tests in the 2002-03 income year but satisfied the same business test. If there is no amount, leave blank.

Year ownership test failed 2001-2002

Show at label K the total amount of tax losses and net capital losses of joining companies which first failed the continuity of ownership or control tests in the 2001-02 income year but satisfied the same business test. If there is no amount, leave blank.

Year ownership test failed 2000-2001

Show at label L the total amount of tax losses and net capital losses of joining companies which first failed the continuity of ownership or control tests in the 2000-01 income year but satisfied the same business test. If there is no amount, leave blank.

Year ownership test failed 1999-2000

Show at label M the total amount of tax losses and net capital losses of joining companies which first failed the continuity of ownership or control tests in the 1999-2000 income year but satisfied the same business test. If there is no amount, leave blank.

Year ownership test failed 1998-1999 and earlier income years

Show at label N the total amount of tax losses and net capital losses of joining companies which first failed the continuity of ownership or control tests in the 1998-99 and earlier income years but satisfied the same business test. If there is no amount, leave blank.

Example 16

A consolidated group comes into existence on 1 July 2002. During the 2002-03 income year the following joining companies transfer tax losses and/ or net capital losses because they satisfy the same business transfer test:

Joining company

Loss year

Amount $

Sort of loss

Year of ownership change

A

1993-94

2000-01

1,000

50

Tax

Net capital

1994-95 2001-02

2001-02

B

1998-99

2001-02

350

400

Tax

Net capital

2002-03

2002-03

C

1998-99

550

Net capital

1999-2000

For the 2002-03 income year, the head company completes part C, item 1 on the schedule as follows:

Year ownership test failed

Code

Amount ($)

2002-2003

J

750

2001-2002

K

50

2000-2001

L

0

1999-2000

M

550

1998-1999
and earlier income years

N

1,000

The amount of the tax loss incurred by company A ($1,000) is recorded at label N because the first change of ownership occurred during the 1994-95 income year.

End of example

2 Amount of losses utilised after consolidation, for which the continuity of ownership test is not passed but the same business test is satisfied.

Note:

  • Do not include film losses or foreign source losses utilised at item 2.
  • Do not include at item 2 losses utilised for which the head company satisfied the continuity of ownership test.

Show at item 2 the amount of tax losses and net capital losses utilised by the head company after consolidation where the continuity of ownership test was not passed after consolidation but the same business test was satisfied.

Before a head company can utilise a loss generated by the consolidated group, or a loss transferred from a joining entity, it must satisfy the continuity of ownership and control tests or the same business test. Subdivision 707-B of ITAA 1997 modifies the recoupment tests for transferred losses. The loss year is modified so that it starts from when the loss was transferred to the head company. Accordingly, losses transferred to a head company of a consolidated group because they satisfied the same business transfer test are effectively refreshed in the hands of the head company, in that the ownership test period for these losses commences at the time they are transferred to the head company.

However, in determining whether a head company can use a loss transferred to it from a joining company which passed the continuity of ownership and control tests, changes in ownership of the joining company prior to it joining the consolidated group are taken into account. In addition, it is assumed that the head company's interest in the joining company remains unchanged from the joining time. This means that, in determining if a head company can utilise a loss transferred to it from a joining company, the head company will satisfy the continuity of ownership test if the joining company would have satisfied the continuity of ownership test in respect of the loss.

For more information on the same business test refer to sections 165-13 and 165-210 of ITAA 1997 and Taxation Ruling TR 1999/9.

Tax losses

Show at label O the amount of tax losses utilised by the head company which did not satisfy the continuity of ownership and control tests but did satisfy the same business test.

Net capital losses

Show at label P the amount of net capital losses utilised by the head company which did not satisfy the continuity of ownership and control tests but did satisfy the same business test.

Example 17

A consolidated group comes into existence on 1 July 2002. On that date the following losses are transferred to the head company from a joining company which satisfied the continuity of ownership and control transfer tests:

Year loss incurred

Sort of loss

Amount ($)

1999-2000

Tax

1,200

1999-2000

Net capital

4,600

During the period from the start of the loss year (1 July 1999) until immediately after the joining time (1 July 2002) there was a 40% change in the persons who controlled the voting power of the head company and had the rights to the company's dividends and capital distributions. The joining company was a 100% subsidiary of the head company during this period.

For the 2002-03 income year the consolidated group generates sufficient capital gains and other assessable income to enable the transferred tax and net capital losses to be fully utilised applying the available fraction method. On 1 August 2002 there is a 20% change in the persons who, at the start of the loss year, controlled the voting power of the head company and had the rights to the company's dividends and capital distributions. The head company does not satisfy the continuity of ownership test because of the change of majority ownership on 1 August 2002-that is, combined ownership changes of 60% (40% + 20%). However, the head company satisfies the same business test because the consolidated group carried on the same business during the 2002-03 income year as it did immediately before the change of ownership.

In determining whether a head company can use a loss transferred to it from a joining company which passed the continuity of ownership and control tests, changes in ownership of the joining company prior to it joining the consolidated group are taken into account.

The head company completes part C, item 2 on the schedule as follows:

Label

Code

Amount ($)

Tax losses

O

1,200

Net capital losses

P

4,600

 

End of example

3 Amount of losses carried forward to later income years for which the same business test must be satisfied before they can be utilised.

Note:

  • Do not include film losses or foreign source losses utilised at item 3.
  • Do not include at item 3 losses carried forward to later income years for which the head company satisfies the continuity of ownership test.

Show at item 3 the amount of tax losses, excluding film losses, and net capital losses carried forward to later income years for which the head company must satisfy the same business test to utilise these losses.

Before a head company can utilise a loss generated by the consolidated group, or a loss transferred from a joining entity, it must satisfy the continuity of ownership and control tests or the same business test. Subdivision 707-B of ITAA 1997 modifies the recoupment tests for transferred losses. The loss year is modified so that it starts from when the loss was transferred to the head company. Accordingly, losses transferred to a head company of a consolidated group because they satisfied the same business transfer test are effectively refreshed in the hands of the head company, in that the ownership period for these losses starts at the time they are transferred to the head company.

However, in determining whether a head company can use a loss transferred to it from a joining company which passed the continuity of ownership and control tests, changes in ownership of the joining company prior to it joining the consolidated group are taken into account. In addition, it is assumed that the head company's interest in the joining company remains unchanged from the joining time. This means that, in determining if a head company can utilise a loss transferred to it from a joining company, the head company will satisfy the continuity of ownership test if the joining company would have satisfied the continuity of ownership test in respect of the loss.

For more information on the same business test refer to sections 165-13 and 165-210 of ITAA 1997 and Taxation Ruling TR 1999/9.

Tax losses

Show at label Q the amount of tax losses carried forward to later income years for which the head company must satisfy the same business test to utilise these losses.

Net capital losses

Show at label R the amount of net capital losses carried forward to later income years for which the head company must satisfy the same business test to utilise these losses.

Example 18

A consolidated group comes into existence on 1 July 2002. On that date, tax losses of $2,200 are transferred to the head company from a joining company which satisfies the continuity of ownership and control transfer tests.

For the 2002-03 income year, the consolidated group makes group tax losses of $1,700 and group net capital losses of $3,500 which are carried forward to the 2003-04 income year.

There is a change of majority ownership of the head company during the 2002-03 year but this does not result in the head company joining another consolidated group. The head company must satisfy the same business test in later income years to utilise the losses carried forward comprising tax losses of $3,900 ($2,200 + $1,700) and net capital losses of $3,500.

The head company completes part C, item 3 on the schedule as follows:

Label

Code

Amount ($)

Tax losses

Q

3,900

Net capital losses

R

3,500

 

End of example

QC27493