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Ruling

Subject: Deduction of tax losses, same business test

Question 1

Will A be carrying on the same business for the purposes of section 165-13 of the Income Tax Assessment Act 1997 (ITAA 1997) as it carried on immediately before the change of ownership?

Answer

Yes.

Question 2

Will A be able to deduct tax losses in future years by satisfying the same business test in subsection 165-210(1) of the ITAA 1997?

Answer

No.

Question 3

Does paragraph 165-210(3)(b) of the ITAA 1997 apply in respect of the proposed transaction to enter into a lease and licence agreement between A and the purchaser of the business?

Answer

Not necessary to answer in the light of the above questions.

Question 4

Does Part IVA of the Income Tax Assessment Act 1936 apply in respect of the entering into the proposed lease and licence agreement so as to deny any deduction for prior year losses by A?

Answer

Not necessary to answer in the light of the above questions.

This ruling applies for the following periods:

1 July 2012 to 30 June 2014

Relevant facts and circumstances

A is a private company that was ultimately owned by a non-resident individual. A operated a business. A owned land and buildings that made up the business operations. A had been running the business for a number of years prior to the sale of the business.

In late 2010 a contract for the sale of the land, fixed assets, stock, trademarks, trading names and goodwill that comprised the business was entered into. This sale was completed in X 2010. The purchaser was B, a company that was not related to A. From this date the operations of the business were carried out exclusively by B.

A has carried forward tax losses.

The Director's Report attached to the financial statements of A for the year ended 31 December 2011 states that the company was in a non-trading state since the sale of the operations in X 2010.

Early 2012 the sale of shares in A commenced by transfer documents being completed. The shares in A were to be sold to the two entities which own the shares in B. Completion of the sale of the shares occurred mid 2012.

A and B are now contemplating entering into an agreement where A would lease from B the land and buildings comprising the business as well as carrying out the business operations under a licence granted by B, for a period of ten years from January 2013.

Under the proposed agreement, A would again be running the business and this business would be virtually identical to the business that it sold. The only difference would be that the business would be run under a lease and licence agreement rather than under freehold arrangements.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 165-10

Income Tax Assessment Act 1997 section 165-12

Income Tax Assessment Act 1997 section 165-13

Income Tax Assessment Act 1997 section 165-210

Reasons for decision

Summary

The business operations of A after the commencement of the lease and licence agreements will be the same as it was prior to the sale of the business. However the company will not be able to satisfy the same business test because at the relevant test time the company was not carrying on that same business.

Detailed reasoning

Under section 165-10 of the ITAA 1997, a company is unable to deduct tax losses unless it meets the tests of section 165-12 of the ITAA 1997 regarding the maintenance of the same owners (the continuity of ownership test). For the continuity of ownership test to be satisfied the company must have had persons who held more than 50% of the voting power in the company as well as more than 50% of the rights to dividends from the company as well as more than 50% of the rights to capital distributions from the company at all times during the ownership test period.

If a company is unable to satisfy the continuity of ownership test then it may still qualify for a deduction of tax losses subject to satisfying the same business test conditions set out in section 165-13 of the ITAA 1997.

For a company to be able to deduct a tax loss under subsection 165-13(2) of the ITAA 1997, it must satisfy the same business test for the income year in which it wants to claim the deduction. This year is referred to as the same business test period and the test is applied to the business carried on by the company immediately before the test time.

What is meant by the test time is set out in the Table to subsection 165-13(2) of the ITAA 1997 and depends on the circumstances of the company. As it is practicable in the circumstances of A to demonstrate when during the ownership test period it failed the continuity of ownership test, the relevant test time is the latest time that it was able to satisfy the continuity of ownership test - Item 1 of Table to subsection 165-13(2) ITAA 1997.

The requirements for the same business test are set out in section 165-210 of the ITAA 1997, comprising one positive requirement (contained in subsection 165-210(1) of the ITAA 1997), two negative requirements contained in subsections 165-210(2) and (3) of the ITAA 1997 and an anti-avoidance requirement, contained in subsection 165-210(4) of the ITAA 1997. All requirements have to be met but it follows that if a company cannot satisfy the positive requirement, it is not necessary to consider the other requirements.

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.

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.

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 the 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.

165-210(4) So far as the *same business test is applied for the purpose of Subdivision 165-B (which is about working out the taxable income and *tax loss for the income year of change of ownership or control), the company also does not satisfy the test if, at any time during the *same business test period, it incurs expenditure:

(a) in carrying on a *business of a kind that it did not carry on before the *test time; or

(b) as a result of a transaction of a kind that it had not entered into in the course of its business operations before the test time.

To satisfy the positive requirement of the same business test as set out in subsection 165-210(1) of the ITAA 1997 it is necessary for a company to carry on the same business during the year in which it is seeking to recoup the tax losses as it did immediately before the test time.

The relevant business is the business that A carried on prior to selling it. The facts provided indicate that the business that A will carry on under the proposed agreements will be the same business that it carried on prior to its sale by A in December 2010, despite A having to pay lease rentals and licence fees to B to operate the business.

However, the same business test requires a comparison between the business carried on during the year of recoupment of the loss to that carried on by the company immediately before the test time. In the circumstances of A the relevant test time is immediately before 1 June 2012, being the date the transfer of the shares was completed and it is at this time that the continuity of ownership test is unable to be satisfied. The same business test requires a comparison of the business carried on by A immediately before 1 June 2012 with the business operations that are to be carried on under the proposed lease and licence agreement. In the circumstances of A though, no such comparison can be made because at the relevant test time, A did not carry on the relevant business. While it is clear that the business was in operation at this time, it was not being carried on by A. A had sold this business some 18 months prior to the test time and therefore will be unable to satisfy the same business test.

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