Edited version of your private ruling

Authorisation Number: 1012441116463

Ruling

Subject: Income Tax - Tax Loss - Same Business Test (SBT)

Question 1

If it has enough assessable income in a particular financial year, would the Company be able to recoup its tax losses incurred in the financial years ended:

(a) 30 June 2009;

(b) 30 June 2010;

(c) 30 June 2011; and

(d) 30 June 2012

under section 36-17 of the Income Tax Assessment Act 1997 (ITAA 1997) by virtue of being taken to have satisfied the SBT in section 165-13 of the ITAA 1997?

Answer:

Yes

Question 2

If the Company had enough capital gains in a particular year of income, would the Company be able to reduce the capital gains derived by it by the capital losses incurred by it in the income years ended:

(a) 30 June 2010;

(b) 30 June 2011; and

(c) 30 June 2012

at step 2 of the method statement contained in subsection 102-5(1) of the ITAA 1997 by virtue of being have taken to have satisfied the SBT in section 165-13 of the ITAA 1997?

Answer:

Yes

Question 3

Will section 165-210(3) of the ITAA 1997 apply to deem the SBT not to be satisfied?

Answer:

No

Question 4

Will the Commissioner seek to apply section 165-15 of the ITAA 1997?

Answer:

No

This ruling applies for the following periods:

Financial year ended 30 June 2013

Financial year ended 30 June 2014

Financial year ended 30 June 2015

Financial year ended 30 June 2016

The scheme commences on:

1 July 2012

Relevant facts and circumstances

The Company is a public company.

The Company is incorporated and tax resident in Australia.

Throughout its history the Company has carried on the same business.

The Company has appointed various external managers and advisors to assist in its business.

While the external managers have changed over time, the Company's practice of appointing external managers to assist in advising on and managing its business has remained the same.

No external party makes decisions in relation to the Company's business and the Board retains a broad power to make decisions after considering recommendations.

With the arrival of the global financial crisis (GFC) in the year ending 30 June 2009, the Company's financial performance began to suffer, with the result that the company entered a period of sustained and significant loss making.

The Company has incurred tax losses and capital losses (Test Losses).

The Proposed Scheme as outlined in the Private Ruling application is detailed as follows:

· It is proposed that the Company undertake an off market share buyback and to subsequently delist from the ASX. As a result of the proposals, it is uncertain whether, the Company will remain a 'widely held company' (as defined in section 995-1 of the ITAA 1997) after the buy-back is completed. Accordingly, Division 166 may cease to apply from the time of delisting of the Company from the ASX.

· It is also proposed that the Company invest in a newly formed entity which for present purposes we will call the Entity.

· The Company will have a stake in the Entity of not more than 50%.

· The Company will appoint an external manager to advise on and manage the business held by the Entity.

· The business of the Entity is to be predominantly the same business as the Company.

Assumptions

For the purposes of responding to the questions set out the Private Ruling, the Commissioner has been asked to assume that at all times henceforth:

1. In the year in which the Test Losses are sought to be deducted or recouped, the Company will not be a 'widely held company' or eligible 'Division 166 company' (as defined in section 995-1 of the ITAA 1997);

2. It is not practicable for the company to show that there is a period that meets the conditions in subsection 165-13(2) such that the relevant testing times are those stated in Item 2 of the table in subsection 165-13(2), i.e. just before the start of the relevant loss year;

3. The business in each income year (i.e. each year in which the Test Losses are sought to be deducted or recouped) will be the same as the business being conducted at the date of the ruling application.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 165

Income Tax Assessment Act 1997 section 36-17

Income Tax Assessment Act 1997 subsection 102-5(1)

Income Tax Assessment Act 1997 section 165-12

Income Tax Assessment Act 1997 section 165-13

Income Tax Assessment Act 1997 subsection165-13(1)

Income Tax Assessment Act 1997 section 165-15

Income Tax Assessment Act 1997 subsection 165-210(3)

Reasons for decision

Question 1

If it has enough assessable income in a particular financial year, would the Company be able to recoup its tax losses incurred in the financial years ended:

(a) 30 June 2009;

(b) 30 June 2010;

(c) 30 June 2011; and

(d) 30 June 2012

under section 36-17 of the Income Tax Assessment Act 1997 (ITAA 1997) by virtue of being taken to have satisfied the SBT in section 165-13 of the ITAA 1997?

Answer

Yes

Reasoning

Broadly, a company can deduct a prior year loss if the company satisfies either the continuity of ownership test (the "COT") or the same business test (the "SBT") under section 165-12 and section 165-13 of the ITAA 1997 respectively.

The Applicant has requested consideration of the Company satisfying the SBT and furthermore advised that the Company is proposing to undertake an off market share buyback and subsequently delisting from the ASX.

The Applicant has requested the Commissioner to assume the following:

'In the year in which the Test Losses are sought to be deducted or recouped, the Company will not be a 'widely held company' or eligible 'Division 166 company' (as defined in section 995-1 of the ITAA 1997); …'

In relation to the SBT subsection 165-13(2) of the ITAA 1997 states as follows:

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.

The 'test time' is the time when the applicant failed the COT or, if it is not practicable to determine whether the COT is failed the test time is the start of the income year when the loss was incurred where the applicant has been in existence at all times during the loss year, item 2 subsection 165-13(2) of the ITAA 1997.

As the Company is proposing to delist from the ASX, it is not practicable to determine whether the Company fails the COT or not. Accordingly, since the Company was in existence at all times during the loss year the test time for the Company is the commencement of the year in which the loss was incurred.

The SBT

The SBT is set out in Section 165-210, comprises a positive test and two negative tests, as follows:

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.

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.

(1) The Positive Test - Carries on the Same Business

The Commissioner of Taxation (Commissioner) in 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 at paragraph 13 has explained the SBT in the following way:

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.

The leading case on the SBT is Avondale Motors (Parts) Pty Ltd v. Federal Commissioner of Taxation (1971) 124 CLR 97; 71 ATC 4104; 2 ATR 312 (Avondale), where the term 'same' was interpreted to mean 'identical' and not merely 'the same kind of business' or 'similar' as per Gibbs J:

'The meaning of the phrase "same as", like that of any other ambiguous expression, depends on the context in which it appears. In my opinion in the context of the section the words "same as" import identity and not merely similarity and this is so even though the legislature might have expressed the same meaning by a different form of words. It seems to me natural to read the section as referring to the same business, in the sense of the identical business, and this view is supported by a consideration of the purposes of the section... '

In Laycock v. Freeman, Hardy & Willis Ltd (1938) 22 TC 28 in relation to similar provisions in the United Kingdom, the English Court of Appeal said:

'That does not, of course, mean that the business, regarded after the succession [i.e., the change-over] must be in every respect and in every detail identical with the business which was carried on before the succession. The successor may succeed to a business with; let me say, 50 shops. He may choose to shut up some of those shops. He may make alterations in the goods that he sells. All sorts of alterations of that kind may take place. He may change his supplier. He may cut out a particular class of customer or a particular area. …Changes of that kind may or may not be so substantial as to make it right to say, as a matter of fact ... that the business is not the same as the one to which he succeeded….'

Further, paragraph 60(d) of TR 1999/9 states:

An expansion or contraction of the taxpayer's business activities may not, in itself, result in a change in the identity of the business carried on by the taxpayer: Gibbs J in Avondale Motors. However, the expansion or contraction of activities may result in a change in the identity or character of the business, taking into account the nature and extent of the expansion or contraction. In particular, the organic growth of a business through the adoption of new compatible operations in the ordinary way and, similarly, the discarding of old operations in that way, may not cause a taxpayer to fail the same business test, but a sudden and dramatic change brought about by the loss or acquisition of business operations on a considerable scale is likely to do so: Walton J in Rolls-Royce (Motors) Ltd v. Bamford.

Accordingly, whether changes to a business cause that business not to be the "same" business is a question of fact and degree, having regard to all the relevant circumstances. A company will still be considered to carry on the same business despite changes being made to that business, provided that these changes are not so substantial that the business undertaken after those changes is not the same one as that which was previously carried on.

Application to the Company

The first step is to define the Company's business.

As at 30 June 2008, 30 June 2009, 30 June 2010, 30 June 2011, 30 June 20l2 and during period from 1 July 2012 through to the date of this PBR application, the Company carried on the same business.

The various changes to the way in which the Company's business was undertaken during the relevant periods is further analysed below in the context of the SBT.

Mode of Investment

Paragraph 60(c) of TR 1999/9 provides that:

There is a distinction between a change of business and a "mere change in the process by which [the business] is carried on" (see Avondale Motors and Case Y45; AAT Case, 272). The second kind of change does not, of itself, result in a taxpayer not satisfying the same business test. However, When a change in the taxpayer's business operations or processes affects the identification of the taxpayer's business by going beyond a mere change In the way in which the business is carried on, it is likely to result in a change in the business itself e.g., Gordon & Blair Ltd v. IRC.

In J Hammond Investments Pty Ltd v FC of T (1977) 31 FLR 349; (1977) 7 ATR 633; 77 ATC 4311 (J Hammond Investments), the loss company was a venture capitalist, providing capital and managerial support to existing businesses. In this activity the company had invested in a bakery property development and a furniture/furnishings business. Historically, these investments had been made by way of the acquisition of shares in special purpose entities. However, in a new venture dealing in artificial marble, the taxpayer entered into a partnership arrangement with two other entities.

In J Hammond Investments the central issue was the degree of specificity with which the company's business was defined and, in particular, whether a company which had formerly invested in a diverse array of business ventures satisfied the SBT even though its mode of investment had changed. That is, was the mode of investment central to the definition of the taxpayer's business or peripheral to it?

The Commissioner argued that this change in the mode by which the company entered into an investment signalled a change in the nature of the business, because the company had changed its business from investing in businesses by acquiring shares in companies to one of investing in businesses by joining a partnership.

Adopting a stance of legal formalism, the Commissioner submitted that the nature of a partnership meant that the taxpayer was compelled to actively participate in the business venture, rather than maintain the aloof approach it had formerly adopted in making its other investments. Accordingly, the Commissioner argued that the SBT was not satisfied.

In rejecting the Commissioner's argument, Sheppard J held (at 7 ATR 633 at 639) that:

the totality of the evidence points to the fact that the real nature of the taxpayer's business was investment in businesses, ventures and enterprises of various kinds. The form of the investment, although, down to the date when the partnership agreement was entered into, it had always been by the taking up of shares, was an inconsequential matter. .,. The agreement evidencing that partnership contained provisions ... making it clear that the taxpayer and ASH were in a rather special position and left them, practically speaking, in a similar situation to that in which they found themselves in relation to the other ventures In respect of which they had taken up shares in other companies.

Sheppard J also stated:

"I think it relevant to look at the conduct of the taxpayer as described in the evidence of Mr Scheinberg. It is plain that he was not concerned with legal structures but merely with the investing of money in sound business ventures managed by persons who had capacities in particular fields."

As at 30 June 2008, 30 June 2009, 30 June 2010, 30 June 2011, 30 June 2012 and during the period from 1 July 2012 through to the date of this PBR application, the Company carried on the same business though its business was severely affected during the GFC.

In accordance with the decision in J Hammond Investments the changes in the mode or form of investments, alone, is not considered to result in a change in the identity of the Company's business.

Paragraph 60(d) of TR 1999/9 provides that:

An expansion or contraction of the taxpayer's business activities may not, in itself result in a change in the identity of the business carried on by the taxpayer Gibbs J in Avondale Motors. However, the expansion or contraction of activities may result in a change in the identity or character of the business, taking into account the nature and extent of the expansion or contraction. In particular, the organic growth of a business through the adoption of new compatible operations in the ordinary way and, similarly, the discarding of old operations in that way, may not cause a taxpayer to fall the same business test, but a sudden and dramatic change brought about by the loss or acquisition of business operations on a considerable scale is likely to do so: Walton J in Rolls-Royce (Motors) Ltd v. Bamford.

The changes in the composition of the Company's business and in particular the recent changes by the Company are not considered to result in a change in the identity of the Company's business. Rather the change in the composition of the Company's business is an ordinary incident of its business and represents organic growth or contraction of the business through the adoption of new compatible operations in the ordinary way. Therefore, in accordance with judicial authority and the Commissioners views in TR 1999/9, the change in the composition of the Company's business is considered to part of its business.

External Management Arrangements

In Lilyvale Hotel Pty v FC of T (2009) 75 ATR 253 (Lilyvale) the full Federal Court considered whether the taxpayer satisfied the same business test where there was a change in the management of the hotel. Before the sale of the shares, Enterprises Australia carried on the business of managing the hotel and the taxpayers' involvement in the business was so distant from the day-to-day activities of the hotel that it could not be said to be conducting a hotel business. However, after the sale of the shares Enterprises Australia was no longer involved with the hotel, rather, the taxpayer had stepped into the shoes of Enterprises Australia as the manager of the hotel.

In Lilyvale, the full Federal Court held that:

The fact that at one stage the appellant conducted its hotel business without the intervention of a hotel management group and at another did so with the assistance of such a hotel management group is a distinction without a difference. In our opinion, the appellant correctly described the business which It carried on as that of "owning and operating . . (a] hotel to derive revenue from its guests and profits from its operation' The execution of the management of the hotel at different times in different ways had no bearing upon the identification of the business which the appellant carried on.

As at 30 June 2008 and 2009, the Company had a management agreement with Company X. As at 30 June 2010, 30 June 2011, 30 June 2012 and during the period from 1 July 2012 through to the date of this PBR application, Company Y provided certain financial and administration services to the Company. Further, from month 20XX Company Z provided specialist advisory and management services to the Company.

As supported by the decision of the case in Lilyvale, the execution of the management of the Company's business at different times in different ways is considered not to have a bearing upon the identification of the business that the Company is carrying on.

Further, while the management of the Company's business has changed over time, the Company's practice of appointing external managers to assist in managing its business has remained the same. In this regard, there has been no change between external and internal management as was the case in Lilyvale.

No external party makes decisions in relation to the Company's business and the Board retains a broad power to make decisions after considering recommendations.

Capital Management

The Company also undertook a capital management program.

Paragraph 61 of TR 1999/9 outlines matters relevant to consider in this regard, and includes at paragraph 61(h):

Changes in the taxpayer's capital management and working capital (for example, the manner and source of finance). This is a good example of a factor that is unlikely, of itself, to lead to a different business being carried on (except perhaps, on some occasions In relation to a finance company), but which Is not uncommonly the result of a different business being carried on. The nature of some changes in working capital may assist one to conclude other factors have caused a change of business; conversely, the absence of any important changes might help deprive other matters of their apparent significance.

The Company's business did not change as a result of the changes to the Company's capital structure.

Change of Name

Paragraph 60(g) of TR 1999/9 provides that:

Other factors relevant to the issue of whether the same business is being carried on after the change-over include the name of the taxpayer, the location of the business, the existence of a period or periods of dormancy. end the circumstances accounting for the inactivity and in which activity is resumed: Avondale Motors; Yarmouth Industrial Leasing v. The Queen and also, the extent to which there is continuity of, or change in, custom and goodwill: Tryka Ltd v. Newall; Wadsworth Morton Ltd v. Jenkinson.

The Company changed its name during the period under consideration. It is accepted that this change occurred solely as a result of the termination of the management agreement, rather than any change to the underlying business conducted by the Company.

Other Factors

Paragraph 61 of TR 1999/9 provides an illustration of factors to be considered and how they are to be weighed in applying the same business test. Each of the matters is said to be relevant to consider although not necessarily significant in itself.

For completeness, each of the factors as detailed in TR 1999/9 is considered below:

(a) Change in the product manufactured

The Company does not manufacture products.

(b) Whether the taxpayer commences any other activities

This is addressed below in analysing the New Business Test.

(c) Changes in the activities carried on by the taxpayer (including an analysis of the cessation of operations or the outsourcing of operations)

There have been no changes in the Company's activities including any cessation of activities throughout the relevant test periods. The Company has not outsourced any activities during the relevant test periods.

(d) The market for a company's services or products

In the case of a company with just one customer or a very few customers, a change in the identity of that customer or those customers is often a matter of significance. Similarly, where the custom of a company is derived from a connection with another, perhaps associated company, a sudden change in that custom following the severing of the connection often points to a change of business. As a listed company it has a wide range of investors therefore a change in investors would not indicate a change in business. We note that Company Z acquired X% of the Company in the 20YY financial year. However, this acquisition by Company Z did not coincide with a change in the custom of the Company. That is the Company remained a listed company with a spread of investors. Furthermore, we note that there was a severance of the relationship with Company X. However, Company X was not a shareholder of the Company and there was no sudden change in custom following the change of manager to Company Y. At all times the fundamental business of the Company did not change as a result of the change in shareholdings and management agreements.

(e) Changes in the mix of customers of the taxpayer

The changes in the Company's customers do not result in a change in the Company's business.

(f) Changes in the turnover or gross assets of the taxpayer

There have been significant changes in the Company's turnover throughout the relevant test times. This volatility is a product of the Company's business and a result of net changes in the fair value of financial assets recognised in the profit and loss statement and not as a result of any changes in the business of the Company. Furthermore, a mere contraction of the business of the Company will not constitute a change in business.

(g) Changes in the method of selling

In some businesses, the mode of sale is significant and a change in it may result in (or be the result of) a different class of customer forming the taxpayers market. Often; however, it has little importance. The business of the company did not result in a different class of customer.

(h) Changes in the taxpayers' capital and working capital

This has been addressed above.

(i) Changes in the goodwill of the taxpayer

Goodwill is an important indicator. Even businesses selling virtually identical products to an identical market may be sharply differentiated by goodwill and conversely, undertakings that might otherwise be thought of as distinct businesses may form part of the one business because they share the same goodwill. Where goodwill remains the same, other changes, even if fairly substantial are likely to amount to no more than a variation in the way in which the same business is being carried on, whereas a complete change of goodwill is very likely to support a conclusion that the same business is no longer being carried on, even if the means by which the business is carried on have hardly altered. There have not been any significant changes in the goodwill of the Company throughout the relevant test periods. The Company changed its name during the period which has been addressed above. The name change did not coincide with a change in goodwill, but rather than appointment of a new manager, the investors in the Company did not change as a result of the name change and the types of investments entered into also did not change.

(j) Changes in the location or locations where the taxpayer carries on business and/or changes in the location of the taxpayer's customers

Throughout the relevant test periods the Company has listed on the ASX and the location of its customers has remained consistent.

(k) Changes in the trade names, trademarks, patents royalty arrangements or other intellectual property rights of the taxpayer

The change in name of the Company has been addressed above. There were no other changes in intellectual property during the relevant test times.

(l) Reductions or increases in the number of persons employed by the taxpayer or who are contracted by the taxpayer to perform services for the taxpayer, and changes in the nature of the services performed by persons who are employed or contracted by the taxpayer

At all times during the relevant test periods the Company has used external managers to assist in managing its business and undertake certain financial and administrative services. The services provided by the external managers have not significantly changed during the period. There have not been significant changes in the number of persons employed by the Company throughout the relevant periods. Therefore, this factor would not indicate a change in the Company's business.

(m) Changes in the directors and / or management of the taxpayer

This was a factor considered in Avondale Motors. Generally speaking, however, it has little significance as it usually follows a change in ownership, regardless of what business is carried on, but its absence could point to a favourable answer to the question posed by the same business test. Changes to the Company's Board have occurred recently. As outlined in TR1999/9 the changes in the Board follow a change in ownership and should have little significance in this case as the business of the Company following the changes in the Board continued to remain the same.

The above is not a checklist and is not exhaustive. However, on the balance of factors and having regard to all of the matters outlined above it is clear that the Company's business has not changed during the relevant test periods.

Impact of the proposed investment in the new Entity

The investment in the new Entity, as with other changes in the composition of the Company's business, is an ordinary incident of its business and represents organic growth or contraction of the business through the adoption of new compatible operations in the ordinary way. Accordingly, the business should not be changed as a result of the proposed investment in the Entity.

2(a) - New Business Test

The intention of the new business test is to limit the expansion available under the SBT by preventing a company from adding to its operations, activities that it had not carried on prior to the change over time. Hence, a company that has passed the primary SBT may still fail the new business test.

The word 'business' in the new business test is a reference to each of the different kinds or types of activities (If there be more than one kind or type of activity) carried on by the taxpayer at the change-over time.

As provided by paragraph 74 in TR 1999/9:

As stated above, whether a new business. In the sense of a particular undertaking or enterprise, is of a different kind from the old undertakings or enterprises of a company is a question of fact in characterising an undertaking or enterprise, regard must be had to the undertaking or enterprise as a whole. A new undertaking or enterprise may be of a different kind from an old one, even though some or all of the transactions that it comprises or by which it is carried on, occurred in the old undertaking or enterprise because, in a different context, those transactions considered with the other business operations of the taxpayer, may be such as to lend a different character to the undertaking or enterprise considered as whole.

Where a taxpayer acquires or commences a new undertaking and amalgamates it in its overall business, the Commissioner considers the relevant question to be whether the new undertaking was of the same kind as the undertakings of that business. The new business test looks at whether the same business, though expanded in scale and operations, includes business activities of a kind it did not carry on before the change. Generally, 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 SBT.

As outlined in the background facts, the Company has not entered into any new undertakings or enterprises since 30 June 2008. At all of times since 30 June 2008, the Company has held interests indirectly in a variety of assets consistent with the Company's objective.

As outlined above in relation to the SBT, and in the background facts, there have been no changes to the Company's fundamental business. Therefore, while the Company has entered into new undertakings since 30 June 2008, these new undertakings have been of the same kind as existing undertakings of the Company's business.

The investment in the Entity, as with other changes in the composition of the Company's business, is an ordinary incident of its business and represents organic growth or contraction of the business through the adoption of new compatible operations in the ordinary way. Accordingly, no income from a new business will arise as a result of the proposed investment in the new Entity.

In consideration of the above it is accepted that the Company would not breach the New Business Test.

2(b) - New Transactions Test

The aim of the new transactions test is to prevent the injection of income into a loss company that has satisfied the SBT and the new business test

The reference to "transaction of a kind" in the new transactions test refers to all transactions entered into in the course of the company's business operations, regardless of whether they were transactions entered into as part of the daily or regular conduct of the business carried on by the taxpayer.

Paragraph 82 of TR 1999/9 provides that:

In the new transactions test "transaction" has a broad meaning. The meaning of the word "transaction" depends upon its context It is clear that, in the context of the second limb of sections 165-13 and 165-210, "transaction" refers to every means or event by which the taxpayer derives income, for the word appears in association with the expression "business operations" as the last of a descending hierarchy of tests that examines, first, the overall business of the company, then its component undertakings or enterprises and, finally, the individual acts by which the business is carried on. The new transactions testis concerned to ensure that a company deducts losses from income from transactions of the same kind as the operations by which it generated income before the change-over.

However, as provided by paragraph 15 of TR 1999/9:

generally speaking, the new transactions test is not failed by transactions of a type that are usually unmotivated by tax avoidance, namely, transactions 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.

The new transactions test was considered by Sheppard J in J Hammond Investments. Sheppard J said:

Upon reflection I think it is correct, as both counsel concluded, that the word
"transaction" means "dealing".

One could imagine a situation where a company was taken over for the purpose of its tax losses in order to gain the benefit thereof, not for the purpose of offsetting income derived from the business against the losses of previous years, but for the purpose of offsetting against those losses an isolated or chance profit which might have been foreseen, perhaps a profit taxable by reason of the provisions of section 26(a) of the Act or some other income resulting in a chance or isolated profit or gain to the company.

The matters I have so far mentioned do not, however, in my opinion, take the matter sufficiently far to explain the presence in both provisions of the words, "in the course of its business operations", but I have come to the conclusion that there is a different type of transaction which probably does explain their presence. There are of course many receipts which are not properly described as being income from a business. There is an example of such a receipt in the present case. The partnership acquired a new building with a tenant in it, who remained in occupation for a short time after the acquisition. The sum of $160 was received by way of rental. It does not seem to me that that was income derived from the business being carried on by the partnership but it was certainly income derived from a transaction entered into in the course of the partnership's business operations. Many other transactions of this general type can be imagined.

Whilst, therefore, I do not regard the matter as free from difficulty, I have reached the conclusion that the second limb of the paragraph is not intended to refer to the daily transactions involved in carrying on a business but to transactions of an isolated and independent kind, which transactions have nevertheless arisen in the course of the taxpayer's business operations.

In the present case there is not, in my opinion, any special isolated or separate transaction to which the provisions of the second limb could attach.

Example 8 of TR 1999/9 relates to Portfolio Ltd, a company that owns shares that it holds for their yield, not as trading stock. Scenario 3 of example 8 provides that:

Portfolio's new owner, Paris Australia, carries on a similar business of holding shares for their yield, not as trading stock. Some of those shares have appreciated enormously in value. Paris Australia would like to sell them, but this will result in Paris Australia deriving a large taxable income. It transfers them at cost, a fraction of their market value, to the taxpayer. After a time, the taxpayer realises them at their true value.

In this scenario the Commissioner's view is that the taxpayer fails the new transactions test as:

a non arm's-length transaction at grossly artificial prices is extraordinary when judged by reference to the ordinary course of its business before the change-over, and is of a different character to the transactions in which it had previously engaged.

Example 8 of TR 1999/9 relates to a large retailer with bad debts that have not been written off. The large retailer is sold and after the changeover the taxpayer enters into a transaction to lend money to an associated finance company. As part of the same transaction, the taxpayer then assigns its right to receive interest on the loan from the finance company to another company for a lump sum. The taxpayer has never done anything like this before.

In this scenario the Commissioners view is that the taxpayer fails the new transactions test as the transaction, being extraordinary, judged by reference to the ordinary course of the taxpayers business before the change-over, differs in kind from the transactions by which it derived income before the change-over.

During the relevant test periods the Company has not entered into transactions of a different character to the transactions that the Company has previously entered into.

The investment in the Entity, as with other changes in the composition of the Company's activities, is considered to be an ordinary incident of its business and represents organic growth or contraction of the business through the adoption of new compatible operations in the ordinary way. Accordingly, no income from a new type of transaction will be derived as a result of the proposed investment in the Entity. The investment in the Entity is a passive investment. Accordingly, the business will not change as a result of the proposed investment.

Accordingly, the Company will not fail the New Transactions Test.

Conclusion

The Company will be able to recoup its tax losses incurred in the financial years ended 30 June 2009; 30 June 2010; 30 June 2011; and 30 June 2012, under section 36-17 of the ITAA 1997, by virtue of being taken to have satisfied the SBT under section 165-13 of the ITAA 1997.

Question 2

If the Company had enough capital gains in a particular year of income, would the Company be able to reduce the capital gains derived by it by the capital losses incurred by it in the income years ended:

(a) 30 June 2010;

(b) 30 June 2011; and

(c) 30 June 2012

at step 2 of the method statement contained in subsection 102-5(1) of the ITAA 1997 by virtue of being have taken to have satisfied the SBT in section 165-13 of the ITAA 1997?

Answers

Yes

Reasoning

Section 165-96 of Subdivision 165-CA of the ITAA 1997 contains the rules governing the application by a company of capital losses incurred in prior years.

Specifically subsection 165-96(1) of the ITAA 1997 provides:

In working out its net capital gain for the current year, a company cannot apply a net capital loss it has for an earlier income year if Subdivision 165-A would prevent it from deducting the loss for the current year if:

(a) the loss were a tax loss of the company for that earlier income year; and

(b) section 165-20 (about deducting part of a tax loss) were disregarded.

This provision prevents a company applying a prior year capital loss in a current year if, assuming the capital loss was a 'tax loss', Subdivision 165-A of the ITAA 1997 would deny the loss in the current year. This means that in order to claim the capital loss, the company has to satisfy either the COT or SBT tests.

Given the tax losses are allowed to be deducted under Subdivision 165-A of the ITAA 1997 on the basis that the SBT has been satisfied, as discussed above, the net capital losses being carried forward may also be utilised by the Company to reduce capital gains in a particular year of income.

Question 3

Will section 165-210(3) of the ITAA 1997 apply to deem the SBT not to be satisfied?

Answer

No

Reasoning

Section 165-210(3) of the ITAA 1997 provides that:

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.

As outlined above, under question one, the Company will satisfy the SBT.

Consequently, section 165-210(3) of the ITAA 1997 will not apply to deem the SBT not to be satisfied.

Question 4

Will the Commissioner seek to apply section 165-15 of the ITAA 1997?

Answer

No

Detailed reasoning

Section 165-15 of the ITAA 1997 imposes a further restriction on the deductibility of past year losses in cases where there has been a change in the control of the voting power which is associated with a purpose of gaining a tax advantage. It applies even if the company has met the conditions in section 165-12 or section 165-13 of the ITAA 1997.

This further restriction is set out in subsection 165-15(1) of the ITAA 1997 which applies where:

· for some or all of the ownership test period - starting at the end of the loss year and finishing at the end of the income year (and including any intervening period), a person controlled, or was able to control, the voting power in the company,

· for some or all of the loss year, that person did not control, and was not able to control, that voting power, and

· that person began to control, or became able to control, that voting power for the purpose of getting some advantage or benefit in relation to how the Act applies, either for that person or for someone else. This also applies if this is only one of a number of purposes.

Furthermore, subsection 165-15(2) of the ITAA 1997 states:

· However, that person's control of the voting power, or ability to control it, does not prevent the company from deducting the tax loss if the company satisfies the same business test for the income year (the same business test period).

In summary, even if a company meets the conditions in section 165-12 or section 165-13 of the ITAA 1997, it cannot deduct a tax loss unless it meets the requirements in section 165-15 of the ITAA 1997 that the same people must control the voting power, or the company must carry on the same business.

As discussed earlier, the Company satisfies the same business test for the income year (the same business test period), and as a result section 165-15 of the ITAA 1997 will not apply to prevent the Company from deducting prior year tax losses.

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