Edited version of your private ruling

Authorisation Number: 1012519786457

Ruling

Subject: Same business test

Question 1

Will the company, providing the 'proposed services' outlined in the facts of this private ruling, satisfy the same business test in section 165-210 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

This ruling applies for the following period(s)

1 January 2014 to 31 December 2014 (recoupment year)

The scheme commences on

1 January 2014

Relevant facts and circumstances

· The company was incorporated in the 2000s.

· The company advised it failed the continuity of ownership test in 2006 (change-over time) and had carry forward tax losses at that time.

· The company's business currently consists of the provision of a testing kit for condition A and testing of the results. The company's business activities have not materially changed since the establishment of the company.

Proposed new services

· The company is considering a strategy to expand its existing product offering to include two new tests for conditions B and C. The new tests are for two different conditions than tested by the original product.

· The new tests will be available over the counter and the results will be determined in pharmacy instead of a pathology lab.

· The company's current staff will be used for all functions in providing the new screening tests.

· It is proposed the company will offer the new tests in 2014.

· Between the change-over time and the proposed recoupment year, there are no material changes to staff numbers, assets and liabilities of the company.

There will be a material change to revenue, customers and the company's suppliers.

Relevant legislative provisions and taxation ruling

Income Tax Assessment Act 1997 Section 165-13

Income Tax Assessment Act 1997 Section 165-210

The ATO view on the application of the same business test is Taxation Ruling: TR 1999/9: Income tax: the operation of sections 165-13 and 165-210, paragraph 165-35(b), section 165-126 and 165-132.

Summary

The company, providing the proposed services in the recoupment year will not satisfy the same business test in section 165-210 of the Income Tax Assessment Act 1997 (ITAA 1997).

Detailed 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 165-13 of the ITAA 1997 respectively.

The Same Business Test (SBT)

The SBT is set out in Section 165-210 of the ITAA 1997 and 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. (the same business test, subsection 165-210(1)).

2. However, the company does not satisfy the same business test if at any time during the same business test period the company derives assessable income from:

(a) from a business of a kind that it did not carry on before the test time (the new business test, paragraph 165-210(2)(a)); or

(b) from a transaction of a kind that it had not entered into in the course of business operations before the test time (the new transactions test, paragraph 165-210(2)(b)).

The Same Business Test, section 165-210(1) of the ITAA 1997

Paragraph 60 of TR 1999/9 states:

Subject to the foregoing observations, the reported decisions on the application of the 80E test may be said to provide guidelines in determining whether the taxpayer has satisfied the same business test.

Those guidelines in paragraph 60 of TR 1999/9 which are considered most relevant to the company are:

60(a) Identifying the business carried on by he taxpayer at the change-over involves identifying with specificity the actual business activities carried on and transactions entered into at the change-over. The business of the taxpayer is not identified by reference to the kind of industry to which the taxpayer belongs, or by reference to certain activities only, on the grounds they constitute the heart or core of the business - all activities are relevant (see Fielder Downs; Case Y45; AAT Case 7,272; Rolls - Royce (Motors) Ltd v Bamford.

For the company, the business carried on will change from the sale of a testing kit to include the sale of two new testing kits. The business of the taxpayer is not identified by the kind of industry, 'sale of testing kits,' rather the activities undertaken, 'sale of testing kit for condition A.' That is, for the company the guideline in subparagraph 60(a) indicates that the same business test is not passed.

60(d) 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.

For the company, it can be argued that the sale of the new kits is organic growth. However, the new business operations have several different features; they are sourced from new third party suppliers, they will be sold to pharmacies only and not direct to patients and the company will not perform the pathology for the new tests. In the Commissioner's view, the new business will change the character of the business and the guideline in subparagraph 60(d) is not met.

60(f) The commencement or acquisition, by merger or otherwise, of new business undertakings (including going concerns and similar or complimentary undertakings) may cause a company to fail the same business test, e.g., if the result is to alter the character of the overall business: George Humphries & Co v Cook; Seaman v Tucketts.

For the company, it can be argued the new undertakings are similar or complimentary to the business it carried at the change-over time, but, as discussed at the guideline from subparagraph 60(d), the new business will change the character of the business.

60(g) 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, and the circumstances accounting for the inactivity and in which the inactivity is resumed: Avondale Motors; Yarmouth Industrial Leasing v Queen. And the extent to which there is continuity of, or change in, custom and goodwill: Tryka v Newall; Wadsworth Morton Ltd v Jenkinson.

For the company, the name and location remain the same, there is no period of inactivity and there is some change to custom in that the new kits are not distributed directly. The change to goodwill is not known. However, the guidelines at subparagraph 60(g) support the company satisfying the same business test.

On balance, the Commissioner's view is that based on the guidelines in TR 1999/9 the company does not pass the same business test.

The New Business Test

The Commissioner's view of the new business test pursuant to subsection 165-210(2) of the ITAA 1997 is stated in TR 1999/9.

TR 1999/9 provides:

The meaning of 'business' in section 165-210

28. The word 'business' is capable of different meanings in different contexts. In the new business test in the second limb of section 165-210, and its statutory equivalents, the word 'business' is clearly intended to mean a particular undertaking or enterprise, while the expression 'business operations' must refer to all the activities of the company. As the tests that the second limb comprises, i.e., the new business test and the new transactions test, are intended to prevent the injection of income into a loss company that has satisfied the primary, positive test in the first limb of section 165-210 and its equivalents, i.e., the same business test, it may be supposed that the second limb is examining activities carried on within the business of the company.

...

68. In the new business test the word 'business' has a different meaning from the word 'business' in the same business test. It is a reference to each one of the different kinds of activities (if there be more than one kind or type of activity) comprised in the business that is referred to in the same business test and is carried on by the taxpayer at the change-over. Thus, each particular undertaking or enterprise carried on or out by the taxpayer as part of its overall business in the period of recoupment, is tested by the new business test.

69. The question of whether an undertaking of a new kind has been commenced is a question of fact. If activities different in kind from those carried on before the change-over are carried on after the change-over with some degree of system, repetition and continuity and are distinguishable from the other activities of the taxpayer, it is likely a new undertaking different in kind from the old undertakings of the taxpayer has been commenced.

70. The new business test is intended to limit the expansion available under the same business test. That is, the taxpayer cannot add to it operations a business, that is, an undertaking or enterprise, of a kind it had not carried on before the change-over.

The company sold and provided pathology services for a kit to test for condition A at the change-over time. The proposed new activities are the sale of kits to test for conditions B and C. The new activities meet the criteria on paragraph 69 of TR 1999/9 as products which will be sold with a degree of system, repetition and continuity and are distinguishable from the original testing kit.

The meaning of 'kinds of activities' could differ if activities are considered as a general class of activities or as separate specific activities. Paragraph 69 of TR 1999/9 indicates that the specific activities are the intended meaning.

For the company, while the proposed new services are the same kind of activity as the activities at the change-over at a general level, 'sale of testing kits', they are not the same kind of specific service.

Examples

TR 1999/9 provides examples with the proviso:

Note at paragraph 96

Important note: the Examples are only intended to illustrate various points in the Ruling; they do not have the level of detail necessary to apply sections 165-13 and 165-210, or the related provisions, in an actual case.

Example 3

107. A company (Restaurant Pty Ltd) owned and operated a restaurant in a Sydney suburb, which served a distinctive style of Northern Japanese cuisine. The restaurant attracted heavy trade from Japanese businessmen and was notably expensive. The name of the restaurant reflected the style of the cuisine and the name was a registered trademark of Restaurant Pty Ltd. The style of operation was suitable for franchise. The restaurant made losses and the company changed hands.

108. During the year of recoupment, the taxpayer continues to own and operate the Japanese restaurant ('Original Japanese Restaurant'). During that year the taxpayer also purchases an Italian restaurant, situated some distance away, from an unrelated party. The restaurant attracts a random cross selection of locals; it is notably cheap.

...

111. In Scenario 2, the taxpayer continues to operate the Italian restaurant during the period of recoupment.

...

113. In regard to the new business test, the answer to the question of whether a new business of a different kind has been commenced depends on the 'kind' of business operated before the change -over. The content of the word 'kind' derives from the nature of the business being carried on before the change-over. While the 'kind' of business carried on by a company with several restaurants of differing cuisines catering to various segments of the market, might be that of operating restaurants, in this case, where only one type of restaurant was operated before the change-over, it is that of operating Japanese restaurants. Hence the taxpayer commenced to carry on a business of a different kind in the year of recoupment.

The note at paragraph 96 indicates that the example is intended to illustrate the ruling only. However, the example reinforces the reasoning used in applying paragraphs 68 to 70 to the company and the example is similar to the company's circumstances. That is, the kind of business carried on by a company which sold many medical testing kits might be that of selling medical kits. In the case of the company which only sold a testing kit for condition A and conducted pathology services, the kind of business is the selling and pathology testing of testing kits for condition A.

Thus, the company will fail the new business test even if it passed the same business test.

New transactions test

The Commissioner's view of the new transactions test pursuant to subsection 165-210(2) of the ITAA 1997 is stated in TR 1999/9.

TR 1999/9 provides:

79. In Fielder Downs, Campbell J indicated a company fails the new transactions test if the company derives income during the period recoupment from a transaction that was of a different kind from the transactions the company had entered into in the course of the business carried on by the company at the change-over, even if the first mentioned transaction is a transaction ordinarily involved in carrying on a business of the taxpayer during the period of recoupment. In Fielder Downs, Campbell J said

'If the business carried on beforehand should properly be held to be a business of the development of pastoral land for the eventual grazing of stock and one which was at all material times the one and same business continuing from its commencement until the lands were developed and stocked [that is, if the same business test as satisfied], it seems to me that the transaction of selling cattle (or wool or sheep) [that is, a day to day transaction or a transaction that was entered into in the ordinary course of the taxpayer's business after the change-over] was a transaction of a kind that the company had not entered into in the course of its business operations of developing the property prior to the sale. There is a difference in kind between a dealing or transaction concerning with the selling of seed or cereals for income and a dealing involved with obtaining income from the sale of stock.

In J Hammond Investments Pty Ltd v FC of T (supra) Sheppard J at 4318 expressed the view that the [new transactions test] "is not intended to refer to the daily transactions involved in carrying on a business but to transactions of an isolated or independent kind, which transactions have nevertheless arisen in the course of the taxpayer's business operations."

I think that the [new transactions test] contemplates that the transaction not previously carried on was one which could have been carried on in the course of the company's business operations prior to the change-over. Sales of stock had not been carried on prior to that time, and indeed prior to that time the company had no stock available which it could have sold. So, it seems to me, the sale of stock was a transaction of a different character from any which had previously been entered into by the company.'

For the company, sales of the new kits were not carried on prior to the change-over and the company had no stock of the new kits available at that time. Therefore, the sale of the new kits would be a transaction of a different character from any which had carried on prior to the change-over.

It is considered that the company would fail the new transactions test.

Summary

If the proposed new services commence, the Commissioner's view is that the company will not satisfy either the same business test pursuant to subsection 165-210(1) of the ITAA 1997, the new business test pursuant to subsection 165-210)(2) of the ITAA 1997 nor the new transactions test pursuant to subsection 165-210)(2) of the ITAA 1997 and therefore fail to satisfy the overall same business test pursuant to section 165-210 of the ITAA 1997 separately on each test.

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