Edited version of your written advice

Authorisation Number: 1012702585084

Ruling

Subject: deductable tax losses

Question 1

Does Company B satisfy the same business test contained in section 165-210 of the Income Tax Assessment Act 1997 (ITAA 1997) such that it can deduct tax losses incurred in the years ended 31 December 200X, 31 December 200X, 31 December 200X and 31 December 200X pursuant to section 36-17 of the ITAA 1997 for the income year ended 31 December 201X to the extent that Company B's total assessable income exceeds its total deductions (except tax losses) for that year?

Answer

No.

This ruling applies for the following periods:

Income tax year ended 31 December 201X

Relevant facts and circumstances

In 198X Company C, a company owned by Company D, was incorporated. The name of Company C was changed to Company CD.

In 200X Company CD changed its name to Company BA. In November 200X, Company E and a wholly owned subsidiary, Company F, were incorporated to facilitate the acquisition of Company BA by XYZ Company.

In 200X Company A and a wholly owned subsidiary, Company AB, were incorporated to facilitate the acquisition of the existing entities by JKL Group.

Until 200X JKL Group owned the entities. During this period, the group was an income tax consolidated group with the head company of the consolidated group being Company A.

In 200X all of the shares (100%) in Company A were acquired by a company incorporated in Country X. That company changed the name of Company A to Company B on acquisition.

As a result of the change of ownership, Company B no longer satisfied the conditions in section 165-12 of the ITAA 1997.

Company B has a substituted accounting period ending 31 December and had carried forward losses to 31 December 200X.

The business of Company A in 200X

The business objective of Company A was to be a manufacturer and supplier of products.

The percentage of revenue attributable to these products was:

The customers of Company A for products A and B included:

• Customer A;

• Customer B;

• Customer C;

• Customer D;

• Customer E; and

• Customer F.

The customers of Company A for product C included:

• Customer G;

• Customer H; and

• Customer I.

The customers of Company A were in the following locations:

• New South Wales;

• Victoria;

• Queensland;

• South Australia;

• Western Australia;

• Tasmania; and

• New Zealand.

Company A manufactured in Australia 81.8% of the products it sold in Australia (the remaining 18.2% of products sold in Australia were imported from overseas).

Company A stored both locally manufactured and imported products centrally in Victoria. A third party logistics provider then transported the products to interstate distribution centres where a different third party logistics provider picked up the products and delivered them to customers.

Company A employed XXX people.

Company A had X directors.

Company A had specific brand names for products A, B and C. The brand names were recognised as intangible assets and the value of them was included in the financial statements of Company A:

Goodwill was recognised in the financial statements of Company A in the amount of $35,640.874.

The business of Company B at 31 December 201X

The business objective of Company B was to offer the finest products to the market.

The percentage of revenue attributable to these products was:

The customers of Company B for products A, B, C and D included:

• Customer A;

• Customer B;

• Customer C;

• Customer D;

• Customer E; and

• Customer F.

The customers of Company B for product E included:

• Customer G;

• Customer H;

• Customer I; and

• Customer J.

The customers of Company B were in the following locations:

• New South Wales;

• Victoria;

• Queensland;

• South Australia;

• Western Australia;

• Tasmania; and

• New Zealand.

Company B manufactured in Australia 0% of the products it sold in Australia (100% of the products sold in Australia were imported from overseas). The imported products were of a better quality compared to products which were manufactured in Australia. Manufacturing was discontinued over a period of time.

Company B imported all products into state ports where customers were located and engaged a single third party logistics provider to facilitate all direct shipping and the delivery of imported products to Australian ports and customers.

Company B employed XXX people. A reduction of XXX employees was attributable to manufacturing ceasing in the year ended 31 December 201X.

A further reduction of XX employees was attributable to other circumstances.

Company B had X directors.

Company B had specific brand names for products A. The brand names were recognised as intangible assets and the value of them was included in the financial statements of Company B:

Goodwill was recognised in the financial statements of Company B in the amount of $35,640.875.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 36-17

Income Tax Assessment Act 1997 section 36-25

Income Tax Assessment Act 1997 Subdivision 165-A

Income Tax Assessment Act 1997 section 165-10

Income Tax Assessment Act 1997 paragraph 165-10(a)

Income Tax Assessment Act 1997 paragraph 165-10(b)

Income Tax Assessment Act 1997 section 165-12

Income Tax Assessment Act 1997 section 165-13

Income Tax Assessment Act 1997 subsection 165-210(1)

Income Tax Assessment Act 1997 subsection 165-210(2)

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

Income Tax Assessment Act 1997 subsection 165-210(4)

Income Tax Assessment Act 1997 subsection 701-1(1)

Reasons for decision

Section 36-25 lists special rules that apply to the deduction of tax losses by companies. Item 2 of the special rules listed in section 36-25 for the tax losses of companies refers to the provisions in Subdivision 165-A. Subdivision 165-A contains the general rules governing the deduction by companies of tax losses of earlier income years.

Pursuant to section 165-10, Company B cannot deduct a tax loss unless either:

(a) it meets the conditions in section 165-12 (which is about the company maintaining the same owners); or

(b) it meets the condition in section 165-13 (which is about the company satisfying the same business test).

Company B has failed to the meet the conditions in section 165-12 and therefore cannot satisfy paragraph 165-10(a). Company B must therefore satisfy paragraph 165-10(b) which will require it to meet the conditions in section 165-13 about satisfying the same business test.

The conditions to be satisfied under the same business test are contained in section 165-210 which provides:

(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.

(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 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.

Subsection 165-210(1) is the primary positive test and it looks to whether the business of Company B in the same business test period (the period of recoupment) is the same business that was carried on immediately before the test time by Company A. In the event that the primary positive test is failed then it will be unnecessary to consider the negative tests contained in subsection 165-210(2) and the anti-avoidance test contained in subsection 165-210(3).

The Commissioner's views on the operation of section 165-13 and section 165-210 are set out in Taxation Ruling 1999/9 Income tax: the operation of sections 165-13 and 165-210, paragraph 165-35(b), section 165-126 and section 165-132 (TR 1999/9).

The Commissioner's views on how the same business test applies in the context of determining whether deductions are available to the head company of a consolidated group in respect of prior year tax losses are set out in Taxation Ruling 2007/2 Income tax: application of the same business test to consolidated and MEC groups - principally, the interaction between section 165-210 and section 707-1 of the Income Tax Assessment Act 1997 (TR 2007/2).

Paragraph 14 of TR 2007/2 states that the principles set out in TR 1999/9 in respect of the application of the same business test to a single company apply equally to the head company of a consolidated group. As a result of the single entity rule in subsection 701-1(1), subsidiary members of a consolidated group are taken for the purposes of the same business test to be parts of the head company.

In determining the one overall business carried on by Company B, as the head company of a consolidated group, it is necessary to have regard to the activities of the subsidiary members of the group.

Applying the principles in TR 1999/9 to a consolidated group, the one overall business of Company B is to be identified by examining all of the activities, enterprises or undertakings carried on:

• immediately before the test time by all those entities that were members of the consolidated group at that time; and

• by all entities during that part of the same business test period when they were members of the consolidated group.

Same business test: subsection 165-210(1) - the primary test

The same business test in subsection 165-210(1) requires a comparison of the business carried on throughout the income year (same business test period) with the business carried on immediately before the time (the test time) shown in the relevant item in the table in section 165-13. Accordingly, to satisfy the same business test Company B must carry on the same business throughout the year ended 31 December 201X (same business test period) as it carried on at the test time in 200X.

Paragraph 8 of TR 1999/9 states that the expression 'same business' in subsection 165-210(1) means the business of the company as an entirety, or its 'overall business'.

Paragraph 13 states what the word 'same' in the phrase 'same business as' requires:

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.

Paragraph 25 of TR 1999/9 explains that the same business test:

…looks to see whether the business of the company in the year of recoupment is actually the same business that was carried on at the change-over. The same business test is intended to ensure continuing identity between the whole of the business activities carried on by the taxpayer at the change-over and the whole of the business activities carried on by the taxpayer during the period of recoupment.

Paragraph 34 of TR 1999/9 provides that in identifying the business:

…it is relevant to examine every activity of the business, although those activities must be considered as a whole… it is not correct to single out certain activities as the heart or core of the business, and identify it merely by reference to those activities.

Paragraph 36 of TR 1999/9 provides that:

…the word 'immediately' in the same business test does not mean that only those things done immediately before the change-over in the course of the business are relevant to the application of the same business test. The word 'immediately' in the same business test refers to the overall business being carried on at change-over, rather than to the particular activities taking place at that time as part of it.

Paragraph 38, 39 and 40 of TR 1999/9 consider the situations where there have been changes in business activities.

Paragraph 38 explains that applying the same business test:

...does not mean that the business carried on by the taxpayer during the year of recoupment must be identical in every respect with the business that was carried on immediately before the change-over. A business may be the same, even though there have been some changes in the way in which it is carried on, provided the identity of the business is not changed.

Paragraph 39 of TR 1999/9 explains further that:

Mere expansion or contraction of the taxpayer's business may not result in a change in the identity of the business carried on by the taxpayer. In Avondale Motors, Gibbs J said

'In some circumstances a company may expand or contract its activities, it may close an old shop and open a new one, without starting a new business, but the only conclusion that can be drawn from all the circumstances of the present case is that the business of the taxpayer after 15 March 1968 was different from that which it carried on before that date.

...

It does not, of course, follow that a business will not be the same because there have been some changes in the way in which it is carried on; some cases under sec 80E may give rise to questions of degree which do not arise in the present case.'

Paragraph 40 of TR 1999/9 states that:

…as a practical matter, expansion or reduction of business activities, if carried to a sufficient extreme, is likely to amount to more than a mere change in the scale of the business carried on by the taxpayer and so may result in a change in the identity of the business. In particular, a sudden and dramatic expansion or contraction brought about by the acquisition or loss of activities on a considerable scale could mean the same business is no longer being carried on. As Walton J observed in Rolls-Royce Motors Ltd v. Bamford:

'There is all the difference in the world between an organic growth of trade and a sudden and dramatic change brought about by either the acquisition or loss of activities on a considerable scale.'

Moreover, the evolution of a business is not necessarily the same as mere expansion and may lead to change such that the business can no longer be described as the same business as that carried on immediately before the change-over, as was recognised in Fielder Downs (WA) Pty Ltd v. FC of T.

Paragraph 43 of TR 1999/9 considers organic growth of a business:

The question of whether the discontinuation of an activity will produce a change of business is, however, ultimately one of degree. Sudden and dramatic change brought about by either the loss or acquisition of activities on a considerable scale is to be contrasted with an organic growth of a business: per Walton J in Rolls-Royce (Motors) Ltd v Bamford.

Paragraph 59 of TR 1999/9 provides a summary of how to determine whether the same business test is satisfied:

There are various relevant factors to take into account in determining whether the same business test is satisfied by a taxpayer. A single factor or matter might be so important that it determines the issue but, usually, it is a combination of factors, appropriately weighted, that decides whether the same business is carried on during the period of recoupment. A factor that in isolation has little weight, may in combination with other factors have great weight and, conversely, something that is significant when it appears with other changes, may have no importance when it appears alone. Nor is it only changes that must be weighed: answering the question of whether the business carried on in the year of recoupment is the same business carried on at change-over requires one to have due regard to what remains the same. In determining whether the same business test is satisfied, significant weight is given to changes after the change-over in the income producing product or service of the taxpayer, how it is produced, acquired or provided and/or changes in the market for that product or service. But even these are a question of fact and degree often to be decided in the context where some expansion or contraction would be expected.

Comparison of business activities

Business activities which remained the same

A number of business activities carried on by Company A at the test time in 200X remained the same as the business activities carried on during the year ended 31 December 201X by Company B:

Business activities which had less significant differences

A number of less significant differences existed in the business activities carried on by Company A at the test time in 200X and the business activities carried on during the year ended 31 December 201X by Company B:

Business activities which had significant differences

A number of significant differences existed between the business activities of Company A at the test time in 200X and the business activities carried on during the year ended 31 December 201X by Company B:

Application of the same business test

The business activities identified above which have remained the same demonstrate a continuing identity between the business carried on at the test time in 200X and during the year ended 31 December 201X within the meaning of paragraph 25 of TR 1999/9.

The business activities identified above which are considered to have less significant differences are considered to be nothing more than a 'mere change in the scale of the business' (paragraph 40 of TR 1999/9). These activities also demonstrate a continuing identity between the business carried on at the test time in 200X and during the year ended 31 December 201X within the meaning of paragraph 25 of TR 1999/9.

However, the business activities identified above which are significantly different are so sufficiently extreme that they amount to more than a mere change in the scale of the business as envisaged by paragraph 40 of TR 1999/9 and indicate rather a change in the identity of the business.

The complete discontinuation of manufacturing and the consequent large reduction of employees represent a loss of activities on a considerable scale which is considered to be both sudden and dramatic especially given they occurred in the year ended 31 December 201X. As such, the changes in these business activities are not considered to be organic growth of the business as envisaged by paragraph 43 of TR 1999/9.

Consistent with paragraph 59 of TR 1999/9 'significant weight' should be given to changes in the income producing product or service of the taxpayer and how it is produced, acquired or provided in determining whether or not the same business test is satisfied. In determining whether the same business test is satisfied business activities identified above which are considered to be significantly different should therefore be accorded significant weight.

The Commissioner considers that there is no continuing identity between the whole of the business activities carried on by Company B throughout the same business test period (the income year ended 31 December 201X) and the whole of the business activities carried on by Company A at the test time in 200X.

Company B therefore does not satisfy the same business test contained in subsection 165-210(1) and will therefore be unable to deduct any tax losses incurred in the years ended 31 December 200X, 31 December 200X, 31 December 200X and 31 December 200X pursuant to section 36-17 for the income year ended 31 December 201X.

Given the above conclusion it is unnecessary to consider the remaining tests contained in subsections 165-210(2) and 165-210(3).

Note: A number of authorities are also of relevance in considering application of the same business test in the particular facts of this private ruling and we include the following discussion for completeness:

Avondale Motors (Parts) Pty Ltd v Commissioner of Taxation (1971) 124 CLR 97 (Avondale)

In Avondale the word 'identity' was used by Gibbs J at page 105 in the context of interpreting the expression 'same as'. Gibbs J considered that the words 'same as' in the context where it was used imported 'identity' and not merely 'similarity' with the effect that the relevant provision required one to consider whether a company, during a period of recoupment, carried on a business which was 'identical to' the business carried on prior to the period of recoupment (rather than one which was simply 'similar to'). The word 'identity' is used in various contexts in paragraphs 13, 25, 38, 39, 40, 60(d) and 61(d) in TR 1999/9.

Your view appears to be that the word 'identity' is a reference to the identity of a company in the sense of its overall corporate objective or mission statement. On that basis you advocate that paragraph 38 of TR 1999/9 therefore means that there can be substantial changes in the business activities of a company but provided the identity (on your view the corporate objective or mission statement) of the company remains the same then the same business test will be satisfied.

We do not consider that you are correct in your view about the use of the word 'identity' and consider that the view you adopt is not consistent with the relevant authorities or the overall approach advocated in TR 1999/9. The word 'identity' speaks to 'identity' as between the activities of a company and the use of the word is best reflected in paragraph 25 of TR 1999/9 where it summarises that the '…same business test is intended to ensure continuing identity between the whole of the business activities carried on by the taxpayer at the change-over and the whole of the business activities carried on by the taxpayer during the period of recoupment.'

Gordon & Blair Ltd. v. I.R.C. (1962) 40 TC 358 (Gordon & Blair Ltd)

In Gordon & Blair Ltd a decision from the United Kingdom a taxpayer company brewed, bottled and sold beer but ceased brewing and thereafter bottled and sold beer brewed by another company. It was determined that the taxpayer company did not carry on the same trade. Gordon & Blair Ltd is referred to in paragraph 42 and 60(c) of TR 1999/9.

Case K20 (1978) 78 ATC 184 (Case K20)

In Case K20 a taxpayer company manufactured, sold and installed fibreglass swimming pools but later bought the swimming pools (the same type it previously manufactured) from another associated company for sale and installation. It was determined that the taxpayer company was not carrying on the same business. (Case K20 is referred to in paragraph 60(c) and 60(e) of TR 1999/9.

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